On Freedom, Shedding Skin, and Creative Destruction

Three issues dominating the news this past week felt like they had a common thread … I wasn’t sure what it was but here’s my take… let me know your thoughts

1) Religious Freedom: The Mosque project near ground zero

Obama appropriately waited for NYC’s Landmarks Preservation Commission to green light the Mosque project in Lower Manhattan before weighing in on the month-long simmering dispute. Obama nobly stated “This is America, and our commitment to religious freedom must be unshakable. The principle that people of all faiths are welcome in this country, and will not be treated differently by their government, is essential to who we are.” Well yes, he is right of course. Yet judging by the reactions of some cowardly liberals, rabid conservatives and the seething White House clarifications, being right does not make it politically savvy… or does it?

Let’s cut to the chase – this is not about the mosque, security, Islam, religious freedom or constitutional rights. It is about politics, the 2010 elections and … well, about race. Because there is still a broad swath of Americans that have yet accepted that a Black man runs the White House and an even broader swath that believes Obama is a Muslim, calculating politicians (Gingrich, Palin, Lazio, etc.) are quickly capitalizing on a small local issue to rally the extreme sentiments of their national base and lambasting the President with the usual critiques of being weak on national security, slow on mending the economy, and favoring big government.

While it is “politics as usual”, you know we are rapidly entering the most pernicious kind of politics when smart politicians (I don’t think Gingrich or Boehner are idiots – Palin…) exploit the ignorance, fear, and extremism of its base to achieve short term electoral gains even at the risk of flouting the very Constitutional provisions they claim to protect. OK, but Obama knows that and he probably anticipated the reactions. He may even have set this as a trap for them. So, is he betting on his opponents making stupid and contradictory blunders that will prove fatal during the fall elections? If so, he will need the full support of the Dems. That is not a sure bet.

If he loses, the Mosque will be the least of our concerns. It will mark the time when America’s core values of tolerance and inclusion disappeared.


2) Shedding Skin

That brings me to the Republican Party and the next elections. Lately, many articles argue and results of primaries show that Republicans are fielding a number of new outsiders with little political background and even less established “Republican” alliances. Tea Party candidates and other Independents are rising fast and are expected to fold into the Republican Party come crunch time. In other words, the Republican Party is quickly shedding skin, rejuvenating and expanding its base, its leadership, and its message. It is still in the dumper in the approval ratings, but it seems to be gaining traction. The message is narrowly concentrated on government deficits, debts, intervention, bailouts and taxes … all either too high or too much. The mood is for less of everything and mostly less of well-established insiders with heavy baggage. It does not augur well for Democrats who are now viewed as the staid Party with the same old recipes of higher taxes, more government spending, and stronger regulation. The Party of “Change” is no more.

Whatever the merits of both positions is not the issue here … all I want to say for now is that no matter how you cut it, the Tea Party and the newly-skinned Republican Party are giving voice to a lot of people who are sympathetic to views of various elements of the far-right (the Nationalist Party being far out there but closer and closer) and who never had a channel to express their feelings and desires. In other words, the new Republican party is saying “It’s OK to be a Redneck – come with us, come campaign, come vote – Vote for us!” … and why not? Let them all huddle under that big inviting Republican tent… better there than in the bushes. I mean, had the Tea Party existed back in 1995, Tim McVeigh would have probably ran for Senator rather than blown up Oklahoma City. So, in a way, the Republicans are more tolerant and more “inclusionary”… of the far-right elements.

So we should expect, and indeed are seeing, that as more and more McVeighs find that voice and means of expression, the Republican Party will by definition move further to the right. My fear is that if this recession and unemployment picture doesn’t get much better very soon, the Democrats will implode in 2012 and the Republicans will rush in with a strong army of McVeighs in its ranks.

Hello Mosque?


3) Creative Destruction

Finally it comes down to this again: “it’s about the economy stupid.” This election, as most others before it, will be determined by the strength of the domestic economy. Voters don’t care much about what was inherited or how difficult it is to fix. They vote, it appears, on the basis of verifiable results: “Am I better off this year than last?” So the fact that we’ve been in recession and anemic recovery mode ever since the end of 2008 – pre-Obama – and are expected to muddle along well into 2011 or 2012 is not a very good sign. What the Democrats need is a swift turnaround and there is simply no leadership to show the way. Academics, professional economists, and pundits are polarized on issues of deflation, deficits, bailouts, taxes, etc. Frankly it’s hard to take one side or another – we are in uncharted waters. As a result government officials are paralyzed and keep doing the same thing over and over again and expecting different results – what was that saying from Einstein? …

Anyway, to make my point clear, last week the Federal Reserve and Treasury served us some new leftovers of the same old ineffective remedies: low interest rates and more quantitative easing (purchases of longer-term notes). Please note that the Fed Funds rate has been set at close to zero (0) since December 2008 (that’s 20 months) and that the Fed has already purchased over $2T (Trillion) of assorted bonds since early 2009. And what’s the result? Well after showing a pulse… the economy seems to be dying down again and fast. So why try the same remedy (in a lesser dosage to boot) if the first major wallop didn’t do the trick? Because change, real change, is always difficult to accept and implement.

It’s time to accept the fact that Banks are not lending and borrowers are not creditworthy because they are simply filled with too much bad debt. All Banks still have too many toxic assets in their bellies that are valued at fantasy prices. Bankers know better than to squander their capital (in case another wave of defaults emerges) and would rather play safely on the yield curve. So no or little lending. Likewise a lot of borrowers are filled to the gills with bad debts rendering them practically insolvent. So little demand for loans. Lowering interest rates will not help either one out of their respective mess. Only reducing debt levels will.

So how do we start talking about that issue like adults? This nonsense about moral hazard is so disingenuous at this point; especially when bankers are reaping record profits and bonuses again… it makes one wonder. The fact is that banks, investors, borrowers, and government will have to take major haircuts. It’s time to reinstitute an RTC-like structure to squeeze the toxicity out of banks and to implement arrangements designed to alleviate or write-off heavy borrower debts. In other word, we need a clean slate or what was once called Creative Destruction. But we seem to lack the former and don’t like the latter.

If we don’t do something more creative soon, the winds of political change will bring their own version of destruction.

The Fed, Liquidity Traps, ST Greed, and LT Fear

The financial markets and probably everyone else have been awaiting today’s Fed decision as horse-race bettors do Kentucky Derby day: with the excitement of blind hope mixed with the anxiety of the unknown. In other words, we’re all waiting for leadership from somewhere especially since it hasn’t been coming from either the private or public sector. And everyone is debating whether we’re in the grips of deflation or inflation, too much intervention or not enough stim, the role of the State, this or that … it makes me dizzy.

The Fed finally announced it will reinvest proceeds from maturing mortgage bonds into long-term Treasuries. So the Fed is not reducing its balance sheet and wants to put downward pressure on long-term interest rates. The rationale being, I guess, that businesses are not investing because rates are too high (but wait, they’re already at historic lows) and that consumers are not spending (think housing or big items) because mortgage rates are too high (wait again, they’re already at historic lows too). So I don’t quite get the Fed’s action… but the markets liked it… figures.

It seems to me that we are in a classic liquidity trap or about to enter into one. Lowering rates will not make already cash-rich businesses invest or hire more if their top lines are not growing. Likewise it will not make over-leveraged consumers assume more debt to spend “unproductively” – if they could get more debt at better terms, they would rather pay down current debts! And most Banks are quite happy playing the yield curve to slowly recapitalize their balance sheets… before the next wave hits…

This morning, Mohammed El-Erian, CEO of PIMCO, justly said that looking solely to the Fed for a magic bullet was unrealistic. Rather he suggested that "the country is facing structural issues” and that what needs to be done is "First, selling a vision, a long-term vision as to what the policy response is to restore growth and employment. And second, to fill it out with proper structural policies."

Well … Here are two concepts I have not heard since the late 1970s – Long Term vision and Structural policies… Hello… anyone listening?

That will be a hard sell. As I wrote this morning, our system is geared to satisfying Short Term greed … and anything with Long Term or Structural in it smacks of Socialism… which is to be feared as Hell, right?

Fed Can't Do Much More to Boost Economy: El-Erian

Wall Street’s obsession with the Short Term

A major piece of the GFC puzzle is Wall Street’s obsession with the Short Term … meaning quarterly metrics, earnings, bonuses, job hopping, etc. It’s a cultural aversion to the Long Term which, in the minds of many, means Planning. Oh my god, Planning? Isn’t that a socialist/communist thing?

Anyway, the structure of bonuses is obviously at the root of all evils here and the SEC and Ms. Story are missing it in the article linked below. The former by design and the latter by ignorance. Yves Smith, of Naked Capitalism and author of ECONNED, might be a bit too hard on Ms. Story but Yves OWNS this story and she's 100% right in wanting to expose the truth. The fact that too few of us actually care about what really happened explains much of why we are in such deep shit …

NYT Muffs Merrill/Magnetar Piece (And Why is No One Investigating the Related Bonus Fraud?)

Greenspan's Revisionism and the Dems' Fifth Column

Does this sound like a man who believes we’re about to embark on a new vigorous growth spurt?

If it’s just “politics as usual” why aren’t Republicans/conservatives supportive?

What Greenspan is saying is the sad truth I think… I wished Obama would have said it 2 years ago… read on:

“Our choices right now are not between good and better; they’re between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about.”

He said the country’s fiscal problems could not be solved by higher taxes alone. “We are going to have to confront a major surge in medical entitlement spending. Irrespective of what you say should be done on the tax side, you still have to cut some benefits on the expenditure side.”

Greenspan Calls for Repeal of All the Bush Tax Cuts


Lastly … the article by Matt Taibbi on how FinReg was sausaged into reality is outrageous. The maneuverings of Dodd-Frank go way beyond usual political machinations - it's legislative bait and switch - although legal, it is totally unethical. If Taibbi's sources are real and verifiable, the Democrats have just handed plenty of ammo to the Tea Partiers come Fall.

Wall Street’s Big Win

Where do you stand on the Spectrum?

Have you ever wondered where you really stood on the socio-political spectrum? Is it always issue-specific?

What about your overall stance when adding an “economic philosophy” dimension to your political views?

Are you conflicted?? Does any of this make sense? Does the communication/internet revolution alter this prism?

Anyway, look at the 2 graphs below and if you want to know where you stand … take the test (5mns) by pressing this link … Welcome to The Political Compass

… no cheating …

The Rule of Law, Tyranny, and the Corruption Syndrome…

Lately it seems like the US is sinking deeper and deeper into the dark caverns of corruption…

The article below by Taleb suggests this is happening mainly because wide differences between public and private sector incentives work at cross-purposes. Taleb rightfully points out that heavy regulatory environments (a form of Tyranny) carry the seeds of their own self-defeating “arbitrage”. While I agree this might be partially responsible for the spreading disease, I feel there are other issues at play (breathless Capitalism; widening income inequality; diminishing social cohesion; human nature; etc.)... but that's another post...

The real question is how to put an end to this behavior… Taleb offers precious little on that!

The only thing I’m fairly sure of is that if left unchecked corruption will destroy the fundamental trust binding society. There is an inverse relationship between corruption and trust... and when trust is broken what usually ensues is either civil strife or a police state... and the time gap separating the two spheres can narrow surprisingly fast… It’s happened in the most “civilized” nations before… don’t fool yourself!

The Regulator Franchise, or the Alan Blinder Problem