The Rabid Independent, Nonpartisan solutions, independent policy ideas

Tom Friedman’s Flat Earth

I have a lot of respect for Thomas Friedman’s views on the Middle East but not much for his efforts to be an economist or environmentalist.

In his biggest book about global trade he argues that we need to fight foreign competition by becoming more educated.  I’m all in favor of education but if a third world country has no  trade barriers to your economy then they will undercut you relentlessly no matter what you do and they can become just as educated (as he has figured out).  Their vastly cheaper labor costs will drive your wages down to their levels unless you work in a non-tradable goods sector. This is called factor price equalization.  The solution to his problem (for an individual) is to hide out in sales, law  or construction.  The problem is fixed over time by either a huge appreciation in the 3rd world country’s currency or a huge transfer of wealth to them from us.

His latest book about about global warming is doom and gloom about a problem that is so expensive to fix that no one (especially the 3rd world he admires so much in the first book) will ever do anything about it.  The most important service he could have provided to his cause was an air tight case proving that all or most global warming (or “wierding” as he prefers) is man made.  He made no effort at this at all.  He simply points to melting glaciers and thinks the job is done. It’s NOT.  Here’s the Princeton math genius featured in the NY Times magazine this weekend:

 

To get the world to give up enormous amounts of GDP to reduce emissions takes a huge amount of political unity, probably produced by overwhelming fear.  TF needs to PROVE his case.

History TV Channels

I read and study history – a lot.  I also frequently look to see what the History Channel and History International have on.  Why is it that I am constantly seeing shows like History’s Mysteries where they discuss Voodoo, Decoding the Past  where they explain the text of the Koran, and Beyond the Da Vinci Code ?. 

Have they run out of programming?  There is a natural thrill to be had from grasping at straws that connect history to mythology.  It allows us to believe in dragons and Martians and ghosts. I understand the temptation.  Inconveniently, history requires facts, evidence, and corroboration.

All these shows should be moved to CBN or TBN.

Managing an Occupation Without Reprisals

Our invasion of Iraq in 2003 led to a small conflict which ended in a couple of weeks.  Then the occupation (“the seizure and control of an area by military forces, esp. foreign territory.”)began.  This is not a war because there is no opposing army,there are no campaigns, battles or active military operations.  Every poll shows that the people of Iraq do NOT want us there.

If we look back in history to see how other countries successfully managed occupations we find they all used reprisals to quell rebellions or insurgencies.   Napoleon was particularly vicious in Spain.  One of the most famous WW2 reprisals was in Prague after English trained guerrillas assassinated Reinhard Heydrich (one of my top ten most evil men in the history of the world), they destroyed the town of Lidice.  13000 people were arrested, deported or killed. The assassins killed themselves.

Alas reprisals no longer sit well with our modern day sensibilities and besides – we would look even more obviously like an evil occupying empire than the freedom deliverers we pretend to be.  Instead we do the more modern thing – we pay insurgents off.  The insurgents are the disenfranchised angry Sunnis who have virtually no say in the Iraq quasi government that takes its orders from Iran.  They have joined together, named themselves The Awakening” and have agreed to be quiet and not hang out with Al Qaeda as long as we keep giving them money and arms. That is why our “surge” has worked.  The Iraqi government is champing at the bit to get these guys (they arrested one of their leaders last week and all hell broke lose).

The moment we leave it will all become unstuck.

My Trip to Hades

In 1998 I was a manager of a small fund of funds that invested in managers that used ‘alternative” approaches that did not correlate to the stock market.  It was my (our) opinion that the bubbly tech-driven stock market was scary and people needed to diversify (my partners and I found few people who agreed with us). 

The most popular managers came in three categories: event driven managers, private equity investors and MBS traders.  We visited various candidates including Cerberus Capital – the huge and famous private equity manager.  My partner and I went to their magnificent offices in NY city.  We waited in their three story foyer while six foot tall models in miniskirts offered us Perrier.  Eventually we were shown into a managers office who explained their approach.  They bought private companies or illiquid assets that they believed to be undervalued and then waited patiently for them to appreciate.  Their latest venture was into illiquid Japanese bank loans that had been non-performing since the collapse of their economy in 1989.

We asked how they valued these assets after they were in their portfolio since there was no active market.  The manager said Cerberus set a price that they believed to be the “correct”value.  That gradually rising (never declining) value was the basis for them to charge ever greater management/performance fees.  We left shaking our heads.

If there were fund redemptions then they used new contributions to pay for them since there was no liquidity in their assets and they would have to be sold at far lower prices than the market value in the statements they were sending out.  If new money stopped flowing in and redemptions were requested (lock ups were often required for this very reason) then they would indeed have a Madoff style problem.

What a roach motel.  I wonder if they still serve Perrier.

What is an Ally?

When we grant MFN status to a country and open up our markets so they can prosper by selling us everything they make, shouldn’t they be an ally?  Shouldn’t there be a standard where a country is truly our “friend” before we give them aid? 

President Clinton began giving away MFN preference in 1994 like candy to every country he visited or every head of state he met.  It seemed like it had no cost and everyone loved him.  He could say he was a free trader, even if the other country maintained huge protectionist walls against our imports. 

On the weekend we learned that China has a massive computer espionage network.  As I have written in the past, China has always ONLY looked out for itself.  Maybe this news will make some people wake up to that fact.

I similarly struggle with the assertion that Israel is a great American ally.  How many times has Israel done something they would not have normally done because we asked them to in the name of international relations and peace?  How many times have we asked them to stop building new settlements in the West Bank?  For a complete list of all their spying on the US, go HERE.

England sent hundreds of thousands of men to their deaths in World War I because it stuck by a treaty commitment to help Belgium if it was attacked by Germany. 

That is an ally.

Language and Polemics

Divisive political rhetoric over the past eight years has brought us ridiculous terms like “war on terror” and “Axis of evil”.  A typical attack includes words like fascist, communist, tyrant and evil. I understand that polemicists are always looking for a strong pejorative to convey their disgust but they should all be required to have dictionaries at their desk to explain and defend their choice of words.

The latest ridiculous term that is being bandied about is Socialist – a supporter of Socialism.  Socialism is a “system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.”.(www.dictionary.com)

It is said “Barack Obama and his administration are all socialists.”  That is to say they are – as we speak – taking control of the means of production and distribution of the US economy.  Do we have even one example – a company or an industry, where that is true  (leaving aside bankrupt financial companies)? If anything they are lending money to industries like banking and automobiles while taking very little equity and taking almost no control over their management after they have done so.

People seem to be searching for a word that is negative in tone that refers to a policy of bigger government spending as a per cent of GDP. 

The word for this is NOT Socialism. 

Genie and the Bottle

It seems there is still a debate about how we move forward as a society and as an economy.  The old paradigm was where we bought and borrowed while China saved and produced.  We spent our time building unnecessary housing and engaging in completely ridiculous financial transactions that chopped up assets, merged and “LBO’d” every company and promoted speculation in everything.

It is always hard to imagine what industry or discovery will lead the next growth cycle.  More often than not we simply revive the old economy by first reducing inventories or using traditional stimulus techniques like lowering interest rates.  Sometimes depressed commodity prices give us improved purchasing power (oil in 1982).

This time oil is a far lower factor in GNP, interest rates were nearly at zero before the collapse occurred, and our entire manufacturing sector has been destroyed and relocated to China (Asia in general). 

What can we stimulate and how do we stimulate it?  If we build more bridges, the steel will come from China, if we add technology to the healthcare industry then the computers will all be made in .. China.  FDR never had this problem.

One answer is we can try to revive the old economy where we gamble and broker houses.  We pretend to be experts at finance as though we will be able to export our expertise to the Third World at some point.  We try to get consumers to go back to their old buy and borrow ways.  The problem is that the entire model was unsustainable as we just proved.  Even if we could squeeze this genie back into its bottle we shouldn’t want to.

That is why I’m still a little frightened by the fact that the current brain trust of Geitner, Summers, and Bernanke all believed in the old paradigm and still seem to want to protect the old system and revive it if they can.  (AIG CDS payouts)

If I had the chance to ask one question to all three of them, I wouldn’t ask how they planned to get us out of this mess.  I’d ask if they realized now that all their opinions about unlimited leverage and deregulated banks were wrong.  I’d ask if they believed that it is a good economic model to have our economy consume to excess using debt while depending on another to make everything and lend us all the money.  (That’s two questions.)

They will be revealing their new regulatory scheme in the next two weeks.  That should tell us if they really understand the errors of old policy.

Money and Genius

People want to believe that if you are smart enough then you can manufacture money in your basement.  All you have to do is watch CNBC. (as seen in I Love You Man)  Think of all the wealthiest people you know – are they the smartest?   In my experience, being in the right place in the right time has a lot more to do with it.
During bull market bubbles everyone seems willing to believe that genius creates wealth. Silicon Valley shell companies shot up like fireworks in the Nasdaq bubble of the late 90's. Do you remember all the geniuses at LTCM and Enron?  The market following media promotes a culture where financial success is worshiped and genius must be involved. 
Idol worship then takes over and investors chase after these people and their opinions with saliva dripping from their mouths.  This story is older than anyone reading this.  In my grandfather's day – the man of the day was Ivar Kreuger. The week of the crash in 1929 this was the front cover of Time Magazine:
Kreuger

Failed States

We keep hearing that Pakistan (for example) is a virtually failed state.  The government has no national political mandate.  The state has insufficient money to police itself or its borders.

Mexico gets 30% of its government revenue from Pemex – its state owned oil company.  Pemex was going bankrupt before oil prices collapsed.  The Mexican state like that of it’s southern neighbor Venezuela (50% of govt revenue from oil) and Russia (oil and gas = %20 of GDP) is going broke. 

Every discussion of foreign policy and potential threats to US security involves the same issue. As all these countries go broke we cannot save them.  So what are our obvious foreign policy responses to this mess:

  • We will need the national guard at our southern border – it’s only a matter of time. 
  • We will have to use drones to attack Al Quaeda/Taliban inside Pakistan. 
  • We can ignore any threats from Iran or Venezuela since they are now shriveling up into economic basket cases.
  • Helping anyone with aid money is like spitting in the wind.

New Paradigm; Same Government

Now that the swamp has been drained we have figured out that a completely deregulated financial sector was always a bad idea.  The economy has crashed and in all likelihood we will see an appropriate collection of new regulatory laws written and enforced in the near future. 

Consumers have been jolted into the realization that you can’t build wealth by gambling and borrowing.  Their shock will manifest itself in a savings rate somewhere in the 10% area.  Plasma TV sales have dropped of off have a cliff.  Vegas is in real trouble. Soon 2007 will start to look about as familiar to us as 1927.

But one thing has not changed.  During the long extended bubble of leverage and ever increasing government debt, the US government acted like no one cared what they did or how irresponsibly they behaved.  We had unlimited ear-marks, unlimited lobbying, unlimited unpaid –for tax cuts, and unlimited defense dept. toys,. The government had an endless supply of cash to sprinkle all over the world (or dump off the back of trucks in Iraq). 

As long as the unemployment rate is below 7% the masses pay little or no attention to government budgets.

Then suddenly, just as politicians were arguing about their obligation to be thrifty, they have been given a new pass to spend and spend and spend.  In the short run I understand that we need an economic agent who will spend while everyone else is cowering with fear.  In the long run however we will need an entirely new mentality out of our public servants.  It’s not fun to be a government leader and announce huge cutbacks and huge increases in taxes.

Why is it so hard to cull the fat even while you protect or add to the stimulus programs we all need so desperately.  Can we still afford military bases all over the world?  Does every earmark improve productivity and reduce unemployment?  Can we afford Medicare and Social security without any means tests?

After we produce a new set of laws for financial industry regulation we will need to totally overhaul how our drunken government does business.  I believe it will take an entirely new crop of politicians .

Fair and Unbalanced

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