The Rabid Independent, Nonpartisan solutions, independent policy ideas

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.”.(

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:

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 .

Taxing Bonuses – Can’t We Ever Get This Right

What’s wrong with wall street bonuses paid in deferred stock with a 2 year look-back.  If you lose money the next year then there is an allowance to claim some or all of the prior year’s bonus.  That’s it. 

If an institution that has received a government loan makes a good hire then he will want a competitive offer. It’s true that right now most places aren’t paying that well but they are paying better than whatever you’ll get after a 90% tax rate.  Every bank with a loan will get the worst of the worst so we’ll never get any of the loan back, or at least it will take a lot longer when you have the worst talent in the world.

If the US government owns a majority of the stock then that is a special case (AIG).  If we have only made a loan (and taken very little equity) then compensation is set by the board of directors.  That’s the law.

Popular outrage is not with the bonuses themselves, it’s with the contradiction between huge losses and big bonuses.  It’s with gross mismanagement and a complete failure to regulate. 

Stupid populism makes bad policy.

We Must Become Insurgents

In Afghanistan we will never succeed in building the country’s infrastructure, controlling their government and reducing graft or their bustling drug business.  They will never love us and see us as liberators.  The terrain is unconquerable.  A big chunk of the population believes that Sharia law is the way to go.

My plan is to pull every man out and periodically use drones to strike the Taliban or more importantly Al Qaeda training sites (if they exist).  We need to think like an insurgent who jumps out of the jungle, takes a shot and then goes back into hiding.

We cannot manage this country or occupy it.  Our goal was always to ONLY stop them from giving safe haven to terrorists who then plot and train and plot and train.  The Taliban are only our enemy if they befriend Al Qaeda. We cannot referee a civil war and we should not stop the people from having the government they vote for.

Let’s reduce our strategy to what’s possible. 

I love drones.

What Gave Regulation Such a Bad Name

Way back in the 70’s Jimmy Carter and his advisors (specifically Alfred Kahn)  figured out that in certain cases government oversight and control over some industries was producing gross inefficiency.  This lead to their deregulation of the airline industry and later the trucking industry.  Believing this to be success libertarians were heard to yell “I told you so” and our business culture embraced all aspects of deregulation including disinterest in enforcing anti-trust law.  The stock market loved  all the new buyouts and new entrants into industries that used to be restricted.  The telephone industry was the next big whale to be set free, and all was good.

The problem is that regulation also means law enforcement.  Laws against pollution dumping, political payoffs, fraudulent accounting and illegal alien employment all came under indictment.  Laws that protect worker safety, guarantee a minimum wage, or require proper and complete product information were looked upon as unnecessary- just burdensome paperwork.  Many companies avoided these laws by moving many workers to countries without such laws.  No one cared- it was good for profits.

Then along came Enron.  This was a perfect case study of how a company can avoid every regulatory rule protecting shareholders from excessive hidden leverage, losses and taxable income.  It also exposed the crazy new compensation schemes where a company could go bust while certain traders kept huge bonuses.  There are other examples but this one was in the finance world that had become the primary business of the US economy after it moved its manufacturing industries offshore.

Thus when corruption ran amuck in the housing finance industry  all the “regulators” had been well trained to look away.  No one had learned anything from Enron. The SEC was effectively closed.  Everyone, even most democrats, still describes regulation as inherently evil as though Alfred Kahn were still in the White house.

Is it so hard to differentiate between excessive government control and proper enforcement of appropriate necessary laws?

The Populist Cry- “No Bailouts For Anyone!”

Let’s imagine a world where we go along with Ron Paul and refuse all bailout money to every financial institution that is in trouble.  We let them all go under.  Let the chips fall where they may.  Many believers of this hands-off economic policy seem quite secure – as if they not only know that the fallout will be benign or that they know they won’t be injured in the ensuing tsunami. 

Can we imagine a world where all the major banks closed, most money market funds went into liquidation and any borrower who needed to roll over debt was shut down.  The FDIC would be broke so don’t expect to get the $250,000 maximum from your savings account.  The stock market would be down about 90%.  All the debts you have like your car lease and your mortgage – they would all be intact, but you would would have no income.  Let’s not forget that the average citizen began this mess with virtually no savings.

So all the people who want to pull the plug are either

  1. far more liquid and insulated from catastrophe than I am or
  2. failing to appreciate how huge the downside will be in a system without a solvent financial industry

Are all these people hording gold bars or $100 bills in their mattresses?  Maybe they’re short the stock market.

Maybe they haven’t thought this through at all.

Fair and Unbalanced

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