December 23, 2008

Happy Holidays!

May you be safe and warm, filled with joy, and surrounded by friends and family. (In the best possible way - not in the cops-encircling-desperadoes-holed-up-in-a-warehouse-with-hostages kind of way.)

Have a wonderful holiday season. Sensen No Sen will return in 2009.

December 20, 2008

Some Questions on the Credit Crunch

Friday brought news that U.S. Treasury Secretary Henry Paulson believes Congress should release to him the second $350 billion (of $700 billion total) for the Trouble Assets Relief Program (TARP), so it can be distributed to banks and lenders. Meanwhile, President Bush announced that he would use the remaining $17.4 billion of the first TARP installment to shore up troubled automakers General Motors (GM) and Chrysler, with an eye toward their rapid restructuring by March of 2009.

Increasingly, though, there are doubts about the way the TARP money has been utilized. Initially, it was - as the name suggests - intended to fund direct purchase by the government of illiquid, "toxic" securities and mortgages from banks. The goal of such purchases was to simply remove liabilities from bank balance sheets and return those institutions to full fiscal health. Public resistance to this plan, however - as well as the actions of foreign governments in addressing their own financial crises - convinced Secretary Paulson to pursue another path.

As a result, TARP has been used to buy interests in financial giants like Citigroup and American International Group (AIG), with the idea that this infusion of cash will allow them to begin lending again, something that is crucial to the workings of the American economy. Ostensibly, taxpayers would be afforded some protection through the purchase of equity stakes, since, as the banks recover, their stock prices will rise, and it might even be possible for the public to make a profit.

All well and good, but it's entirely unclear that the sort of strictly disciplined approach needed to make this plan work has been undertaken. In addition to serious concerns about the lack of oversight on TARP, there are some very legitimate questions about whether or not the financial sector has simply gotten a nice, fat government subsidy with no obligation to resume doing what needs to be done to keep the credit markets flowing.

Banks still aren't lending, and the plight of the car companies, for instance, is at least somewhat directly tied to that fact. With the Bush Administration's insistence on removing a key provision regulating executive pay, bonuses and dividends for TARP recipients - as well as the GOP's clear intent to use the automobile industry's tremulous state to try and defang the United Auto Workers (UAW) - it is increasingly difficult to be certain that efforts to confront the consequences of massive deregulation are being made in good faith.

Which brings me to some key questions.

First, why aren't we pushing for more financial institutions to do what Credit Suisse is doing? The Swiss bank has announced that it will pay executive bonuses in illiquid assets, rather than cash, equity or options:
The bank will use leveraged loans and commercial mortgage-backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.

“While the solution we have come up with may not be ideal for everyone, we believe it strikes the appropriate balance among the interests of our employees, shareholders and regulators and helps position us well for 2009,” Chief Executive Officer Brady Dougan and Paul Callelo, CEO of the investment bank, said in the memo.

The securities will be placed into a so-called Partner Asset Facility, and affected employees at the bank, Switzerland’s second biggest, will be given stakes in the facility as part of their pay. Bonuses will take the first hit should the securities decline further in value.

“It’s monstrously clever,” said Dirk Hoffman-Becking, an analyst at Sanford C. Bernstein Ltd. in London who has a “market perform” rating on Credit Suisse stock. “From a shareholders’ perspective it’s great because you’ve got rid of some of the assets and regulators will be pleased because you’ve organized a risk transfer.”

For employees, “there’s some upside in there and if the alternative is nothing, it’s a lot better than nothing,” Hoffman-Becking said.
Second, why are we allowing financial firms to maintain and distribute massive bonus pools? Any company that needs to turn to public financing in order to survive has no business handing out bonuses to anyone, no matter how well workers may have performed against their individual goals for the fiscal year. The justification for these bonuses - that they are vital for the retention of good employees - is utterly ludicrous in the face of company performance, the current job market, and the fact that these once-mighty financial titans are teetering on the brink of collapse.

Third, why are we lowering interest rates effectively to zero and aiming to pump more cash into the financial sector? Dropping interest rates might ease the reluctance of a few banks to lend, but the much larger effect is to drive demand for loans and mortgage refinancing without doing anything that encourages lending. There is already more than enough unmet desire for credit and new terms on housing loans, and pushing money into institutions that will not, in turn, lend it, accomplishes little other than to provide a lifeline to struggling companies that have shown an unwillingness to make tough restructuring choices and who continue to hand out large bonuses on the taxpayer's dime.

Perhaps it is time the for the government to simply bypass the banks that won't lend and set up a program whereby it makes commercial and even personal loans at a rate slightly higher than that set by the Federal Reserve. Such an approach would guarantee that the government will never offer rates that banks - at least in principle - cannot also meet, or even better. Companies that have maintained strong balance sheets, such as Wells Fargo, will have no trouble competing, but banks that are currently hoarding cash (especially public cash) will be cut out of the market unless they loosen their purse strings. More crucially, such a program wouldn't fuel excess demand for credit or push policies that don't address that demand, and individuals and firms that need loans would get them.

Finally, and perhaps most importantly, why are we ignoring the root of the problem and failing to address subprime mortgages directly? If banks are forced to lock in adjustable rate mortgages (ARMs) at the introductory rate - or even one only somewhat higher - the majority of homeowners who are struggling to make their payments would then be able to do so, and lenders would still make money, although not as much. It would certainly take some effort, but reader lokywoky lays out a plan of action in comments on a previous post:
Identify and map ALL the subprime loans back to their originators. De-link them from the derivative pools and nullify all the credit default swaps (which are worthless pieces of paper anyway). TELL the banks that they WILL renegotiate these loans - whether they are in default or not. The terms will be a 30-year fixed rate at the original "teaser" rate the buyer got when they signed the loan documents. The banks will write down any and all fees, late charges, foreclosure costs, etc. The principal of the loan would remain as it was after the most recent payment. If there are extenuating circumstances, the loan term may be extended to 35 or 40 years.
Anyway, liquidity at the bottom is what will fix this problem, not pouring money into the black hole of derivatives and designer crapshoot paper Ponzi schemes. Once the credit market is fixed, presto - no more bailouts for the auto companies will be needed. No more trillion dollars disappearing money from the treasury. And - my solution doesn't take one dime from the taxpayers. How about that!
Now that we are $350 billion in the hole for TARP, it appears that Congress will be asking Secretary Paulson some tough questions when he returns to Capitol Hill for more money. These should be among them.

December 15, 2008

Getting the History Right

Over at Vanity Fair, Nobel Prize-winning economist Joseph Stiglitz has a short, easy-to-read article on the major decisions that led to the current economic crisis., highlighting five that he believes are the most important:
  1. Firing Paul Volcker - Federal Reserve Chairman Volcker had been successful in his position by any measure, but he also believed that markets should be regulated. Uncomfortable with that viewpoint, President Ronald Reagan replaced him with Alan Greenspan, who eventually presided over two massive bubbles - technology and housing - and in so doing, essentially failed at his primary duty: maintaining the stability of the financial system.

  2. The repeal of the Glass-Steagall Act - Glass-Steagall was a product of the Great Depression, and was meant to "curb the excesses of that era, including grave conflicts of interest." The central mechanism of Glass-Steagall was to investment banks and their tolerance for high risk separate from commercial banks, which depend on stability. Its repeal - the result of a $300 million lobbying campaign and headed by former Senate Banking Committee Chairman (and McCain campaign adviser) Phil Gramm - led directly to the clamor for consistent high rates of return which only risky investing can produce.

  3. The Bush tax cuts of 2001 - The Bush tax cuts actually did very little to stimulate the economy in the face of steadily increasing energy prices. Because of that, the Federal Reserve was forced to keep the wheels greased with low interest rates and lots of liquidity, which in turn fueled the housing bubble. Further, easy money for housing encouraged leverage, allowing those who would not normally have been able to purchase a home to not only do so, but then borrow against it, fanning the flames of over-extension and driving the household rate of savings in the United States into steeper decline, and ultimately, negative territory.

  4. Faking the numbers - In 2002, in response to the collapse of Enron and WorldCom, the Sarbanes-Oxley (SOX) Act was passed in an effort to shore up public trust in the accounting numbers reported by corporations. Unfortunately, while SOX confronted the most flagrant abuses, it failed to address accounting for stock options, which in turn provided an incentive for top management to mis-report results in an effort to drive up the price of equity. This in turn was fed by the fact that the securities ratings companies were being paid by the same firms they were charged with evaluating, and the end result - manifested today in the credit market turmoil - is a crippling absence of trust in the financial system.

  5. The financial sector bailout - The hastily assembled bailout package cobbled together by Treasury Secretary Hank Paulson has been a model of ad hoc reactiveness. Worse, when Treasury began providing banks with the funds they needed, it was done in a way that both cheated American taxpayers and failed to ensure that the money would be used for lending, which was desperately needed to kick start the credit markets. (Banks were permitted to continue paying dividends to their shareholders as public money was being poured money in to keep them afloat, and a restriction on limiting pay for executives at companies receiving federal dollars was removed by the Bush Administration.)
Dr. Stiglitz concludes with the following:
The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting* and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America - and much of the rest of the world - of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.
A commenter on a previous post opined that this sort of exercise in root cause analysis can be traced simply to human greed, and amounts to little more than finger-pointing. I concur with the first portion of that statement, but take issue with the second, as does Dr. Stiglitz. In fact, he states that the purpose of his piece is to "get the history right" so as to not only avoid repeating the same mistakes in the future, but to ensure that the policies and people who have driven us to the brink are removed from the levers of power. That will only be the case if we refuse to let free market fundamentalists mythologize what has taken place.

* Regular readers of Sensen No Sen will know that I agree with this point, although I think it is important to note that Dr. Stiglitz's language is imprecise. Markets ARE, in fact, self-adjusting, but because collapses and wild swings are part of that self-adjustment, they can more properly be regarded as not TOLERABLY self-adjusting.

Meanwhile, Mark Fiore does a wonderful job capturing the attitude of "crybaby capitalism" in the animation below:

December 10, 2008

Huckabee's Tired Arguments Get Slapped Down

Last night, former Arkanas governor and Republican presidential candidate Mike Huckabee joined Jon Stewart on The Daily Show to discuss his new book, "Do the Right Thing." The book focuses on what Governor Huckabee sees as a need for his party to hew even further to the right in response to its sweeping electoral defeat, and with the implosion of the GOP, he is clearly trying to position himself as the standard-bearer for the tattered conservative movement in the 2012 elections.

Unfortunately for the governor, his tired and hollow arguments against same-sex marriage run smack into Jon Stewart:

December 6, 2008

Poor, Persecuted Persecutors

Amid ongoing protests against the passage of California's Proposition 8, an organization called The Becket Fund for Religious Liberty placed a full-page ad in the New York Times decrying the violent intimidation of Mormon (LDS) and Catholic institutions - as well as businesses and individuals - who supported the measure. The Becket Fund, which describes itself as a non-profit, non-partisan, interfaith public interest law firm dedicated to protecting the freedom of religious expression, makes a valid point: violence has no place in a civilized society.

Having said that, the vast, overwhelming preponderance of activism against Proposition 8 has been entirely peaceful. There are always a few fringe-dwellers in any movement, but while same-sex couples - who have been relegated to second class status by Prop 8 - have every right to be bitter and angry, the idea that the backlash against Prop 8 is one characterized by organized violence and systematic intimidation is unquestionably false.

To get a sense of the Becket Fund's methodology, it's worth noting that it is behind a new website (which is also home to their full-page ad) called, ominously, And this passage from the ad makes clear that it is merely one more religious organization working to claim victimhood when sectarian bigotry is decried for what it is:
Let's be clear: even the crudest anti-religious propaganda isn't illegal, and may not constitutionally be outlawed. But it's nevertheless wrong. It has no place in civilized society.
As the Human Rights Campaign noted, the idea that the LDS is the offended party is pretty difficult to substantiate:
When did the LDS Church become the victim? It’s hard to believe, but that is exactly what it is trying to convince the public of. It is continuing to spend an excess of dollars in an attempt to mislead the public and transform its image. But the truth is that this is the same church that conducted a national broadcast to every temple, calling on members to organize and write checks to the Prop 8 campaign. The same church that donated more than half of the $40 million behind Prop 8, even though California Mormons represent just 2 percent of the state's population. Yes, it’s the same church.
The hypocrisy required to champion a constitutional effort to deny consenting adults the right to marry, but then claim injury when there are repercussions, is pretty tough to stomach. I'm not religious myself, but I seem to recall a biblical admonition about reaping what one sows, and Friday's Washington Blade reported that the California Fair Political Practices Commission (FPPC) is investigating whether the Mormon church violated state law by failing to report all contributions supporting Proposition 8.

The backlash against the passage of Prop 8 continues and a recent poll indicates that fully 8% of voters who supported it would vote against it if it were on a ballot today. That's a swing large enough to have defeated the measure, and a sign that this egregious dehumanization of same-sex couples, which does nothing but cheapen our society, may not be long for the political world.

For added perspective, please be sure to view this classic clip from the Daily Show, which aired after Massachusetts legalized same-sex marriage in 2005, and check out the Prop 8 musical featuring Jack Black.

December 1, 2008

The Man Who Got Zarqawi Comes Out Against Torture

I have written extensively about the use of torture in the interrogation of prisoners in U.S. custody; it is one of the blackest marks - in a long, long list of black marks - left on our country by President George W. Bush. Not only does it stain our reputation and run counter to the ideals or our nation, it isn't even vaguely reliable, and it has placed American lives in danger by aiding recruitment among terrorist organizations.

Nonetheless, individuals like the disgraceful William Kristol believe that the use of torture by the United States should be forgiven - if not praised, outright - despite the obvious and ugly hypocrisy necessary to take such a position when the Allies prosecuted Germans after World War II for following orders "in good faith" and for ignoring crimes committed around them:

One last thing: Bush should consider pardoning - and should at least be vociferously praising - everyone who served in good faith in the war on terror, but whose deeds may now be susceptible to demagogic or politically inspired prosecution by some seeking to score political points. The lawyers can work out if such general or specific preemptive pardons are possible; it may be that the best Bush can or should do is to warn publicly against any such harassment or prosecution. But the idea is this: The CIA agents who waterboarded Khalid Sheikh Mohammed, and the NSA officials who listened in on phone calls from Pakistan, should not have to worry about legal bills or public defamation. In fact, Bush might want to give some of these public servants the Medal of Freedom at the same time he bestows the honor on Generals Petraeus and Odierno. They deserve it.
In a bit of timely coincidence, however, Matthew Shephard, the man who led the team of interrogators that found Abu Musab al-Zarqawi - without resorting to torture - puts all of this in stark perspective in an article in yesterday's Washington Post. The entire article is well worth reading, but I found the following passages striking:

I'm not some ivory-tower type; I served for 14 years in the U.S. Air Force, began my career as a Special Operations pilot flying helicopters, saw combat in Bosnia and Kosovo, became an Air Force counterintelligence agent, then volunteered to go to Iraq to work as a senior interrogator. What I saw in Iraq still rattles me - both because it betrays our traditions and because it just doesn't work.
Amid the chaos, four other Air Force criminal investigators and I joined an elite team of interrogators attempting to locate Zarqawi. What I soon discovered about our methods astonished me. The Army was still conducting interrogations according to the Guantanamo Bay model: Interrogators were nominally using the methods outlined in the U.S. Army Field Manual, the interrogators' bible, but they were pushing in every way possible to bend the rules - and often break them. I don't have to belabor the point; dozens of newspaper articles and books have been written about the misconduct that resulted. These interrogations were based on fear and control; they often resulted in torture and abuse.

I refused to participate in such practices, and a month later, I extended that prohibition to the team of interrogators I was assigned to lead. I taught the members of my unit a new methodology - one based on building rapport with suspects, showing cultural understanding and using good old-fashioned brainpower to tease out information. I personally conducted more than 300 interrogations, and I supervised more than 1,000. The methods my team used are not classified (they're listed in the unclassified Field Manual), but the way we used them was, I like to think, unique. We got to know our enemies, we learned to negotiate with them, and we adapted criminal investigative techniques to our work (something that the Field Manual permits, under the concept of "ruses and trickery"). It worked. Our efforts started a chain of successes that ultimately led to Zarqawi.
I know the counter-argument well - that we need the rough stuff for the truly hard cases, such as battle-hardened core leaders of al-Qaeda, not just run-of-the-mill Iraqi insurgents. But that's not always true: We turned several hard cases, including some foreign fighters, by using our new techniques. A few of them never abandoned the jihadist cause but still gave up critical information. One actually told me, "I thought you would torture me, and when you didn't, I decided that everything I was told about Americans was wrong. That's why I decided to cooperate."

Torture and abuse are against my moral fabric. The cliche still bears repeating: Such outrages are inconsistent with American principles. And then there's the pragmatic side: Torture and abuse cost American lives.

I learned in Iraq that the No. 1 reason foreign fighters flocked there to fight were the abuses carried out at Abu Ghraib and Guantanamo. Our policy of torture was directly and swiftly recruiting fighters for al-Qaeda in Iraq. The large majority of suicide bombings in Iraq are still carried out by these foreigners. They are also involved in most of the attacks on U.S. and coalition forces in Iraq. It's no exaggeration to say that at least half of our losses and casualties in that country have come at the hands of foreigners who joined the fray because of our program of detainee abuse. The number of U.S. soldiers who have died because of our torture policy will never be definitively known, but it is fair to say that it is close to the number of lives lost on Sept. 11, 2001. How anyone can say that torture keeps Americans safe is beyond me - unless you don't count American soldiers as Americans.
If you are new to Sensen No Sen - or remain unconvinced by my previous posts on this topic - consider this thought experiment from Barry Eisler at The Heart of the Matter. I think the answers to Barry's questions are readily apparent, if we're honest with ourselves:

... If instead of American soldiers and Arab detainees, the photos and videos from Abu Ghraib were of American POWs and, say, Iranian guards, what would be the American reaction? Note the linguistic choices in the previous sentence, which would be automatic: Arabs are denied the dignity of being designated Prisoners of War. They're not even prisoners. They're merely "detainees" (I'm half-surprised we haven't started calling them "guests"). The Americans holding them are "soldiers"; were the shoe on the other foot, the enemy captors would doubtless receive the less exalted term, "guards." Would there be any debate about whether the practices revealed in the photos were "outrages upon human dignity," as prohibited by the Geneva Conventions and U.S. law? Would we describe the practices as "abuse?" Or would they obviously, and rightly, be called "torture?" If Americans were taken against their will and spirited away by Iranian government forces, would we call the practice "rendering," or would we recognize it as "kidnapping?" Would we call the places to which Americans were secreted and where they were held without acknowledgment to their families or even to the Red Cross "detention centers?" Or would we call such a system a gulag?
President-elect Obama has promised to (re-)outlaw the practice of torture. Ending a practice that is effective only in endangering American lives, diminishing standing of the United States in the eyes of the world, and aiding our enemies can't come soon enough.