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Amazon.com has sent me an e-mail with a special announcement: I get a whopping 6% return if you buy a Gift Certificate through my site (this month only). So, if you are one of those people who have trouble thinking of what to buy for Christmas, Hanukkah, Kwanzaa or any other special occasion, would you consider a Amazon.com Gift Certificate?

Garry Kasparov on the Colbert Report

Not much of substance was discussed.

Best line:

Kasprov: "In chess there are rules. In Russian politics there are no rules."

Both Stephen Colbert and Garry Kasparov have new books on the market.

Alarming Parallels

An anonymous commenter over at Sudden Debt has alerted me to an article in The American Prospect entitled The Alarming Parallels between 1929 and 2007.

Testimony of Robert Kuttner
Before the Committee on Financial Services
Rep. Barney Frank, Chairman
U.S. House of Representatives
Washington, D.C.
October 2, 2007

Mr. Chairman and members of the Committee:

Thank you for this opportunity. My name is Robert Kuttner. I am an economics and financial journalist, author of several books about the economy, co-editor of The American Prospect, and former investigator for the Senate Banking Committee. I have a book appearing in a few weeks (The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity) that addresses the systemic risks of financial innovation coupled with deregulation and the moral hazard of periodic bailouts.

...

Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials -- excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence.

The most basic and alarming parallel is the creation of asset bubbles, in which the purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.

...

A second parallel is what today we would call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank -- e.g. Morgan or Chase -- as a proxy for the soundness of the security. It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks -- part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed's discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.

Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s -- lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction -- assuming perpetually rising asset prices -- so in a credit crisis they can act as net de-stabilizers.

A third parallel is the excessive use of leverage. In the 1920s, not only were there pervasive stock-watering schemes, but there was no limit on margin. If you thought the market was just going up forever, you could borrow most of the cost of your investment, via loans conveniently provided by your stockbroker. It worked well on the upside. When it didn't work so well on the downside, Congress subsequently imposed margin limits. But anybody who knows anything about derivatives or hedge funds knows that margin limits are for little people. High rollers, with credit derivatives, can use leverage at ratios of ten to one, or a hundred to one, limited only by their self confidence and taste for risk. Private equity, which might be better named private debt, gets its astronomically high rate of return on equity capital, through the use of borrowed money. The equity is fairly small. As in the 1920s, the game continues only as long as asset prices continue to inflate; and all the leverage contributes to the asset inflation, conveniently creating higher priced collateral against which to borrow even more money.

The fourth parallel is the corruption of the gatekeepers. In the 1920s, the corrupted insiders were brokers running stock pools and bankers as purveyors of watered stock. 1990s, it was accountants, auditors and stock analysts, who were supposedly agents of investors, but who turned out to be confederates of corporate executives. You can give this an antiseptic academic term and call it a failure of agency, but a better phrase is conflicts of interest. In this decade, it remains to be seen whether the bond rating agencies were corrupted by conflicts of interest, or merely incompetent. The core structural conflict is that the rating agencies are paid by the firms that issue the bonds. Who gets the business -- the rating agencies with tough standards or generous ones? Are ratings for sale? And what, really, is the technical basis for their ratings? All of this is opaque, and unregulated, and only now being investigated by Congress and the SEC.

Yet another parallel is the failure of regulation to keep up with financial innovation that is either far too risky to justify the benefit to the real economy, or just plain corrupt, or both. In the 1920s, many of these securities were utterly opaque. Ferdinand Pecora, in his 1939 memoirs describing the pyramid schemes of public utility holding companies, the most notorious of which was controlled by the Insull family, opined that the pyramid structure was not even fully understood by Mr. Insull. The same could be said of many of today's derivatives on which technical traders make their fortunes.

...

A last parallel is ideological -- the nearly universal conviction, 80 years ago and today, that markets are so perfectly self-regulating that government's main job is to protect property rights, and otherwise just get out of the way.

...

One last parallel: I am chilled, as I'm sure you are, every time I hear a high public official or a Wall Street eminence utter the reassuring words, "The economic fundamentals are sound." Those same words were used by President Hoover and the captains of finance, in the deepening chill of the winter of 1929-1930. They didn't restore confidence, or revive the asset bubbles.

The fact is that the economic fundamentals are sound -- if you look at the real economy of factories and farms, and internet entrepreneurs, and retailing innovation and scientific research laboratories. It is the financial economy that is dangerously unsound. And as every student of economic history knows, depressions, ever since the South Sea bubble, originate in excesses in the financial economy, and go on to ruin the real economy.

That is a lot of parallels to think about; and they are alarming parallels at that.

The Shock Doctrine

Thanks to Charles Smith at Of Two Minds for bringing this to my attention.

The Shock Doctrine is a new short film by Alfonso Cuarón (the Director of Children of Men) based on the new book by Naomi Klein regarding how leaders in power use shock techniques to control entire populations.

"Only a crisis -- real or perceived -- produces real change." -- Milton Friedman

As the short film says: "Information is shock resistance. Arm yourself."

The Psychology of Right-Wing Authoritarianism

John Dean is in the process of writing a three part series explaining part of his new book Conservatives Without Conscience. Something he wrote struck me:

The Followers: Right-Wing Authoritarians

In addition to being especially submissive to established authority, Altemeyer's research revealed that those he calls right-wing authoritarians also show "general aggressiveness" towards others, when such behavior is "perceived to be sanctioned" by established authorities. Finally, these people are always highly compliant with the social conventions endorsed by society and established authorities. These basic traits, submissiveness to authority and conventionality, are the essence of those Altemeyer describes as right-wing authoritarians. If these traits are not present in some significant (albeit varying) degree, he does not consider the subject to be a right-wing authoritarian. However, these people can, and often do, consistently reveal they have many other interesting traits as well.

Based on Altemeyer's study, as well as those of other social psychologists, I prepared a list of the additional traits that these personalities, both men and women who test high as right-wing authoritarians, often evidence: highly religious, moderate to little education, trust untrustworthy authorities, prejudiced (particularly against homosexuals, women, and followers of religions other than their own), mean-spirited, narrow-minded, intolerant, bullying, zealous, dogmatic, uncritical toward their chosen authority, hypocritical, inconsistent and contradictory, prone to panic easily, highly self-righteous, moralistic, strict disciplinarian, severely punitive, demands loyalty and returns it, little self-awareness, usually politically and economically conservative/Republican.

The Leaders: Social Dominators

People who test high as social dominators are also economically conservative and have little tolerance for equality. They consistently agree when asked about statements such as the following: "Some people are just more worthy than others"; "This country would be better off if we cared less about how equal all people were"; and "To get ahead in life, it is sometimes necessary to step on others." In addition, they will respond in the negative to the proposition that "All humans should be treated equally." (In fact, they are given many more questions when tested; I am merely providing a very small sample.)

Again, I have prepared a listing of the traits revealed in the testing of these remarkably manipulative and cunning personalities, who are typically men: dominating, opposes equality, desirous of personal power, amoral, intimidating and bullying, faintly hedonistic, vengeful, pitiless, exploitive, manipulative, dishonest, cheats to win, highly prejudiced (racist, sexist, homophobic), mean-spirited, militant, nationalistic, tells others what they want to hear, takes advantage of "suckers," specializes in creating false images to sell self, may or may not be religious, usually politically and economically conservative/Republican.

These lists of traits for both right-wing authoritarian followers, and social dominating authoritarian leaders, should be understood as not necessarily describing every person who falls into the type. While many have all the traits, not all will have all, or even most, of them. Most people who test high as authoritarians, whether followers or leaders, have some of these traits, however.

What struck me at first was a sense that many of these qualities seemed to be similar to that of a psychopath or sociopath ("amoral," "pitiless"). John Dean says he calls people who exhibit all of these traits Conservatives Without Conscience. That may be fitting because we often call people who are amoral and have no conscience as sociopaths. However, I admit I may be overreading this.

I've mentioned Altmeyer's work before. But I am still digesting this commentary. However, John Dean's column is worth a read. You can find his prior columns here.

Moral Hazard Hypocrisy

Conservatives love to argue against national healthcare on moral hazard grounds; but somehow we taxpayers and the Federal Reserve are supposed supposed to bail out educated, smart, wealthy and powerful people when they take they know -- or should know -- are excessively risky financial instruments.

Here is a snippet from Robert Reich's excellent post:

When it comes to risky behavior in the market, America has a double standard. We’re told that economic risk-taking as the key to entrepreneurial success, but when big entrepreneurs take big risks that fail it’s amazing how often they get bailed out. Indeed, the history of modern American business is littered with federal bailouts, loan guarantees, and no-questions-asked reorganizations. Some are well known, such as the Chrylser bailout of 1979, the savings and loan bailout of 1989, and the airline bailout of 2001. Most occur in the relative dark, such as the 1998 bailout of giant hedge fund Long-Term Capital Management (courtesy of former Fed chair Alan Greenspan), the not infrequent bailouts of under-funded corporate pension plans by the government’s Pension Benefit Guarantee Corporation, price supports for big agribusinesses facing market downturns, or the current bailout of Wall Street being engineered by Ben Bernanke’s Fed. Behind every one of these bailouts are CEOs or financial executives who were rescued from their bad bets.

Mr. Reich has a new book out called Supercapitalism.

The New Gilded Age

On Diane Rehm's show this morning, Ms. Rehm had a panel of guests that discussed The New Gilded Age -- a discussion about the "trends in the U.S economy and implications of the growing disparity between this country's super rich and everyone else."

You can listen to the program in Real Audio or Windows Media.

Robert Rubin discussed his new book In an Uncertain World. A lot of good points were made, but I don't yet have the ability to give snippets from the show.

Get Your "Hows" Right

In his New York Times column today, Thomas Friedman writes about the blogosphere:

When everyone has a blog, a MySpace page or Facebook entry, everyone is a publisher. When everyone has a cellphone with a camera in it, everyone is a paparazzo. When everyone can upload video on YouTube, everyone is filmmaker. When everyone is a publisher, paparazzo or filmmaker, everyone else is a public figure. We’re all public figures now. The blogosphere has made the global discussion so much richer — and each of us so much more transparent.

The implications of all this are the subject of a new book by Dov Seidman, founder and C.E.O. of LRN, a business ethics company. His book is simply called “How.” Because Seidman’s simple thesis is that in this transparent world “how” you live your life and “how” you conduct your business matters more than ever, because so many people can now see into what you do and tell so many other people about it on their own without any editor. To win now, he argues, you have to turn these new conditions to your advantage.

For young people, writes Seidman, this means understanding that your reputation in life is going to get set in stone so much earlier. More and more of what you say or do or write will end up as a digital fingerprint that never gets erased. Our generation got to screw up and none of those screw-ups appeared on our first job résumés, which we got to write. For this generation, much of what they say, do or write will be preserved online forever. Before employers even read their résumés, they’ll Google them.

“The persistence of memory in electronic form makes second chances harder to come by,” writes Seidman. “In the information age, life has no chapters or closets; you can leave nothing behind, and you have nowhere to hide your skeletons. Your past is your present.” So the only way to get ahead in life will be by getting your “hows” right.

...

“We do not live in glass houses (houses have walls); we live on glass microscope slides ... visible and exposed to all,” he writes. So whether you’re selling cars or newspapers (or just buying one at the newsstand), get your hows right — how you build trust, how you collaborate, how you lead and how you say you’re sorry. More people than ever will know about it when you do — or don’t.

This is why I like reading Thomas Friedman: he frequently writes very thought-provoking articles. He makes me think. Good writers do that.

I am reminded of the line from the movie Sneakers wherein the character Cosmo (portrayed by Ben Kingsley), tells Martin Bishop (portrayed by Robert Redford): "No more secrets, Marty. No more secrets."

It is been said that it is important to start a blog because you want to define yourself before others do it for you. I am not so sure writing an online diary is such a good idea. Certainly sharing some life experiences are important to fill in the blank spaces -- it is how we build our philosophy of life, after all -- but I don't think that having secrets is such a bad thing.

The openness that the advent of the internet has brought us is both good and bad. We are fragile creatures, you and I. So treat others with kindness. "Respect the dignity of all living things" as it says in the Book of Common Prayer. And to quote a line from Letters from Iwo Jima: "Do what is right because it is right."

The Ubiquitousness of Poverty

Today I read a book review by Nicholas Kristof of Poor People by William Vollmann. I found these paragraphs disquieting:

One measure of the ubiquity of these tradeoffs is that today, as every day, 30,000 children will die of hunger, disease, and other consequences of poverty, according to UNICEF. In many cases, those will be daughters, because parents (particularly in South Asia) don't have the resources to keep all their children alive, so they put a finger on the scales on the side of their sons. In India alone, among children aged one to five, girls are 50 percent more likely to die than boys—meaning that 130,000 Indian girls are mortally discriminated against each year.

Poverty both in the US and around the world remains a central fact of twenty-first-century life; a majority of the world lives on less than $2 a day, one common measure of who is poor. Yet we manage, pretty successfully, to ignore it and insulate ourselves even from poverty in our own country. When it pops out from behind the screen after an episode like the Watts riots of 1965 or the New Orleans hurricane of 2005, then we express horror and indignation and vow change, and finally shrug and move on. Meanwhile, the world's five hundred wealthiest people have the same income as the world's poorest 416 million.

I have been thinking about all of the wars that take place in the world today. I have often wondered how many of those wars are fought over such simple things as access to clean, potable water? Many wars, historically, are fought over access to natural resources.

It makes me wonder: how much money it would cost to provide clean, potable water to everyone in the world? How many needless deaths can we prevent just by expanding access to water? Water is life. Where you find water, you find civilization. Many of the diseases that Bill Gates and Warren Buffett want to eradicate probably start from unclean water supplies. I don't think it is enough to go after the diseases themselves. We need to go after their root causes.

How does this tie in to my post? Most of these people cannot afford individually -- even collectively -- to build water treatment plants. They cannot build wells deep enough to reach potable water and bring it to the surface. Some countries might be able to utilize water from the sea if they could afford desalinization plants.

This is the sort of problem that truly does need cooperation from everyone in the world and funding primarily from wealthy countries and individuals.

P. M. Prescott's New Book

Author P. M. Prescott was kind enough to come by and make a comment on the New Mexico situation on my post yesterday. You might want to check out his new novel: Optimus, Praetorian Guard