Libya

The news is out. Libyan rebels have taken most of the capital and captured three of Gadhafi's sons including his heir apparent, Saif Al Islam, who promised that the streets would run with rivers of blood before his family gave up power.

The CNN infotainment models are making a big deal this morning about whether the US involvement was "worth it." So let's do some rough cost benefit calculations.

What did cost? CNN reports that the White House estimates that US involvement in Libya will cost $1.1 Billion. Other estimates by critics of the operation run more like $33 Billion. What did it achieve? I believe no US military people have been killed.

1) Gadhafi's forces were poised to perpetrate a mass slaughter of the populations of Benghazi and Misrata - cities with hundreds of thousands of people each. The operation clearly prevented Gadhafi's forces from capturing either city.

2) Gadhafi was a particularly nasty dictator who had sponsored some of the most infamous terrorist attacks other than 9/11. He's now out of the world picture except as a fugitive.

3) The US was able to make a high profile, tangible effort to remove an Arab dictator that the overwhelming majority of Arabs across the Middle East despised. For once the US was doing something that advanced the cause of democratic reforms in the Middle East.

4) The example of Libya should not be underestimated in relation to the ongoing rebellion against the Assad dictatorship in Syria.

5) At the time the US got involved, there were indications that some of our close European allies were keen to get involved with us or without us (especially France and the UK). Our involvement made their efforts much more likely to succeed. Preventing a European foreign policy disaster is of great value to us and should not be dismissed casually.

The cost benefit calculation for the Libyan operation is in stark contrast to the enormous costs (in lives and money) and dubious benefits of either the war in Iraq or Afghanistan. Granted, the honeymoon in post Gadhafi Libya will be brief. Libya will almost certainly have a long, painful and ultimately disappointing transition. But the same is true for Iraq and Afghanistan both of which cost much much more. As military adventures go, Obama's foray to the Shores of Tripoli will probably be shown to be a relatively costless distraction at worst but at best could end up generating a series of important benefits for US policy in the Middle East for a bargain basement price.

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If you thought you new Michele Bachmann . . .

you don't. She is a Christan Taliban. Total fringe. This article from the Aug. 15th, edition of the New Yorker is worth the read. RBR, I'd be interested in your take on the Iowa Straw Poll.

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Sunday Musings-DEBT

The recent downgrade by the S&P of US debt was lousy, but it was a wake up call. US citizens have too much debt- and it isn't all their fault. College tuition is rising faster than inflation. It's keeping pace with medical care. It's a crisis in the making, a real catch 22. So students take out loans for tuition then put their text books on credit cards. Hello!

Now the next big debt bubble: Student Loans- largely fueled by for-profit institutions. Problem here, folks, is that there is no way out for the borrows. Waltz on over to MyBudget360.com for a very good article on the next crash.

That was the morning coffee conversation with my fiance this morning. Then we went grocery shopping and we were having a conversation with the clerk. She and her husband are having trouble paying their mortgage. So they called the bank to see about renegotiating their 6% interest rate into something lower. The bank informed them that to do this, they would have to reassess the property and that they are not currently assessing property. End of conversation. She and her husband told them that they were considering strategic default. This had no effect on the bank. (People in my part of the world are rather open about their finances-oddly enough.)

After leaving the grocery store, my finance and I started to figure out what perverse incentive was keeping the bank from a simple re-negotiation. Of course, this has been written about all over, but not by me. So my turn. This is what we realized:

1) Banks don't pay property taxes on the homes they are holding.(thus the strapped states and counties)
2) Banks can keep inflated assets on their balance sheets, thus not having to recognize their losses to investors. The idea is to keep investors interested in Bank stocks. But investors have been bearish on banks stocks because of the confusing about what these banks actually hold on their balance sheets and because banks are keeping larger cash slush to cover bad debt,
3) Banks collected on the PMI. In other words, they got the insurance money on the loss.
4) all told, even if the bank tears the house down, they've made more money on it than they would have if they sold the houses at a loss.

The way this works is that the bank will foreclose. Then the house is supposed to go to auction. So the bank will bid whatever price is equal to the outstanding mortgage. Of course, the outstanding mortgage is usually based on very inflated prices. So the bank usually wins the house at auction. Then the county tax collector sends the bank a bill for the outstanding taxes, the banks asks for a deferment until they sell the house. Without the proper legal remedy, the tax collector agrees to to the deferment. But then the bank holds the property off the market, not wanting to further deflate prices with overstock.

So in the end, the original owner has a great incentive to walk away- believing that in 3 years he will be able to buy a new house at a cheaper price. The banks on the other hand were hoping to see interest rates rise. But the Fed just told them not to hold their breath. So score 1 to the people.

We need to start putting banks back in line- charging them property taxes and putting bans on their ability to package student loans into securities. They also need to change the rules on student loans. At this point, I must start to agree with those conservatives who point out that student loans encourage sharking by universities and colleges- particularly the for-profits. Loan limits need to be set lower. And students should be given a 20 day grace before interest accrues on their loans, like credit cards.

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London Calling

London has finally managed, more or less, to put an end to three nights of rioting which has also spread to other cities. The cause of the rioting is not specifically known. From across the pond, I think the reason for the rioting is not hard to discern. Teenagers have seen a massive economic collapse, their futures effectively taken away from them (in the short timeframe of youth) and nobody has yet paid for it. A kid who was 14 in 2007 saw a crash when he was 15 and is now trying to get a job at 18, with none available. This is not a specific riot over a specific thing. It is the result of an alienated and disaffected generation that is angry at society at large and sees nothing in government, church, or school that would connect them to civil society. The best analogy is to California hills in recent years that are full of unburnt fuel (trees and brush) from years of bad forest management, bone dry and ready to ignite.

Eventually, there was bound to be some violence in response to what I would call the economic violence perpetrated by bankers against the middle classes of the developed world. In London, it appears to be low scale rioting by kids. In the USA, it is taking on the darker hues of the Tea Party, a group not dissimilar to emotional teenage rioting but much more dangerous. Or random violence such as the shootings in Tucson last January. As I said to people two weeks ago, the main desire of Tea Partiers was to see an actual default by the Federal Government and the chaos that would follow: "Burn, baby, burn!" There will be blood. This was to be expected. Lucky London that it is all so mild and juvenile. Greece has not been so lucky.

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Downgrade

My opinion on this is pretty strong. Ratings agencies should not rate the credit worthiness of governments. Governments are more like non-profits. They serve a social purpose. They should not be treated like businesses. The logic of the downgrade has little to do with finance and more to do with Congress. From the S&P press release:

"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011. Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon."

The S&P should not have any power over the government finances of the United States, the hand that feeds it, the nation that allows it to exist, that provides the environment under which it thrives. This is a prime example of the corporatist model gone awry.

This is aside from the fact that the ratings agencies have had terrible track record. Didn't they give AAA ratings to toxic bonds?

I am just cynical enough to believe this is political gamesmanship.

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What's the deal with the Tea Party?

In our last post, we debated a little about whether the Tea Party was really a 3rd party or just a passing fad. I found this map at Patchwork Nation. The map is interactive. So go to the site and take a look.




What jumps out at me is that there are varying degrees of support for the Tea Party, but that this support is widespread, even if the numbers are relatively small in individual counties. It remains to be seen how this will play out in the next elections.

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The Debt Limit Compromise, Keynes And Obama

There are two lessons about this deal that most Democrats seem to be missing. First, in any "divide the dollar" type negotiation, the side that is most willing to see no deal take place has a big advantage. Second, the side that makes the proposals has a big advantage. In this case, both of those advantages were with the Republicans. We should expect, based on those two factors alone, that the Republicans would be able to get almost all of what they wanted.

The Democrats were divided between those, like Reid, who wanted a combination of modest cuts and modest tax increases and those on the left who wanted only tax increases.

The Republican House was demanding massive and immediate cuts to social security, medicare and medicaid all while refusing any consideration of tax increases. Some versions of their demands even demanded additional tax CUTS.

So what did they get? CNN has a summary of the deal here. The full text of the bill is here. The big thing is that the debt limit will be increased in stages such that we won't face this kind of crisis/deadline again until after 2013 (after the 2012 elections). There will be neither any immediate tax increases or cuts to medicare, medicaid or social security. With regard to the two biggest issues being debated, the compromises essentially punts. Neither spending cuts nor tax increases will take place immediately but both could be possible later. The bulk of immediate deficit reduction will come in the form of caps on military spending and domestic spending other than medicare, medicaid and social security. The second round of deficit reduction will take place this fall and will be proposed by a bipartisan joint committee of House and Senate members. If they can't get a deal then, the debt ceiling will automatically raised. The bottom line is that the deadline is postponed for a couple of years and one would be forgiven for thinking they're going to let the voters determine the actual outcome in November 2012.

The irony is that this is a fundamentally Keynesian deal. At least in the short term, the fragile recovery will not be burdened with either tax increases or spending cuts. So for all the wailing and gnashing of teeth on the left, we are going to see the Republicans sign onto a deal that implicitly acknowledges the legitimacy of Keynes' approach to economics. Von Hayek would not approve.

Many Democratic activists are running around bemoaning Obama's lack of backbone or the Democratic parties habbit of caving in to Republican demands. These are silly and, to the extent they hurt Democratic party chances in 2012, ultimately counter productive attitudes to take. Frankly, I'm inclined to think that Obama and the Democrats got very close to the best deal they could have gotten out of a Republican party willing to put the entire world into a global recession to prevent a few relatively minor tax increases on the rich and oil companies. Democrats had a very weak hand to play but managed to avoid their worst case scenario or even their second worst case scenario.

For those liberal activists convinced that Obama "caved," I'd like to know what they think he should have done in this situation. What should Obama have done with default looming? Should he have refused to sign anything that didn't include tax increases and dare the Republicans to join him in default? Doing that would not only be disastrous for the economy, it would be unclear who voters would blame for the misery that would result.

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