THE VIEW FROM CHAOS MANOR
View 537 September 22 - 28, 2008
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This is a Day Book. Pages are in chronological, not blogological order.
September 22, 2008
I have done release candidate 1 of part two of the September column. A lot of it is about the financial crisis as it affects the readership. It should be up tomorrow sometime. The purpose isn't to look into politics, or prescribe some general remedy; it's to lay out what happened, and how it's going to affect the high tech industries, and in particular to get readers thinking about what they, personally, should be considering in order to get past the next year without undue misery.
Look for it tomorrow.
Anyway, that's what I was doing yesterday and most of this morning, which is why this is a bit late.
You might also have a look at an old column on the Gods of the Copybook Headings.
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September 23, 2008
There will be a new column at Chaos Manor Reviews sometime today.
The column is up. It looks into the causes and consequences of the financial crisis.
I am not defending this imperial action, but I understand it. Were they to attempt to give me the power to spend that money, I would insist on immunity or I would not take the position; and in this political climate, with prominent Democrats saying openly that they intend to prosecute Bush and Cheney for war crimes as soon as they leave office, anyone I would entrust with the bailout money would so insist. One of the reasons the Roman Republic collapsed was that the two parties simply could not refrain from prosecution of public officials after they left office. Political differences became crimes; and while few of those prosecutions came to anything important, the cost in time and money was large.
Gerry Ford spared us a terrible ordeal by pardoning Nixon as his first action as President. That act cost Ford the presidency, and saddled the nation with Jimmy Carter, but those were small costs compared to what would have happened had he not done it. And yes, I have heard the arguments about "rule of law" and how no one should be safe from the consequences of his actions. Prosecutions of Presidents goes to the heart of the concept of "rule of law" because "the law" doesn't rule; people holding office and commanding power rule. Tampering with the fountain of justice is a terribly dangerous thing, as our English ancestors found when they deposed and executed King Charles (Charles I, King and Martyr) and found that whatever Cromwell's good intentions, the real rulers were the New Model Army. For more on that, see Macaulay's History of England.
As to review by courts, can you imagine anything that would negate the entire purpose of the bailout more certainly than the promise of lawsuits, lawsuits, lawsuits over every decision and purchase made? The entire purpose of the bailout is to rebuild confidence in the system. The financial system can withstand some scandalous mistakes; what it can't withstand is continued uncertainty, and if every decision made by the Treasury (including individual mortgages) can be (and thus WILL be) the subject of review by judges, whose decisions can be appealed -- why the result will be even greater uncertainty only this time after the government has taken enormously expensive and drastic measures. The government did all it could and there is still uncertainty! Panic!
Having said all that, there does need to be some backstopping; but I am damned if I can see what it ought to be. There will be literally millions of transactions, all conducted by a vast bureaucracy composed largely (I would guess) of laid off Wall Street employees. Who else will they hire to do this? There will be mistakes. There will be cronyism and favoritism. There will be deliberate frauds both by bureaucrats and those seeking relief. There will be misvalued mortgage papers. There will certainly be overvalued mortgage papers. There will be no time for slow study and evaluation because the success of the bailout depends entirely on acting swiftly and finally and introducing some certainty back into the situation.
Now perhaps there ought to be no bailout; but if there is one, it must be swift and certain. The Administration is going to have to let Senator Dodd and Congressman Barney Frank wet their beaks because that's the way things work in Washington now; otherwise there will not be a bailout. But if we are going down this road, we have to do it boldly and quickly -- and we have to do it knowing full well that nothing this big is ever done without mistakes, waste, inefficiency, and corruption.
Astute readers will notice that many in Congress have grasped this, but don't know what to do. Listen carefully: They don't want to be blamed for killing the bailout, but they don't like the notion of handing out arbitrary power. Neither do I. I am not eager to see this bailout, but the remedies I would take are not going to happen. The Masters of the Universe, and all of Our Masters in Washington, are howling for a bailout, quick, now, before it is too late. It will be done; and however it is done, there will be fraud, waste, and corruption: this in a climate in which we are criminalizing political differences.
As to government by the people, clearly the smart people don't want that: just listen to what they say about Sarah Palin.
The illimitable Spengler demonstrates that he doesn't always know as much as he thinks he does:
He does not understand the American people or America. His foreign policy realism is often on target, but his view of America is highly distorted. Here is his conclusion:
September 24, 2008
We went to the LA Opera last night. We saw Puccini's il trittico, three one-act operas, one (Il Tabarro) a drama, one a tragedy with redemption (Suor Angelica) and one a farce (Gianni Schicchi). They were all splendidly done, with excellent (and very different) sets and unobtrusively excellent costuming. Gianni Schicchi was directed by Woody Allen with Sir Thomas Allen in the title role. I don't usually like what Hollywood people do with opera, but I would be hard pressed to come up with suggestions for even minor improvement in Woody Allen's stage direction (at one time I was an assistant to Jose Quintero at the original Circle in the Square, and I studied stage direction with my usual fervor, so I fancy myself something of an expert). It was a thoroughly enjoyable evening.
A week ago Saturday we saw the LA Opera production of The Fly (yes, an opera based on the short story that became the Jeff Goldblum SF/horror flick) , an opera commissioned for the LA opera and written by Howard Shore (3 time Oscar winner for the musical scores to the three movies of The Lord of the Rings) to a libretto by stage and screen writer David Henry Hwang. Placido Domingo conducted, and Hollywood director David Cronenberg did stage direction (he directed Goldblum in the movie). It too proved me wrong in that the direction was superb. The acting was splendid. The singers acted very well indeed, and all looked their parts. The set was imaginative and well done as was costuming. The libretto was excellent. Indeed, I liked everything about The Fly except that there was no music. There was a passable movie score for background, but the singers did their lines in recititative throughout the opera. There were no arias or duets, and indeed no dramatic musical moments. It was infuriating, because the libretto contains some extremely dramatic and poignant lines. I keep thinking what Puccini could have done with that libretto. Or Gershwin, even. I confess it has annoyed me to the point that I have thought of a musical theme for the climatic lines, and I have a tune. Of course I am no composer and I can't do orchestration, but I am thinking of finding one of those music programs we used to have that let you mouse about composing as you listen to what you've done, then writes it all down in proper musical notation. I had programs that did that for the Amiga and Commodore computers, so surely they must exist for Vista or the Mac? It's hardly an urgent project, but I do have this tune in my head now.
I have a letter and a rather lengthy reply on the meaning of "Black Swan" over in Mail.
September 25, 2008
It is pointless to comment on the bailout. There will be one (whether it is the right thing to do or not), and it will send lots of money to both Democrats and Republicans. It will have pork aplenty, and Barney Frank and Dodd will get to wet their beaks as will a great many other people.
Perhaps it must be done, and if it were done, it were best it were done quickly. The whole point is to keep the market from collapsing leaving pensioners without the securities to generate their pensions. After all, inflation is a tax on fixed incomes, and if there are no fixed incomes there is nothing to tax. A capital collapse leading to a real depression is in no one's interest; and if there is any reasonable chance that the bailout will prevent that -- and there appears to be evidence that it will -- then it is not an unreasonable insurance policy to take out. One wants to minimize maximum regrets and take precautions against really undesirable outcomes. Our national leaders think this will do that. We'll see.
Oh my stars!
For some reason there are a lot of recent reports of reactionless drives. I pay little attention to them, because if someone can build a working model, it is easy enough to demonstrate. After all it doesn't need to work very well; just a tiny bit of hanging off center in a swing is all that's needed to generate enormous excitement. If there's any thrust at all, it is easy to prove. We have had many theories of reactionless drives, the best worked out being that of Col. Wm. Davis, Ph.D.; none of these have resulted in a working model. I have neither the time nor the competence to evaluate theories, and so far no one has offered me the chance to inspect an actual working model. I'd still love to see a working spacedrive. I doubt that I ever will.
I have other notes claiming that the Chinese are working on reactionless drives. I doubt much will come of it, but I certainly wouldn't stop watching them just in case...
September 26, 2008
As I surmised, the bailout -- good idea or poor -- can't be made to happen until Barney Frank and Senator Dodd are allowed to wet their beaks. The Democrats want part of that pie. Obama's leadership abilities were put to the test, and apparently found wanting: even in the White House, with what all of them concede to be the financial health of the Republic at stake, no agreement is possible. I note that the Democrats have a majority in both houses, and if the two Presidential candidates can come to some agreement then there is nothing that can stop a bill other than a veto by Bush; and given the assent of the two candidates, no veto could be sustained.
If there were some genuine disagreements on principle -- and perhaps there are but if so they are not apparent -- then there is nothing but partisan politics to prevent a bill.
As to what needs to be done, I confess I do not know. On principle I don't like government meddling in the economy. The end of that game is easily foreseen. On the other hand, the economic system runs on confidence, and that confidence is vanishing. What's at stake are pensions and pension funds; if the financial institutions collapse, the holdings that generate pension income will crash, pension payments will stop; government bailouts will be absolutely necessary, and very likely cost a hell of a lot more than what's needed now.
When the game is to restore confidence, it's important to act quickly. When the ship of state is being blown onto the rocks, it may be best to drop anchor; it may be best to raise sails and beat to windward; either course of action may work. Both will not work. Doing nothing is certain disaster.
I'm no expert on this stuff. I am not sure there are any experts -- those who pretend to be experts seem to have brought us to this potential disaster -- but I am old enough to remember the Great Depression, and I assure you it's worth a lot more than this bailout bill will cost to avoid that. I know that Japan lost about 50% of the entire nation's net worth about 20 years ago, and again that was considerably more than the bailout bill would cost.
It's a horrible bill. It gives arbitrary power to executive officials and absolves them from blame (barring actual theft). It potentially saddles every taxpayer (which is not the same as every citizen!) with several thousand dollars in debt. Of course that's not all that large compared to the debts most taxpayers (as opposed to citizens) already have, but it's certainly not trivial. On the other hand, I guarantee you that if a few hundred dollars (in 1932 money) per taxpayers could have stopped the bank runs and restored some liquidity to the nation in 1932, it would have been the best investment we ever made.
And, of course, the bailout isn't going to cost as much as the alarmists make out. After all, the point of the bill is to buy assets that have some intrinsic value -- possibly more value than they are being sold for just now. Houses do deteriorate, but the property retains value. No one can at the moment sort out what the various "toxic" "mortgage backed" securities are really worth, and I doubt that's going to change in the next few months. I know that we have computers, and that there are many of you who think it ought to be easy to sort these packages of bad paper out; but like the business of train control, some things that look simple enough from the outside turn out not to be. There really are difficult problems in this world, particularly when they have been designed to be murky and incomprehensible, as these crazy derivatives have been. Note that they were deceptive enough that pension fund managers and other smart people invested in them. But the physical assets are still out there, and they still have some value. Whatever the cost, it won't be as high as the face value of the bailout, and indeed, the Democrats seem to think there's a chance that the actual "cost" will be negative, i.e. that the bailout will eventually make a profit. I say this because one of the objections the Democrats seem to have is the disposal of those profits: they want them to go to a "community organizing organization" -- a citizen group that Obama and Ayers supported -- while the Republicans want any profits to be returned to the taxpayers.
If you want an indication that this mess is serious, note that the Washington Mutual collapse is the largest bank failure in history. That is a non-trivial event.
Today's Wall Street Journal has columns on this mess. John Paulson suggests that instead of buying toxic paper, the government ought to buy senior preferred stock in troubled companies. That makes sense to me; go read it and decide for yourself. But if it doesn't make sense to the Masters of the Universe and Our Masters in the District of Columbia then it won't be done, and if nothing is done we are in for a world of hurt. I grew up in the Great Depression. I wasn't sentient when it first happened, but some of the first books I read when I was old enough to read were accounts of the bank runs and collapse. I think I'd prefer Paulson's senior preferred stock investments to buying toxic paper, but mostly I prefer that something be done quickly before more banks fail. Note that WaMu died from a lack of confidence. They had overinvested in toxic paper -- deliberately, it seems, and they were out there pushing bad loans. Of course the Community Reinvestment Act pretty well required banks to make bad loans -- also called sub-prime -- but it also required Fannie Mae and Freddie Mac to guarantee them. The loans were guaranteed, and made with the expectation of a guarantee.
Think on it. If you create a situation in which profits are private and go to stockholders (with a good chunk of them siphoned off for lobby activities and campaign donations and other such legally allowed 'investments'), while the losses will be taken by the general public through government guarantees, is it immoral to invest in that situation? If they thrive is it immoral for those who managed those entities to take obscene profits? Perhaps so; but is it illegal?
And if it was not illegal -- and all indications are that it was not -- then retroactively confiscating those obscene bonuses is an arbitrary use of power and the end of the rule of law; and if the rule of law is gone, we will have lost far more than $700 billion dollars spent in an arbitrary and capricious manner. Without rule of law, which means no ex poste facto laws and no Bills of Attainder, we are no longer America. It may be that the former CEO's of some of these institutions ought to be given golden parachutes and made to use them from 20,000 feet, and it's fun to imagine that happening, but the consequences of actually doing anything of that sort are grave.
Were it left to me, I think I would go with the senior preferred stock suggestion; but that doesn't mean I would, were I part of the negotiations, blow things off and fly off to Mississippi if I didn't get my way.
There isn't a hell of a lot of leadership being shown here. The Senators who are running for office seem more bent on that than on being part of the Senate. Everyone seems agreed that something must be done, but that his or her team won't get enough out of it, so we need more negotiations. That is probably not going to work. I sure hope something does before it's too late and nothing will work.
I am about to go work on Mamelukes, but I had a thought. The goal of Fannie Mae and Freddie Mac was to increase housing ownership in the US. It's a noble goal, and one I fully agree with, could it be done without mucking up the financial system, but in practice these good intentions created monsters that ate Wall Street. My thought was, how can we aid and encourage low cost housing ownership without unduly affecting the market economy?
And immediately came to mind a national housing lottery. We have a national lottery -- many states including California have a great deal of experience in running such entities -- in which the tax exempt prize is a house free and clear, to be constructed in a neighborhood near the winner. The maximum value of the house would be, oh, I don't know, say some function of the median price of a house in that neighborhood. Assume a dozen or so standard designs; the winner picks one. The house is built and paid for, and the winner owns it. Now to induce lottery ticket sales to those who already own a house, we have provisions that allow the winner to apply some large fraction -- say 90% -- of the winnings to paying off his own mortgage, or perhaps for remodeling. He doesn't get the entire amount that he won because the purpose of the lottery is to encourage and assist home ownership, but he wins enough to induce him to buy lottery tickets.
I don't know how much this would cost or how many houses it would get built, but given the California lotteries I would guess that it would be pretty successful. After all, if Thomas Jefferson could raffle off Monticello to pay his debts (the winner gave the plantation back to him as I recall, and there being no income taxes in those days the former President got to keep his home) then we can't look too askance at the concept. We could start small, say 100 houses at $250,000 average per house, making an appropriation of $25,000,000 plus perhaps $10 million in startup and administrative costs, and see what happens. That wouldn't cost the taxpayers any noticeable amount in a budget of trillions, and any profits the scheme made would go back into the system so that more prizes could be awarded. My totally wild guess is that we'd be awarding thousands of houses every year in no time. Properly advertised we might reach tens of thousands in under ten years.
Refinements come to mind. Make the lottery tickets a tax deductible expense up to some fixed cap. This would let those who pay no taxes sell their non-winning tickets to those who do pay taxes to their mutual benefit. There won't be a lot of traffic in this business, but every little bit of addition to GDP helps. I can think of even more amusing tricks to increase lottery sales.
It will be amusing to see the lobbying efforts of architects and contractors to sew up the design and construction work for the winning houses, and there's enough slop in the concept to allow the inevitable graft that always accompanies government work (I do not know who is fattening off the California lotteries, but I would bet reasonable sums that some money flows toward the people whose job it is to regulate the lottery, and some more goes to the legislators who might otherwise be tempted to increase regulation or even shut down the state lottery; you may be sure there'd be plenty of that in the National Home Ownership Lottery ((NATTY OWL)). On the other hand, I doubt anyone would make as much as the various officials of Fanny Mae and Freddie Mac took on their way out.)
Ah, well. It was just a whimsical thought I had on my way to write fiction.
September 27, 2008
This promises to be a lazy day. Last night on my midnight walk with Sable I blocked out the next scenes -- they're scenes, not just connecting tissue -- to Mamelukes. I pretty well know how to end the book once I get past this section; it's another 15,000 words and it will be a doozy.
I note that today's Wall Street Journal editorial page says about what I have been saying for a week. The bailout is horrible. It's not clear what's better, but what is clear is that doing nothing has a fairly large probability of producing disaster. We have to do something, and we have to do it fast.
I understand that a lot of people would rather punish those who got us into this mess than do anything that would make that less likely but might get us out of it. I understand the sentiment, but I don't share it. If the banking system chokes up so that we can no longer operate on credit, the long term result might be a great improvement, but in the long run we are all dead. You do not want to live in a Great Depression. Believe me.
If I sound uncertain, it's because I don't have the responsibility for doing anything. I can speculate and hesitate and look at alternatives and my thoughts aren't going to trigger another round of anxiety in the system. Those who have real responsibility can't admit uncertainty. Remember: the goal here is to restore confidence so that the system operates again; so that people can get housing loans (sound ones) and car loans, and such like.
Meanwhile you might like to think about how we got into this mess:
Peter Glaskowsky sends this
It's told in partisan terms -- Cato papers usually are when the subject is government interference in the economy -- but it's also told pretty correctly. Note that the Democrats are insisting that the bailout contain provisions for more "affordable housing." Increasing the number of home owners is a noble ambition, and the republic can benefit from having more people with a stake in the system; but as we have seen with Fannie Mae and Freddie Mac, the costs are often unbearable. I'd rather see us use the lottery system I proposed in whimsy yesterday.
September 28, 2008
It appears that we have a bailout bill. It is festooned with 100 pages that I am sure include a lot of perks to Pelosi, Reid, Dodd, and Barney Frank. There is probably buried in there a provision that allows lobbying with money that will be paid out. The Democrats will tell everyone they have saved the country from some disaster. In a bipartisan way they will beat up on Bush and the Republicans, and they will never mention the real cause of all this bad paper (The CRA forces the banks to issue bad paper to irresponsible buyers; see http://www.youtube.com/watch?v=H5tZc8oH--o for details. But Pelosi will certainly go out and tell everyone how the Democrats have save us from the crisis, and the Republicans are the villains.
I am listening to Pelosi, who is telling us that the heroes will be Barney Franks and Chris Dodd, who, according to the Democrats, had nothing to do with causing the problem, and who now ride forth to save the country.
Whether this will inspire confidence in the economic system is problematic: they seem to have forgotten that this is really the purpose of this immense injection of public money into the private sector. But the Democrats, who are dominating the press, act as if they discovered the crisis, and they and they alone have saved the nation; and Barney Frank and Senator Dodd are the real heroes.
It will be interesting to see what happens next.
I note that Barney Franks and Dodd are making certain we understand that the crisis was caused by deregulation. Of course it was not. It was caused by over-regulation, and the CRA forcing banks to make bad loans or face lawsuits. But we will hear it all again and again. But see http://www.youtube.com/watch?v=H5tZc8oH--o for details.
Regarding firing the SEC Chairman: The President cannot "fire" a commissioner of a quasi-independent agency like the SEC, but he can fire him as chairman and name a new chairman; the commissioner remains a commissioner.
It will be interesting to see what is in that 100 page bill. I am sure there is a lot of what amounts to earmarkery.
Off the top of my head observations:
Golden parachutes: we may detest them, but they are not the cause of the problem. And every one of the Democrats involved in this bailout benefited from Fannie Mae and Freddie Mac, and every one of them was in favor of the CRA provisions requiring more and more sub-prime loans in order to increase home ownership.
And listening to Pelosi and Reid's press conference, I am guessing that their provisions for helping keep people in their homes probably means that those who should not have been buying houses in the first place will be protected in one way or another. People who made horrible decisions and bought houses without down payment and interest only loans will be bailed out by those who put up a down payment and took out a normal 30 year amortization loan and have made their payments all along. Perhaps this is a good thing. Ownership promotes a certain independence. But I suspect that things will be gimmicked so that in order to keep the house you should never been able to buy, you will have to continue to support the Democrats. But then I have a nasty suspicions mind.
On protecting Wall Street:
Biden is asking where McCain was! Well, Biden, McCain was in 2003 trying to curb Fannie Mae and Freddie Mac and cut back the pressure from the CRA, that's where he was. Where were you? And where was Obama?
Query: does anyone know the holdings of Pelosi and Reid and the others in AIG and Lehman and such like? They must keep their money somewhere.
And here is the kind of mail that really makes me feel like working to keep this site going.
Fortunately there are enough of you who have subscribed to make me think this is probably not typical. Alas, since I am my own webmaster -- whatever that is -- since no one else has done much work on this site, I don't think I can comply with that suggestion. Boy it sure makes me feel good to get mail like that.
Interesting. I replied to the above mail at this address:
And I received this answer:
Which is interesting, I suppose. I wonder whether the anonymous sender is a crime victim, a domestic violence victim, or a person in recovery, and I am entirely mystified as to why his views on my web site demanding my resignation have to be sent through this means or how my web site contributed to his (her) becoming a crime victim, domestic violence victim, or a person in recovery -- or indeed how it might contribute to anyone entering one of those categories. Ah well.
I am now listening to the Republican press conference on the bailout bill. It's pretty clear that they think this is better than nothing, but there's little fervor for it.
If the Republicans had stood on principle after Newt left as Speaker and had not taken us on a wild spree of wild spending and unlimited pork, we wouldn't be in this mess. Now they stand on principle when something has to be done to restore confidence -- and thus liquidity -- to the financial system.
I suppose it was all inevitable?
In about an hour I got a lot of mail like this:
Indeed. And in the past hour or so I have many more such notes, so I do not think we will be making many changes here. I do agree that I could do a better job with making an analytical table of contents, but that takes time I often don't have.
I think this closes the discussion except that I welcome concrete suggestions on how I might improve the place; the general note that things aren't always easy to find I already have, but I am dancing as fast as I can... Incidentally the link takes us back to very early days of this site (mail 9!) and the kinds of things we talked about then. I was just learning how to do this and wondering if it was worth the effort. Now we are up to mail 537...
for the record:
This is a day book. It's not all that well edited. I try to keep this up daily, but sometimes I can't. I'll keep trying. See also the weekly COMPUTING AT CHAOS MANOR column, 8,000 - 12,000 words, depending. (Older columns here.) For more on what this page is about, please go to the VIEW PAGE. If you have never read the explanatory material on that page, please do so. If you got here through a link that didn't take you to the front page of this site, click here for a better explanation of what we're trying to do here. This site is run on the "public radio" model; see below.
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