What we need to do now

So it’s actually looking like Obama has a chance to win this thing, and oh, what a mess he inherits. I think a few things will have to happen. First, we need a WPA style rebuilding of our infrastructure. The roads, bridges, dams and rails of this country are sub-par, and a big dose of federal funds would be just the ticket. How far do you suppose $700 billion would go to fixing that up? I’ve heard it said that we could build an entire national high-speed rail system for something like $50 billion. How many jobs does that create?

Second, we need a Manhattan Project style attempt to create and deploy alternative energy. We have the minds and the will, let’s just add some cash and do it. I earlier figured it would cost about $5 billion to create a photovoltaic grid big enough to provide electricity for the entire US. How could anyone vote for a $700 billion bailout and NOT vote for a $5 billion stop burning coal and oil in generators plan? Whiskey Tango Foxtrot?

Third would be to provide 5,000 visas and scholarships for Iranian college students to study in America. At $100,000 a whack for a free ride we’re talking half a billion, which is what, a few days in Iraq? Think about the diplomatic impact of having 5,000 students, which multiplied by extended families makes hundreds of thousands of new advocates for the US of A each year in Iran. That beats the hell out a preemptive nuclear strike.

Fourth, read “Three Cups of Tea” and carry it out on a giant scale. The title of the book refers to a Muslim saying that if we have a cup of tea we are acquaintances, and after the third we are friends. Long story short, an American in Pakistan and Afghanistan is building schools with local labor and donated materials. He has created more goodwill for the US and helped those folks more than Condi Rice and W could imagine.

There’s going to be a tough row to hoe as these things cost money. There’s been a huge disconnect in the American psyche about spending and taxes. The figure cited for the bailout is about $8,000 per American household. Will we pay it in increased taxes? Not yet. We’ll borrow it from the Chinese and Japanese and leave the bill for the kids and grandkids. At what point do we stop using the national credit card and start paying for stuff?

Two Republican truisms have hopefully been shattered by recent events. One, lower taxes DO NOT increase revenues enough to pay for themselves. Two, an unbridled free market IS NOT an ideal thing. Alan Greenspan yesterday “admitted that he was “partially” wrong in his opposition to tighter regulation, and added that he was in a state of “shocked disbelief” that shareholders were not protected.” Well, no shit Sherlock.

This is such a tectonic shifts it leads to a head scratching moment and wondering what the hell the Right is going to grasp to now? I stopped in at Townhall.Org, a real cesspool of a right wing echo chamber and they really don’t have much to say. The usual “John Murtha is a traitor” from people who never served in the military and bitching about the liberal media. Yawn. Can it be that the long national nightmare is over? One can always hope.

I remember a headline from The Onion during the 2000 campaign season, “Bush promises an end to eight years of peace and prosperity”. If only we’d known how true that would be. There’s a really interesting graphic showing how the rest of the world would vote for US President. Quick! Somebody spin this as “Obama is a foreigner!”

Anyway, it’s too bad that it’s taken a collapse like this to knock some sense into the electorate, but we had it coming. And thank God they couldn’t kick the can of the economy down the road like they did with the war in Iraq, making it someone else’s problem. This fetid pile of feces lies in their greedy, grabbing mitts, and there’s nowhere else to fling it.

We may end up with an entire generation that distrusts business and free markets, which would be a shame in some ways, but ooh Lord, didn’t we get too far off in the other direction? The worst part wasn’t the enabling of voracious greed, it was the idea that the poor and downtrodden somehow deserved their fates, as if some billionaire in Greenwich didn’t have a hell of a lot of luck on his side, rather than just hard work, true grit or being a member of the lucky gene club.

Maybe we’ll end up with a social contract concerned with more than keeping taxes low and every man for him or herself. I loved it when Obama said this is what W meant by an ownership society. You’re on your own!

Conservatives for Obama

This literally brought tears to my eyes. Maybe, just maybe, we can get our country back.

Wow.

Maybe, just maybe

It’s hard to remain optimistic about Obama’s chances, given all the idiots out there and the scenes from McBush/Qualin rallies that look like Nuremburg, but there are a few telling events that made it look possible.

First, conservative columnist Kathleen Parker comes out against Palin. She is excoriated by her previously fawning fans and is shocked, shocked at the murderous hatred contained in the thousands of nasty emails and postings.

Next, William F. Buckley’s own son, Christopher comes out online for Obama. His employer, the National Review, founded by his father asks for and gets his resignation.

Now, it looks like Colin Powell is coming out for Obama. I’m sure his former right wing pals will call him rather scurrilous things that rhyme with bigger and back blastered.

But I can’t think of any Progressive types coming out for McCain. Have I just missed them? Except for a few bitter idiots who felt Hillary was mistreated who claim they’ll vote McCain, I can’t think of one.

When you google “democrats for mccain” you get a series of sad little blogs written by obvious fakes claiming to be lifelong Democrats who are now by McCain, given away by the standard right wing rant by the second or third post. So do we have a chance? Do we overcome the vast ignorance and intolerance that has blighted so much of this country for so long? Time will tell.

One thing’s for sure; the poor bastard who wins the election will be facing all holy hell in January. This might be the worst condition any President has had to step into in American history; two wars, economic and financial collapse and a mind-boggling deficit. Good luck!

If it’s Obama, there are two things I hope he thinks to put in place. They have each occurred before in our history, and only need to be started and funded. The first is a modern version of the WPA, FDR’s make work program that created many of the roads, bridges and state parks we enjoy today. The modern version could focus entirely on fixing our broken infrastructure of crumbling roads, bridges and railways.

The second would be a Manhattan Project style all out effort to develop and deploy alternative energy. America cannot get back on its’ feet economically while sending billions and billions of dollars to the Middle East. For God’s sake, I hope the next President will tell us that the most patriotic thing we can do is carpool.

Drill, baby, drill? Yeah, whatever, it might make a difference of a few cents a gallon in decades, but why not develop alternatives right here in the good ol’ US of A? It could be the basis for a revival of manufacturing here; instead of making low wage service workers, we could have well paying jobs right here. I really don’t think we’ve quite reached the level of being the lazy slackers popular in the media, but we could use a kick in the ass to get out of complacency.

I’m pretty sure the impending economic brush with death could be the catalyst required to get us off the pot and out there innovating. It’s been estimated that it would take a 94 square mile photovoltaic array to provide the entire electric output the nation requires. We drove across the American west last fall, and let me tell you, there are a hell of a lot more than 94 square miles of empty, barren and eternally sunny space out there. Why not give it a whack? What could it cost compared to a multi-trillion dollar war in Iraq and a trillion dollar Wall Street bailout? And we’d have gained the economies of scale and expertise to manufacture and export this stuff to the rest of the world. What’s to hate?

Both readers of this blog know that the math usually kills my brilliant plans, like the tidal power harnesser, but I’ll give it a shot here anyway. On the scale we’re talking about, I’ll assume an installed cost of two bucks a square foot, which is about 20% off the national average, according to the EIA. 94 square miles is 2,620,569,600 square feet, which means for about $5 billion and a tiny corner of the Mojave, we could be done with oil, coal or any fossil fuels forever. Whiskey Tango Foxtrot?!? Isn’t that, like, a few weeks in Iraq?

Man, I believe Exxon made several times that in three months earlier this year. Why wouldn’t we divert a large portion of public money into building massive solar PV farms and a national grid upgrade to support it? Why wouldn’t we take a portion of bailout money and use it on wind farms? Driving across Texas and Oklahoma, it is stunning to see the hundreds of ginormous windmills twirling away across an otherwise blank landscape.

While we’re at it, we could fund development of cheaper and more efficient fuel cells, so we can store excess capacity as hydrogen, and have something with which to generate at night or when the wind stops.

Anyway, this is pretty off-topic, but the idea of an Obama Administration just offers so much hope for this kind of thing. Imagine a world in which Americans are admired, American green technology is sought after and American foreign policy is humble. It gives me shivers. As my friend Conrad says, “I liked it better when they liked us.” That pretty well sums it up.

Anyhoo, here’s to hopeful thoughts for the future in an America where we kick the petroleum habit, root out and destroy what’s left of racism, teach the world peace by example and help out the less fortunate, which unfortunately is about to include a lot more Americans.

For the love of God, stop it!

After the onslaught

I get the feeling that the rally yesterday has a lot of people heaving a sigh of relief, believing we passed through a tough two weeks, and now the financial world is going to be one big bull market party for another 25 years, but there just might be a teeny little problem with that scenario.

Like the fact that the majority of adjustable rate mortgages that will ratchet up eventually have not yet done so. Ooops.

With all that inventory out there and more arriving everyday, what are the odds the price of housing is up within a decade? I’m thinking slim to none. Result? More foreclosures and more bankruptcies.

The vast proportion of blame for this entire blowout lies in failing to consider risk appropriately when seeking returns. If the government promises to cover your losses, what risks wouldn’t you take? How would you risk $10,000 of your own money in a casino? How would you risk it if your losses would be covered by someone else, but you keep the winnings? I really hate the idea of multi-million dollar bonuses being paid to twenty something geniuses with our tax dollars as the backstop. Don’t seem right.

There have been two great episodes of “This American Life” that describe the three main pieces of the meltdown. They were titled “The Global Pool of Money” #355 and “Another Scary Show about the Economy” and I highly recommend picking up the pod casts (free!) at iTunes or NPR.org.

There are three areas these two hours of audio cover, and they do it in a really easy to understand way. The three are:

1. Just what happened in the sub-prime meltdown and what caused it?
2. How does credit crunch and what is commercial paper?
3. Why do I care about credit default swaps?

The sub-prime meltdown was an unintended consequence of a good idea taken way, way too far. In the beginning of the decade, developing nations, primarily BRIC, Brazil, Russia, India and China began throwing off huge profits, and needed somewhere to put them to get a safe and fair return. Meanwhile the US was artificially holding down interest rates to give the economy a post-9/11, post Internet bubble boost. The only safe good yields seemed to be US Treasuries (basically loaning the US government money) and American mortgages.

As you’d expect, these folks bought up all the debt we felt like issuing, and under the Bush administration that was one hell of a lot of debt. They also couldn’t get enough of America’s mortgages, which had a long history of decent yields, like 5-7% with relatively few defaults. What could be better? Wall Street contacted banker and mortgage brokers and let them know they would buy all the mortgages the banks and brokers had. This was all well and good until they purchased every last mortgage taken out by people who could afford the, packages them into financial instruments (a process called securitization) and sold them to the willing buyers from the Global Pool of Money.

The problem really started when there were no more Americans qualified to own a home and have a mortgage who didn’t already have one. This is when Wall Street, loving the big fees and commissions they were earning started lowering their standards. Hearing the actual players in this game describe what they were doing is absolutely fascinating. They seemed to know that what they were doing didn’t make sense, but it paid so incredibly well that they just kept doing it.

First, a mortgage broker of banker would call her Wall Street contact and ask if maybe they’d buy a loan with only 10% down instead of 20. Calling all the investment banks, maybe one would take it. The rest would fall in line.

Next, maybe assets could just be stated rather than proven. Slowly, but inexorably the standards slipped and slid until the now infamous liar loans, requiring no money down, no income and no assets. Incredibly, Wall Streets brilliant minds were watching historic mortgage performance (loans made under much tougher rules) and decided everything was fine. Until on day in the fall of 2007 when it wasn’t. A waive of late payments and foreclosures popped up on somebody’s radar and the whole game of musical chairs stopped cold.

Small banks and brokers were left holding these ridiculous, toxic loans they had expected to hold for hours or days, and now no one else wanted them. What caused the meltdown was realizing that these financial products made up of lots and lots of horrible loans were held worldwide by just about every financial institution out there, and because they were so difficult to value, nobody knew who was in how much trouble, and the credit markets slowed to a crawl. It’s not that all the loans were bad, it’s that no one knew which ones were what.

How much would you pay for a case of beer containing 23 bottles of tasty Heineken and one bottle of anthrax tainted Heineken? These cases of poison beer are the first thing the US Treasury is going to buy from the banks. Can’t you just see the earnest girls and boys of Wall Street scrambling through all the paperwork to find the most worthless, absolute trash debt they can find to palm off to the government for as much money as they can get? Makes you proud, don’t it?

On the second hour, we learn about the commercial paper market and how the credit market froze solid. I’ve got a degree in Economics and worked at the senior executive level at companies private and public, but I didn’t know what commercial paper was. It’s not that complicated, but given its size, I’m amazed I’d never heard of it.

When the Treasurer or CFO of a big company gets to work, the first thing he asks is “How much money do we have?” They use ServiceMaster as an example, and the answer can range from “We’re short $50 million” to “We have an extra $50 million.” Based on this a clerk will call a guy on a desk on Wall Street and either say “We need $50 million by 11 am” or “We can loan $50 million by 11 am” and generally it just got done. One day loans, simply overnight by large and substantial companies.

As the subprime crisis got worse, there was a crisis of confidence and the commercial paper market, involving hundreds of billions of dollars flowing in and out and back and forth stopped dead. No loans offered, only loans requested. Nothing. Nada. Zilch. Ouch.

That was in September 2008. And since then it’s pretty much been a one way ride. Imagine if credit cards stopped working and all you could count on was cash. Would you loan any of it you had? I doubt it. You’d sell everything you could for cash and invest in food. That’s what companies are doing, selling stocks and buying gold, US Treasury debt, gold and other safe stuff. When everyone is selling prices drop. Witness the S&P down 40% in 12 months. Buy and hold indeed!

Commercial paper market. Sound so innocent, like a division of Dunder Mifflin.

The third part of the Scary Economy covered is the market for credit default swaps, and this one is a doozy.

Remember how in the first section, everyone got in trouble because they couldn’t figure out who held how much debt and whether it was worth anything or not? Well there was about $10 trillion in the US home mortgage market as of last year. If that $10 trillion somehow went bad, somebody would at least be left holding one hell of a lot of real estate with a value that is at least a large fraction of $10 trillion. Maybe only $2 trillion, maybe as much as $7 trillion, nobody really knows, but there is some kind of value there.

A staggering $500,000 per American household, credit default swaps (CDS) totaling $60 trillion dollars are out there and not looking particularly healthy. So what is a credit default swap? It is an unregulated private agreement between two parties to insure a bond. If you have a million dollar bond from Ford, and you start worrying that Ford will default and fail to pay you for the bond, you can buy a credit default swap. In return for an annual fee, let’s say $20,000 the other party will make good on the bond if Ford fails to. Get it? It’s like insurance. But then the boy and girl geniuses take a whack at it.

What if you could take out insurance on your neighbor’s house? In insurance lingo, this creates a moral hazard, in which your motivations can become less than altruistic. You might not flick matches next door, but you might not be so quick to call the Fire Department if you smelled smoke.

There are an estimated $5 trillion in corporate debt that could be covered by credit default swaps, and yet there are an estimated $60 trillion in actual CDS’s out there. So 11 of 12 of these bets are held by people who don’t even own the underlying bond. All of these deals are private, unregulated and invisible to all other people and organizations. If a billion dollar bond fails, on average it’s going to take down $12 billion. For a $100 billion dollar bond, the losses are a staggering $1.2 trillion.

All of the organizations are in a circle, with a knife on the throat of the one in front and a knife on the throat from the one behind and everyone is feverishly praying that no one sneezes. When the Fed throws a hideously expensive $700,000,000,000 bailout at a ticking time bomb at $60,000,000,000,000 it suddenly starts to feel like we’re tossing bricks into the Grand Canyon for all the effect it could have.

See it here:
Proposed bailout $700,000,000,000
Credit default swap liability $60,000,000,000,000

That, boys and girls, is why they call it a panic.

Ignore this post

In My Little Town

After getting back to Maine this spring, it was hard working up the bile for a rant. This place can just exude calm, which happens to be the antonym of rant. Eventually politics and the economy were up to their old tricks and it was time to weigh in. But today, I want to offer a word or two about this great place my great-grandfather left England for, the State of Maine.

We live in a small village near a small town on the coast of midcoast Maine that sees a tourist trade for the high season from July 4 to Labor Day, and little after and before that. Summer can be (relatively) frantic as you pretty much make your money by Labor Day, or you move back in with Mom and Dad.

There are lots of small businesses, shops and restaurants, our own weekly newspaper and until recently our own King. King Brud, the hot dog guy, but I digress. The town has it’s traditions, including an International Rock Skipping Contest, a Windjammer celebration, 4th of July fireworks, lobster boat races and a raft of stuff that can make you miss this place with an actual ache when you have to go. There’s a reason Mainers still say, although it hasn’t been the official tourism tagline for years, “Maine. The way life should be.”

Just last weekend I had one of those Maine moments that make you realize we’re in a very special place. Last Spring, we set up a second raised bed garden across the road and added pickling cucumbers to it. By July, I had enough to make a dozen pints of dill refrigerator pickles and did. By September I had enough to make another dozen quarts and did.

By last weekend, I had about twenty huge cukes, actually two inches in diameter, and decided they were too big to pickle. My wife said why not put them in a big bowl out front with a sign that said “Free Cukes.” Occasionally passing the big steel bowl, I noticed the pile getting smaller as the day wore on. By morning there were only two left, and they disappeared quickly.

A young couple I'd never seen before was walking the peninsula and asked if the cucumbers were grown right here. They were, I told them. They said they’d eaten them with dinner and they were great.

“Do you like pickles?” I asked.

“Sure!” they came back.

I ran into the house and grabbed a recent vintage quart of dill slices.

“Take these, we have lots” I said,

With hearty thanks, they walked off with a jar of pickles wedged under an elbow. Hours later they drove by as we were throwing a cocktail party on the lawn and handed us a huge gorgeous bouquet of wildflowers they put together and drove off laughing.

When I showed my wife and told her what had happened, we both had the same response.

“Maine. The way life should be.”

Martial Law?