Pluripotent creativity

A question sparked by Victor Hugo’s eccentric exile house in Guernsey.

The oddest tourist attraction in Guernsey must be the town house on a hill above St. Peter Port in which Victor Hugo lived from 1856 to 1870, as an exile from Napoleon III’s autocracy, at first forced, and later self-imposed. The exterior is conventional. The interior was remodelled by Hugo to his own designs, with the help of Guernsey craftsmen but no professional interior designer or architect.

theaterraum Continue reading “Pluripotent creativity”

It’s not just wisdom that comes with age

When I was a brand new baby lawyer in my twenties, I could not fathom sexual harassment.  I got the point that a law school diploma and an admission to the bar were meaningless in the face of my complete lack of knowledge about how the real work of lawyering was done.   I understood that the gladiatorial nature of litigation meant I was bound to take some body blows from seasoned lawyers.  Nonetheless, I could not for the life of me understand why the hostilities so often had a sexualized overtone.  What could be causing these men to remark on my appearance in between barbs and snark while standing in a filthy courthouse corridor arguing about discovery obligations in a surety case?  It made no sense.  A clerk once called into chambers to tell the judge that I had arrived, and said, “It’s either Ms. Heussler or a young Maureen O’Hara.”  What?  And who was this Maureen person anyway?

So, okay, I turned 50 last year and I now I get it.  Continue reading “It’s not just wisdom that comes with age”

Rush Limbaugh

doesn’t know the difference between a slut (promiscuous) and a prostitute (seller of sex services).  Married four times and childless for any of several possible reasons, he thinks birth control pills cost more the more sex you have.  He apparently enjoys pornography, and wants it provided to him by women whose birth control is paid for by insurance.  His idea of political discourse is to slime a young woman, about whom he knows nothing (including her sexual behavior, as though that were anyone’s business in any case), as a slut because she recited facts about how denial of birth control medicine for non-contraceptive use damaged her friend.

Sandra Fluke, who has been radiating unbelievable class through this whole episode, was not a public figure when Rush took his swing, invited to testify before a Congressional panel. I hope there’s a defamation suit cooking with a lot of zeroes in it.

John Boehner managed to force himself to murmur that the Rush’s slime was “inappropriate”, and immediately vitiating even that little demurral by saying in the same sentence that Democrats shouldn’t raise money on the episode.   I’m not aware that any other Republican, of the elected or pundit varieties, has gone on record to separate himself or herself from this turd (who has been doubling down on his first bet ever since). Rush Limbaugh is the ideological and spiritual heart and soul of the Republican Party, a secular pope who brooks and receives no rebuttal or criticism from his completely cowardly adherents.

Sadly, I’m also not aware of any reporters forcing Republicans to take a stand on their leader.  Maybe on the Sunday morning shows…but I’m not getting my hopes up.

There is a move to get advertisers to pull their buys from Limbaugh’s show; good. It would not be out of order also to draw a commercial bead on Clear Channel, a company that uses Limbaugh as a device to sell ears to advertisers.  Along with the advertiser boycott, how about getting as many people as possible to promise Clear Channel that they won’t listen to any of their stations until they clean house?…pass it on.

UPDATE:  On Wolf Blitzer this evening, Rick Santorum will apparently savage Rush unmercifully.  Going all in to raise Boehner, he will come right out and say, on national television, that what Rush said is … wait for it…”absurd”  [update 21:30 PST: it occurred this way]. With this escalation, it’s only a matter of time before Romney has to throw caution to the winds and devastate Limbaugh with regrettable…Double Wow!

UPDATE 2: I gave Romney too much credit; apparently he agrees with Rush but would have phrased the sentiment better, perhaps with a little dog-whistle obbligato.

You want a Ponzi scheme? I’LL Show You a Ponzi Scheme.

If Mark has his way, Rick Perry’s assertions that Social Security is a Ponzi scheme will not get thrown down the memory hole.  Unfortunately, our last Ponzi scheme is already hurtling downward.

If you think about it, a large part of American (and global) prosperity rests on a real Ponzi scheme: the financial system.  I’m actually not being hyperbolic here.  In order to make credit circulate through the economy, banks must have less money on deposit than they have out on loan.  If a panic occurs, then bank runs result.  That’s why central banks were created: to be the lender of last resort.

That’s just the basics.  But if you push it even a little harder, then the House-of-Cards nature of the system gets even bigger.  Bankers have an inherent incentive to leverage far higher than they should, and it gets worse the more they get into trouble: if everything goes belly up, they can only lose their holdings (this is especially true if there is limited liability), but if everything goes well, then they make a killing.  So it is inherent within the structure of incentives for banks to take unreasonable risks.  In fact, if they don’t take unreasonable risks during good times, they will lose market share, and thus their jobs: “as long as the music is playing, we’ve got to keep dancing,” Merrill Lynch CEO Stan O’Neill famously observed.

As Hyman Minsky pointed out several decades ago, the very stability of the system creates instability: as growth and credit occur, everyone’s incentive is to keep extending credit, and then hoping to get off before the whole thing crashes.  This is not some pathology: it is inherent in the system.

To the extent that there is a “solution” to all of this, it is to regulate the system to prevent the risks getting out of control, e.g. leverage requirements, cordoning off sectors of the system to avoid contagion (i.e. Glass-Steagall), compensation regulation, and above all, transparency.  And all those are things that Rick Perry and the Republican Party oppose: the GOP is the nation’s biggest political promoter of Ponzi schemes.

It’s almost classic Rove: attack the other guy for your own weakness.  Except that Perry is too crazy/stupid/egotistical even for Rove.

In 100 years, if America lasts that long, historians will look back on this era to determine what caused someone like Perry — or a party like today’s GOP — to become major political forces.  And I’m not sure that they will be able to find a rational answer.

The Treasury Department: A Wholly-Owned Subsidiary of Bank of America

If it’s good enough for B of A and Chase, then it is good enough for the Treasury Department. No questions asked.

Today for lunch, I met with the executive director of a local legal aid organization and the director of the local Industrial Areas Foundation group.  They have been organizing for quite some time to get banks to renegotiate.  They are also trying to get money for a pilot project to get banks to write down some principal if the borrower can get a soft second. 

So they went to the Treasury Department to try to sell Treasury officials on the plan.  They met with one very high-ranking member of the Department, who asked them whether the banks were in on it.  When they replied that they had gotten tentative commitments from B of A, and Chase, and asked whether the government would be able to get the money to support such a program nationwide, the official replied,

“If B of A and Chase come in here and say that we should do this, then we’ll find the money.”

I asked them to repeat that, to make sure I heard it right.  Yes, you heard it right, they said.  The Treasury didn’t want to know whether the program worked — just whether B of A and Chase wanted it.

 The Treasury is now officially a wholly-owned subsidiary of the big banks.  We knew that already, but I have rarely heard it stated so baldly.

Sexism and the Financial Crisis

Larry Summers and Tim Geithner seem to have a problem with highly qualified women who disagree with them.

We take time out from the Green Revolution to wonder whether sexism isn’t playing a large role in the Obama Administration’s response to the financial crisis.

Over at the Big Picture, Chris Whalen does a punishing takedown of the Sunday NYT story on infighting between the bureaucracies. Essentially, according to Whalen, Geithner and Currency Comptroller John Dugan are doing the big banks’ bidding, and then using their media contacts to trash FDIC chair Sheila Bair, who seems to want to follow the law and ensure that we don’t have zombie banks ruining the economy for years.

Dugan is a complete tool of the large zombie banks, IMHO, a career “public servant” who is entirely captive of the industry he pretends to regulate. Thus his forceful protestations about Bair’s tough line with Citigroup and other insolvent money center banks. Along with Secretary Tim Geithner, Dugan takes his marching orders from GS, JPM and the other major banks, thus the continued effort to try and force Bair out at FDIC. Unfortunately, the Times is so busy carrying the water for Master Tim that they neglect to provide you with the adequate coloration to full appreciate who is serving the public interest among the regulators. . . .

Of course Paulson, Bernanke et al were “fuming” at Sheila Bair. The FDIC Chairman was doing her job while the rest of these spineless weasels, these duplicitous, traitorous villains were selling out the taxpayer to subsidize the bond holders of the large banks — the clients of PIMCO, BlackRock and the rest of the Buy Side. Following Paulson’s lead, Dugan and Geithner are simply representing their clients and future employers on the Sell Side.

As they say, read the whole thing.

But this all made me notice something. If this account is right (and it is a big “if”), then Bair is third highly expert woman whom the testosterone-charged Masters of the Universe have decided to ignore, then try to undercut.

In 1999, then-CFTC chair Brooksley Born attempted to regulate Credit Default Swaps: Summers, Geithner (then Undersecretary of the Treasury for International Affairs), Greenspan and Phil Gramm then stripped her of her authority to do so and dismissed her concerns. Instead of brining her into the administration, Summers and Geithner have kept her far away. They have also sidelined TARP watchdog Elizabeth Warren, who as a Harvard Law Professor should have complete entree into the Cambridge-heavy administration. And now Bair.

Summers, of course, has been accused of sexism in the past, and I have defended him from that charge. You can be a jerk without being a sexist (although it helps.). But this doesn’t look good — and more importantly, it appears to be blocking the development of good policy.

This is an n of 3. It could be a coincidence. It’s premature to leap to conclusions.

By the way — you notice that we have had a three female Secretaries of State, and a female national security advisor, and several women on the Supreme Court — and no female Treasury Secretary? Wonder why that is? Just asking….

Take the Money and Run

It’s quite nice to be a big bank: you can take taxpayer money and have no accountability.

The FT reports that JP Morgan Chase and Citigroup have announced that they will not participate in PPIP, the Treasury’s plan to incentivize investors to purchase “legacy assets” (i.e. toxic waste).

So let me get this straight:

1. JP Morgan Chase and Citigroup demand bailout money from the Treasury, claiming an impending crisis. The Treasury forks it over.

2. JP Morgan Chase and Citigroup don’t actually, you know, make any new loans with it; instead, they spend a lot of money on anti-union lobbying and bonuses.

3. Congress is outraged and places executive compensation limits on PPIP money.

4. Then JP Morgan Chase and Citigroup say that they won’t participate — thus, suggesting that they really aren’t in that bad of a shape to begin with.

So whom am I supposed to be angrier at? JP Morgan Chase and Citigroup for taking taxpayer bailout money? The morons who gave it to them? Or the Very Serious economics and finance “experts” who insisted that this was all necessary?

Some Questions About Your Speech, Mr. President

For all of the President’s explaining, the key questions about Treasury policies remain unanswered.

Lots of smart folks are praising the President’s speech, and I liked it, too. But with all the enthusiastic talk about the President “explaining” things, the critical things about Treasury policies remain unexplained.

Here is the key passage:

There have been some who don’t dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. So let me be clear — the reason we have not taken this step has nothing to do with any ideological or political judgment we’ve made about government involvement in banks, and it’s certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess.

Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. Governments should practice the same principle as doctors: first do no harm.

Now, the questions:

1) What do you mean by “preemptive government actions”?

2) You previously dismissed the Swedish model by saying that they didn’t have enough banks, but really, in the United States, we are talking about a few huge banks. So why the misleading talk beforehand? What exactly is wrong with what they did?

3) Why do you believe that keeping current management, and not liquidating the interests of shareholders and investors will “cost taxpayers more in the end”? Where does that belief come from? Does it have any evidence behind it? Or is it a faith-based initiative?

4) What really do you mean by confidence? Whose confidence? Certainly it would undermine the confidence of those on Wall Street? But doesn’t that prove too much?

5) You say that your decision is not based on any ideological judgment about government involvement in banks; but isn’t the “belief” about “preemptive takeovers” exactly that sort of ideological judgment?

We’re waiting for some answers…

The bishop and the banker

Bishop Huber has no professional competence to discuss economics, but he does seem to have a point about Deutsche Bank: is there really a safe and honest way to earn 25% on invested capital in a competitive industry?

I generally take a fairly firm line on intellectual specialization. I’m not especially interested in a biologist’s opinion about the Real Presence, or a bishop’s opinions about reproductive biology. Of course, there might always be a biologist with some real expertise in Christian theology or a Pope who knew something about biology, but in general the odds aren’t good, and in any case the case for expertise has to be established, and shouldn’t simply be assumed.

By contrast, when a bishop talks about transubstantiation or a biology professor about the efficacy of various means of birth control, they ought to be presumed by non-specialists at least to know what they’re talking about (which of course isn’t the same as being right): that is, not to be talking complete rubbish by the standards of their respective disciplines.

Similarly, when either the biologist or the bishop expresses a view about the current fiscal crisis, their professional credentials don’t justify giving their opinions any particular weight. So when Bishop Wolfgang Huber, the senior bishop in the German Lutheran church, starts to rag on the Chairman of Deutsche Bank about excessive risk-taking, my first reaction is, “And where’s his economics degree from?”

On the other hand, wouldn’t it be nice to live in a country where influential religious leaders remember that covetousness, as well as theft, is forbidden by the Ten Commandments? (Unlike, for example, same-sex marriage or abortion or marijuana.)

Moreover, whatever his credentials, the good Bishop does seem to have a point: in a world where banking is an internationally competitive business both for customers and for staff, it’s hard to imagine a way to earn a consistent 25% rate of return on invested capital without either taking lots of risks or cutting lots of corners.

Incentive management and the Madoff affair

We know there was an incentive-management problem: the odor of fish was detectable, and in fact detected, but no one had a strong motive for raising a fuss.
What we don’t know is where the money went. It ought to be HARD to lose $50b.

One thing seems clear about the Madoff affair: it wasn’t impossible to figure out that the deal had a fishy smell, and some people did in fact figure it out. But no one, inside or outside the firm, and either official or unofficial, had a sufficiently strong incentive to blow the whistle.* [See second update.] That offers a hint about the required fix. A little qui tam, anyone?

What isn’t clear (to me) is where the $50B went.** [See third update below.] It must have been some combination of outright theft, trading losses, and expenses (commissions, salaries, etc.). If it was stolen, then it must still be somewhere; Madoff could hardly have spent any noticeable fraction. It’s also hard to see how expenses could have accounted for much of that sum. Did he really manage to lose most of 50 gigabucks? Shouldn’t that be hard to do? Roughly as hard as making that much? After all, every trade has a counter-party, so what Madoff lost someone else gained.

Update Josh Marshall wonders what I wondered: did this start out as a fraud, or did it start out as real investment-management activity that made some bad bets and then engaged in fraud to cover up the results? Answer: It seems to have been a fake at least as far back as 2001 1999. The described investment strategy simply wasn’t capable of yielding the claimed returns.

* Second update Actually, at least one person, Henry Markopolos, had it spotted from 1999, and tried hard to make a fuss about it, but couldn’t get any action out of the SEC. Of course I don’t know what Markopolos’s false-positive rate is, or how many others make claims of fraud with equal surface plausibility in cases where no fraud exists, but this suggests that some sort of “private attorney general” set-up might have saved investors tens of billions of dollars.

** Third update Robert of Robert’s Stochastic Thoughts thinks it must have mostly been paid out to the early investors.