Is Closing Guantanamo Just a Bait and Switch?

torture-abu.thumbnail.jpgNot something I like reading:

Clive Stafford Smith, head of a legal charity called Reprieve, called President Obama’s strategy "the Bagram bait and switch," where the administration was trumpeting the closure of a camp housing 242 prisoners, while scaling up the Bagram base to house 1,100 more.

"Guantanamo Bay was a diversionary tactic in the ‘War on Terror’," said the lawyer. "Totting up the prisoners around the world — held by the U.S. in Iraq, Afghanistan, Djibouti, the prison ships and Diego Garcia, or held by U.S. proxies in Jordan, Egypt and Morocco — the numbers dwarf Guantanamo. There are still perhaps as many as 18,000 people in legal black holes. Mr. Obama should perhaps be offered more than a month to get the American house in order. However, this early sally from the administration underlines another message: it is far too early for human rights advocates to stand on the USS Abraham Lincoln and announce, ‘Mission Accomplished.’"

Well, isn’t that something special.  And yes, it appears to be a hellhole:

Apart from staff at the International Red Cross, human rights groups and journalists have been barred from Bagram, where former prisoners say they were tortured by being shackled to the ceiling of isolation cells and deprived of sleep…

 …the Red Cross issued a formal complaint to the U.S. government in 2007 about harsh treatment of some prisoners held in isolation for months.

In general my feeling is that escalating in Afghanistan is a mistake for the Obama administration.  Bagram may well be their Guantanamo, and Afghanistan overall will be their… Afghanistan, actually.  I don’t think it’s going to even turn out as well as Iraq did, so to speak. (more…)

SOTU Speech Wrap Up

Obama SpeechIf we know nothing else, we know by now that Obama can give a good speech, and he did so again today.  There’s a fair bit to like in the speech, in particular I agree with Ed O’Keefe that this was significant:

"We will double this nation’s supply of renewable energy in the next three years," Obama said. "We will soon lay down thousands of miles of power lines that can carry new energy to cities and towns across this country. And we will put Americans to work making our homes and buildings more efficient so that we can save billions of dollars on our energy bills."

That’s some of the vision I’ve been looking for from Obama—not just generalities, but a real vision with some specifics.  With 50 billion a year behind energy, for two years, some real good could and should be done.  I’d like to have seen even more, but 100 billion isn’t chickenfeed.

Obama seems to understand that the risk of inaction on banks is Japanification—an economy that just never really gets good:

Still, this plan will require significant resources from the federal government – and yes, probably more than we’ve already set aside. But while the cost of action will be great, I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade. That would be worse for our deficit, worse for business, worse for you, and worse for the next generation. And I refuse to let that happen.

The details on the plan are still rather vague, and long on talk of responsibility and short on using hard words like nationalization, but talk of responsibility and of making sure that banks actually lend again is welcome.

The healthcare talk was likewise good to hear, though I worry about the specifics.  And there was a bit in the discussion of Social Security which left me wondering:

To preserve our long-term fiscal health, we must also address the growing costs in Medicare and Social Security. Comprehensive health care reform is the best way to strengthen Medicare for years to come. And we must also begin a conversation on how to do the same for Social Security, while creating tax-free universal savings accounts for all Americans.

I’m curious what this means.  Does this mean Obama wants tax-free universal savings accounts as part of Social Security reform?  Will there be required savings, or is it optional?  When can you take the money out?  Is the money expected to be used to make investments, if so what kind of investments and who makes the decisions?

Overall though, another excellent speech and some policy proposals and rhetoric in it that the most die hard liberal can believe in. 

(Oh, and Bobby Jindal just did himself immense amounts of damage with his rebuttal.  Ouch.)

Phil Breseden and Bobby Jindal: Do you like screwing the weakest of your citizens?

graphic by twolf1

First there there were a bunch of Republican governors including Jindal saying they would not accept money for expanding unemployment benefits.  Now Democratic Tennessee governor Phil Breseden is also considering turning it down?  What is wrong with these people?  Do they enjoy hurting people who need help the most?  Oh, they’ll take some money, but not money that helps people who have lost their jobs through no fault of their own.

I really can’t think of words that could adequately express my visceral contempt for such heartless governors.  I’d say they don’t deserve the title of humans, but in fact, this is all too human behaviour: selfishness, callousness and lack of empathy—a display of the worst traits of our species. It is a disgrace that men who are so callous and unfeeling have risen to the rank of governor.  Hopefully the citizens of their states will rectify the problem at the earliest opportunity.  If they do not do so, then I guess it will be true that they got what they voted for.

Social Security “Reform”: Are They in It for the Money?

social-security-seal.jpgLet’s cut to the chase here. Social Security doesn’t need a fix to make it keep helping seniors, even according to the very conservative estimates of the Social Security trustees, which state that Social Security:

  • Will take in more money than it is spending until 2017
  • Including interest on the SS trust fund, not be spending more money than its income till 2028
  • Not run out of money till 2041

Benefit cuts are actually pushed a fair bit into the future, and wouldn’t occur under Obama’s first term, as I understand the Diamond-Orszag plan, so Social Security "reform," from the point of view of the administration, would be more about upping the balance of cash coming in. It’s not clear that the administration wants any Social Security reform (or, that after the furor over it, they would still want it), but if they do, well, perhaps the reason might be money. (more…)

Was Dow 6,000 Optimistic?

throwing_away_money.thumbnail.jpgOctober 7th I suggested that once the market broke 8,000 the likely bottom was 6,000.  Today the DOW hit 7.114.78 but I’m beginning to wonder if 6,000 is really the bottom.  When I made my estimate I was using price to earnings ratios. The historical norm for bear markets is 7x Price/Earnings.  Unfortunately, as Peter Corless notes, earnings continue to drop.  What looked like forward earnings in October look rather optimistic right now.

The general consensus seems to be that this is driven both by the vagueness of Geithner’s plan and by the fact that the Geithner/Bernanke put (the likelihood that they would not just bail out financial institutions but their stockholders) is looking more dubious.  The more the administration refuses to rule out nationalization, the more people think it is bound to happen.  In addition to these issues, when Geithner said 1 trillion was the top number for his private/public plan, that was less than the banks think they need (4 trillion is their bottom number.)  Geithner isn’t promising a full bailout anymore.

There’s also a technical phenomenon going on.  The more losses investors take, the more they have to meet margin calls.  Good securities are sold to meet bad bets, driving down even the price of good investments.  A friend of mine who advises various investment funds has seen even good ones hammered by redemptions, people selling the investments that are working to cover their losses in investments that are going south.  This is a phenomenon which is self-reinforcing.  The more people who have to sell, the lower prices go, forcing even more people to sell, and so on.  

So, where’s the bottom?  I don’t know, but I think 6,000 for this year is now a conservative estimate.  Of course, markets have ups and downs and this one may well bounce back up.  No one should think this is trading advice. Still, I’ll be very surprised if the downward trend doesn’t continue.  The economic fundamentals are not going to get better for some time and forward looking earnings estimates will continue to go down.

At the same time, there will come a point where bottom buying makes sense.  There will be a generational opportunity to buy up stock at lows most of us will never see again.  But when that bottom will occur is not yet clear.  It could be this year.  Or it could be further out.

So hang onto your hats, while we wait to see what the market gods, whose members include Bernanke and Geithner, have in store for us.

Citigroup: Take a 40% Stake, Please!

Image by Admit1

Image by Admit1

This does get more and more amusing:

Citigroup is pressing the US government to agree on a new capital injection that would increase the authorities’ stake in the troubled bank to about 40 per cent but stop short of an outright nationalization.

Of course they are.  Not that nationalization would mean much, if Geithner and Summers have their way—as they envision it, it will be just long enough to take all the crap off a bank’s books at taxpayer expense, then they’ll sell it back to the private sector.  It’s becoming pretty clear that even when Geithner and Summers are forced to the right thing, they’ll do it exactly the wrong way.

Perhaps even more interesting is what Massacio points out, that much of the TARP money didn’t actually go to banks and the 25 billion supposed to go to Citibank earlier, actually went to Citigroup—which owns a number of firms:

This is not just a detail. The $25bn never got to Citibank. When Blue America candidate Alan Grayson (donate here) asked the head bankers what they did with the money, he got no answer.

That money isn’t going to increase lending by Citibank. Maybe it became collateral for credit default swaps. Maybe it shored up Variable Interest Entities (p. 116), which are separate legal entities, trusts or LLCs, for example, where Citigroup (or Citibank, the financials don’t separate them in this area) has a significant risk of loss or gain, even if it doesn’t own a controlling equity interest. These are included in the activities of the ICG, that group of losers. If that’s where the money is, it sure isn’t going to increase lending. All it could do is prevent horrendous losses to outside investors.

This is becoming a sick joke.  Nationalize or don’t, but the key issue isn’t nationalization, it’s lending.  Force them to lend, one way or the other, or have the Fed lend directly, but stop playing these games.

Social Security: The Diamond-Orszag Plan is Not the Liberal Alternative

The Diamond-Orszag plan for "reforming" Social Security calls for reducing benefits on youngsters to make up for people living long—and the younger you are now, the more the benefit reduction. Their plan is to make up half of the shortfall (a shortfall which may not even exist, we’ll come back to that) by reducing benefits, and half of it by increasing FICA taxes. They do intend to increase the amount of money that richer people pay, modestly, and they also intend to reduce benefits for wealthier folks by more than they reduce benefits for those who have more average earnings.

Diamond and Orszag claim that since wages are increasing, in real inflation adjusted terms, this will still mean that young folks wind up earning more:

An average earner who is twenty-five years old in 2004, for example, would still receive an annual inflation-adjusted benefit at retirement that is more than 25 percent higher than the benefit of an average earner who is fifty-five years old. The reason is that Social Security benefits increase when career earnings rise, and today’s twenty-five-year-olds are expected to have higher career earnings than today’s fifty-five-year-olds because of ongoing productivity gains in the economy. . . .

productivity-and-wages.thumbnail.jpgThis is simply not the case, as it assumes that productivity gains are passed onto median wage earners, which is not the case and has not been for some time (see the chart to the right). On an individual basis, hourly wage earners (the people who need SS the most) have only seen minor wage increases for 30 years (at best). Households have, but that is because more and more households are dual earner.

It is therefore unlikely that reducing the percentage of wages won’t lead to absolute benefit reductions, unless Diamond-Orszag are somehow convinced that the productivity-wage connection which hasn’t operated for thirty years is suddenly about to start up again. So the result of their reductions will be both an absolute and a relative decline in social security payments for most people.

Goods producing non-supervisory wages

Goods producing non-supervisory wages

Now the plan has some good parts, for example Diamond-Orszag want to increase benefits for people with low lifetime earnings and for widows and to shift disability payments so that workers who are disabled young get more money, which is appropriate, since they’ve lost more of their lifetime’s earnings (which tend to peak in late middle age, if your career goes well.)

I did find this little bit amusing: (more…)

Warning: This Economic Crisis is NOT a Black Swan

I have become increasingly concerned that some in the Obama administration are treating this economic crisis as a "black swan" event. That is a very rare, random and unpredictable event. The key thing about black swans is that because they are random and unpredictable you can’t stop them from happening, you can only create your systems so that they can handle them if they occur. A pandemic flu that killed tens of millions might be a black swan, and it’s one that we’re completely unprepared for, as we don’t have the excess medical capacity to handle it.

The most recent event which made me think of this is the news that Mary Schapiro, new chair of the SEC, doesn’t plan on reforming ratings agencies. Now, ratings agencies were one of the key actors in this mess—they certified mortgage backed securities and other toxic derivatives as AAA quality. If they had not done so, almost no one would have bought them. The ratings agencies are paid by the companies whose securities they rate.

I trust you see the problem?

If you think that the crisis is just random, a once in a century (or at least once every few decades) disaster, then you won’t think making major changes is necessary. Get through the problem, go back to how you were doing things before, and everything will be fine.

But, of course, the economic and financial crisis unfolding right now was not random. It was predicted by multiple people, and it was predicted because of policy steps taken by government and widely known private actions.

We could all read the charts showing a bubble in housing prices and sales. We could all see that derivatives were also in a bubble. We knew that leverage was out of control, ballooning to 30X or in many cases, even higher numbers. We knew that with financial deregulation firms had started being involved in multiple different types of businesses, putting retail banks at risk from their insurance or brokerage or investment banking arms. We all knew that the US savings rate had hit unsustainable lows and that the trade deficit was too high. We knew that the carry trade was introducing tons of hot money to the system (borrowing for nothing in Japan and using that money for leveraged plays elsewhere).

And, perhaps most importantly, we should have known that executives in the financial sector paying themselves huge bonuses were concentrating on short term gains and did not care about long term viability of their companies or even care about the honesty of what they were doing, because hey, by the time it all fell apart, they’d be rich, rich, rich and never need to work again. (more…)