November 30

  • The crazy, irrational beliefs of Muslims — Tom Friedman can declare with a straight face that "anyone who shoots up innocent people is … mentally imbalanced" without seeing how clearly that applies to himself and those who think like he does.  It’s that self-absorbed disconnect — seeing Hasan’s murder of American soldiers as an act of consummate evil and sickness while refusing to see our own acts in a similar light — that shapes most of our warped political discourse.  And note the morality on display here:  Hasan attacks soldiers on a military base of a country that has spent the last decade screaming to the world that "we’re at war!!," and that’s a deranged and evil act, while Friedman cheers for an unprovoked war that killed hundreds of thousands of innocent civilians and displaced millions more — all justified by sick power fantasies, lame Mafia dialogue, and cravings more appropriate for a porno film than a civilized foreign policy — and he’s the arbiter of Western reason and sanity.
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  • Yves Smith: Bernanke Tries to Defend the Fed – In a sign that the Federal Reserve is circling the wagons, chairman Ben Bernanke has an op-ed in the Washington Post that attempts to defend the central bank’s role. What is interesting is how much the tables have turned. The Obama effort to make the Fed into the uber bank regulator has become a rout, with decent odds that the Fed will have its powers reduced, and an increasing possibility that Bernanke might not be reconfirmed (which is frankly the right outcome, no CEO who presided over a similar disaster would still be in charge). This piece has so many artful finesses that I must limit myself to the most salient points.
     
    An Empire at Risk –  For the smaller countries, the financial losses arising from this crisis are a great deal larger in relation to their gross domestic product than they are for the United States. Yet the stakes are higher in the American case. In the great scheme of things—let’s be frank—it does not matter much if Iceland teeters on the brink of fiscal collapse, or Ireland, for that matter. The locals suffer, but the world goes on much as usual. But if the United States succumbs to a fiscal crisis, as an increasing number of economic experts fear it may, then the entire balance of global economic power could shift. Military experts talk as if the president’s decision about whether to send an additional 40,000 troops to Afghanistan is a make-or-break moment. In reality, his indecision about the deficit could matter much more for the country’s long-term national security.
     
    Harvard ignored warnings about investments – It happened at least once a year, every year. In a roomful of a dozen Harvard University financial officials, Jack Meyer, the hugely successful head of Harvard’s endowment, and Lawrence Summers, then the school’s president, would face off in a heated debate.

    Through the first half of this decade, Meyer repeatedly warned Summers and other Harvard officials that the school was being too aggressive with billions of dollars in cash, according to people present for the discussions, investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity. Meyer’s successor, Mohamed El-Erian, would later sound the same warnings to Summers, and to Harvard financial staff and board members.

    Professor advises underwater homeowners to walk away from mortgages – Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don’t feel guilty about it. Don’t think you’re doing something morally wrong. Doing so, Brent T. White, a University of Arizona law school professor suggests, could save some of them hundreds of thousands of dollars that they "have no reasonable prospect of recouping" in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume, he says.
     

    Buyers Take a Pass on Some Failed Banks – WSJ – Last Monday’s change of plans by the Bridgeport, Conn., bank-holding company underscores a problem with the growing pile of terminally ill U.S. banks being wrestled with by the Federal Deposit Insurance Corp. Some are in such bad shape that potential buyers won’t touch them at any price, even if the government agrees to eat losses on the failed bank’s bad loans. In addition to their depleted capital, many seized banks operate in areas with sluggish growth prospects, are puny and are loaded with expensive deposits gathered through brokers that are likely to leave when the acquiring bank reins in interest rates, some bankers complain.

     Best Buy, Krugman and the Carry Trade – I looked at the Best Buy (BBY) Black Friday ads and compared them to last year’s. Look how they stretched the interest free financing period: For BBY to double the term of interest free financing to three years is just an effort to increase top line sales. This is an example of the “Carry Trade”. We normally think of this in purely financial transactions.
     On ABC Paul Krugman remarked: “The cost of the deficit is only 1.2% real rate of interest (less inflation) at the Federal level.” In response, George Will made the point: "In ten years the interest cost of servicing the debt will go to $700 billion per year!"
    Mr. Krugman responded: In ten years GDP will be $20 trillion, debt service would still be 3.5%. That doesn’t sound too bad”.
    Mr. Krugman believes in the ultimate carry trade. His view is that growth will come from affordable (cheap) debt capital. He thinks that the US can go to 100% Debt/GDP without upsetting the applecart. I think he is dead wrong.

    Taxing Wall Street Transactions Today Wins Support for Keynes Idea of 1936  (Bloomberg) — John Maynard Keynes proposed a tax on financial transactions in the middle of the Great Depression, and another economist, James Tobin, revived the idea in the 1970s as a way to counter currency market speculation. Neither effort gained much acceptance. Now, a growing number of economists and politicians argue that it’s time for a levy on trading stocks, bonds, currencies and derivatives.

    U.K. Prime Minister Gordon Brown said that a transaction tax might compensate for the billions of dollars that the public has spent on bank bailouts. Government officials in France, Germany and Austria have voiced their backing. U.S. Treasury Secretary Timothy Geithner answered Brown a day later, saying the tax was not something the U.S. would support. Even if political consensus on a transaction tax is lacking the idea is attracting supporters worldwide. 
    :
    We must get ready for a weak-dollar world – 
     – The two most significant structural consequences of the recent financial debacle are the massive deficits and debts of the US and the shift of economic power from west to east. There is only one effective way for governments to address the combined impact of both: press for a sea change in currency relationships, especially a permanently and greatly weakened dollar. The roots of this situation are well known. The American budget deficit of this past fiscal year reached 10 per cent of gross domestic product, the largest since the aftermath of the second world war.  To close the gaps, taxes would have to be raised to sky-high levels and spending brutally slashed. It would take a miracle if America’s political system – one rife with vicious partisanship and riddled with well-financed special interests – could do either, let alone both.  Washington will therefore have little choice but to take the time-honoured course for big-time debtors: print more dollars, devalue the currency and service debt in ever cheaper greenbacks. In other words, the US will have to camouflage a slow-motion default because politically it is the easiest way out. That is why Tim Geithner, US Treasury secretary, should invite his colleagues in the UK, eurozone, Japan and China to meet secretly, perhaps between Christmas and New Year, to start discussions out of the public spotlight (to avoid spooking markets). The big question: what kind of monetary system will best serve the world given deep-seated changes in the balance of economic power, and what process can be followed to develop it?

    The cost of China’s excess capacity – The world has changed; but China has not. China has responded to the world financial crisis with what seems to be great success. But this is an illusion. China’s solution – a surge in spending on investment – will create greater excess capacity. China’s high-savings, high-investment economy is costly for its people and destabilising for the world. The time for a radical reform is long past. In a disturbing new report, the European Chamber of Commerce in China lays out the challenge in six sectors: aluminium, wind power, steel, cement, chemicals, and refining. Yet vast additional capacity is on the way. The scale of the excess capacity is breathtaking. At the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union’s total output. Yet, notes the report, “there are currently 58m tonnes of new capacity under construction in China”. To the extent that gross domestic product is driven by such absurd spending is a measure of waste, not of economic welfare.

    Is America’s addiction to debt like its Civil War era addiction to slavery? – Amazingly, our country is making 21st century mistakes as serious as ones leading up to our Civil War. Where are the large cuts to the federal deficit that Obama promised six months ago? The $500 billion structural deficit of a few years ago is now a trillion dollar structural deficit. We are as addicted to debt now as this nation was trapped by slavery back then. In both cases the subsidy of injustice is unsustainable. In both cases the redemption payment will be profound.

    Theory that Civilization is a Heat Engine – Garrett treats civilization like a "heat engine" that "consumes energy and does ‘work’ in the form of economic production, which then spurs it to consume more energy," he says."If society consumed no energy, civilization would be worthless," he adds. "It is only by consuming energy that civilization is able to maintain the activities that give it economic value. This means that if we ever start to run out of energy, then the value of civilization is going to fall and even collapse absent discovery of new energy sources."
    Garrett says his study’s key finding "is that accumulated economic production over the course of history has been tied to the rate of energy consumption at a global level through a constant factor." That "constant" is 9.7 (plus or minus 0.3) milliwatts per inflation-adjusted 1990 dollar. So if you look at economic and energy production at any specific time in history, "each inflation-adjusted 1990 dollar would be supported by 9.7 milliwatts of primary energy consumption," Garrett says.

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