What They’re Not Telling Us

$700 billion is a boatload of bailout money (if it is eventually allocated by Congress). But, to fully understand our current economic paroxysm, one must add to this money the $200 billion bailout of Fannie Mae/Freddie Mac AND last week’s $300 billion Congressional bailout of Main-Street mortgage holders. This would total $1.2 trillion of taxpayer relief to ameliorate this financial predicament (tagged “The Sub-prime Mortgage Crisis”). Add to this the approximate $400 billion of write-downs that U.S. corporations have already taken against these bad assets brings this total to around $1.6 trillion. If the average mortgage in default is for $200,000 (probably high) that suggests that there are around 8 million houses that are foreclosed or in arrears. This seems to me like a very high number since the total number of U.S. homeowners’ mortgages is only about 44 million. To view it another way, as of this summer there were in the U.S. $3.6 trillion in real estate loans and the latest statistic is that 9% of them are foreclosed or in default. This totals $324 billion of problem mortgages or about ¼ of the government money that Frank/Pelosi/Paulson have or want to be thrown at this problem. And this is less than the toxic amount that has already been financially evaporated off corporate balance sheets!

So, it seems to me that there is a lot more to this economic crisis than they are telling us. I suspect I know what it is … and it is something called “credit-default-swaps” (CDSs). Basically these are unregulated (and therefore opaque) ad hoc insurance policies that have been created to offload risk from debt holders (such as banks) in case these debts (such as mortgages) are not paid back. These CDSs carry an insurance premium and have been traded worldwide back and forth like stocks and bonds … that is, they did until the credit markets recently froze up. (The worldwide nature of CDS trading, it seems to me, is why what should be an U.S.-only problem has spread around the globe.) Now, if the final holder of some of these CDSs goes belly-up (such as AIG), then this insurance also disappears and the backstop to mortgage holders becomes will-o-the-wisp. The most recent estimate of the total amount of CDSs circulating world-wide is $62 trillion … a staggering number … which effectively multiplies the size of the mortgage crisis by almost 39! Now note that, when AIG went south, the Federal Reserve also stepped in and fronted AIG with an $85 billion bailout. So, I conclude, that, no matter how this financial crisis is being painted as the failure of U.S. sub-prime mortgages, it is now really a collapse of the worldwide CDS market precipitated by the U.S. sub-prime mortgage crisis (which, as has been shown, should have more than enough committed funds to fix it).

Obvious Conclusion: The $700 billion bailout package REALLY IS A BAILOUT OF WALL STREET AND ALL THOSE INSTITUTIONS THAT HAVE CREATED CDSs. IT ONLY HAS A TANGENTIAL RELATIONSHIP TO MAIN STREET. IT SHOULD NOT, I REPEAT NOT, BE ENACTED UNLESS AND UNTIL IT CONTAINS RULES AND OVERSIGHT FOR THE CDS MARKETPLACE. (IMHO)

Word Smart

As used by Joe Malchow in the blog, Dartblog (definition from Websters)

semiotics
def: a general philosophical theory of signs and symbols that deals especially with their function in both artificially constructed and natural languages and comprises syntactics, semantics, and pragmatics

Party Animal

Republican or Democrat? The way to determine what political party you effectively are is to see which one you are willing to give the benefit of the doubt to.

Voting Requisites

As we approach our next national election, my misgivings about our election process are growing. No, I do not mean “hanging chads” or “paper trail” concerns; I mean I am worried about who gets to vote. When I am allowed to add my bit to the Constitution (why not, everyone else seems to want to), I would advance the following new requirements for voter eligibility:

- Must be able to read and laugh at a Dave Barry column
- No more than one (inconspicuous) tattoo
- No body piercings with rusty protuberances
- No weirdly spelled first names, such as Jessye, Eriq, and Alisyn
- Must be a taxpayer – “No representation without taxation” … this would eliminate most students in situ (unless they went home)
- No members of PETA, NAMBLA, or the ACLU
- Cannot be a regular MTV or “The Daily Show” viewer
- No droolers
- No TV talking heads or news anchors
- No professional athletes or, for that matter, anyone earning over $1 million per

That should do it.

Mark to Market

There are plenty of charlatans who are to blame for our current financial crisis – such as Barney Frank, Franklin Raines, Chris Dodd, Jamie Gorelick, and Jim Johnson. But there is one overweening reason that, combined with the loopy notion that the U.S. taxpayer should buy everyone (of whatever means and morality) a house. This naive idea has brought this country, like Monica Lewinsky, to its knees. This reason is poorly understood by most and, thus, needs to be explained further. This precipitating event was the FASB’s (Financial Accounting Standards Board) change of accounting rules a year ago (FASB 157) that decreed that companies must daily “mark to market” any balance-sheet assets. Mark to market means that any asset, such as a mortgage must be valued at what a willing buyer and a willing seller would agree to in order to affect a transfer.

Now, when financial panics occur, such transactions become very sticky and thus marking to market becomes degenerative. For instance, if a bank’s asset’s value (such as a mortgage) sinks by $50,000, this means that required capital rations cause a bank to reduce it’s lending by $500,000. This puts the pressure on the bank to raise additional capital to justify its current lending portfolio … and, if unsuccessful, further reduces the pool of willing buyers and the mark-to-market price of its mortgages. A vicious cycle is initiated which, as we have seen, can wipe out a financial institution in a matter of days.

Secretary of the Treasury, Henry Paulson, started his testimony to the Senate on Monday with an explanation of this toxic process. He suggested that we might consider changing this rule to permit a less onerous way of valuing such assets, basically a discounted stream of future income. Thus, if a mortgage is to return so much per month for the next 25 years, one could apply a discount cash flow rate of say 5%. If such a mortgage is in default, then the discount rate would be higher, say 10% and the resultant discounted value substantially lower. But, this is a lot less punishing than what is currently required by FASB 157 … yet far better than what Japan did years ago when banks kept mortgages on their books at full value and it took over a decade for Japan’s financial stability to return.

An interesting twist to this dilemma is that Chris Cox, the head of the SEC, could, with the stroke of a pen, change this “mark to market” accounting requirement … to a discounted cash flow calculation and, thus, possibly eliminate the need for the $700 billion bailout now being debated in Congress. Perhaps, McCain’s calling for Cox’s dismissal had some legs after all.

Uh Uh Uh

"WASHINGTON (AP) - Democrat Barack Obama studied and practiced privately with aides in a Florida hotel Tuesday in the first of three days of intense preparations for his upcoming foreign policy debate with GOP rival John McCain."

They're giving him an uh-uh-uh-dectomy.

Robin’ Robin Hood

Barak Obama, if he is elected, has a Robin-Hood economic plan – tax the “rich” and reward the “poor.” Unfortunately for his election prospects, such wealth redistribution is now taking place in clubs (I can’t say that other word). Hedge funds, the piggy banks of the plutocrats, have, over the last few months, taken multiple financial hits:

- First, the bursting of the oil and other commodities bubbles

- Second, the freeze-up of financial liquidity brought about by the sub-prime mortgage fiasco

- Thirdly, the blood bath on Wall Street due to the failures of Bear Sterns and Lehman Brothers (and, to a lesser extent, Merrill Lynch) and the bailouts of Fannie Mae, AIG, and Freddie Mac

- Fourthly, the world-wide dramatic deflation of emerging-economy equity markets – particularly China and Russia

- Fifthly, the current run on the money market funds to the extent that they needed to be backstopped by the U.S. Treasury

- And possibly others to come

It is the lucky nabob who has navigated these treacherous times with his/her fortune intact. Therefore, Barak’s social-engineering economic promises have become somewhat moot. Come his prospective January inauguration, it is unlikely that there will be an extra penny in the U.S. Treasury for Obama to buy a populist’s vote for his second-term run. He will be lucky if we can pay for Michelle’s redecorating of the White House (as all First Ladies seem prone to do.)

Queasy about Quasi

You’d think we’d learn.

Politicians (and unfortunately, voters) frequently set up quasi-governmental organizations to remove them from the corruption of political patronage and malfeasance. Massachusetts set up the Massachusetts Turnpike Authority (MTA) in 1952 for these very reasons and Congress created Fannie Mae and Freddie Mac in 1968 for many identical rationales. Big mistakes! The MTA sired the “Big Dig” that has cost the taxpayers upwards of $17 billion dollars (about ten times the original estimate) for a series of leaky tunnels and contractor corruption that rival a third-world country.

And Fannie Mae and Freddie Mac were created to buy mortgage securities with the “implicit” backing of the U.S. government. And these two have been, as described by Mort Zuckerman, “the honey pot of the Democratic Party for a number of years.” Now the Federal Reserve Bank has had to step in to save these venerable mortgage-backing institutions from themselves by changing “implicit” to “explicit”. This all done at an ultimate taxpayer cost of probably hundreds of billions of dollars!

What happens with these quasi-governmental organizations is that they are effectively removed from voter oversight but not from the greedy designs of politicians. Interested readers can, within a few minutes of Googling, find enough political patronage abuses in these “companies” to nauseate even the most iron-stomached. Now, the ovine taxpayer has again been fleeced by trusting the public-relations lie of “quasi” being akin to “safe”.

Bull-hockey! Let us, the public, never again believe that fronting the description of a governmental entity with “quasi” is a recipe for keeping our solons’ greasy paws out of the cookie jar.

The Rise and Fall of Nations

Richard Lamm, the former Governor of Colorado, has warned that multiculturalism in our nation is very likely to bring about the failure of our future. See here. A friend, Axel Grabowsky, argues that the Roman Empire did not fall (as per Gibbon) solely because of the dilution of the Roman populus by the huge and continued influx of mongrel citizens from the Roman provinces and, therefore, Lamm’s argument is suspect. In fact, Grabowsky claims that there were as many as fifty reasons for the demise of this and other great empires. He adds, “I do not entirely agree with Toynbee. The empires of the world, ‘all the great civilizations,’ as Toynbee puts it, did have a hand in both their rise and fall, of course. But the outside reasons for both the rise and fall were at least as important as the internal ones.”

This avowal has gotten me to thinking about what does contribute to the rise and fall of empires? I have compiled below the following thoughts (roughly in order of importance):

- Geography – country’s absolute size, number/size of abutting nations, degree of geographic isolation, country’s shape (area relative to border length), number, size and dispersion of satellite territories, mean height above sea level

- Natural Resources – energy sources, mineral resources, amount and fecundity of arable land, timber resources, harvestable animal/fish populations, water resources, pestilence frequency

- Weather – rainfall/snowfall amounts, temperature/seasonal variants, predilection to natural disasters, sunshine amounts

- Demographics – proportion of young vs. older people, gender balance, life expectancy rates, infant mortality rates, immigration/emigration rates

- Infrastructure – quality and number of roads, rails, airports, ports and other public and private buildings; communication systems; other public transportation systems; infrastructure maintenance rates, sanitation facilities; gas/electric utility build-outs

- Cultural Ethos – clear and reinforced national goals, work ethic, morality baseline, stability of institutions, family values, religious faith, innovativeness, a sense of history/traditions, a commitment to the arts, the degree of a population’s hybrid vigor, the degree of cultural integration (salad bowl vs. melting pot, ala Lamm)

- Civil Freedom/Democracy – government guarantees of life, liberty and the pursuit of happiness; a swift and effective justice system; freedom of movement, assembly, expression, and privacy, a non-confiscatory taxing system

- Common Cause/Hegemony – a national identity, a common language, a forward purpose/resolve, a sense of history, a general dearth of prejudice, quality of leadership

- Economic strength – stability of monetary system, size of middle class, trustworthiness in commercial transactions, strength of financial institutions, world-trade effectiveness, health-care quantity and quality, degree of entrepreneurship

- Educational System – breadth, depth and general affordability of educational opportunities, openness to new ideas, a quest for natural truths, scientific/logical rigor, innovativeness encouragement

- Terrain –ease of movement of citizens/merchandise, number of alternative commerce routes, barriers (mountains, lakes, rivers, oceans, etc.) to potential enemies (These factors were much more important a century ago, before the age of airplanes, steamships, and motorized surface travel).

Each of these bullet points could engender a whole paragraph of exposition (or perhaps even a book.) But note, that in my opinion (and I assume Axel’s), such mongrelization as Lamm describes is not at the top of the list. But … it is not insignificant either, particularly when it can (and often does) impact so many other of the above bullet points.

It is an interesting and enlightening exercise to grade our country on these metrics relative to other world powers … to judge for yourself how much longer we may be around.

Small Things

As seen in a photo on the front page of the “Boston Globe” today, at the 9/11 memorial service at Ground Zero yesterday, Barak Obama tossed his rose on the existing pile of commemorative flowers while John McCain bent over and carefully placed his rose. I know it is a very small thing, but one’s temperament is made up of lots of tiny actions … and Mr. Obama has had his share of revealing slips.

You Saw It Here First

I’ve coined a nickname for Sarah Palin – “The Smiling Cobra.” I’ve e-mailed this suggestion to Rush Limbaugh, Michael Graham, Howie Carr, and David Brooks. Soooo, if this is picked up on, you saw it here first!

Palin Peccadillos

In case you didn’t know, Sarah Palin has committed the following serious political peccadillos:

- She coerced he fellow office workers into buying Girl Scout cookies for her daughter
- She has shot and dressed (with a dull knife) three caribou (and her family ate them!!)
- She had her staff work overtime 27 times in the last 2 years
- When she played basketball for Wasilla, she fouled out nine times (once in a tournament!)
- Her cousin, Wilber, twice watched the Playboy Channel
- She had a Brazil waxing back when she ran for Miss Alaska
- When she worked in her husband’s fishing business, she claimed she didn’t like halibut
- While in college in Idaho, she never joined a sorority
- As a sports reporter for KTUU-TV, she often entered the men’s locker room without knocking
- Over her life, she has removed twelve “Do Not Remove” tags from pillows and mattresses

How can we possibly vote for such a monster?