I'm Sick of the Greeks!

I have often blogged or commented about my opposition to direct democracy. Usually, my ire is directed at Prop 13 and other examples of how direct democracy undermines good government in California. But today I'm going to direct my disapproval at the proposal of the Greek Prime Minister, George Papandreou's, that the EU debt deal be subjected to a popular referendum in Greece. In particular, Mr. Papandreou, a social democrat from the PASOK party, is arguing that since the deal requires further austerity measures in Greece, he cannot implement them without the mandate of a popular referendum. I shall make three arguments against this step. The first is institutional: that Mr. Papandreou could in fact implement these measures immediately. The second is practical: that the average Greek citizen is not qualified to understand the implications of rejecting this plan and is even unlikely to understand which alternatives are genuinely viable. The third argument is moral: that since a significant contributing cause of the crisis is the widespread tax evasion of ordinary Greeks, they do not have the moral authority to plunge the entire European Union and the world with it, into another Great Recession.

Greek institutions are exceptionally centralized. Policy implementation in Greece, when it happens, is a relatively straightforward process. Most policies are implemented under the supervision of local prefects appointed by the interior minister. The interior minister is appointed by the Prime Minister and since Greece is nearly always governed by a single party government, Prime Ministers are the top of a highly centralized chain of command within the bureaucracy. There might be a legislative problem. Mr. Papandreou's party have a very slim majority and there have been resignations. One might suggest that this could prevent Mr. Papandreou from enacting the necessary legislation. However, the main principles of the austerity measures are in line with the typical agenda of the center right. As it happens the only serious opposition party in Greece is a center right party, New Democracy. Surely some deal could be struck that would allow cooperation between both parties. Indeed, several PASOK members of parliament have called for a grand coalition of national unity between the two major parties to do exactly that. The only reason a referendum is "necessary" is because Papandreou is trying to avoid getting the political blame for painful austerity measures.

So why is it more practical for this be done by a representative legislature instead of a referendum? There a three reasons for this. First, a referendum by its nature can only be a straight up or down vote on a given proposal. Negotiations and amendments, even minor ones, are not possible. A legislature allows for nuance and flexibility that may be critical in a time of monumental economic crisis. Second, voters cannot be expected to understand the complexity of all policies. One should not expect the average voter to understand the enormous complexity of a debt restructuring program that involves numerous national governments in Europe, North America and beyond along with global intergovernmental organizations like the International Monetary Fund. Third, if a majority of Greek voters reject the restructuring package out of a reluctance to accept the pain of the austerity elements, it would almost certainly provoke a disastrous financial tsunami on the order of the 2008 financial collapse. The Greek voters simply cannot be relied upon to understand the consequences not only for their own country but for the world if they indulge in some emotional populism in the form of this referendum.

But why, you may well ask, should a democratic society be expected to accept massive economic pain (and it will be painful) without being given the chance to vote for their own interests? Normally, I'd be quite open to this line of reasoning. However, the Greek situation is one of their own making. International banks did not force the Greek government to neglect the training and staffing of their tax collection authority. International banks did not force individual Greeks to take advantage of that lack of tax collecting enforcement by engaging in widespread tax evasion. As I have said in other blog entries that raising taxes is not a viable option because the Greek tax collection capacity combined with the ubiquitous tax evasion means that raising the nominal tax rates will simply change the text of the tax laws that everyone is ignoring. It won't actually generate more revenue. The Greek people, politicians and bureaucrats brought this catastrophe on themselves and the rest of us. They should NOT be given a veto over how the world decides to fix the mess.

There is plenty of pain being shared around the world in this restructuring. German tax payers will be paying off Greek pensions for a generation or more as it is. German taxpayers are also putting up additional emergency funds to cover future problems should the debt crisis spread to Italy or Spain. French banks are going to write off enormous portions of the debts Greek borrowers owe them. The Italian parliament just approved austerity measures of their own to stave off a similar crisis emerging in that country. Ireland has been living with these austerity policies since 2009. For the Greeks to now sabotage this plan is adding insult to the injuries already being endured around Europe! Enough! Mr. Papandreou should enact this law NOW. And if it means his political career ends after that, so be it!

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Obama's Proposals Don't Change Student Loans

It has been reported that the President wants to change the student loan program. One change that is being touted is that students are allowed to consolidate private and public student loans.

Well, this isn't a change. This is a long standing policy. I had both private (i.e. Sallie Mae) and USDE loans (Public). I consolidated them with the USDE in 2000. What they do is average out the interest rates on all your loans to get a new interest rate for your current loan. The benefit is that you make one payment to one lender at one interest rate. Usually this means a single lower monthly payment. Credit counselors have used this trick for years to help "restructure" the debt of their clients. This type of consolidation is not new nor does it represent a change to the current student loan systems.

Assuring that student loan payments don't exceed more than 10% of someone's disposable income doesn't represent much of a change either.The student loan program introduced an "income contingent" repayment plan back in the early 2000s. They take your pay stub and based your monthly student loan payment on your gross salary. The bad news here is that if your income is low, then your monthly payment under the income contingent program may not be enough to cover the interest that accumulates over the moth. Interest that is not paid is capitalized, meaning added to the principle of the loan. So there is a whole cycle there. Interest needs to amortized like they do with home mortgages to really be fair and help students pay down the loans. Building bigger principle is simply a desperate measure to alleviate today's pain. Income contingent re-payment only keeps people under the boot of debt longer.

I am not sure if the Obama Administration is being misunderstood by the media, or if it really is selling a load of crap to the "Occupy" crowd and the voters. I would hate to believe that the Obama Administration is that cynical.

Really the best deal for students and lenders is what I already proposed in my earlier post.

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The End of Gadhafi

It's official, Lybia is now well rid of Moammar Gadhafi. This may seem like a minor event to most Americans who - justifiably - may be focussed on more pressing economic troubles at home. But this could have enormous, mostly positive implications not just for the Middle East for Africa and the rest of the developing world.

Gadhafi saw himself as world revolutionary leader with particular interest in tilting at internationalist windmills. In the 1970s Gadhafi was a prime moving force behind abortive plans to unite various Arab countries into the Arab Islamic Republic or the Federation of Arab Republics. The FAR plan's collapse led eventually to a war between Egypt and Libya (Egypt won reasonably easily). In the 1990s, Gadhafi turned his vision southward and pushed for the creation of a United States of Africa.

Gadhafi was not only a consistent backer of terrorist attacks but he was also the primary source of training and weapons for some of Africa'sworst dictators and irregular militia groups. Gadhafi had close military ties with (among others): Idi Amin, Charles Taylor, Robert Mugabe, the Janjaweed, Slobodan Milosevic, FARC, Hugo Chavez, Daniel Ortega and other, less infamous, tyrants, cleptocrats, thugs and killers. It's worth noting however that Gadhafi was consistently incompetent militarily. Other than successfully winning his coup d'etat 42 years ago, I don't think he was victorious in any military operations of note (I may be wrong but a string of famous defeats is foremost in my head now).

This man was not merely a quirky and somewhat clownish dictator who oppressed his own people. He was a force for chaos and bloodshed around much of the world. He had a knack for picking loathsome allies. His only saving grace was his military incompetence. If he had succeeded in more of his plans, the world would have been even worse off than it was given his bloody failures.

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Occupy Wall Street: Student Loan Forgiveness

Some Occupy Wall Streeters are calling for student loan forgiviness. This sounds like a great idea, especially for people like me with high debt. However, I disagree with this proposal. Rep. Hansen Clarke (D-MI) has sponsored a bill to forgive student loans and MoveOn.or is sponsoring a petition in support of this.

I do not agree with complete loan forgiveness. Nor do I think it should be discharged in bankrupcy court. They tried that once and young people ended up filing for bankrupcy at alarming rates. 1) moral hazard arguments still stand 2) So long as the price of education is inflating faster than that of medical care, student loans are going to be a necessary and permanent evil. We cannot create disincentives for lenders or further barriers to qualified students. 3)Currently, there is a new bubble forming around student loans as they are packaged and sold as derivatives. The chain reaction has been sent into motion just like the housing market. This will encourage larger loans to lesser qualified students, and further fuel rising tuition costs.

But the program rules should be changed to make the loans more fair on borrowers. I have some more moderate suggestions that I would like lawmakers to consider.

Some background: I graduated with my MA in 1999 with over $60K in debt- of which about half was used for tuition and the other half for housing and expenses. I took on this debt freely, but out of necessity. The job market requires a graduate degree, I needed the money to help pay for it. I consolidated my debt with the USDE at 7.26% interest, low compared to many of my predecessors.

When interest rates began to fall in the mid-2000s, I called the USDE to see about re-financing and was told that this was not legally possible. Once consolidated, borrowers are not allowed to refinance unless they are willing to take out a private loan, usually a second mortgage. I didn't own a home and couldn't afford one with my debt levels froms school, and even in 2004 most lenders were not going to provide a loan without collateral. Therefore, I continue to pay an interest rate more than twice the current market rate.

I do receive a tax deduction on the interest I pay. However, this is little help throughout the year as monthly bills come due. Nor does it adequately address the inherent unfairness (almost usury) in how interest is handled in the student loan programs. And let's face it, it isn't an asset-backed necessity like housing. So I'd be willing to sacrifice it for some real reforms.

Interest on student loans accrues daily. And no matter how much you pay beyond your fixed amount, the interest is always paid first and it usually eats up most of the payment. And what’s worse, it's a moving target. The amount I pay in interest changes constantly and is nearly impossible to budget for, calculate, or get around. To date, the amount I have paid back in interest is nearly equal to the principle balance I started with and I still have $42K to go. Currently, if I were to make payments so that I could pay the remaining balance in 10 years, I would have to pay over $750 a month, down from the over $800 I would have paid 10 years ago. Either
way, that's not possible. But the debt is still my responsibility, students still need loans, and the USDE needs the revenue stream these loans create.

Rather than forgive debt entirely, I would suggest the following:

1) that the law be amended to allow for refinancing of all student loans down to current rates
2) once the amount paid back in interest exceeds more than say 20% of the original principle, the interest should be curtialed entirely while the remaining principle is paid down.
3) if #2 is not feasible, then the interest should be regulated in the same way has home loans.
4) outlaw the selling of derivatives on student loans.

These changes would lessen the burden on borrowers without the moral hazard associated with total loan forgiveness or the loss to the lenders, which includes the USDE. They may be enough to prevent fueling education inflation. Making the terms a bit more fair would be welcome and would help the longer term economy and a generation of young people trying to get started in a jobless economy who will default in droves if we don't do something.

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Rading Social Security Funds

This is a short post, but this article, Looting of Social Security posted on Fed-Smith.com today is the clearest explanation of what has happened to Social Security funds that I have yet seen. It is a quick and easy read.

Basically, the 2.7 trillion surplus that was to be invested in Social Security has been poured into the general fund and spent. It's gone. There is nothing but a literal cabinet filled with IOU statements.

Now, will the government repay this money?? Well that is a good question. From where will it get the money? Since it wasn't invested as promised.

Again, I remind everyone that this isn't news. Remember Al Gore and his "lock box". So we are all investors who have been swindled. So, in light of this, I agree with the President that the 2% cut in payroll taxes should be continued. And it's all legal. Because in a democracy, you can pass all kinds of laws to make what you want or need to do legal. In another context, this would be termed "corruption".

Because money paid for social security is going into the general fund, it amounts to a 2% income tax hike on the salaried class. Another reason we are the 99%.

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National Sales Tax... Worst idea ever

Herman Caine is surging in the polls as the latest "Not Romney" As he is, the media is falling all over themselves to do halfassed analyses of his 9-9-9 tax plan. As you may have heard this refers to a 9% flat income tax, 9% flat corporate tax and a 9% national sales tax. Most of them focus on whether it will raise or lower the over all tax burden on the average family or whether it will generate enough revenue to cover existing spending. It is probably not surprising that a plan put forward by a Republican reduces revenue and further shifts tax burden away from the wealthy and corporations and onto middle class families. But the problems with the 9-9-9 are, if anything, even more catastrophic than simply yet another screwing the middle class the Grand Old Plutocrats. That 9% sales tax is a like a bomb let off in the heart of the US economy.

Right now, retail sales/household spending make up about 70% of the US economy overall. If we suddenly imposed a 9% sales tax to everything bought in the US, it would certainly cause that vital sector of the economy to shrink. Consumer demand in the United States is not only a vital part of our economy it is an important driving force for the entire world economy. For example, China exports about 20% of all their exports to the US alone. If the US demand for Chinese stuff suddenly drops, it would be a serious blow to the Chinese economy as well. The same goes for Mexico, Canada, the EU, etc etc etc.

With the world economy in a fragile state now, Herman Caine's plan could plunge the world into a demand slump depression along the lines of what we saw in 1929. Imagine, just as we are showing the faintest hints of recovering from a capital crisis recession and just as the Europeans are getting their collective act together about Greece, Cain would have us voluntarily jump off the cliff again. You can't run a global economy like a pizza delivery joint.

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Oct 5th Statement from Occupy Wall Street

They didn't leave anything out. That is for sure!

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Neutron Bomb

Last night, Harry Reid exercised what is known as the "nuclear option" in some circles over Senate rules. He led a majority of Democrats to overrule a parliamentarian and cut off the right of the minority to call for multiple votes on amendments after cloture. It happened rather unexpectedly in an attempt to an amendment to the Chinese-currency-kvetching bill. McConnell wanted to force a vote on an amendment containing Obama's original jobs bill (not the current version with the millionaire's tax) to embarrass the president and cause more delay. This restricts post-cloture maneuvering by the minority. Of course, this is not really a nuclear option in the sense that that term was created to talk about outlawing the filibuster altogether in 2005. (Note, according to The Hill, a similarly arcane such use of the majority-overrule took place in 2000 under Bill Frist's leadership to eliminate votes on "sense of the senate" resolutions under such circumstances.)

This is actually a very big deal. It is the first time Harry Reid has ever done anything to stand up to the minority in the Senate worth a damn. It is the first time he has reacted seriously to the way McConnell has flouted tradition to all but shut down the Senate. Republicans are threatening direly about possibly messing with the filibuster when they're in the majority as retaliation. I have no doubt they will do so no matter what Reid does. I hope we see more of it. Part of what made it work was the Reid sprang this on McConnell unexpectedly and got the 51 votes without much fuss and bother. No showdown, just a win.

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Two Visions of Frustration

In light of the last post about the Occupy Wall Street protests and how they might be an emerging contrast to the Tea Party I thought I would post two links to the Democratic version of the "us vs elites" meme and the Republican version of the "us vs elites" meme.

Here is Elizabeth Warren's now famous statement about fair taxation and "class warfare."

Here is Governor Rick Perry's address to a Republican/Tea Party rally in Austin Texas.

One thing that strikes me is that Warren's rhetoric is must more focussed economic distribution. Who wins and who loses from the current economic regime. Perry's rhetoric does mention taxes but mainly focusses on abstracts like "states' rights" and "the constitution" and "the founding fathers" etc.

Another difference is that Perry's rhetoric - to the extent it talks about economic distribution - focusses on the idea that government should stop taking things from individuals. Warren's rhetoric focusses on the idea that corporate elites have been taking things from the community without paying anything back.

It's not obvious to me which message will have more traction in the midst of ongoing sluggish economy or renewed recession. But certainly the mere fact that there is now a clearly enunciated and easily understood alternative to the "taxes bad" mantra of the Tea Party makes the 2012 election campaign more competitive. It's also refreshing that this may turn out to be the first election in a long time in which the two parties are clearly debating rival visions of the future in a substantively meaningful way. It will be nasty and hard fought. And many people will be upset that their side didn't win but this is exactly the kind of policy debate so many people who are frustrated with politics as usual want to see.

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Occupy Wall Street A Potential Game Changer?

Something interesting is happening in response to a year of Republican austerity measures imposed by the 2010 elections at the state level and by House Republican blackmail over government shut downs and government debt defaults. A new wave of protests have emerged modeled on the "Occupy Wall Street" protests in NYC. The protests are spreading to cities across the country. What's more, while unions were not the initial driving force, they are quick to see the potential of allying themselves with these protesters. Several big unions are planning to join the protesters.

Here is why I think this is potentially a big deal. First, this seems to be a continuation of the anti-union busting protests in Wisconsin that lead to the recall of several Republican state legislators in that state and threatens to lead to the recall of Republican governor Walker. These kinds of protests are provoked by Republican policy overreach and have a record of have electoral consequences.

Second, and this may be more important, both the Wisconsin protests and the Occupy Wall Street protests are changing the nature of the anti-elite populism that the Tea Party has tried to tap. Where the Tea Party directs their ire at government and intellectuals, these protests are defining the elite in terms of wealth. Instead of calling high school teachers "communists" or railing about homosexuals, immigrants and "librul elites" these protests are zeroing in on the mega wealthy at the top of corporate America. In other words, the Tea Party now has serious competition for the leadership of the angry masses. If the new wealth-based definition of bad-guy elites takes hold, it will directly undermine the Republican 2012 political campaign and find an obvious ally in the Democratic party which is already pushing for more transfer of wealth from the mega rich to the middle class and poor.

Finally, the single greatest fear of the Republican party is a high turnout election in which large numbers of middle and low income people vote based on their rationally identified economic self interest. So long as this segment of the population can be distracted by "Guns, Gays, and God" or by the Tea Party's cartoonishly ideological rants, the GOP can survive the fact that their policies are actually likely to have a negative impact on the clear majority of voters' lives. These protest threaten to put the focus of the 2012 elections on income disparity and tax fairness. If those become the dominant themes of 2012, it gives the Democrats and inherent advantage. It also gives Democrats something to rally their otherwise demoralized base around.

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Obama's New Approach

President Obama has adopted a new approach to going after the Republicans. Rather than bending over backwards to compromise with uncompromising jerks, he is focussing the spot light on meaningful policy differences that most people can readily understand. This is a good idea. The deficit/debt problem is fundamentally a distributive one. Specifically there is no solution that makes all interested parties better off without making someone worse off. That means that any debate will ultimately boil down to WHO is going to be made to be worse off that the others may benefit. Republicans are insisting that it should be the middle class and poor who are made worse off so that the wealthy and corporations benefit. That's a hard position to defend when it is revealed for what it is.

The Democrats' position is that taxes should be raised on the top brackets and corporations. At this point the mood of the country is increasingly angry with exactly the targets of these increases.

So long as Obama continued to try to find common ground the stark differences would not be revealed and Republicans could more easily hide the real effects of their policies. But with Obama's new confrontational approach, the Republicans will be forced to state exactly why the super rich should continue to pay low tax rates while the rest of the country struggles. Obama dug quite a whole for himself through the (I think necessary) compromises to avoid defaulting on the debt, but the more the 2012 election becomes about these two competing visions, the harder it will be for Republicans to win. If the Republicans are foolish enough to nominate Perry, the contrast will only become starker.

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In Defense of Crossing T’s and Dotting I’s

There is an emerging talking point among Republicans that the way to create jobs is not to spend government money on infrastructure projects or even to cut payroll taxes or give tax breaks to companies that hire new people. All of these things have been supported by Republicans in the past. But now they swear that the only policy worth pursuing is eliminating a wide range of existing regulations. I was watching CNN this morning as I ate breakfast and it is clear that American journalists are simply not equipped to report on this subject. Instead of engaging in a discussion of what regulations are and how they are enacted, CNN ran a human interest style story where they interviewed the owner of a small car painting business in California. He swore that he was personally committed to protecting the environment etc but that some regulations were simply unreasonable intrusions into his business. He described these as regulations that did nothing but force him to “cross t’s and dot I’s.” The point of the story was clear: Regulations are silly because they make well intentioned business owners waste their time filling out paper work instead of creating new jobs. This interview reminded me of a conversation I once had with a group of small business owners at a yacht club in Santa Barbara. They are standing around grousing about exactly this sort of regulation. They hated it and blamed “socialists” in Sacramento and Washington for the whole thing. Here is the gist of what I told them.

The complexity of the paperwork is not a result of “socialist” dominance. On the contrary, the excess of paperwork is a direct result of a regulatory system that depends overwhelmingly on self-reporting. The self-reporting approach was insisted upon by conservatives who were able to force it through the necessary compromises so common in American politics. In more centralized democracies, such as the UK, there is a good deal less paperwork to fill out. However, such countries have a good deal more inspectors barging into businesses and snooping around. I asked the cluster of businessmen at the yacht club if they would rather have paperwork or government inspectors and they all said, “Paperwork!” without hesitation.

Clearly the Republicans are trying to use the persistent economic troubles as an excuse to undo a century of regulations entirely. They want to return us to a Dickensian dystopia of the 1890s. If we eliminate the paperwork without hiring thousands of new inspectors at the state and federal agencies that enforce environmental, workplace safety and other regulations, we would effectively eliminate the original regulations. These regulations were not imposed to make life difficult for business. Rather they were put in place because businesses were making life unlivable (literally) for the workers who were getting sick and injured in dangerous workplaces, the neighbors who were being poisoned by industrial run off and the many species that were being driven to extinction by the same (such as the bald eagle that Republicans love to fetishize).

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Marketing the Presidency-There Danger Lies

Prepare for a rant. Today I was reading NBC's news blog. The headline was "Obama's Rough News Day". After describing why the day was tough, the article says, "All of these stories can be explained away via individual context. But taken together, they signal how Obama’s brand has taken a big hit." (Italics are mine")

It is no secret that we market celebrities, politicians, and ideas like candy and children's toys. The lines between simple advocacy and unadulterated celebrity have long been blurred. But I beat an old horse, already whipped by Noam Chomsky. The difference today is the ability to target specific people and to gather data using new technologies. The ability to hit smaller and smaller targets only increases with each passing day. And it segments and balkinizes the body politic. Marketing to a vast audience is now narrowed to brainwashing a specific piece of the electorate. And it plays with our minds. Politics is no longer a national discussion to be held above the din of marketing. We can now target the 10 people in Indiana who we need to convince to vote for us rather than the entire state.

We use to joke about the celebrity of Bill Clinton, or JFK for that matter. But the entire presidency? This NBC thing is the first time that I have seen such a blunt admission that the presidency is now a "brand". It'd be funny if it wasn't so disturbing. Palin is a brand. I haven't heard yet of the "Bachmann or Romney brand". That's just because they haven't yet been fully market tested. But they are working on it. They already know that the one line testing well for Bachmann is "“Make no mistake about it, Barack Obama will be a one . . . term . . . President!” (New Yorker: Leap of Faith). They can do this with audience response systems. And they ensure that her "Barbie Doll"(Mattel, slogan: "Creating the future of play") image is well honed and protected. To be fair, all candidates are doing the same thing.

We now live in a landscape where the nonsensical is standard for marketing. Can you tell me what "Natural French Fries" are? If they are now natural, what the hell have they been up until now? That ranks up there with Jumbo Shrimp and all natural flavor, which means what again? Chemistry meant to taste natural, or that they actually added a dab of real fruit juice to that high fructose corn syrup? Our politics are as nonsensical. "It's time for America to be America again" (Rick Santorum). What has it been up until now? Pseudo-America? The line is actually from a Langston Hughes poem- a liberal civil rights poem.

Gee, maybe we should just give up and go all the way. Let's cut the deficit by funding our government institutions like we do sports stadiums. After all, California was ready to sell off real-estate to close its budget gap. Maybe the Super Committee (reminds me of jumbo shrimp again- just a flavorless crustacean, higher in useless cholesterol and empty calories than the regular shrimp) should try this out. We can sell the White House to Proctor & Gamble and rent it back, calling it "The Gillette White House". We can do the same with Congress. I can see "The Coca Cola Capital Dome". And on the Old Executive Office Building, we can add a digital billboard with all sorts of great advert slots for sale. Before the opening speech at the next party caucus they can announce, "This caucus, hosted in Tazo Stadium, is brought to you by Pepsi co., a family of beverage firms bringing naturally refreshing ideas to you!" And we can digitally swap out the banner ads along the balconies of the convention center like they do at Pro tennis matches. (Maybe they are already doing this?) And we can employ Google technology to insure that if you check a candidate website every banner ad on your free e-mail engine will belong to that candidate or his friends. They can link it to the local party congressional candidate (thanks to that address you provided on your Facebook page) to ensure that you get the full party slate.

Then when we can overlay consumer buying patterns at Home Depot against voting tendencies and demographic data to identify the 10 those Independent voters in central Indiana to the exclusion of everyone else. And while we are at it, we can make sure to find clever ways to disenfranchise those 50 voters in county X who always vote for the wrong state assembly representative. We need wall-to-wall one party rule, you know. And we don't even need gerrymandering to do it anymore. Gerrymandering has gone they way of the filibusterer. All of this subverts the democratic process. Everyone of us becomes nothing more than a cog in the marketing wheel- divorced from the means of production. (Gee, can you say Carl Marx? Moment for thought. Hummmm.)

My favorite brand is "The American People". What a brand that is! I can see it now, "American People" bubble gum- light, airy, and full of hot air! The label can be emblazoned with eagles and flags. I just watched a movie the other day where Susan Hayward's character says, "Millions of dollars spent to sell the American culture to the world, and still no one knows what Root Beer is." We are bought, sold, and spent.

So, to end my rant, my dad use to shake his head and say, "you can't stop progress". And he is right. But you should be able to control it. The day we turn entire branches of government into nothing more than brands and commodities, we have lost as a citizenry. The technology has taken over and we don't matter to the process. Only the 10 people in some distant corner of the nation matter. And candidates will further lock themselves in DC while radicalizing their ideas and rhetoric to capture those 10 people. And in the process, the whole purpose of getting elected by a majority to genuinely to govern and serve, is lost.

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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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