The Great Unraveling

Wednesday, December 17, 2008

December 17, 2008
Op-Ed Columnist

The Great Unraveling

Hong Kong

The stranger, a Western businessman, slipped into the chair next to me at an Asia Society lunch here in Hong Kong and asked me a question that I can honestly say I’ve never been asked before: “So, just how corrupt is America?”

His question was occasioned by the arrest of the Wall Street money manager Bernard Madoff on charges of running a Ponzi scheme that bilked investors out of billions of dollars, but it wasn’t only that. It’s the whole bloody mess coming out of Wall Street — the financial center that Hong Kong moneymen had always looked up to. How could it be, they wonder, that such brand names as Bear Stearns, Lehman Brothers and A.I.G. could turn out to have such feet of clay? Where, they wonder, was our Securities and Exchange Commission and the high standards that we had preached to them all these years?

One of Hong Kong’s most-respected bankers, who asked not to be identified, told me that the U.S.-owned investment company where he works made a mint in the last decade cleaning up=2 0sick Asian banks. They did so by importing the best U.S. practices, particularly the principles of “know thy customers” and strict risk controls. But now, he asked, who is there to look to for exemplary leadership?

“Previously, there was America,” he said. “American investors were supposed to know better, and now America itself is in trouble. Whom do they sell their banks to? It is hard for America to take its own medicine that it prescribed successfully for others. There is no doctor anymore. The doctor himself is sick.”

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?

Far from being built on best practices, this legal Ponzi scheme was built on the mortgage brokers, bond bundlers, rating agencies, bond sellers and homeowners all working on the I.B.G. principle: “I’ll be gone” when the payments come due or the mortgage has to be renegotiated.

It is both eye-opening and depressing to look at our banking crisis from China. It is eye-opening because it is hard to avoid the conclusion that the U.S. and China are becoming two countries, one system.

How so? Easy, in the wake of our massive bank bailout, one can now look at China and America and say: “Well, China has a big-state-owned banking sector, next to a private one, and America now has a big state-owned banking sector next to a private one. China has big state-owned industries, alongside private ones, and once Washington bails out Detroit, America will have a big state-owned industry next to private ones.”

Yes, an exaggeration to be sure, but the truth is the differences are starting to blur. For two decades, a parade of U.S. officials came to China and lectured Beijing on the necessity of privatizing its banks, said Qu Hongbin, the ch ief economist for China at HSBC. “So, slowly we did that, and now, all of a sudden, we see everybody else nationalizing their banks.”

It’s depressing because China in many ways feels more stable than America today, with a clearer strategy for working through this crisis. And while the two countries are looking more alike, they appear to be on very different historical trajectories. China went crazy in the 1970s, with its Cultural Revolution, and only after the death of Mao and the rise of Deng Xiaoping has it managed to right itself, gradually moving to a market economy.

But while capitalism has saved China, the end of communism seems to have slightly unhinged America. We lost our two biggest ideological competitors — Beijing and Moscow. Everyone needs a competitor. It keeps you disciplined. But once American capitalism no longer had to worry about communism, it seems to have gone crazy. Investment banks and hedge funds were leveraging themselves at crazy levels, paying themselves crazy salaries and, most of all, inventing financial instruments that completely disconnected the ultimate lenders from the original borrowers, and left no one accountable. “The collapse of communism pushed China to the center and [America] to the extreme,” said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland.

The Madoff affair is the cherry on top of a national breakdown in financial propriety, regulations and common sense. Which is why we don’t just need a financial bailout; we need an ethical bailout. We need to re-establish the core balance between our markets, ethics and regulations. I don’t want to kill the animal spirits that necessarily drive capitalism — but I don’t want to be eaten by them either.


"The Thing Itself"

Tuesday, December 16, 2008

December 14, 2008
Op-Ed Columnist

Cars, Kabul and Banks

If there is anything I’ve learned as a reporter, it’s that when you get away from “the thing itself” — the core truth about a situation — you get into trouble. Barack Obama will have to make three mammoth decisions after he takes the oath of office — on cars, Kabul and banks — and we have to hope that he bases those decisions on the things themselves, the core truths about each. Because many people will be trying to throw fairy dust in his eyes.

The first issue will be whether to bail out Detroit. What is the core truth about Detroit? Auto executives will tell you that it’s the credit crisis, health care, retirement costs and unions. Sure, those are real. But the core truth is that for way too long Detroit made too many cars that too many people did not want to buy. As even General Motors conceded in its apology ad last week: “At times we violated your trust by letting our quality fall below industry standards and our designs become lackluster.” Walk through any college campus today. You don’t see a lot of Buicks.

Over the years, Detroit bosses kept repeating: “We have to make the cars people want.” That’s why they’re in trouble. Their job is to make the cars people don’t know they want but will buy like crazy when they see them. I would have been happy with my Sony Walkman had Apple not invented the iPod. Now I can’t live without my iPod. I didn’t know I wanted it, but Apple did. Same with my Toyota hybrid.

The auto consultant John Casesa once noted that Detroit’s management has gone from visionaries to operators to caretakers. I would say that they have now gone from caretakers to undertakers. If they are ready to bring in some visionaries and totally restructure — inside or outside of bankruptcy — so they can make money selling cars that people will want to buy, then I say help them. I’d hate to see the Detroit auto industry go under. But if all we are doing is prolonging auto undertakers, then we have to let nature take its course.

After Detroit, Mr. Obama will be asked to bail out Afghanistan. Watch out. The tide has turned against us there because too many Afghans don’t want to buy our politics, or, more precisely, the politics of our ally, the corrupt government of President Hamid Karzai. That is “the thing itself.”

The main reason our Iraq bailout — a k a “the surge” — has had a positive effect is because Iraqis voted with their own guns and their own lives, taking on both Al Qaeda and pro-Iranian Shiite militants. Iraq has avoided bankruptcy for the moment — a total meltdown — because enough Iraqis wanted what we were selling: freedom from extremists. That is the thing itself, and right now I’m not seeing enough of that thing in Afghanistan. Beware of a Kabul bailout.

But maybe the most flagrant area where we continue to avoid looking at “the thing itself” is with our banks. What we are dealing with there is the effect of a credit bubble that began in the late-1980s with the advent of global securitization — the chopping up and bundling into bonds of everything from home mortgages to student loans to airplane leases, and then selling them around the world.

When you take this much leverage and this much globalization and this much complexity and start it in America, and then blow it up, you have a nuclear financial explosion. The deflating of this credit bubble i s so wealth-destroying that even the most prudent banks have been ravaged by it.

What to do? The smartest people I know in banking are praying that Obama’s Treasury Department will tackle “the thing itself.” That is, do a real analysis of what the major banks are worth in a worst-case scenario. Then determine, if, on that basis, they have viable, survivable equity-to-asset ratios.

Those that do should get more government investment. Those that are close should be forced to find new investors and merge. And those not viable should be shut down and have their bad assets bought by a government-owned body (which would sell them over time) and their deposits shifted to healthy banks to make those banks even healthier. Some experts believe we still need to close 1,000 banks.

This process will be painful, but probably by the end of a year the market will clear, investors will come in, and the surviving banks will be ready to lend to each other and you and me. The “thing itself” here is that banks still don’t want to lend because they still don’t know the true value of their own balance sheets, let alone anyone else’s.

The market has to clear. We can do it painfully and quickly, as we did with th e dot-coms, or we can be Japan and drag it out.

So whether it's cars, Kabul or banks, we have to stop wishing for the worlds we want and start dealing with the things themselves. If Obama does, his first year will be excruciatingly painful, but he could have three years after that to be creative. If he doesn’t, I fear that cars, Kabul and banks will dog his whole presidency.


Only China Can Save The Sharks

When the buying stops, the killing can too.

Commentary: Only China can save our sharks

By Peter Knights
Special to CNN

Editor's Note: Peter Knights is Director of WildAid, an international conservation organization focused on ending the demand for illegal and unsustainable wildlife products. He has researched the trade in shark fin for 10 years and has worked on conservation programs in 45 countries.

SAN FRANCISCO, California (CNN) -- At certain times in history, great nations find themselves shaping the future of the world. For many of our most endangered wildlife species, China finds itself in that role today.

Old customs of consuming certain wildlife as foods, medicines and decoration and new economic success have blended to create a recipe for extinction for a number of wild animals unless the growing appetites can be curbed.
Rare animal consumption in China was formerly limited to a tiny affluent minority, but incredible economic growth of 10 percent a year has led to a booming number of new consumers. After the SARS outbreak, authorities reported seizing 980,000 live animals from wildlife markets. China is now the primary market for tiger bone, rhino horn, elephant ivory, live snakes, pangolins and a whole host of wildlife products.

Perhaps the greatest example of this boom is its role in the largest mass slaughter of any large animals going on today. Every year the fins from up to 70 million sharks are being used to make shark fin soup -- the vast majority going to China and Hong Kong.

Though the cartilage from the fins has no real flavor and is basically just protein, this soup retains a cachet that can fetch more than $100 per bowl. It is bought for business dinners, banquets and weddings as an indication of high spending to "honor" guests, but it is leading to environmental vandalism on a massive scale worldwide.

Fishing for fins has spread to the most remote parts of the planet as easily accessible shark populations have already plummeted, some by up to 95 percent in the last fifteen years.

Although most shark fishing is completely unrestricted, in the few areas they are protected they are still being heavily poached. In the Galapagos Marine Reserve, up to 10,000 fins (2,500 sharks) have been seized in a single shipment and endangered sea lions and dolphins are used as bait.

In 2006, Australian authorities seized 365 Indonesian boats fishing illegally in their waters mostly for shark fins. Only threatening to fire upon boats if they didn't heave to and burning the offending boats eventually stemmed this tide. But as I recently discovered, the shark finners just moved on to Papua New Guinea, where there are no controls.

Reporter Lisa Ling and the "Planet in Peril" team filmed as we hauled up illegal longlines inside the Cocos Island Marine National Park in Costa Rica and as we chased off the same boats two days in a row. I have traveled around the world to witness the inability of even developed nations to protect their waters from illegal fishing.

Drug trafficking has shown that even draconian laws and billions spent on law enforcement cannot stem the tide if the demand in consuming countries remains high. For wildlife and especially fisheries, regulation is weak and enforcement is invariably poor.

That is why WildAid focuses on trying to end the demand -- the only long-term solution. WildAid believes that "when the buying stops, the killing can, too." The organization has broadcast this message to up to 1 billion people a week with the help of more than 100 celebrity ambassadors from the worlds of movies, music and sport.

The encouraging news is that when people in China know what's going on, they do care. Our initial research revealed that 75 percent of Chinese didn't even know "fish wing" soup, as it is called there, was derived from sharks. They didn't know that sharks mature late and reproduce slowly and that nearly one third of shark species are considered endangered or vulnerable.

So we embarked on one of the largest conservation awareness initiatives, reaching hundreds of millions of Chinese.
China's most popular star, Yao Ming, championed the program pledging to never again eat shark fin soup, generating 300 news stories. We covered Beijing with his image, appealing for the sharks, and a host of Chinese and international Olympians recorded messages that Chinese state television and video billboards broadcast widely.

A top survey company in Beijing, CTR, found that 55 percent of those surveyed remembered our campaign, 94 percent of those became aware of the issue, 89 percent subsequently thought the soup should be banned or regulated and 82 percent said they would stop or reduce their consumption. We got similar results from previous work in Hong Kong, Taiwan and Thailand.

For the health of our oceans, we must hope that China can show global leadership in banning or strictly regulating shark fin soup and continue to educate the public, saving our sharks and other endangered species. We hope that this great culture that has lasted for thousands of years can conserve, rather than destroy, these animals that have survived for nearly 400 million years and yet face annihilation in our lifetimes, all for a bowl of overpriced soup.


Mass Murder for Soup

Thursday, December 11, 2008

This segment on one of your herd's more noble adventures around the globe was part of CNN's (excellent) Special Report, "Planet in Peril: Battle Lines" that aired several times tonight & will be repeated so hope you get to see it. You can see the video and photos on the website at this link:

Here is part of the shark transcript, my comments follow it:

Shark fin soup alters an ecosystem

By Lisa Ling
Special to CNN

KAOSHIUNG, Taiwan (CNN) -- There is no animal on earth more vilified than the shark. Pop culture references and annual, over-hyped reports of attacks on swimmers or surfers have put sharks on the top of the list of the world's most feared living things.

There is however, a creature far more predacious than the shark: Humans.

Sharks existed before there were dinosaurs and they pre-date humans by millions of years. Yet, in a relatively short period of time, humans and their technological arsenal have driven most shark populations to the verge of extinction.
This is bad news for the world's oceans. Sharks are the top predator in the ocean and are vital to its ecosystem. The rapid reduction of sharks is disrupting the ocean's equilibrium, according to Peter Knights, director of WildAid International.

"These are ecosystems that have evolved over millions and millions of years," said Knights. "As soon as you start to take out an important part of it, it's like a brick wall, you take out bricks [and] eventually it's going to collapse."

When sharks attack humans, it inevitably makes news - it is a sexy story. What is rarely reported is that worldwide, sharks kill an average of 10 people every year. It's usually when people venture into a shark's habitat and not20the other way around. By contrast, humans kill around 100 million sharks every year - a number that has ballooned in recent years because of the enormous demand for shark fins to make shark fin soup. VideoLisa Ling visits 'ground zero' in battle to protect sharks »

Shark fin soup is a delicacy reserved for the wealthy on special occasions and it has been part of Chinese culture for centuries. For years, only rich Chinese mostly in Hong Kong, Taiwan and Singapore consumed it, so the impact on the overall shark population was negligible.

Over the last decade, the exploding middle class in China has changed the fate of the shark. With an unprecedented number of people making more money than ever, the demand for all things that signal an improvement in status is gargantuan. The ability to serve and consume shark fin soup is among the most revered of activities, because it signifies that one has made it.

Shark fin soup can be expensive. A bowl of imperial shark fin soup can cost upwards of $100. These days, shark fin soup is so fashionable that it's becoming commonplace. Buffets serve versions of it for as low as $10 a bowl. The irony is that shark fin is flavorless -- its cartilage has a chewy consistency. Tens of thousands of sharks are being killed for a gelatinous thing in a soup.

To satiate the appetites of upwardly mobile Chinese, fishermen traverse all corners of the Earth's oceans in search of sharks or, more specifically, their fins. Because space is limited on fishing vessels and shark bodies are bulky and not considered as valuable, fishermen often catch the sharks, saw off their fins and toss the sharks back into the water. Without their fins, sharks cannot swim and they sink to the ocean floor, where they're picked at by other fish and left to die. PhotoSee photos of Taiwan's shark finning trade »

The "Planet in Peril" crew traveled with Knights to Taiwan's southern port city of Kaohsiung, which is considered one of the world's main hubs for shark fins. We watched as the fishermen unloaded their catch. Thousands of fins were thrown from one of the ships that had spent months fishing the international waters of the Pacific. See a map of where the 'Planet in Peril' crew traveled for their worldwide investigation »

Because of the sensitivity over this issue, few people were willing to talk to us.

Shark finning is not illegal. Taiwan has no law against fins taken from international waters coming into its ports.

However, Taiwan does have what it calls a "plan of action" that requires the bodies of the sharks the fins came from to be accounted for and not dumped into the sea.

But at this port, we see more fins than bodies as a forklift scoops up large piles of fins and dumps them into a truck. There are no signs of anyone monitoring the weight ratio or making sure there's no illegal fishing of the five shark species protected under international treaty.

"The laws are weak and when you take the fins off, identifying these species is almost impossible," Knights said. "You can see they all look almost identical and yet they're makos and threshers and blue sharks; there [are] all kinds of species there, but identifying them and monitoring them and having a regulated fishery is virtually impossible."

Taiwan is not alone. Shark finning thrives off weak regulations around the world and only a few countries demand that sharks arrive i n port with fins attached.

Knights says it comes down to economics.

"The fin is one of the most expensive pound-for-pound item from the sea. And the beauty about the fin is that it's very compact ... it doesn't take up your hull and you can make a lot of money from it," said Knights.

Fins can sell for $500 per pound, according to WildAid, which is campaigning for a global ban on shark finning.
In recent years, Cocos Island has become another battleground in the fight to save the shark.

Located 300 miles off the coast of Costa Rica, the only way to get to this uninhabited islet in the eastern Pacific is by boat. Cocos Island, recently declared a national park, is a nearly pristine and richly preserved ecosystem where thousands of sharks have roamed for centuries. Scientists think there are more sharks there than any other place on Earth.

Fishermen come from all over the world to catch the sharks that swim around the island. It is illegal for fishing boats to get within three miles of the island, but the law is routinely ignored. On any given day, one can see numerous fishing boats no more than a mile away from the island.

The fate of the shark is grim. Increasing public awareness of the shark's role in the marine ecosystem and the rapid rate of extinction because of the demand for shark fin soup may be the best hope for the shark, which has inhabited the planet for 400 million years.

"Can you imagine if it was Yellowstone Park and people were shooting up grizzlies? No one would ever get away with it. But this ocean, because it's out of sight, out of mind, [shark finning] carries on," said Knights.

It is just profoundly incomprehensible that millions of my kind would permit the mass slaughter of sharks, in the most barbarous way, to the brink of extinction, for a bowl of soup. Doesn't anyone see or care about the disequilibrium and injustice in that? Why isn't this savage, wholly unnecessary murder, completely & immediately ostracized as being beyond the pale of acceptability? WHO are we????

Oh, I know, sharks have to be monetized because they are there, and we can. That is how we justify all the atrocities and crimes that we commit on others. But to decimate the sharks in the cruelest of ways for an elective, non-essential gustatory delectation??-----It is a monstrous act that in its very elements of intent and perpetration, constitutes an abject relationship to the world, the depravity of which gravely dishonors and condemns ourselves. Where are those among us who stand up and say, NO MORE! ??

This visual (video) report is a rather sobering look at who we are and what we do, but at a minimum we bear an absolute responsibility to look deeply at the truth about ourselves. To exterminate the sharks for soup without moral examination and introspection is cowardly and reprobate.

SINS OF OMISSION: When I force myself to LOOK at the ghastly sights, those excruciating, bloody pictures of the beasts sliced up alive and tossed overboard hemorrhaging to fall to the ocean depths to bleed out & suffocate, awesome animals who were just swimming naturally & unmolested in the previous moment, animals whom I, in complicity with my tribe, attack & cause to suffer, whose life & place I snatch as a mass murderer does-----that compulsory LOOKING, when I would rather look away, not see, and cloak myself in the sin of not-knowing, is a first act of penance for the penitent.


Secretary of Food

If ever a system were in need of overhaul, it is our process (theory & practice) of unhealthful food production. Yet we seem incapable of making the most obvious changes in the structure of factory farming that everyone agrees and bemoans is harmful to all-----detrimental to humans, especially children, to animals, and to the land. Kristoff has written a thoughtful piece to move us in the right direction. We need to totally kick out the lobbyists and their politicians from any proximity to food policy and decision-making, sever & excise them like a predatory cancer. Any awake, thinking, sensible people would never have surrendered their agriculture, and treatment of their farm animals, to the hijacking industrial operators whose exclusive purpose is maximum monetization regardless of atrocious, barbaric consequences, to "TYCOONS WHOSE BUSINESS MODEL IS ABUSING ANIMALS."

Food should not be fast, nor should it be cheap.

Highly recommend:
Matthew Scully, DOMINION

December 11, 2008
Op-Ed Columnist, N.Y. Times

Obama’s ‘Secretary of Food’?

As Barack Obama ponders whom to pick as agriculture secretary, he should reframe the question. What he needs is actually a bold reformer in a position renamed “secretary of food.”

A Department of Agriculture made sense 100 years ago when 35 percent of Americans engaged in farming. But today, fewer than 2 percent are farmers. In contrast, 100 percent of Americans eat.

Renaming the department would signal that Mr. Obama seeks to move away from a bankrupt structure of factory farming that squanders energy, exacerbates climate change and makes Americans unhealthy — all while costing taxpayers billions of dollars.

“We’re subsidizing the least healthy calories in the supermarket — high fructose corn syrup and hydrogenated soy oil, and we’re doing very little for farmers trying to grow real food,” notes Michael Pollan, author of such books as “The Omnivore’s Dilemma” and “In Defense of Food.

The Agriculture Department — and the agriculture committees in Congress — have traditionally been handed over to industrial farming interests by Democrats and Republicans alike. The farm lobby uses that perch to inflict unhealthy food on American children in school-lunch programs, exacerbating our national crisis with diabetes and obesity.

But let’s be clear. The problem isn’t farmers. It’s the farm lobby — hijacked by industrial operators — and a bipartisan tradition of kowtowing to it.

I grew up on a farm in Yamhill, Ore., where my family grew cherries and timber and raised sheep and, at times, small numbers of cattle, hogs and geese. One of my regrets is that my kids don’t have the chance to grow up on a farm as well.

Yet the Agriculture Department doesn’t support rural towns like Yamhill; it bolsters industrial operations that have lobbying clout. The result is that family farms have to sell out to larger operators, undermining small towns.

One measure of the absurdity of the system: Every year you, the American taxpayer, send me a check=2 0for $588 in exchange for me not growing crops on timberland I own in Oregon (I forward the money to a charity). That’s right. The Agriculture Department pays a New York journalist not to grow crops in a forest in Oregon.

Modern confinement operations are less like farms than like meat assembly lines. They are dazzlingly efficient in some ways, but they use vast amounts of grain, as well as low-level antibiotics to reduce infections — and the result is a public health threat from antibiotic-resistant infections.

An industrial farm with 5,000 hogs produces as much waste as a town with 20,000 people. But while the town is required to have a sewage system, the industrial farm isn’t.

“They look profitable because we’re paying for their wastes,” notes Robert P. Martin, executive director of the Pew Commission on Industrial Farm Animal Production. “And then there’s the cost of antibiotic resistance to the economy as a whole.”

One study suggests that these large operations receive, in effect, a $24 subsidy for each hog raised. We face an obesity crisis and a budget crisis, and we subsidize bacon?

The need for change is increasingly obvious, for health, climate and even humanitarian reasons. California voters last month passed a landmark referendum (over the farm lobby’s furious protests) that will require factory farms to give minimum amounts of space to poultry and livestock. Society is becoming concerned not only with little boys who abuse cats but also with tycoons whose business model is abusing farm animals.

An online petition at calls for a reformist pick for agriculture secretary — and names six terrific candidates, such as Chuck Hassebrook, a reformer in Nebraska. On several occasions in the campaign, Mr. Obama made comments showing a deep understanding of food issues, but the names people in the food industry say are under consideration for agriculture secretary represent the problem more than the solution.

Change we can believe in?

The most powerful signal Mr. Obama could send would be to name a reformer to a renamed position. A former secretary of agriculture, John Block, said publicly the other day that the agency=2 0should be renamed “the Department of Food, Agriculture and Forestry.” And another, Ann Veneman, told me that she believes it should be renamed, “Department of Food and Agriculture.” I’d prefer to see simply “Department of Food,” giving primacy to America’s 300 million eaters.

As Mr. Pollan told me: “Even if you don’t think agriculture is a high priority, given all the other problems we face, we’re not going to make progress on the issues Obama campaigned on — health care, climate change and energy independence — unless we reform agriculture.”

Your move, Mr. President-elect.


While Detroit Slept

Great NY Times column today by Tom Friedman:

December 10, 2008
Op-Ed Columnist

While Detroit Slept

As I think about our bailing out Detroit, I can’t help but reflect on what, in my view, is the most important rule of business in today’s integrated and digitized global market, where knowledge and innovation tools are so widely distributed. It’s this: Whatever can be done, will be done. The only question is will it be done by you or to you. Just don’t think it won’t be done. If you have an idea in Detroit or Tennessee, promise me that you’ll pursue it, because someone in Denmark or Tel Aviv will do so a second later.

Why do I bring this up? Because someone in the mobility business in Denmark and Tel Aviv is already devel oping a real-world alternative to Detroit’s business model. I don’t know if this alternative to gasoline-powered cars will work, but I do know that it can be done — and Detroit isn’t doing it. And therefore it will be done, and eventually, I bet, it will be done profitably.

And when it is, our bailout of Detroit will be remembered as the equivalent of pouring billions of dollars of taxpayer money into the mail-order-catalogue business on the eve of the birth of eBay. It will be remembered as pouring billions of dollars into the CD music business on the eve of the birth of the iPod and iTunes. It will be remembered as pouring billions of dollars into a book-store chain on the eve of the birth of and the Kindle. It will be remembered as pouring billions of dollars into improving typewriters on the eve of the birth of the PC and the Internet.

What business model am I talking about? It is Shai Agassi’s electric car network company, called Better Place. Just last week, the company, based in Palo Alto, Calif., announced a partnership with the state of Hawaii to road test its business plan there after already inking similar deals with Israel, Australia, the San Francisco Bay area and, yes, Denmark.

The Better Place electric car charging system involves generating electrons from as much renewable energy — such as wind and solar — as possible and then feeding those clean electrons into a national electric car charging infrastructure. This consists of electricity charging spots with plug-in outlets — the first pilots were opened in Israel this week — plus battery-exchange stations all over the respective country. The whole system is then coordinated by a service control center that integrates and does the billing.

Under the Better Place model, consumers can either buy or lease an electric car from the French automaker Renault or Japanese companies like Nissan (General Motors snubbed Agassi) and then buy miles on their electric car batteries from Better Place the way you now buy an Apple cellphone and the minutes from AT&T. That way Better Place, or any car company that partners with it, benefits from each mile you drive. G.M. sells cars. Better Place is selling mobility miles.

The first Renault and Nissan electric cars are scheduled to hit Denmark and Israel in 2011, when the whole system should be up and running. On Tuesday, Japan’s Ministry of Environment invited Better Place to join the first government-led electric car project along with Honda,=2 0Mitsubishi and Subaru. Better Place was the only foreign company invited to participate, working with Japan’s leading auto companies, to build a battery swap station for electric cars in Yokohama, the Detroit of Japan.

What I find exciting about Better Place is that it is building a car company off the new industrial platform of the 21st century, not the one from the 20th — the exact same way that Steve Jobs did to overturn the music business. What did Apple understand first? One, that today’s technology platform would allow anyone with a computer to record music. Two, that the Internet and MP3 players would allow anyone to transfer music in digital form to anyone else. You wouldn’t need CDs or record companies anymore. Apple simply took all those innovations and integrated them into a single music-generating, purchasing and listening system that completely disrupted the music business.

What Agassi, the founder of Better Place, is saying is that there is a new way to generate mobility, not just music, using the same platform. It just takes the right kind of auto battery — the iPod in this story — and the right kind of national plug-in network — the iTunes store — to make the busi ness model work for electric cars at six cents a mile. The average American is paying today around 12 cents a mile for gasoline transportation, which also adds to global warming and strengthens petro-dictators.

Do not expect this innovation to come out of Detroit. Remember, in 1908, the Ford Model-T got better mileage — 25 miles per gallon — than many Ford, G.M. and Chrysler models made in 2008. But don’t be surprised when it comes out of somewhere else. It can be done. It will be done. If we miss the chance to win the race for Car 2.0 because we keep mindlessly bailing out Car 1.0, there will be no one to blame more than Detroit’s new shareholders: we the taxpayers.


Goodbye To All That

Wednesday, December 10, 2008

On November 28, 2008, a worker was trampled to death as customers stormed a Walmart store in Mineola, New York, for cheap goods on the day after Thanksgiving (symbolic irony not lost here). Jdmytai Damour, 6'5" tall and 270 pounds, was killed when a crowd 2000 strong broke down the electronic doors in a frantic pursuit of bargains on big-screen TVs, clothing, and other stuff. He died of asphyxiation related to trampling. Those hundreds of people who did make there way into the store literally had to step over or around him, or on him, to get into the Walmart store, and those locked out when the store was closed, howled and shouted in protest at not being allowed in to partake of the bargains, notwithstanding the homicide. Look at where we as a species have arrived with our depraved, obssessive consumption: SHOPPING HAS BECOME A BLOOD SPORT, surely the nadir in shameful, desensitized, reckless human behaviour. Love of stuff trumps all constraints and sense of right behaviour....obliterates all regard for the other. What have we become?

As a nation, we save zero now and are consuming 6% more than we are producing, but twenty years ago we were saving 8% of earnings. We have had a credit party like we have never seen before. But spending borrowed money is not an economy, and it has destroyed the financial security of the nation and of individuals. It is complete folly to allow consumption to constitute two-thirds of U.S. GDP, and to have dismantled the industrial base and outsourced jobs overseas, because it has made us vulnerable---I think now we all see how it has weakened the American nation. We manufactured ourselves into the wealthiest country in the world, and then consumed our way into bankruptcy, all the while transfering that great wealth to Asia and the Middle East. Neither a smart nor strategically secure monetary transformation, forged in the crucible of mad love for cheap goods. In that exchange, we ended up with nothing but junk, and not anything vital to life, and they ended up with economic wealth and power. Want more flat screeen TVs????

I knew that seismic changes in human behaviour were inevitable when I recently saw a $5 million black diamond bra modeled in a Victoria's Secret fashion show described as, "The new sexy is glamourous this season." Inanity and excessive behaviour like that makes my brain explode, the quintessence of the mindless consumption that exacts way too high a price on species, planet and scarce resources. We know no bounds, yet it is urgent that the human species self-impose limits in all avenues of conduct. Desperately we need to get a grip.....this devouring depletion CANNOT be what freedom is for--- to exhaust the earth.

As the society sheds the superfluous goods and services, millions of jobs, unecessary jobs, will be lost. But new jobs will be created in the green economy of energy independence & efficiency, and its attendant manufacturing. The point is that these parts of the economy must generate in the private sector in order to create anew capital formation in the economy now broke, as opposed to more borrowing & governmental spending/endebtedness to prime the pump. This process of new and dynamic industry arising from the ashes of moribund commercial activity is the Shumpeterian process described as "gales of creative destruction." (Joseph Schumpeter, 1883-1950, 20th-century economist)

Seems that most people are finding that they can do with LOTS less stuff, looks like many are relinquishing the flotsom & jetsom of modern life, turning instead to savings for more security. Maybe the pendulum swings from addicted consumerism to revulsion at the mountains of detritus all around us. Demand destruction will be the strongest brake on retailing & sales, as Americans come off the binge and to their senses. Maybe we will be devotedly good at frugal. I think (hope) this is the next stage, and that tons of retailers will fold up shop, with "we don't need it, thank you" reverberating all the way down the line to the (foreign) originators: over the next ten years, a cascading tectonic seachange away from the consumption binge of the last decades. In the U.S., we have to start producing our own industrial goods again, of quality and life-time durability, and say goodbye to the cheap, disposable, inconsequetial junk enriching foreign saving nations. GET SMART, AMERICA!

Partial Transcript
December 7, 2008, CNN:

CHRISTINE ROMANS, CNN HOST: Welcome to YOUR MONEY. I'm Christine Romans.
Nothing is more critical to your money than your job and American jobs are disappearing fast. 1.9 million jobs have vanished so far this year bringing the unemployment rate now to 6.7 percent. The losses have spiked at the end of year. More than half a million of you lost your job in November alone, that's the biggest one-month cut in almost 34 years. More than 300,000 jobs were cut in October. More than 400,000 in September. That's more than a million jobs lost in just the past three months.

ALI VELSHI, CNN HOST: Retail trade losing 91,000 jobs in November, that's when they're supposed to be ramping up and the job losses are coming at companies where the names will be very, very familiar to you. A huge week for job cut announcements, AT&T slashed 12,000 workers. Credit Suisse, 5,300, DuPont laying off 2,500 employees. Viacom making 850 cuts and NBC announced plans to cut 500 jobs worldwide. That's more than 20,000 this week alone.

So is there any relief in sight? We are joined by a fantastic panel, Peter Schiff the president of Euro Pacific Capital, Lakshman Achuthan is the managing editor of the Economic Cycle Research Institute and Jim Ellis is the assistant managing editor of "Businessweek." Thanks to all of you for being here.

I want to start with you, Peter; you have been writing about and describing a coming crash and recession for some years now. I hate to say that some of the things that you've written about is outlandish as they seem do seem to be bearing out right now.

PETER SCHIFF, PRESIDENT, EURO PACIFIC CAPITAL: Sure, you know the problem, too, a lot of the jobs that are now being destroyed in our economy never should have been created in the first place, they were a function of our bubble economy. The fact that Americans were borrowing money and spending too much and as they can no longer spend because we're broke, all of these phony service sector jobs will have to disappear.

As painful as it is for the people who are in those jobs, the government has to stand aside and let it happen. We can't try to keep people in nonviable jobs. We have to go back to making things and it will be a very painful process and Americans are going to have to rein in their spending and start saving money.

VELSHI: I just want to ask you one thing, and I know this is theory that you've worked on, but we're now talking about officially close to 2 million jobs lost this year alone and it could be substantially more. I've heard you say it will mean millions of job losses to set this economy straight. What is the real equation there for people? What does your science and your academia tell you what to do when 5 million people are unemployed?

SCHIFF: That's how markets work.

VELSHI: Don't we have an obligation as a nation, as a modern economy to make sure that 5 million people aren't living in tents?

SCHIFF: There's nothing we can do. The government can't create jobs; they'll destroy jobs trying to do it. The government doesn't have any money all they have is a printing press. We need to free markets to create jobs; if the government wants to help they should reduce their burden on the economy. We should be cutting government spending. We should be cutting taxes and we actually should be raising interest rates. We're doing all of the wrong things and we're going destroy this economy.

ROMANS: Nobody is talking about doing any of those things. You're right. What they're talking about doing is spending a whole lot of money in fiscal stimulus and we have the Federal Reserve doing everything that it possibly can to keep the economy.

SCHIFF: Remember, we're in trouble, because we borrowed and spent too much money. We're not going to borrow and spend our way out of it. We have to do the opposite of what we've been doing. We're simply digging ourselves into a deeper hole right now.

ROMANS: Lakshman, we're not doing what Peter says we should be doing and no one says we are going to do that. What are we doing and will it work?

LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INSTITUTE: Well one thing we are doing is we're probably cutting taxes which I think is one of the things you are prescribing. What we are doing here is they are throwing an ungodly amount of money at the economy. Not only the U.S., all of the major economies in the world are doing this, even China is doing it in a coordinated way.

VELSHI: You're a proponent of the idea that that will ultimately work.

ACHUTHAN: Look. What this will do is it will mitigate to a degree the pain on the way down. We are in a severe recession. As you were pointing out this economy went from a mild recession to a very, very severe recession. The numbers today they don't tell you anything about the future they just tell you that a few weeks ago we really accelerated to the downside.

When you look at the forward-looking indicators on the business cycle, they don't look years ahead, they look quarters ahead, they are tanking. They are at the worst readings they've been at in 60 years so we've got more numbers like we saw today on Friday coming in the months ahead and the one thing, the business cycle, the sharper the downturn, it tends to get a sharper upturn.

All of the things that we're doing here in the desperation of the moment are going to create all kinds of big questions on the other side in terms of the ideology of free markets, inflation and other things. Printing presses with the currencies.

ROMANS: But Jim Ellis says, it is too soon too start worrying about that, right? We are facing the beast that we're facing right now and then somewhere down the road there will be a recovery and a bubble that will have to be popped again, but what are we doing right now and will it work?

JIM ELLIS, ASSISTANT MANAGING EDITOR, "BUSINESS WEEK:" Well right now we basically have to find ways to free up the credit markets and get people to lend again and as bad as we ran into trouble with people borrowing a lot and spending, we've got to get people spending again. That is something that I think some people, particularly fiscal conservatives really worry about, but that's the bubble to come. That's next year's fight or the fight after.

Right now, the only thing to do is to get money coursing back do the economy and that will be a real challenge for the new president if and then we're talking about doing that and basically accepting deficits that we haven't seen in years.

VELSHI: Hold on, Peter, we are going to have this discussion in a way where our viewers can understand how they fit into it. This is a very smart discussion. You need to know how this affects you.

ROMANS: Just because we've spent an awful lot of money does it mean that it is right to spend more money?

SCHIFF: My mother always taught me that two wrongs don't make a right. We shouldn't bail out Wall Street. We shouldn't bail out Detroit. It will cost the economy more than the cost of the bailout which is more than the politicians think. We'll run into the hundred of millions to prop these companies up. The real cost is the damage to the economy that we do, because by propping it up, what are we destroying. What companies are going fail so they can stay in business?

ROMANS: You've made the point and a lot of these Congressmen have been making the point that there are dealerships across country and there are plants. Lakshman let's talk about around the country and you have a map that you can show us of how things have changed.

ACHUTHAN: Basically, as this recession has taken hold, job losses have gone from the coast and they've squeezed into the middle of the country and this is how a recession works. It's become more and more pervasive. It's no mystery that California is in trouble and they're really screaming right new.

VELSHI: And you can see Michigan was in trouble back then.

ACHUTHAN: These are the ones that were on the early edge of it and then as the recession has taken hold over the course of the year you've seen job losses just really cover the map.

VELSHI: Let's advance that to October. ACHUTHAN: We're having a little bit of a delayed holdout in the middle of the country from the commodity bubble with both oil prices. Basically, the recession has fully gripped this country and you're seeing that in the latest data. There is a very pervasive job loss. It's regional and its industry wide.

And this is what a recession is. So in the middle of that, right? Ideological arguments that have merit aside, do you want to put a slug of people out of work right there? And if you do, you are going go from what's a severe recession. People act surprised by this number today. I mean, get over it. If you look at forward numbers they're going to get a lot worse.

SCHIFF: People will get put out of work and there's nothing we can do about it. What government policy is doing now is making sure that there are no new jobs waiting for them. We have to let the market work, we can't centrally plan the economy and have the bureaucrats in Washington try to figure out how to run the economy and try to make this green economy and how to micromanage the auto industry. It's never worked.

ACHUTHAN: All of that is a nice discussion before you get into a severe, global recession.

VELSHI: Jim started by saying this will ultimately be a decision made in Washington. The American people would like to know whether the government can help or will help.

ELLIS: The government can undoubtedly can help, the question is whether they'll want to shoulder the burden and shoulder the financial burden that goes with that.

VELSHI: With what money?

ELLIS: I have a feeling that the same way the government has come in and come up with really innovative ways to pump money into the financial system to make sure we have a banking system. They'll say something like manufacturing still does matter in the U.S. It's very difficult to imagine a modern society that's a leader society and economically that doesn't have the manufacturing.

VELSHI: That's a point that Peter will agree with.

SCHIFF: The solution is to save our money. Remember, he's talking about we need spending. When you're overweight the solution isn't that you eat more. When you're broke the solution isn't to spend more. If we're going to have manufacturing in this country, we have to stop spending money.

ELLIS: If people don't spend.

SCHIFF: We'll have a real economy.

ACHUTHAN: Some of the excesses have already been corrected. You have home prices coming down. You've had a lot of jobs lost. You're already having some of that creative destruction already happening. SCHIFF: Spending is not an economy.

ROMANS: We have to leave it there guys. He brings up a good question what we've got get to. That is where do you get the money? We borrow the money. We don't have the money and that's part --

VELSHI: How do we pay it back?


The Real Generation X

Sunday, December 7, 2008

December 7, 2008

Op-Ed Columnist

The Real Generation X

I’ve been thinking a lot lately about Tom Brokaw’s book “The Greatest Generation,” that classic about our parents and their incredible sacrifices during World War II. What I’ve been thinking about actually is this: What book will our kids write about us? “The Greediest Generation?” “The Complacent Generation?” Or maybe: “The Subprime Generation: How My Parents Bailed Themselves Out for Their Excesses by Charging It All on My Visa Card.”

Our kids should be so much more radical than they are today. I understand why they aren’t. They’re so worried about just getting a job or paying next semester’s tuition. But we must not take their quietism as license to do whatever we wa nt with this bailout cash. They are going to have to pay this money back. And therefore, we have an incredibly weighty obligation to make sure that we not only spend every stimulus dollar wisely but also with an eye to creating new technologies.

We not only need to bail out industries of the past but to build up industries of the future — to offer the kind of big thinking and risk-taking that transforms enormous challenges into world-changing opportunities. That is what made the Greatest Generation great. This money can’t just go to patch up our jalopies.

“Remember, this money will not be neutral,” said Andy Karsner, a former U.S. assistant secretary of energy. “We are talking about directing an unprecedented volume of cash at our housing, energy, transportation and infrastructure industries. This cash will either fortify the incumbent players and calcify the energy status quo, or it will facilitate the economic transformation we seek. The stimulus will either be white blood cells that will heal us or malignant cells that will continue to sap our strength.”

Let’s get specific. When it comes to Detroit, my views are clear: I think we should be talking about “bail,” not “bailouts,” regarding the people running the Big Three car companies and the lawmakers who mindlessly protected them for so long. Still, I do not want to see jobs destroyed. But if taxpayers are going to give Detroit money, we must not entrust the spending to people who have run their businesses into the ground.

You want my tax dollars? Then I want to see the precise production plans and timetables for the hybridization of all your cars and trucks within 36 months. I want every bailed-out car company to move to hybrid electric drive trains, because nothing would both improve mileage and emissions more — and also stimulate a whole new 21st-century, job-creating industry: batteries.

Big batteries that can store electricity for transportation and wind and solar generation are the indispensable enablers of the Energy Internet of the future. Any Detroit bailout has to serve that goal.

A major electrification of drive trains in U.S.-made vehicles “would induce explosive growth and investment in a domestic battery business,” said Karsner. Europe, Japan and China are already dominating this industry. It’s the key to clean-tech — and ultimately our national competitiveness. We can’t allow ourselves to be battery importers in the 21st century the way we were oil importers in the 20th.

The same applies to Barack Obama’s plans for a green stimulus in energy efficiency and infrastructure. It makes no sense to spend money on green infrastructure — or a bailout of Detroit aimed at stimulating production of more fuel-efficient cars — if it is not combined with a tax on carbon that would actually change consumer buying behavior.
Many people will tell Mr. Obama that taxing carbon or gasoline now is a “nonstarter.” Wrong. It is the only starter. It is the game-changer. If you want to know where postponing it has gotten us, visit Detroit. No carbon tax or increased gasoline tax meant that every time the price of gasoline went down to $1 or $2 a gallon, consumers went back to buying gas guzzlers. And Detroit just fed their addictions — so it never committed to a real energy-efficiency retooling of its fleet. R.I.P.

If Mr. Obama is going to oversee a successful infrastructure stimulus, then it has to include not only a tax on carbon — make it revenue-neutral and rebate it all by reducing payroll taxes — but also new standards20that gradually require utilities and home builders in states that receive money to build dramatically more energy-efficient power plants, commercial buildings and homes. This, too, would create whole new industries.

Let us not mince words: The Obama presidency will be shaped in many ways by how it spends this stimulus. I am sure he will articulate the right goals. But if the means — the price signals, conditions and standards — that he imposes on his stimulus are not as creative, bold and tough as his goals, it will all be for naught.

In sum, our kids will remember the Obama stimulus as either the burden of their lifetime or the investment of their lifetime. Let’s hope it’s the latter. I like that book title much better.


CPI (Consumer Price Index) Based Upon Statistical Flimflam

Friday, December 5, 2008

This is how the government cooks the economic statistics:

Jubak's Journal12/5/2008

Fake inflation numbers masked crisis

Distortions in the way inflation is calculated contributed to today's financial mess and the 2000-02 tech crash. Unless the problem is fixed, you can count on another crisis ahead.

By Jim Jubak

How do we make sure we don't replay the current financial crisis five years from now?

So far, all the plans, revised plans and re-revised plans that have come out of Washington have focused on saving the banks, Wall Street, the financial system, the U.S. economy and the global economy from a devastating meltdown. That's certainly important.

But unless we address the root causes of this crisis, we're going to find ourselves back in trouble way sooner than we'd like. It took us only five years to go from the bottom of the 2000-02 technology crash and bear market to the top of the real-estate and financial-leverage boom market in 2007. Without essential reforms, I'm afraid we'll be looking at a crisis much like the current one in another five years or so.

What reforms are essential? I'd start with fixing the way we measure inflation. The official inflation number is so misleading that it played a huge role in creating the tech stock bubble that broke in March 2000 and in the leverage bubble that broke in 2007.

3 major shifts in figuring inflation

Most criticism of the official inflation number, the Consumer Price Index, or CPI, has focused on the statistical flimflam used by the Bureau of Labor Statistics to calculate how fast prices are going up.

Chief among these is a technique called hedonics. Starting in the 1990s, some economists and government statisticians began arguing that a $100 increase in the price of, say, a car wasn't really a $100 price increase if the power, safety features or general usefulness of the car improved substantially. If the subjective value of the car went up by $100, then, despite the increase in what you paid, according to the government, the price didn't go up at all.

The objection to this kind of adjustment is that it introduces a huge amount of subjectivity into the process of calculating inflation. Determining the increased usefulness of a product or service requires a subjective judgment about the value of this or that feature. What is the extra horsepower of a car worth to a user? How about extra safety features? And to which user? And if the cost of a car went up by $100 even if it came with more and better features, wasn't the price still in reality $100 higher?

Hedonic quality adjustments weren't the only statistical adjustments that the government made to the inflation numbers. Starting in 1983, the government also started to measure changes in the cost of housing by looking not at the cost of a house but at what an owner would get if he or she rented out that house. Since in a housing boom the price of houses rises about three times as fast as rents do, this change understated the rate of inflation.

In the 1990s, the government also started to include substitution pricing in its inflation measure. In this adjustment, government statisticians assumed that if the price of something went up, people would use less and would substitute a less costly product or service. So when steak went up in price, consumers might buy more pork or chicken. Figuring out what substitution a consumer would make again added to the subjectivity of the inflation numbers. Including substitution destroyed the whole point of the exercise because it turned the government's shopping basket from an inflation measure to a set of lifestyle choices.

How big an impact?

It's hard to figure out exactly how much these three changes have subtracted from the rate of inflation. The St. Louis Federal Reserve Bank calculated that the use of rental equivalents to estimate housing cost increases might have subtracted somewhere around half a percentage point from the official CPI.

Bond guru Bill Gross figures the changes were worth a full percentage point off the official inflation number. Other estimates put the effect of the change at anywhere from 5 to 8 percentage points.

Adding even 1 percentage point to the official rate would have put the real rate well above the 2% to 3% target as early as October 2002, when the official rate was 2.03%. At that point, the Federal Reserve, relying on the official rate of inflation, still had seven more months of cutting interest rates ahead of it and then 12 months with Fed-controlled interest rates at just 1%.

The distortion in the inflation rate compounded a huge policy mistake. In retrospect, keeping interest rates at just 1% for so long allowed the mortgage bubble to develop. Seven months spent cutting interest rates when the unadjusted inflation number showed that the central bank should have been raising rates just made that mistake even worse by giving cheap money a longer chance to build up momentum in lifting housing prices.

Lessons from the bubbles

But even reversing the adjustments that have distorted the official inflation figures won't fix the basic problem with the way we calculate inflation. Think of this: If the price of a can of soup goes up 10 cents, that's inflation, but if the price of a stock soars by 100%, that doesn't count as inflation at all.

That might have made sense once upon a time, when increases in the money supply in one country didn't have a chance to move around the world to create global asset booms or when traders in New York couldn't borrow yen in Tokyo to bid up the prices of stocks in New York and London. But it sure doesn't make any sense in the current global economy, when floods of cash can move directly into asset markets, leaving the prices of goods in the real economy relatively unaffected.

Look at what happened in 1999 and 2007 as bubbles in the asset markets expanded toward bursting. In August 1999, the Federal Reserve did indeed increase interest rates to 5.25% from 5%, but that was only a return to the 5.25% rates of September 1998. Interest rates had been higher in March 1997, but then the Fed spent the next year and a half lowering rates until they hit 4.75% in November 1998. There wasn't any reason to raise rates in 1998 because inflation was a very modest 1.6% -- officially -- that November.

Of course, stock prices were showing a rather amazing rate of inflation of their own. The Nasdaq Composite Index ($COMPX) climbed 39% in 1998 and 86% in 1999. Alan Greenspan's Federal Reserve kept its hands in its pockets as asset values soared, however. The Greenspan Fed's policy was to let asset bubbles follow their own course rather than intervene.

The central bank could have raised interest rates to slow the economy as a whole -- and the stock market along with it -- or it could have used its power to set margin requirements to reduce traders' ability to borrow money to buy shares without affecting the economy as a whole. But instead, the Federal Reserve chose to do nothing. Half of the Fed's mandate is to control inflation, but since the bank doesn't include asset prices in its view of inflation, it could reasonably decide to do nothing.

Same problem, same lack of solution in the run-up to the mortgage bubble that broke in 2007. The Federal Reserve knew housing prices were rising in a speculative fever -- Greenspan famously dismissed the bubble as "froth" -- but with official inflation so low, the Fed didn't need to move aggressively to reduce the rate of inflation in asset prices. Again, the Fed could have raised interest rates to slow the general economy or used specific powers -- in this case its power over bank reserve requirements and lending standards -- to reduce the amount of mortgage money available to homebuyers without slowing the economy as a whole.

Another look at the numbers

A few economists have begun to develop systems that would include asset prices in a measure of inflation. The job is hard, but from the papers I've read, not impossible.

The miscalculating of inflation contributed to our current financial and economic mess in another way as well. When we talk about the growth rate in the economy, we talk about the real rate of growth -- i.e., the rate of growth after subtracting inflation. If the real rate of inflation is higher than the official rate of inflation, that means the actual rate of growth in the economy is lower than the official rate of growth.

So when the economy grew at 1.2% in the fourth quarter of 2005, 1.1% in the third quarter of 2006 or 0.6% in the first quarter of 2007, the actual growth rate for the economy was close to or below zero. If we weren't in a recession in those quarters, we were near one.

And what did the Federal Reserve, which has managing the economy as the other half of its job, do about these signs of dangerous weakness? Nothing, of course, because by the official growth numbers, as affected by the official inflation numbers, there wasn't any problem.

The very weak actual numbers of economic growth might have provoked earlier measures to stimulate the economy. At the least, they would have raised a red flag on the health of the housing market: How could home sales be booming and prices soaring even as the real economy delivered something near zero growth? Someone at the Fed or in the U.S. government might have asked that.

But they didn't.

Because reality, as measured by the official numbers, distorted the truth of the real economy and the real asset markets. There's no guarantee that fallible human beings presented with accurate data won't make mistakes. Even huge mistakes. But with distorted data, we don't have a chance of getting it right.


Calling All Pakistanis

Wednesday, December 3, 2008

Tom Friedman's column today, so clear, & his words so powerful:

December 3, 2008
Op-Ed Columnist

Calling All Pakistanis

On Feb. 6, 2006, three Pakistanis died in Peshawar and Lahore during violent street protests against Danish cartoons that had satirized the Prophet Muhammad. More such mass protests followed weeks later. When Pakistanis and other Muslims are willing to take to the streets, even suffer death, to protest an insulting cartoon published in Denmark, is it fair to ask: Who in the Muslim world, who in Pakistan, is ready to take to the streets to protest the mass murders of real people, not cartoon characters, right next door in Mumbai?

After all, if 10 young Indians from a splinter wing of the Hindu nationalist Bharatiya Janata Party traveled by boat to Pakistan, shot up two hotels in Karachi and the central train station, killed at least 173 people, and then, for good measure, murdered the imam and his wife at a Saudi-financed mosque while they were cradling their 2-year-old son — purely because they were Sunni Muslims — where would we be today? The entire Muslim world would be aflame and in the streets.

So what can we expect from Pakistan and the wider Muslim world after Mumbai? India says its interrogation of the surviving terrorist indicates that all 10 men come from the Pakistani port of Karachi, and at least one, if not all 10, were Pakistani nationals.

First of all, it seems to me that the Pakistani government, which is extremely weak to begin with, has been taking this mass murder very seriously, and, for now, no official connection between the terrorists and elements of the Pakistani security services has been uncovered.

At the same time, any reading of the Pakistani English-language press reveals Pakistani voices expressing real anguish and horror over this incident. Take for instance the Inter Press Service news agency article of Nov. 29 from Karachi: “ ‘I feel a great fear that [the Mumbai violence] will adversely a ffect Pakistan and India relations,’ the prominent Karachi-based feminist poet and writer Attiya Dawood told I.P.S. ‘I can’t say whether Pakistan is involved or not, but whoever is involved, it is not the ordinary people of Pakistan, like myself, or my daughters. We are with our Indian brothers and sisters in their pain and sorrow.’ ”

But while the Pakistani government’s sober response is important, and the sincere expressions of outrage by individual Pakistanis are critical, I am still hoping for more. I am still hoping — just once — for that mass demonstration of “ordinary people” against the Mumbai bombers, not for my sake, not for India’s sake, but for Pakistan’s sake.

Why? Because it takes a village. The best defense against this kind of murderous violence is to limit the pool of recruits, and the only way to do that is for the home society to isolate, condemn and denounce publicly and repeatedly the murderers — and not amplify, ignore, glorify, justify or “explain” their activities.

Sure, better intelligence is important. And, yes, better SWAT teams are critical to defeating the perpetrators quickly before they can do much damage. But at the end of the day, terrorists often are just acting on what they sense the majority really wants but doesn’t dare do or say. That is why the most powerful deterrent to their behavior is when the community as a whole says: “No more. What you have done in murdering defenseless men, women and children has brought shame on us and on you.”

Why should Pakistanis do that? Because you can’t have a healthy society that tolerates in any way its own sons going into a modern city, anywhere, and just murdering everyone in sight — including some 40 other Muslims — in a suicide-murder operation, without even bothering to leave a note. Because the act was their note, and destroying just to destroy was their goal. If you do that with enemies abroad, you will do that with enemies at home and destroy your own society in the process.

“I often make the comparison to Catholics during the pedophile priest scandal,” a Muslim woman friend wrote me. “Those Catholics that left the church or spoke out against the church were not trying to prove to anyone that they are anti-pedophile. Nor were they apologizing for Catholics, or trying to m ake the point that this is not Catholicism to the non-Catholic world. They spoke out because they wanted to influence the church. They wanted to fix a terrible problem” in their own religious community.

We know from the Danish cartoons affair that Pakistanis and other Muslims know how to mobilize quickly to express their heartfelt feelings, not just as individuals, but as a powerful collective. That is what is needed here.

Because, I repeat, this kind of murderous violence only stops when the village — all the good people in Pakistan, including the community elders and spiritual leaders who want a decent future for their country — declares, as a collective, that those who carry out such murders are shameful unbelievers who will not dance with virgins in heaven but burn in hell. And they do it with the same vehemence with which they denounce Danish cartoons.


Never Let A Crisis Go To Waste

There are so many international crises looming as President-elect Obama takes office, and they all present him with an opportunity to formulate a transformative vision of the United States’s role in the new global order.

In one crisis, the terrorism problems are converging in Pakis tan, Afghanistan and India. If the three governments must recognize that they have a common interest in dealing with it, we could have a new era of zero tolerance for jihadists

With the attacks in Mumbai, the .Pakistan military has a success; for very low cost they have destabilized Afghanistan and India. Would Pakistan turn off the terrorist tap? Probably not if they are not yet convinced that they have created an existential threat to themselves and therefore must destroy the plumbing of terrorism.

Unlikely as it might have seen just weeks ago, Obama is the first American president to have South Asia as the number one crisis. Although he might now wish not to have won his turn at bat, it is a major leadership opportunity. United States has had good relations with the three principal actors and can be a useful intermediary in opening the diplomatic channels of communication. The big question is, can there be a settlement of Kashmir 60 years after partition? Toward that end, in this process the U.S. could be an honest broker and facilitator.

Likewise, we have had a frozen relationship with Iran, no meaningful contact with he government of Iran. Obama has an opportunity to open up negotiations with Iran regarding its nuclear program & capability. If we are lucky, we can make progress to deflect the nukes, and if we fail in negotiations with Iran, it will strengthen the hand of the United States to go back to China, India & Europe and negotiate much tougher sanctions against Iran.

As Fareed Zakaria has written, this is a rare moment in history for us: “At this moment, the United States has a unique opportunity to push forward a vision that aligns its interests and ideals with those of most of the world's major powers.” But it is a fleeting opportunity. The great danger in foreign policy is that we become endlessly reactive because everything is so urgent as events unfold in crisis. Obama has the singular opportunity to ask himself, what do I want the world to look like in two, five, or ten years, and then to create an architecture of what he wants the world to look like, then use these crises to move toward that vision rather than episodically putting out fires. To assist him in this task, he heads an exceptionally impressive and powerful foreign policy team of deputies.

Moreover, Obama has unique credibility worldwide which means he can lead in a different way as we make the transition to the global era from the post-cold-war era. The United States still must lead because we are the dominant power but we cannot lead alone, we have to lead in concert with others, and that means we have to recognize one central fact: the great majority of problems the U.S. will face around the world---terrorism, climate change, drug and crime cartels, and the problems of nuclear proliferation—none lend themselves to unilateral action by the U.S., and certainly not to isolationism..

The most immediate crisis that we cannot let go to waste is the economic downturn that now grips the entire globe. That is the pressing issue of the next two, three, or four years. It does create an opportunity for generation-spanning change of a progressive kind in the sense of the G-20* and trying to lead into the inevitable new order. The global economic downturn also creates the opportunity to address the imbalances and to create middle classes around the world that could provide the basis for political stability and sustainable progress globally. Fighting terror is not going to take us there, but using this economic crisis to transform global institutions might do so.

So at this time and for this new President Obama, there is a unique opportunity to use American power to reshape the world. I hope Obama can seize this moment in a way President Bush never did, never even conceived of doing. Because Bush of limited vision squandered our international capital and reputation; this transition is rather like coming out of eight years in the dry desert. We don’t know if Obama will be more successful in navigating through the global thicket, but I sure hope he has an intelligent, coherent vision for America’s place on the global stage as a cooperating agent, and I hope he never lets a crisis go to waste. I like that idea. What an empowering principle of governance, and I wish him well.


Sometimes a crisis provides an opportunity. The Washington G20 meeting, for instance, was an interesting portent of a future "post-American" world. Every previous financial crisis had been handled by the IMF, the World Bank or the G7 (or G8). This time, the emerging nations were fully represented. At the same time, the meeting was held in Washington, and George W. Bush presided. The United States retains a unique role in the emerging world order. It remains the single global power. It has enormous convening, agenda-setting and leadership powers, although they must be properly managed and shared with all the world's major players, old and new, in order to be effective. -Fareed Zakaria


Clean Up the Securities & Exchange Commission

By: Tom Brennan | Web Editor | 02 Dec 2008 |

The SEC is charged with keeping the Wall Street game on the level, and with protecting the public from fraudulent & corrupt rip-off schemes. Wall Street is supposed to be regulated at least as much as Vegas is.

There are certainly more reforms needed, but Cramer has proposed a start with some urgently required changes to bring the SEC back into functional relevance consistent with its supervisory and protective mission:

"Investigate the bear raiders. Subpoena the tapes, the e-mails, the instant messages. Follow the evidence to the wrongdoers. Hold people accountable for the damage done to Lehman Brothers, et al.

Bring back the uptick rule. Remember this little regulation? It prevented traders from selling a stock short until it first ticked up in price. Cox repealed the rule, allowing company after company to be virtually obliterated. This is why the Dow can drop 9% in a single day, like it did Monday.

Get rid of overleveraged exchange-traded funds. Double- or triple-short ETFs allow investors to sidestep important margin rules. A dollar turns into two or three, increasing the size of a bear raid. In fact, these ETFs have had a direct effect on the market recently in ways you probably recognize: ETF orders are placed at 3 PM ET, and executed at 3:40. Does this kind of terrible last-minute action sound familiar to you? Again, just look at what happened Monday if you need proof.

Watch for market manipulation. Why does Exxon Mobil , the largest stock by market cap, trade like a penny stock in the final minutes of the session? Because of the aforementioned ETFs. Of course, Chris Cox believes that the market’s too big to be manipulated, and that’s one of the reasons why we keep getting hurt. Cramer vowed to stop this.

Demand transparency. Cramer’s amazed that Citigroup’s balance sheet – and that of AIG – showed none of the problems that eventually warranted a government rescue. How is that possible? Cramer wants transparent financials. Companies that don’t pony up will be held responsible."

“Christopher Cox, in my opinion, is an ideological fool,” Cramer said. “We need someone with the instincts to go after market manipulation and restore the safeguards that protect you and dampen the outrageous volatility.”

“I’m ready for the job,” he said. “Let’s make the change.”


WANTED: A New Grand Strategy

Tuesday, December 2, 2008

In a conversation about national security on Charlie Rose, December 1, 2008, Fareed Zakaria (a very thoughtful commentator) talked about how the United States cannot afford to let the current crisis go to waste, that we need to use the economic downturn that is now gripping the world to transform global institutions. Indeed, none of the major global threats, such as terrorism, climate change, drug & crime cartels, none of the solutions lend themselves to unilateteral action, and President-elect should not miss the chance to use each crisis to further a larger vision of international cooperation, to create an "architecture" of peace for the 21st century.

Wanted: A New Grand Strategy

The next U.S. president faces a unique opportunity to put in place an architecture of peace for the 21st century.

Fareed Zakaria
From the magazine issue dated Dec 8, 2008

Barack Obama's campaign for president began with his opposition to the war in Iraq. But before last week's terror attacks in India, the subject of foreign policy had disappeared, almost completely overshadowed by the economic crisis. This doesn't mean that international issues will be ignored. No doubt the national-security team Obama is announcing this week will be quick to tackle the many issues in their inbox, and will likely do so with intelligence and competence. There are enough problems to occupy them fully—Iraq, Afghanistan, Pakistan, Al Qaeda, Iran, Russia—and they will face unexpected crises like the Mumbai assaults. But we must hope that as president, Obama does more than select a good team, delegate well and react intelligently to the problems that he will confront. He must have his administration build a broader framework through which to view the world and America's relations with it— a grand strategy. At this moment, the United States has a unique opportunity to push forward a vision that aligns its interests and ideals with those of most of the world's major powers. But it is a fleeting opportunity.

Grand strategy sounds like an abstract concept—something academics discuss—and one that bears little relationship to urgent, jarring events on the ground. But in the absence of strategy, any administration will be driven by the news, react ing rather than leading. For a superpower that has global interests and is forced to respond to virtually every problem, it's all too easy for the urgent to drive out the important.

Strategy begins by looking at the world and identifying America's interests, the threats to them and the resources available to be deployed. By relating all these, one can develop a set of foreign policies that will advance America's interests and ideals. When the unexpected happens, one can respond in ways that are aligned with these broader objectives. One uses the urgent to pursue the important. Or, to put it another way: never let a crisis go to waste.

How to think strategically? Dick Cheney provides an example—a negative one. In the wake of the Cold War, Cheney's staff at the Pentagon produced a draft document that was a self-conscious effort at grand strategy. Allegedly written by the then Undersecretary of Defense Paul Wolfowitz, the Defense Guidelines unabashedly declared that America sought supremacy and freedom to maneuver across the globe. "Our first objective is to prevent the emergence of a new rival," it said, "and requires that we endeavor to prevent any hostile power from dominating a region whose resources would, under consolidated control, be sufficient to generate global power." What is most important, the draft noted, is "the sense that the world orde r is ultimately backed by the U.S." and that "the United States should be postured to act independently when collective action cannot be orchestrated."

The draft proved much too aggressive and unilateral for George Herbert Walker Bush, who ordered that it be toned down. It was a strange document in many ways, a throwback to a world in which "dominating a region" and "controlling resources" were seen as sources of lasting national power. (China has done neither, and yet by developing its economy has become the world's No. 2 power.) But the ideas in the paper provided a powerful organizing ideology for many conservatives, and laid the basis for George W. Bush's post-9/11 foreign policy. Part of the appeal of this strategic framework was that it accurately read the world of the 1990s. While many strategists and politicians were speaking of an emerging multipolar era, the Defense Guidelines recognized that right then, American power was unrivaled.

Any attempt at a grand strategy for today must also begin with an accurate appraisal of the world. For that, the Obama administration should study the National Intelligence Council's newly published forecast, "Global Trends 2025: A Transformed World." "The international system—as constructed following the Second World War—will be almost unrecognizable by 2025," the document says, owing to the rise20of emerging nations, a globalizing economy and a dramatic power shift. "In terms of size, speed and directional flow, the transfer of global wealth and economic power now underway—roughly from West to East—is without precedent in modern history." Some have seized on the fact that emerging markets are slumping to argue that the era of Western dominance isn't over yet. But the rise of the non-Western world—which began with Japan in the 1950s, then continued with the Asian tigers in the 1960s, China in the 1980s and India and Brazil in the 1990s—is a broad and deep trend that is likely to endure.

For some countries, the current economic crisis could actually accelerate the process. For the past two decades, for example, China has grown at approximately 9 percent a year and the United States at 3 percent. For the next few years, American growth will likely be 1 percent and China's, by the most conservative estimates, 5 percent. So, China was growing three times as fast as the United States but will now grow five times as fast, which only brings closer the date when the Chinese economy will equal in size that of the United States. Then contrast China's enormous surplus reserves to America's massive debt burden: the picture does not suggest a return to American unipolarity.

The "rise of the rest," as I=2 0have termed it, is an economic phenomenon, but it has political, military and cultural consequences. In one month this past summer, India was willing to frontally defy the United States at the Doha trade talks, Russia attacked and occupied parts of Georgia, and China hosted the most spectacular and expensive Olympic Games in history (costing more than $40 billion). Ten years ago, not one of the three would have been powerful or confident enough to act as it did. Even if their growth rates decline, these countries will not return quietly to the back of the bus.

The "Global Trends" report identifies several worrying aspects of the new international order—competition for resources like oil, food, commodities and water; climate change; continued terrorist threats; and demographic shifts. But the most significant point it makes is that these changes are taking place at every level and at great speed in the global system. Nations with differing political and economic systems are flourishing. Subnational groups, with varied and contradictory agendas, are on the rise. Technology is increasing the pace of change. Such ferment is usually a recipe for instability. Sudden shifts can trigger sudden actions—terrorist attacks, secessionist outbreaks, nuclear brinksmanship.

The likelihood of instability might increase because of the economic crisis. Despite some booms and busts—as well as 9/11 and the wars in Afghanistan and Iraq—the world has been living through an economic golden age. Global growth has been stronger for the past five years than in any comparable period for almost five decades. Average per capita income has risen faster than in any such period in recorded history. But that era is over. The next five years are likely to be marked by slow growth, perhaps even stagnation and retreat, in certain important areas. What will be the political effects of this slowdown? Historically, economic turmoil has been accompanied by social unrest, nationalism and protectionism. We might avoid these dangers, but it is worth being acutely aware of them.

At the broadest level, the objective of the United States should be to stabilize the current global order and to create mechanisms through which change—the rise of new powers, economic turmoil, the challenge of subnational groups like Al Qaeda—can be accommodated without overturning the international order. Why? The world as it is organized today powerfully serves America's interests and ideals. The greater the openness of the global system, the better the prospects for trade, commerce, contact, pluralism and liberty.

Any strategy that is likely to succeed in today's world will be one that has the active support and participation of many countries. Consider the financial crisis, which several Western governments initially tried to handle on their own. They seemed to forget about globalization—and nothing is more globalized than capital. Belatedly recognizing this, leaders held the G20 meeting in Washington. This was a good first step (though just a first step). Without a coordinated approach, efforts to patch up the system will fail.

The same applies not just to "soft" problems of the future—pandemics, climate change—but to current security challenges as well. The problem of multilateralism in Afghanistan—a place where everyone claims to be united in the struggle—is a sad test case for the future. Thirty-seven nations, operating with the blessing of the United Nations and attacking an organization that has brutally killed civilians in dozens of countries, are still unable to succeed. Why? There are many reasons, but it does not help that few countries involved—from our European allies to Pakistan—are genuinely willing to put aside their narrow parochial interests for a broader common one. Terrorism in South Asia generally requires effective multinational cooperation. Business as usual will produce terrorism that will become usual.
National rivalries, some will say, are in th e nature of international politics. But that's no longer good enough. Without better and more sustained cooperation, it is difficult to see how we will solve most of the major problems of the 21st century. The real crisis we face is not one of capitalism or American decline, but of globalization itself. As the problems spill over borders, the demand for common action has gone up. But the institutions and mechanisms to make it happen are in decline. The United Nations, NATO and the European Union are all functioning less effectively than they should be. I hold no brief for any specific institution. The United Nations, especially the Security Council, is flawed and dysfunctional. But we need some institutions for global problem-solving, some mechanisms to coordinate policy. Unless we can find ways to achieve this, we should expect more crises and less success at solving them.

In a world characterized by change, more and more countries—especially great powers like Russia and China and India—will begin to chart their own course. That in turn will produce greater instability. America cannot forever protect every sea lane, broker every deal and fight every terrorist group. Without some mechanisms to solve common problems, the world as we have come to know it, with an open economy and all the social and political benefits of this openness, will flounder and perhaps reverse.

Now, these gloomy forecasts are not inevitable. Worst-case scenarios are developed so that they can be prevented. And there are many good signs in the world today. The most significant rising power—China—does not seem to seek to overturn the established order (as have many newly rising powers in the past) but rather to succeed within it. Considerable cooperation takes place every day at the ground level, among a large number of countries, on issues from nuclear nonproliferation to trade policy.

Sometimes a crisis provides an opportunity. The Washington G20 meeting, for instance, was an interesting portent of a future "post-American" world. Every previous financial crisis had been handled by the IMF, the World Bank or the G7 (or G8). This time, the emerging nations were fully represented. At the same time, the meeting was held in Washington, and George W. Bush presided. The United States retains a unique role in the emerging world order. It remains the single global power. It has enormous convening, agenda-setting and leadership powers, although they must be properly managed and shared with all the world's major players, old and new, in order to be effective.

President-elect Obama has powers of his own, too.=2 0I will not exaggerate the importance of a single personality, but Obama has become a global symbol like none I can recall in my lifetime. Were he to go to Tehran, for example, he would probably draw a crowd of millions, far larger than any mullah could dream of. Were his administration to demonstrate in its day-to-day conduct a genuine understanding of other countries' perspectives and an empathy for the aspirations of people around the world, it could change America's reputation in lasting ways.

This is a rare moment in history. A more responsive America, better attuned to the rest of the world, could help create a new set of ideas and institutions—an architecture of peace for the 21st century that would bring stability, prosperity and dignity to the lives of billions of people. Ten years from now, the world will have moved on; the rising powers will have become unwilling to accept an agenda conceived in Washington or London or Brussels. But at this time and for this man, there is a unique opportunity to use American power to reshape the world. This is his moment. He should seize it.


Civilization's Last Call