Viva Obama!
One more time, with feeling:
Toxic Sludge
In my last post I attempted to make sense of the origins of the current economic crisis in the subprime mortgage debacle. In this post I look at the solutions being offered and ask: Why do we need a bailout?
As explained in the last post (make sure to view the cartoon slideshow on the subprime lending crisis) the current scandal is the product of banks packaging bad loans as AAA quality securities which could be resold in a deregulated financial marketplace. As a result, the entire financial system is now based on a lot of bad paper. The technical term for this is “toxic sludge.”
The problem is that nobody, not the banks, not the government, knows how much of this toxic sludge they own. And they don’t know how much the other banks own either. So nobody can trust anyone else. As a result banks are unwilling to lend money to each other. That’s why the government needs to step in and buy up this toxic sludge.
That’s why having the Treasury Department buy up all those toxic assets is probably a good idea. Recapitalization isn’t enough if it leaves banks still owning securities with values so variable that it’s too risky to lend to them anyway. We need to get that stuff off their balance sheets in order to make their financial position more transparent and we need to increase their capital base (which the Paulson plan accomplishes by paying above-market prices for the toxic sludge in return for a guarantee of equity down the road if the sludge eventually has to be sold at a loss). That combination has a better chance of working than either one alone.
And why is the toxic sludge so hard to value? Can’t we just make banks open their books and provide detailed information on all this stuff? Sure. But you’ve still got two problems. First, in the later days of the mortgage free-for-all, mortgages were packaged up with no documentation at all. So no one, not even the banks, knows for sure just how good or bad their mortgage portfolios are. Second, even if we knew that, their value would still depend on how much farther down home prices have to go. And that’s anyone’s guess.
Where will the money come from?
Paul Krugman put it best: “it doesn’t have to come from anywhere. Ultimately, the Paulson Plan will move money in a circle.”
James Gailbraith elaborates:
Despite the common use of language, the capital cost of this bill does not involve “taxpayer dollars.” It authorizes a financial transaction, exchanging good debt (U.S. Treasury bills and bonds) for bad debt (the “troubled assets”). Many of those troubled assets will continue to earn income for some time, perhaps a long time. The U.S. Treasury commits itself to paying the interest on the debts it issues. The net fiscal cost — which is also the net fiscal stimulus — of this bill is the difference between those two revenue streams.
In a more recent post Krugman explained further:
The effect would be that if the financial firms did well, taxpayers would share in their good fortune via those stock holdings; if firms did badly, they could meet their obligations by selling some of those bonds, which would cut into the value of all their stock, including the stuff Uncle Sam owns. So as in the case of Wachovia, what’s really happening is that the taxpayers are taking on some of the risk.
How much risk?
The answer is that we really don’t know. James Gailbraith suggests that it will cost about $50 billion a month, and so $700 billion just buys us about a year’s worth of time.
But it isn’t going to be enough, not even by a long shot. Structural changes are needed and everyone’s best hope is that we can simply keep the system going until we elect someone competent who can restore trust in the system.
That person is not John McCain whose main economic policy advisor is Phil Gramm, “the arch-deregulator, who took special care in his Senate days to prevent oversight of financial derivatives — the very instruments that sank Lehman and A.I.G., and brought the credit markets to the edge of collapse.” Just take a look at McCain’s economic policies and you’ll see how beholden he is to the whole conservative orthodoxy which got us into this mess.
The original bailout plan was based on the idea that the toxic sludge is undervalued and that, in the long run, it will be worth what it was originally worth. But almost every leading economist said this was simply not the case – that invariably some of it will be undervalued and we will loose money.
the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.
In other words, its not exactly a full circle as the above diagram suggests – but we simply don’t know what the difference between the two revenue streams will be. Its possible the government/taxpayers will even make some money in the deal – if its written correctly. That’s why there was a call to redo the plan with some protections for the tax payers. The Dodd-Frank bailout offers some of those protections. Here is James Gailbraith on the strengths and weaknesses of the plan.
There is no question that the current bailout bill represents an enormous improvement over the original Treasury proposal. Unlike the original proposal, this bill protects the public interest with requirements for disclosure and audit, for reporting to Congress both on procedures and results, and with protections against arbitrage, conflict of interest, and fraud, with provisions requiring the secretary of the treasury to try to minimize foreclosures, to acquire warrants, and with limitations on executive compensation, especially golden parachutes.
In several respects, the language could still be improved. …
So that’s where we are now. It isn’t the plan most people think would be ideal, but it is much better than nothing and it seems most (sane) people agree it is sorely needed. I strongly recommend you look at this chart to see how your representative voted. If they voted “No” on the Dodd-Frank plan, give them a call and ask them to change their minds. I did.
Subprime
This post is the first of my attempts to make sense for myself of the current financial crisis. In this post I ask the question: How did we get into this mess?
The simplest explanation is that encouraging people to take mortgages was the easiest way to create investment opportunities for surplus capital:
The result was that the wealthy—the investment class—had more money to invest, or lend, than there were people and businesses looking to borrow.
The easiest way to bring more borrowers into the system—and to create more of a market for money—was to promote homeownership in America. This is precisely what the Bush administration did, touting home ownership as an American right. Of course, they weren’t talking about home ownership at all, but rather pushing people to borrow money tied to the value of a house.If people could be persuaded to take mortgages on homes, real estate values would go up for those already invested (like land trusts and real estate funds) and banks would have a market for the excess money they had accumulated.
Even before Bush, regulation had been pushed through eliminating New Deal era restrictions on finance capital:
in 1999, Congress dismantled the Glass- Steagall Act, a pillar of the New Deal, which separated commercial and investment banking. That enormous change was undertaken with no thought or effort — or desire — to regulate the world that it would help to create. Now we know that an entire “shadow banking system” has grown up, without rules or transparency, but with the ability to topple the financial system itself.
But perhaps no deregulatory effort had more catastrophic effect than the 2000 law that explicitly excluded derivatives, including those credit default swaps, from regulation under the Commodity Exchange Act of 1936.
It was in this climate that some very “inventive” schemes were developed to repackage bad loans as AAA quality securities. The people doing this knew it was a bad thing to do, but a culture was created in which everyone was profiting and nobody seemed to be getting hurt, so it continued unabated. The best accounts of this I’ve come across are both in narrative form and both focus on the issue of “subprime” loans. Obviously the current crisis has evolved beyond the subprime loan issue into an international credit crunch, but subprime lending is still at the heart of the story. First there is this amazing episode of This American Life, “The Giant Pool of Money” (they deserve lots of awards for this), and second this roughly drawn but well written cartoon slideshow.
I’m still a little unsure as to exactly how this untenable system came unraveled at the very end – resulting in the international credit crisis we now have, but it seems the whole thing simply fell apart like the house of cards that it was, bringing down the rest of the financial system with it.
[For more information, see my next post on the bailout.]
UPDATE: Here is a map of the foreclosures the NY Times published back in April:
UPDATE: Also see this excellent piece by Robert Kuttner in The American Prospect. It adds some important details about the role of hedge funds as well as how deregulation has changed the role of the Federal Reserve.
Indeed, until Congress dismantled financial regulation, the Fed was not called upon to mount these heroic rescues, which have become so common in recent years. Until the 1960s, the central bank could keep interest rates low, confident that they would underwrite the growth of the real economy rather than risky financial speculation, for the simple reason that entire categories of speculation did not exist.
But during the past quarter-century, as deregulation has turned the economy into a casino, the Federal Reserve has had to mount major rescues at least six times.
In Sync
Two years ago I wrote a post about the various complicated ways I kept my home and office computer synchronized. Because my office computer recently blew up (really!) I have to think about how to get back up and running as quickly as possible, so I thought it would be a good time to update this list. A lot has changed in the past two years…
John McCain
I wasn’t happy with similar sites I found on the web, so I created a wiki to get the word out about some of the more disagreeable positions taken by the McCain campaign. The idea being that all the claims on the wiki are verifiable statements about actual policy positions taken by John McCain. They are not about his record or his personal life.
The site is password protected to limit vandalism, but if you’d like the password please let me know in the comments or by e-mail.
No Smoking
I’m glad that Taiwan is going smoke-free in public spaces and offices, but this PSA just made me laugh. Its so Taiwanese somehow …
More Than A Library
(Reposted from Vimukta.)
[Attention: Please help us raise Vimukta's membership count! Scroll to the end for details.]
The Budhan Theatre Library is much more than just a library; its a community center and an informal school as well. But its first and foremost a library – and a very good one at that! It houses a large collection of (mostly donated) books in three languages: English, Hindi, and Gujarati. Each book has been carefully cataloged and given a call number! In the above picture you see Ruchika updating the catalog for a man who has just borrowed the book Six Russian Short Novels.
Shashwati and I have been visiting Chharanagar every year for the past four years, to work on our nearly completed documentary film, and every time we go the library has moved to a new building. Yet somehow this valuable community resource not only remains in tact, but manages to flourish.
The current library is not the first library in the community. That would have been the meager collection of books housed at the Reform Club Library, hosted by the father of journalist and Budhan Theatre member Roxy Gagdekar. Roxy’s father died when he was still a teenager. He died after being released from police custody, where he had been severely beaten. The Chhara continue to suffer from police brutality, as documented in Budhan Theatre’s powerful plays, but the new library offers children a safe haven where they can learn, play games, and just be kids. (See this wonderful video by Dakxin Bajrange of the children making music with the tools their mothers use to brew liquor.)
It was to support this library that Shashwati and I, together with our producer Henry Schwartz (who did the hard work of applying for 501(c)3 status) initially founded Vimukta. The library doesn’t cost much to maintain. Rent, and a small stipend for the young people who work there, currently costs a mere $1000 a year.
Donations are always welcome, and any amount over our annual goal will be held in trust by the Bhasha Research and Publication Center until such a time as Vimukta and Budhan Theatre are ready to expand our efforts beyond the library. And, indeed, we have big plans. Our dream is to set up a scholarship for Chhara girls, many of whom drop out of school to marry at a very young age. Such a scholarship would be contingent on their finishing school. We’d also like to help Budhan Theatre buy a permanent home for the library.
But to do all that we need your help. We expect that our film, when it comes out, will be a powerful recruiting tool for Vimukta, but we’d like to have a strong network of supporters already in place before that happens. Currently our Facebook group has 24 members. We’d like to see that grow to 500. Please join. Or, if Facebook isn’t your thing, please sign up for our newsletter directly on our website. We know as well as anybody how annoying it can be to be flooded with e-mail, and we promise to keep our e-mails announcements to the bare minimum (about four a year, on average). If you are already a member, please help by spreading the word and inviting your friends.
Thanks!
Music from Liquor
Yesterday Chhara playwright and documentary filmmaker Dakxin Chhara posted a short “musical documentary” to YouTube which shows an original composition by the children of Budhan Theatre. What isn’t revealed until the end of the film is that the musical instruments they are playing are entirely composed of utensils used to brew liquor. Brewing liquor is illegal in the dry state of Gujarat, but it is one of the main sources of income for the Chhara, who are excluded from other forms of employment by deep seated racism.
This summer we are heading back to Chharanagar for the fourth time. We always look forward to our trips, but this one is special. It will be the tenth anniversary of Budhan Theatre, and we will be there for the celebrations. We also plan to show a rough cut of our film to the community for their feedback. But one of the main purposes of our film is to record some music for our soundtrack. We will be joined by the multi-talented musician John Plenge.
There are three kinds of music we wish to record: folk songs still remembered by the older generation, popular songs sung by some of the community’s professional musicians, and music by the members of Budhan Theatre, like what you see in Dakxin’s music video.
If you wish to support Chhara youth, please consider making a donation at Vimukta.org.
The KMT in Burma
Reading Panaj Mishra’s NYRB article about Burma, “The Revolt of the Monks,” I was reminded of the KMT’s adventures in Burma, a remarkable episode in the inglorious history of Taiwan’s ruling party. After several pages discussing the brutal suppression of last year’s protest by Burma’s monks, Mishra turns to the political-economic foundation of military rule:
But the larger explanation of its strength and longevity lies in a much-ignored fact: that Burma has been in a state of uninterrupted civil war since independence in 1948, with dozens of ethnic-minority insurgent groups, which operate in or control between one quarter and one third of the country, ranged against a Burman-dominated state.
It is in the context of discussing the history of this prolonged civil war that he briefly mentions the story of the KMT in Burma. Curious to know more I turned to Google, and found this excellent chapter from McCoy’s 1972 book, The politics of heroin in Southeast Asia:
The precipitous collapse of the Nationalist Chinese (Kuomintang, or KMT) government in 1949 convinced the Truman administration that it had to stem “the southward flow of communism” into Southeast Asia. In 1950 the Defense Department extended military aid to the French in Indochina. In that same year, the CIA began regrouping those remnants of the defeated Kuomintang army in the Burmese Shan States for a projected invasion of southern China. Although the KMT army was to fail in its military operations, it succeeded in monopolizing and expanding the Shan States’ opium trade.
… With CIA support, the KMT remained in Burma until 1961, when a Burmese army offensive drove them into Laos and Thailand. By this time, however, the Kuomintang had already used their control over the tribal populations to expand Shan State opium production by almost 1,000 percent-from less than 40 tons after World War 11 to an estimated three hundred to four hundred tons by 1962. From bases in northern Thailand the KMT have continued to send huge mule caravans into the Shan States to bring out the opium harvest. Today [1972], over twenty years after the CIA first began supporting KMT troops in the Golden Triangle region, these KMT caravans control almost a third of the world’s total illicit opium supply and have a growing share of Southeast Asia’s thriving heroin business.
When the KMT were driven out of the Shan state the trade was taken over by warlord Khun Sa (pictured above), whose death last year was noted by Mutant Frog’s Roy Berman. Berman also linked to to this Taipei Times article about the plight of “‘stateless’ descendants of former Chinese Nationalist Party (KMT) troops.”
Further information: Wikipedia, China History Forum, Time Magazine.
Technologies of the Self
If you google the letters “GTD” you’ll get seven million hits back. GTD stands for “Getting Things Done,” a time management book, method and philosophy promoted by David Allen which has spawned a huge array of self-help blogs and task management webservices. Wired magazine described it thus:
Allen’s approach is not inspirational. Instead, it is detailed and dry. But within his advice about how to label a file folder or how many minutes to allot to an incoming email there is a spiritual promise. He says there is a state of blessed calm available to those who have taken careful measure of their habits and made all the changes suggested by reason. Nirvana comes by routine steps, as an algorithm drives a machine.
I have personally found Allen’s approach tremendously beneficial. I don’t think I could get through the week without the Mac OS X application, Things. Things makes it a breeze to implement GTD without having read David Allen’s book. Before Things I relied on a variety of paper lists, my e-mail inbox, files on my desk and my computer desktop, bookmarked webpages, sticky notes, etc. to try to keep track of all the various tasks I was expected to do. Now I immediately file everything into Things and forget about it. Things allows me to distinguish between those tasks which are current, those which are due at some future date, delegated tasks, and tasks which can be put off indefinitely. Related tasks can be grouped into projects, but the design of Things prevents projects from becoming unwieldily. If you need a “sub-project” just create another project and group it in the same “area” or easily attach keywords (“tags”) to link them together.
An anthropologist and documentary filmmaker, 
