More Dumbing Down....

Yesterday I complained about the dumbing down of America through the conservative media. I take it back. Depressingly Ms Zito must represent the intellectuals of the right wing media. This morning while flipping through various news agencies I came across the Fox Nation website with Rush Limbaugh's response to a caller on his talk show about the recent elections.

Now I don't think Rush Limbaugh is actually as stupid as he sounds so I have to assume that his suggestion that if the Health Care Reform isn't repealed then "We go Egypt on Obama" is insinuating running street battles with the police until Obama resigns?

Is he serious? I will be travelling to California for the next couple of weeks-should I be worried? Jesting aside, just what is Mr Limbaugh suggesting. He goes on to say "And, by the way, Obama can't complain if we go Egypt on him because he said that's how democracy works, that's what he said on Friday. This is the way real democracy works, so he can't complain if it happens to him, and it will."

We are a democracy. Egypt wasn't, and still isn't. But then if I look at the Fox Nation website I get a pretty good idea of their idea of democracy. They are "opposed to intolerance, excessive government control of our lives and attempts to monopolize opinion..." Really?

Sounds more like do what we say, or prepare to do battle.

It's called Feudal Modernity

I just read an article by a Ms Salena Zito of the Pittsburgh Tribune-Review entitled "Our New Jeffersonian Era".

It was an attempt to explain the success of the Republicans in the last election. To me it clearly illustrated the dumbing-down of American history by the conservative press in their attempts to define modern America.

She quotes a Dr Lara Brown, I think, as her prose is unclear, whose focus is on the fact that Jefferson's clothes were slightly worn-ignoring the fact that this was a deliberate move by Jefferson. He came from Virginia, a rural slave-owning state, and took great pains to position himself, scion of a planter's family, as the champion of the yeoman farmer distrusting cities and financiers.

She goes on to say that this anti-elitist pose by Jefferson is the source of fast food, plaid shirts, cowboy boots and jeans. That is one way to describe a cultural wasteland. Actually sounds suspiciously like GW?

Ms Zito goes on to explain how the Tea Party is a return to a Jeffersonian vision of an agrarian nation. Who is she kidding? Jefferson's agrarian ideal included plantations with hundreds of slaves and the forced removal and extermination of Native Americans.

But that is not my theme today. No, I want to focus on the manipulation of the populist dream of an agrarian utopia that never existed, except for the elite few. There is an air of the Luddites in her message. Granted, she has exchanged a Washington-centric government for a revolt against the advent of industrialism, but the two are intimately connected.

The rise of National Socialism was also carried on a wave of nostalgia for an agrarian past equally mired in a feudalistic society. The reality was an incestuous relationship with big business/industrialists, although there was a place for the little man to live out his agrarian fantasy as a soldier-farmer on the edges of the empire.

Sound familiar?

What I find most striking is Ms Zito's closing quote of the inscription on Jefferson's statue in Washington.* It is the most rational statement one could wish for, proclaiming an understanding of progress, enlightenment and cultural evolution. I would have thought it anathema to the Tea Party and its supporters. But then again it might be too long a quote.



*"I am not an advocate for frequent changes in laws and constitutions. But laws and institutions must go hand in hand with the progress of the human mind. As that becomes more developed, more enlightened, as new discoveries are made, new truths discovered and manners and opinions change, with the change of circumstances, institutions must advance also to keep pace with the times."

And a Penny's not a Penny

This morning there was a discussion about the introduction of the decimal system to Britain. I lived in England during the 60's as a schoolboy and not only did we have Shillings and Pence, we still had talked about Guineas-equal to 21 Schillings, and actually had half-penny coins.

What was actually more interesting however was the discussion of the metallurgical value of the coinage. According to the US Mint, it currently costs almost twice as much to produce and ship a penny then its face value.

As of January 14, 2011, the pre-1982 penny which is made of 95% copper has a metallurgical value 289.56% of its face value. 1982–present US pennies, which weigh 2.5 grams, are 97.5% zinc and 2.5% copper (coated over the zinc) by weight and have a metallurgical value of 64.376% of the face value.

I guess it's something I should have thought about previously but I am still surprised to find out that not only is the value of our paper money predicated on a willingness to accept a piece of paper as a medium of exchange, but our coins are also part of this belief system.

I guess alchemy does work.

Sometimes a Cigar is Just a Cigar

Yesterday I was annoyed with Doug Lowenstein, president of the Private Equity Growth Capital Council who suggested that the private equity industry was somehow totally removed from the rest of the world financial system. It was breathtaking to me how he could utter such self-serving statements and keep a straight face.

Today however I am confronted with an argument that goes to the other extreme. Paul Ryan, the new Budget Committee Head in the now Republican-controlled House of Representatives seems intent on blaming anything and everything on Professor Bernanke. Mr Ryan's game plan is to make Bernanke responsible for every economic ill facing "the ordinary American voter".

The charge today is that soaring global commodity prices are all as a result of the Federal Reserve's monetary policy.

The thought process goes like this. Rather than seeing TARP and QEI and QEII as actions designed to save the financial system in the former and to provide economic stimulus in the latter all of the actions are described as budget-busting and inflation-stoking.

These actions by the Fed allegedly created anxiety and panic in investors about the long-run stability of the US$ and "forced" investors to become prey to commodity fund salespeople!

Adding fuel to the inflationary fire the argument continues that keeping US rates abnormally low spurred investment in emerging markets causing the equity, bond and commodity prices in those countries to overheat. The same people who decry the Fed's decision to keep rates low accuse the European Central Bank (ECB) of mistakenly raising rates in '08 out of fear for inflation at a time Europe's economy was crashing.

To be fair, some commentator's also blame the monetary policy of the People's Bank of China for some of the global inflationary pressures they see on the horizon. They do however completely ignore the fact that China's rapacious economic expansion is consuming commodities at an incredible rate both in terms of today's needs as well as in trying to secure resources for the future.

They also seem to forget that economic growth, and that is what they are clamouring for, puts inflationary pressure on commodities-unless you have an inexhaustible supply of resources. We don't.

"Risk is Risk" and Other Tautologies

My ire today is primarily directed at the US managing editor and assistant editor of the Financial Times (FT) Gillian Tett. In an article in last Thursday's paper she stated that the reason the so-called "shadow banking" world was never talked about was because pre-2007 no one knew how to describe non-bank institutions in an eye-catching way.

It is certainly cute to suggest that the lack of a catchy name meant that the entire world of shadow banking was allowed to grow to a point that it managed assets greater than the "real" banking world-but it is completely ridiculous.

It is a weak attempt to try and explain away why the regulators failed to deal with a problem which everyone knew about.

The institutional fixed income sales desk at every investment bank has a set of clients designated as Non-Bank Financial Institutions. Certainly not catchy, but clear for anyone to see during a regulatory review. So when the FSA or the SEC or BaFin or any regulatory body does a review of an institution they not only see it, they query it.

They want to know what it contained, and why. This is where the "shadow world" of Hedge Funds, Conduits, SPV's, Money Market Funds, Repo Facilities and Insurance companies are housed. And they are regulated, and often enough, rated by those pillars of independence, the Rating Agencies. One of the questions a Head of Sales has to deal with from an inquisitive regulator is how they determined whether an account belonged on the Non-Bank Financial Institutions desk, or on the Bank Desk.

Where, for example, should you put the conduit of a major bank? Overlooking the fact that the conduit was set up to avoid the capital requirements that a bank had to hold against its investments, they were interested in the rational as to why some investment houses had them on the bank desk, and others on the non-bank desk. The truth was that it was political but that is a different story.

2008 showed us that regardless of where the conduit sat on an institutional sales desk, the risk was ultimately at the conduit's bank. These conduits essentially destroyed a host of banks for despite the off-balance sheet nature of the structure, the liabilities effectively ended up being on-balance sheet.

One of the first conduits was set up by Citibank. The managers of it recognised the potential and so took the idea and set up a Limited Purpose Operating Company owned by Deutsche Bank (32%), Sarofim & Co.(8%) and the management team (60%). Very clever of Deutsche Bank. They owned a third of the company, but didn't guarantee it. This meant that it wasn't even a contingent liability (beyond their initial investment). A distinction missed by the majority of banks which only looked at return on capital numbers and not risk.

Ms Tett ends her article suggesting that the banks aren't happy with the term "shadow". Already upset by the fact that the "discovery" of the shadow-banking world has resulted in new regulations stipulating higher capital and liquid asset requirements and, according to the banks therefore lower profits, they are now lobbying to create a new less sinister designation for "good" and "bad" forms of non-bank finance.

It is all posturing by the banks and their lackeys to try and maintain their positions, and, to be fair, by members of the shadow world to avoid the spotlight.

Leave it to Citgroup's CEO Vikram Pandit to try and confuse things claiming "Shifting risk into unregulated or differently regulated sectors won't make the banking system safer. On the contrary, overall risk could rise". We all know how well the banks handled risk, don't we Mr Pandit, especially Citibank.

Or what should one deduce when Gary Cohn, President of that paragon of transparency Goldman Sachs states "Risk is risk" and that his concern is "that risk will move from the regulated, more transparent banking sector to a less regulated, more opaque sector."? Really?

But the best quote in defense of unbridled capitalism goes to Doug Lowenstein, president of the Private Equity Growth Capital Council which represents the biggest US buy-out groups. Twisting and turning to avoid tighter regulation being applied to systemically important companies/sectors, he claims "Private equity firms lack the scale, interconnectivity, dependence on short-term funding and most importantly the taxpayer support that characterise systemically significant institutions"!

So now the definition of systemically important means that taxpayer support is implicit in the organisation?

He's obviously never seen "The Butterfly Effect".

If It Walks Like a Duck.....

Last night I had dinner with a friend who for his sins is an advisor to banks in the Middle East helping them devise Islamic Banking Products.

For those of you who don't know, under Islamic or Sharia Law the payment of interest is not allowed. That is not so surprising given that in the Old Testament there were prohibitions on charging interest-except to strangers-and at the end of seven years all debts were remitted except, again, to strangers.

In the early history of the Christian Church Christians were prohibited from indulging in interest. Jews, not being Christians were allowed to fill this role, and as the Torah didn't forbid charging interest to "strangers" it all fit together. Eventually this prohibition was removed from Christians as there developed a separation of church dogma and economic realities. The prohibition on interest was first removed from commercial ventures-the emergence of venture capital-and eventually even from interest on money although usury was forbidden.

The prohibition on interest remains in Islam and the solution to the problem would raise an eyebrow of respect from the best Talmudic scholars. Interest is forbidden; but profit is allowed. So essentially all Islamic Banking products are focused on how to turn interest into profit. And the simplest way to do that? Call it profit.

In the middle of a recent negotiation which went on for weeks my friend got somewhat exasperated and got up from the meeting and went outside to cool down. One of the Sharia scholars followed him to try and help calm him. In the ensuing discussion my friend asked the Sharia expert if he thought God was omnipotent. "Yes" the scholar answered. "So wouldn't God be able to see through this ruse to circumvent the payment of interest?" continued my friend.

The scholar reflected for a moment and said, "but Jews and Christians have the same restrictions and the same God so how can you criticise us?"

Maybe because two wrongs don't make right, but more likely because we live in a secular society. And by the way we still haven't come up with a rational definition of usury.

Not a Rant....

Recently I read an article by a Blogger whose claim to fame was that he was not a Rant Blogger but rather only discussed the facts-of course as he saw them.

Unfortunately I don't remember where I read it but I am pretty sure it was a feed from RealClearPolitics who despite their attempts to be non-partisan seem to have a Republican leaning.

Regardless, I did think it was worth reflecting upon as I didn't wish to fall into the Rant Blogger category.

And yet today I read an interview in the Wall Street Journal (WSJ) which seemed designed to illicit rants. It was with Mr Steve Eckhaus, a lawyer at Katten Muchin Rosenman LLP who claimeed he has negotiated well over $5 billion in banker pay over the years. In general he said his clients are "pure as the driven snow" and doing work that supports the economy and justifies their pay.

Now I don't know anything about Steve Eckhaus and I can only assume it was his way of drumming up business-who wouldn't want to be represented by a lawyer who negotiates extravagant pay packages! But what a weird comment. "In general"? So by definition some of his clients aren't "pure"; their work doesn't support the economy; and their pay isn't justified? He is a lawyer so I would have thought he chose his words carefully!

Then I move to the purchase of Huffington Post by AOL. Interesting move by AOL to try and regain its position in the market. Interesting move by Huffington. $300 million to be paid in cash to co-founder Arianna Huffington, Chairman Kenneth Lerer and a group of investors. And $15million in shares. Doesn't leave me warm and fuzzy about the long term intentions of the Huffington people.

I wonder if Mr Eckhaus negotiated their deal? And what's their view on Capital Gains Tax now?

Which is the Greater Evil.....

There is an ongoing debate as to whether we have more to fear from inflation, or deflation. What is disturbing in the discussion is the fact that often the steps taken to combat the one leads to the other.

The digital approach taken by proponents of both sides of the argument doesn't lend itself to a rational dialogue. On the contrary, there seems to be a movement to immediately politicise the question.

Personally I think the truth is that there is a fine balancing act required to avoid excesses in either direction, and in any event trying to manage the economy is like trying to type with stiff mittens.

I appreciate the difficulties facing Central Bankers and I understand the Fed's decision under Professor Bernanke to target "core inflation" (excluding food and energy prices).

Although the effect of raising oil/energy prices on the economy can be devastating, raising interest rates to combat them often lead to stagflation, which is perhaps even worse than the other two "flations".

At some point the Fed will have to react to the inflationary pressures that they themselves have at least partially created in their attempts to stimulate the economy, but that day is still somewhere in the future.

Anyone arguing that the Quantitative Easing (QE)"time bombs" being laid by the Fed have to be dealt with today runs the risk of demanding actions that might in the long run help avoid an inflation, but in the near term crush the economy.

Blind Perhaps, But Educated-To a Point.

To ensure that I too do not allow myself to be "blinded" by my opinions I took the time to read Judge Vinson's Health Care Ruling.* I do not normally read legal opinions as I find that they tend to be somewhat obtuse and focus on an arcane fact or decision which is often beside the point.

So it was an almost pleasant surprise to find that Judge Vinson's Ruling took almost 42 pages before his personal subjectivity started to appear. Indeed, up to that point his review of the judicial precedents of the Commerce Clause, which is Article I, Section 8 as I mentioned in a previous posting, was actually interesting, enlightening, and well presented.

Specifically the Commerce Clause states that Congress has the power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes". The plaintiffs and the defendants essentially use the clause to attack or defend the requirement in the Health Care Act(HCA) for individuals to buy health insurance.

But, as I said, on Page 42 Judge Vinson manages to nail his colors to the mast. Suddenly his attack on the HCA is predicated on the Boston Tea Party. He suggests that requiring citizens to buy health insurance would be the equivalent of forcing people to buy tea. To allow Congress to mandate the purchase of health insurance would be tantamount to removing all limitations on federal power.

Interestingly our judge didn't deign to delve into the use of the Commerce Clause in enabling Congress to impose a Federal Income Tax. I am sure he would put federal income tax in the same category as requiring people to buy tea.

Unfortunately Judge Vinson spends the next 14 pages on an emotional almost irrational bent berating, even ridiculing the individual mandate until he finally moves the discourse on to the "Necessary and Proper Clause".

Even here he feels compelled to editorialise derogatorily describing any discussion of the clause as “the last, best hope of those who defend ultra vires congressional action.”

To be fair the Necessary and Proper Clause is only relevant in ensuring that the HCA insurance requirement is enforceable under the Commerce Clause. Again he can't resist and while barging down this blind alley Judge Vinson forgets his judicial purpose, jettisoning the legal discussion and lambasting the economics of the HCA.

Finally, on page 63 we get to the discussion on Severability. Here the defendants have been hoisted somewhat on their own petard. They stated clearly that the individual insurance mandate is absolutely necessary, even essential for the Act's insurance market reforms to work as intended.

This left the door to "severability" open. It is not clear why they left a severability clause out of the act. Perhaps it is because without the individual mandate the Act is toothless, and so the real battle is still to be fought in the Supreme Court in determining the validity of the Commerce Clause in this case.

One can only hope they are less partisan in their deliberations...

*http://www.realclearpolitics.com/docs/2011/Vinson_HCRuling_0131.pdf

Blind Justice?

This morning I read that a Federal Judge in Florida has declared the Patient Protection and Affordable Care Act (ObamaCare)to be void because "the individual mandate is unconstitutional and not severable". I am not a Constitutional lawyer but I do know that in a contract what severable means so it is interesting that he chose to focus on this point.

He bases his declaration of the entire act being void because the individual mandate is unconstitutional. I haven't read every page of the act, but it seems strange that it would have been written in such a manner as to make the entire act void if a section of it were to be declared void.

But then again, U.S. District Judge Roger Vinson, who was appointed to the bench by Ronald Reagan in 1983 might have an ax to grind here. He is a Republican.

Judge Vinson's decision to base his opposition on the severable aspect might show some nuance many of the opponents of the act don't have.

Some of his fellow Republicans decided to base their opposition to the act on Article I Section 8 of the Constitution which specifies exactly 18 enumerated powers of Congress, and, unsurprisingly, health care is not one of them.

From there they jump to the Tenth Amendment which grants to the states and people those powers not granted to the federal government by the Constitution. Unfortunately for them they missed the fact that the Tenth Amendment intentionally omits the word "expressly" when describing the powers not granted to the federal government. Our Founding Fathers were aware that it was dangerous to prescribe the future down to the letter.

As always, it's a question of context.

After realising that the Articles of Confederation left the Federal Government essentially powerless vis-a-vis the States our Founding Fathers convened a convention in Philadelphia in 1787. At this Convention they threw out the Articles and in their place created the Constitution. In order to get it ratifed there was quite a bit of horse-trading. The Tenth Amendment, a favorite of the Tea Party, was actually a means of placating those States which condoned slavery as it was used to support the right to own property (i.e. slaves) granted by State's constitutions.

That might not be a coincidence.