Friday, November 02, 2007


Imperialism denied

In the latest issue of Foreign Affairs Richard K. Betts tries to wrap his mind around the problem of bringing the military budget in line with reality. Betts is one of those exceedingly well-credentialed denizens of thinktanks, universities, the Pentagon and CIA who inevitably get invited to testify on Capitol Hill so long as they don't say anything too outrageous. Betts does not disappoint.

The article's summary begins,

The United States now spends almost as much on defense in real dollars as it ever has before -- even though it has no plausible rationale for using most of its impressive military forces. Why?

Why, indeed? Betts recounts the obvious truth that the military-industrial-congressional complex is in its ascendancy. There is no longer any sort of budget ceiling imposed upon the Pentagon, which has led to "interservice civility." The branches of the military no longer compete among themselves for the lucre—there's plenty of cash to go around.

Just how out of whack is military spending? Oh, well. If you ignore the trillion-or-two cost of the Iraq fiasco, we're still below the level of the Cold War, if you calculate it as a fraction of the Gross Domestic Product (GDP). But the rate of increase is staggering—

... the defense budget has risen in nine of the past ten years at an average annual rate of more than six percent -- a record unmatched in any other decade since World War II, even including during the wars in Korea and Vietnam. (In the 1960s, which included Kennedy's military buildup and the worst years of the Vietnam War, the average annual defense budget increase was 2.5 percent.)

And you don't need a degree to understand the reasons Betts gives—

Contractors who live off the defense budget have ... become more adept at engineering political support by spreading subcontracts around the maximum number of congressional districts. And the traditional constituencies1 for restrained spending in both major political parties have evaporated, leaving the field free for advocates of excess.

But the one reason that Betts avoids is that this level of spending is a byproduct of an imperial foreign policy. The caption for the link from the Home page says "The U.S. defense budget is too low for real imperialism but too high for anything else." Actually, what Betts argues is that such a policy would be foolish, so he dismisses the consideration—

An imperial role is ... both unaffordable and unwise. The fact that Washington does not presently have the capabilities to sustain it should not be considered a problem.

But I beg to differ. It should very much be considered a problem. Just because it's insane doesn't imply that it's not operative.

Betts assures himself a continued hearing in the halls of power by painting a picture of American imperialism as essentially benign—

If the current U.S. defense budget is larger than necessary to counter existing and plausible future threats, it is much smaller than necessary to support a truly effective American effort at imperial policing. The notion that the United States has the right and the responsibility to regulate regional peace, discipline violators of civilized norms, and promote democracy and world order is one of the hallmarks of the Wilsonian tradition in U.S. foreign policy. During the Cold War, such ambitions were kept partially in check by Soviet power, but the emergence of a unipolar world has allowed them to flourish.

We are left to ponder why the Soviet Union wouldn't want us to do all those nice things for the world.

It is in part because such mush is purveyed as foreign policy analysis that the American public cannot form a clear picture of what is going on.

But back to the problem of excessive military spending. What is Betts' recommendation for convincing Congress to curb the excess? I know you're not going to believe this but Betts' solution is to promote the slogan "Half a trillion dollars is more than enough."

Marshaling the political will for restraint will be an uphill battle. A starting point might be the slogan "Half a trillion dollars is more than enough."

Once everyone has absorbed the concept Betts concludes that—

Modest reductions for a few years and a steady budget eroded by inflation for a few more could tighten the system's belt. The case for cuts should be made on the principle that expensive programs must fulfill unmet needs for countering real enemy capabilities, not merely maintain traditional service priorities, pursue the technological frontier for its own sake, or consume resources that happen to be politically available.

I'm not sure how we get the slogan across. Do we take out newspaper ads? Chant it in the halls of Congress? Offer tapes for our representatives to sleep on?

We are well and truly fucked.

Related posts
A war we can't afford to win (1/24/07)
Quote of the Day (10/25/07)
Headline of the Day (10/26/07)
Rhetorical Question of the Day, or How to MOP up? (10/28/07)



1By "traditional constituencies" I presume that he means New Deal liberals who wanted to see the money going back into society instead of into armaments and paleoconservatives who wanted to limit government spending of any sort. [back]

Thursday, November 01, 2007


Update on "Gripe of the Day"


Dates to watch

Wednesday, October 31, 2007


Another antigay Republican state representative gets screwed

According to reporter Jeff Humphrey, Washington State Rep. Richard Curtis "voted against domestic partnerships for gay couples and opposed a bill that would have outlawed discrimination based on sexual orientation." But what Curtis does in drag is another matter. Sez he was drugged.

Why don't these guys just vote as they ought so they can change into costume and get on with their sex lives?



Gripe of the Day

[I]t seems remarkable to me that in some of the 11 cities in which protests were held – Boston and New York, for example – major news outlets treated this "National Day of Action" as though it did not exist. —Jerry Lanson, former newspaper editor and journalism professor, writing in "War Protests: Why No Coverage?"

Professor Lanson participated in the antiwar march in Boston last Saturday, and my guess is that he's a first-timer. What struck me about this op-ed was not the point he makes: that there is a stunning lack of coverage of antiwar protests. Anyone who has ever rallied, marched, sat down, stood up or screamed knows that. What is striking is that he, a former newspaper editor and journalism professor, seems not to have known it.

Coordinated antiwar protests in at least 11 American cities this weekend raised anew an interesting question about the nature of news coverage: Are the media ignoring rallies against the Iraq war because of their low turnout or is the turnout dampened by the lack of news coverage?

I find it unsettling that I even have to consider the question.

I find it unsettling that he's never before considered the question.

As far as I can tell, neither The New York Times nor The Boston Globe had so much as a news brief about the march in the days leading up to it. The day after, The Times, at least in its national edition, totally ignored the thousands who marched in New York and the tens of thousands who marched nationwide. The Globe relegated the news of 10,000 spirited citizens (including me) marching through Boston's rain-dampened streets to a short piece deep inside its metro section. A single sentence noted the event's national context.

As a former newspaper editor, I was most taken aback by the silence beforehand. Surely any march of widespread interest warrants a brief news item to let people know that the event is taking place and that they can participate. It's called "advancing the news," and it has a time-honored place in American newsrooms.

But this is not the news that the media bosses wish to advance.

It reminds me of a certain Vietnam protest after which I shared a cell with a highschool civics teacher. The teacher was having a hard time taking it all in. "This is illegal! This is unconstitutional! They can't do this!" To which I could only reply, "Umh... Where do you think you are?"

11/1/07 – 11:30 am — Mr. Lanson's complaint about media coverage of the antiwar demonstrations certainly cannot be leveled at the Washington Post. Our little "Pravda on the Potomac" ran an Associated Press account of the rally in San Francisco, which even mentioned the protests in Seattle and New York. Lanson may have missed it because it was in the Finance section!

Was the Post trying to hide it? Shame on you for thinking such thoughts. No, they were trying to keep the readership they care about—the movers and shakers of finance—informed.

Here's the lede paragraph of the story—

Thousands of people called for a swift end to the war in Iraq as they marched through downtown on Saturday, chanting and carrying signs that read: "Wall Street Gets Rich, Iraqis and GIs Die" or "Drop Tuition Not Bombs."

If you were a New York fat cat, wouldn't you want to know what they're saying about you in the streets?

And it was not just the Post that viewed this story as financial news. The story was shopped around by COMTEX, "the leading wholesaler of real-time news and content for the world's major financial and business information distributors. "

Related posts
The Washington Post: Pravda on the Potomac (6/7/06)


Tuesday, October 30, 2007


Many in finance found to be SIV-positive

Many financial institutions of the world's economy have discovered they are SIV-positive. The disease was first noted with alarm at the inception of the Bush administration but was allowed to spread unchecked. Indeed, it could even be said that George Bush encouraged it with his dream of the "ownership society" and the promise that the free market would house the poor and working class. This allowed a pool of infection to grow in the suburbs.

The disease has a long latency and symptoms are only now emerging. The full symptomatology and the long-term course of the disease remain unknown. Initial symptoms include the disappearance of what some people thought was money and multiple home foreclosures. So far only one death has been reported but more may follow.

Central banks, financial institutions and neoliberal economists are working feverishly to find a free-market cure, though as yet none has been found. The true tragedy of the disease is that a vaccine was available—government regulation of the financial sector—but there was no market for it.

Have I exhausted the metaphor yet? Nah.

SIV—What it is and how you get it

Though there were definitely some simians involved, SIV does not mean "simian immunodeficiency virus." It stands for "structured investment vehicle." There are many variants, but the form that has become most virulent involves loans for housing—mortgages, in other words—to subprime clients, like me.

NY Times columnist and economist Paul Krugman explained it this way—

Today, when a bank makes a home loan, it doesn't hold on to it. Instead, it quickly sells the mortgage off to financial engineers, who chop up, repackage and resell home loans pretty much the way supermarkets chop up, repackage and resell meat.

It's a business model that depends on trust. You don't know anything about the cows that contributed body parts to your package of ground beef, so you have to trust the supermarket when it assures you that the beef is U.S.D.A. prime. You don't know anything about the subprime mortgage loans that were sliced, diced and pureed to produce that mortgage-backed security, so you have to trust the seller -- and the rating agency -- when it assures you that it's a AAA investment.

Let me attempt my own naive explanation of the mortgage-based SIV and the ensuing crisis—

It used to be that heavily regulated commercial banks were the primary source of mortgages. Because of that regulation—that ensured that banks couldn't just do anything with your money, no matter how risky—only the finer upstanding citizenry could obtain a mortgage.

But how could the rest of us participate in a George Bush ownership society and move into our own homes if no one would lend us the money? God knows we didn't have much to begin with and had even less after a few years of the Bush administration.

Since anyone with a wad of cash can issue a mortgage and since anyone lending to you or me would have to charge pawn-shop rates to offset the higher rate of defaults, that's exactly what they did. All good free-market stuff so far. The loan was known as a "subprime mortgage," which of course was still backed by the value of the property it was used to purchase.

If it had stopped right there, the market might have taken care of itself, as they like to say over at the Treasury Department. The higher interest rates would have offset the higher rate of loan failures. In other words, though it was expected that some of the subprime borrowers would eventually lose their homes and their engagement rings, the losses on the loans would be covered by the higher interest rates paid by the remainder. A "market equilibrium" would be reached and things would settle down.

Of course the increased demand for homes brought on by this surge of new home buyers meant that housing prices went up. So a number of things happened at that point.

In addition to the people who actually needed homes (the "subprimes"), other people ("prime borrowers") who already had homes began buying other homes as an investment. They planned to sell them to the subprimes and to each other. Loans were even more readily available to these borrowers. And this of course drove the demand for houses still higher, along with the price. Thus was born the "housing bubble."

The folks making the loans hadn't seen the promise of such high returns on their investment since Willie Sutton invested in a tank of gas to make his getaway from a bank. They then did two things to increase their profits: (1) They made the terms of the loans much easier "upfront," so that people who couldn't pay wouldn't have to worry about it for a few years, thereby guaranteeing more customers and a further rise in home prices. (2) They sold off the loans they had already made so they would have more money to make more loans.

Now here's where the structured investment vehicle comes into play. You take the loan and sell it at a discount to a middleman. The middleman gives you the money so you can continue to make more loans (you're now free and clear of the risk). The middleman takes the loans and claims them as an asset to back the value of a salable piece of paper—let's say a bond—that promises to pay the holder a fixed interest over a number of years. This is known as a "mortgage derivative." The beauty of it is that the middleman gets his money back, so he can now buy more loans from you.

To increase the salability our middleman gets a rating agency (Moody's, for instance) to certify that the paper is really backed by a solid asset and not just a bridge in Brooklyn. Of course, the value of homes, which underlay this house of cards, was going up, up and up, so things were looking copacetic. Other investors—your pension fund, perhaps—bought the paper with the expectation of holding it as a conservative long-term investment.

Then the trouble began. The easy payment terms that had been offered upfront on many of the mortgages came to an end, and subprime borrowers couldn't make the higher payments. And of course subprime borrowers who weren't faced with a leap in their monthly payment still had the challenge of making the current payments when their incomes haven't risen as steadily as the daily increase in the price of food, fuel, healthcare and additional children.

Foreclosures ensued, and with more homes on the market, prices began to fall. This meant that the prime borrowers who had borrowed to own a second property were making payments on a home that might not even be worth what they paid for it. Naturally they wanted to sell as quickly as possible, further depressing the value of the homes.

The issuers of the mortgage derivatives—that unregulated "structured investment vehicle"—watched the value of what they had used to back up their promise to pay evaporate. They were up the proverbial creek without a paddle.

Are you still with me? This is where the fun begins.

The investors who had bought the SIVs realized they had no way of knowing the value of what they were holding, but that it was probably a great deal less than they had supposed. The paper still presumably has some value, since it is backed by mortgages not all of which will be foreclosed (it is hoped!). Also, the paper is salable to the next fool.

But here's the problem. You'd love to sell that hot little potato, but you don't know how much it's worth and neither do the potential buyers. For SIVs that have traded, the God of the Free Market sets a "value," which is just the point where whatever you're willing to sell them for matches the point where someone else is willing to buy them. But these SIVs were originally bought with the expectation of holding them for the long haul, so no trading had occurred. And from the standpoint of a potential buyer, your hot little potato looks remarkably like a pig in a poke.

Now not only do investors not want to buy your hot potato, they don't want to buy anything that even resembles a potato. Since SIVs have become the coin of the realm, the reluctance to hold them is what's known as the "credit crunch."

The treatment

The initial treatment was to declare this to be an Act of God (the Free Market) and to deny there was a problem. The losses, it was said, would be borne by a few players in the financial sector who had been playing fast and loose with their cash and by those silly subprime borrowers who deserved whatever happened to them anyway. After all, the financial sector is only a small portion of the overall economy.

As uneasiness grew and foreclosures increased, the Bush administration then attempted an appeal to "compassionate conservatism." Lenders should renegotiate the mortgages to keep borrowers in their homes, not to mention to sustain the worth of the mortgage derivatives. Of course "compassionate conservatism" turned out to be just as empty of meaning in the markets as it was on the campaign trail. The original lenders had already shed the risk and couldn't give a damn what happened after that.

But as funds began to evaporate, capital sources felt a sudden reluctance to buy SIVs of any sort, preferring to sink their money into U.S. treasury bills. But much of the rest of the economy is financed through this marvelous sale of paper. This of course means that sooner or later, there will be no "money" for "growth."

So the US Federal Reserve and the European Central Bank made more money available to the banks and lowered the interest rate on it in hopes that cheaper money would encourage investors to borrow more and sink more money into these "investment products." That has not proven to be a great success but has lowered the value of the dollar, as you will see shortly at the gasoline pump.

Now the latest treatment has been undertaken by a benevolent consortium of banks such as Citigroup and Bank of America. They have proposed a "superfund," the Master Liquidity Enhancement Conduit (M-LEC), with which they intend to buy some of these SIVs and thus restore public confidence in their value.

Selling dog turds

It's an ingenious plan and Richard Daughty, the "Mogambo Guru" describes it best—

Obviously, the purpose of the bailout is simplicity itself; nobody trusts the mortgage derivatives that the banks have created, which have now imploded and are revealed as being toxic crap that may not be worth anything, since the financial instruments do not have any demonstrated market value simply by virtue of the fact that they have never traded on the open market, and so nobody wants to buy them. Now everybody is sitting on trillions of dollars' worth of these stupid, mysterious things. What to do?

So, the Fed and the Treasury have all decided that they are going to set up a huge special fund, with untold billions of pretend dollars, drawing in more investors to which the banks will sell short-term paper to finance the bailout, so that the banks can trade derivatives around amongst themselves, thus establishing their "market price"! Hahaha!

Suddenly, I realize that I may be too hasty in dismissing this scheme! This remarkable idea has given me a terrific business idea! You are going to love this! You and I will go into business, see, and each of us will (believe it or not) sell dog turds back and forth to each other, priced at the same per-ounce price as gold! Hour after hour, we will busily sell them back and forth between us, you buying mine and me buying yours, thus proving that there really IS a market for dog turds, and they are provably worth their weight in gold! We, like these banks, will both make a fortune! Whee! Hahahaha!

Reuters decided not to report on my fabulous new Mogambo Business Venture (MBV) or my new Mogambo Dog Turd ETF, but they did report essentially the same thing when they wrote, "The fund that is being contemplated would bail out funds known as 'structured investment vehicles', or SIVs."

This comes at a time (as just a coincidence I am sure! Hahaha!), when "Banks including Citigroup, Merrill Lynch & Co, and UBS have in recent weeks announced billions of dollars in asset write-offs and are still struggling to sell off billions of dollars in loans that financed acquisitions globally."

Ooops! If banks can't get rid of their own turds, then perhaps my own dog turd business may struggle too! Damn!

We have a great deal yet to look forward to.

Related posts
A note on understanding elites (9/3/07)
The subprime debacle continues at home and abroad (10/11/07)


Sunday, October 28, 2007


Rhetorical Question of the Day, or How to MOP up?

Now what would a huge US bomb be aimed at?

The London Times' hawk-columnist Gerald Baker was rubbing his hands with glee, or blood, yesterday as he wrote

Nestled deep in George Bush’s latest $190 billion request to Congress for emergency funding for the wars in Iraq and Afghanistan is a tantalising little item that has received scant attention.

The US Department of Defence has asked for an additional $88 million to modify B2 stealth bombers so that they can carry a 30,000 lb bomb called the massive ordnance penetrator (or MOP, in the disarming acronymic vernacular of the military). The MOP is an advanced form of a “bunker buster”, an air-delivered weapon with an explosive capacity to destroy targets deep underground. Explaining the request, the Administration says it is in response to an “urgent operational need from theatre commanders”. What kind of emergency could that be?

Gee, why don't you tell me?

What had provoked Baker into this flurry of rhetorical questions was the story broken by Jonathan Karl of ABC News. And so far ABC News appears to be the only US mainstream media outlet interested, though I expect that to change.

When asked, the Pentagon was coy about the matter, so Karl was forced to call on someone willing to speculate, since reporters are not permitted to think for themselves—

So where would the military use a stealth bomber armed with a 30,000-pound bomb like this? Defense analysts say the most likely target for this bomb would be Iran's flagship nuclear facility in Natanz, which is both heavily fortified and deeply buried.

"You'd use it on Natanz," said John Pike of "And you'd use it on a stealth bomber because you want it to be a surprise. And you put in an emergency funding request because you want to bomb quickly."

But before you head out to the bomb shelter, I think we should consider this—

"It's kind of strange," Pike said. "It sends a signal that you are preparing to bomb Iran, and if you were actually going to bomb Iran I wouldn't think you would want to announce it like that."

My reaction to that comment is a Yes, No and a Maybe. Yes, it sends a signal that you are preparing to bomb Iran. And No, if you were actually going to bomb Iran you wouldn't think at first blush that the Bushies would want to announce it like that. But maybe so. And here's why—

  1. Let us suspend our disbelief and suppose for the moment that the Bush administration really doesn't want to bomb Iran but only to bring as much threat-pressure as possible in order to convince the régime to give up its nuclear development program.
  2. In that case you might publicly announce a military budget item that strongly suggests a plan to bomb Iran and hope somebody notices. (If after some time no one has in fact noticed—which is all too likely, given the state of American journalism—you can always spring a "leak." After all, how can you bring pressure if the presumed target is unaware of the threat?) Furthermore, everyone—reporters, TV talking heads and even the US Congress—think they understand what's going on and feel greatly relieved, not to mention wise. In fact, the Congress may think it's such a spiffy idea that they actually agree to it.

    It seems to me that John Pike is hinting at something along those lines.

  3. But now let's suppose that the Bush administration is only making a show of diplomacy and really does intend to bomb Iran's nuclear facilities. That would be more in character. And after all, Israel has expressed its wishes quite clearly. How would you proceed?
    • PLAN B: Since you have no scruples about lying to Congress and have asserted that it is in your power to take any action necessary to "protect the country," you might simply claim you need the money for, say, hot-air balloons and then proceed with your Stealth-bomber modification.

      In fact, you don't need a line-item really—you can just shift the money around in, say, one of the pre-existing Boeing contracts. Surely they'll play along.

      But wait a minute. If you take that route, there's the very real possibility that somebody somewhere will leak this $88 million project to some fool in the press or Congress. Then you could be hip-deep in do-do because everybody's going to say "They really are planning to bomb Iran and they're trying to sneak around Congress to do it." There might be hearings, and the entire venture could turn quite ugly.

    • PLAN A: So I have a better plan. Why don't we just go ahead and put the MOP modification in the budget but let it be understood as "pressure"? If Congress approves the line-item, they're effectively approving the plan to bomb Iran. And if they don't approve it, we can always fall back to Plan B. As for "warning" Iran of our intentions, the development of the "massive ordnance penetrator" is hardly a state secret. Why else would they be building their nuclear facilities underground? So it's really just a contest between our weapons engineers and Iran's civil engineers. We can take 'em out any time we want to.1

And so, politically speaking, the best tack is to put the Stealth-bomber modification in as a budget item no matter what the true intent. Militarily it is a matter of indifference.

Help from the business community

But how will the Bushites ever get such a budget item approved by those tough-as-nails Democrats? For that they may need a little pressure from Wall Street.

I don't know if the Wall Street Journal has weighed in yet, but Investors Business Daily (IBD) found time out from its market analysis (or perhaps as an adjunct to its market analysis) to editorialize against the Democrats, who are apparently "America's Soft Spot"—

Democrats are balking at a White House request to fund the refitting of B-2 bombers so they can carry bunker buster bombs. It seems they're not interested in dealing with a real threat.

But IBD was able to find one upstanding Democrat in the whole dang military-industrial-congressional complex—

To pretend that Tehran is not a threat, to deny there's a no real war between terrorists and the West, and to cut funding for missile defense in Europe by $139 million is evidence of the Democrats' impotence.

But not every Democrat is ready to lie down. Rep. Norm Dicks, who represents part of the Seattle area, says the bomb is needed to add to our deterrence.

Yes, Dicks' district has ties to Boeing, builder of the B-2 bomber and co-developer of the new bunker buster. But in this case, politics actually has led a lawmaker to make the right decisions.

Yes. Politics and a bit of the lolly.



1I'm assuming that the usual Bush-Cheney-Neocon hubris is still in play. discussed some of the uncertainties in 2004. [back]

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