The Best and the Brightest II

David Halberstam's The Best and Brightest is one of the great books of the past half-century on the problems and faults of American democracy. It documents our top young educated elite who delivered us into the quagmire of Vietnam, and just as importantly how they were for a long time held from accountability by the anti-democratic structures built into the post-war national security state. The book chronicles the universal human weakness of hubris, but just as importantly, shows how the checks and balances of the American system failed. Today, we could use The Best and Brightest II focusing on the great economic liberalization of the past three decades. It would tell the story of Milton Friedman, James Baker, Bob Rubin, Alan Greenspan, Tim Geithner, Larry Summers et al. It would show once again the great failings of hubris and unaccountable power.

One main character in the second book would be Jeffry Sachs. The exemplary "whiz kid" of the new era, who has left a trail of destruction across Bolivia, Poland, and Russia. Alexander Zaitchik in the old, The Exile has an excellent synthesis on Sachs and his role in Russia in a review of Naomi Klein's The Shock Doctrine:

Sachs scripted Russia’s shock-therapy program and stood by Yeltsin’s side throughout his assault on the country’s nascent democracy in the name of the reform agenda. Even before the massacre of 1993, Yeltsin had suspended democracy during his “year of special powers.” Klein reviews the story of how, starting in late ’91, Yeltsin gathered a team of Russian reformers led by Yegor Gaidar known as Russia’s Chicago Boys. Together with Sachs, they crafted a Friedmanite blueprint of radical privatization, price liberalization, and free-trade policies. These shocks were to be administered as quickly as possible on an already dazed public.

When parliament voted to repeal Yeltsin’s special powers and end the experiment (as happened in Poland), Yeltsin’s response was to abolish the constitution and dissolve parliament, moves that started the crisis culminating in his bloody shelling of the White House. The western media duly fell in line behind Yeltsin “the reformer”. Klein describes the ease with which the major papers dismissed elected Duma members as suffering from “a Soviet mentality” (The New York Times) and even of representing “antigovernment” forces (The Washington Post).

Western editorialists had called for a Russian Pinochet, and they got one, although in reverse order. In Klein’s words: “Pinochet staged a coup, dissolved the institutions of democracy and then imposed shock therapy; Yeltsin imposed shock therapy in a democracy, then could defend it only by dissolving democracy and staging a coup. Both scenarios earned enthusiastic support from the West.”

And both scenarios buttress the thesis of Klein’s fascinating book: That sweeping neoliberal reforms are generally not possible in democracies. Which is why powerful boosters of such economics rarely have much use for democracy in any meaningful sense of the word.

Of course nothing succeeds like failure in our contemporary political class, and after throwing Russia into a decade of literal hell, insuring us their enduring animosity, Sachs ends up a tenured professor at Columbia trying to recast his image as advocate for the world's poor. Which I suppose would be ok if Columbia didn't let him off campus, but Sachs continues to pop-up. Yesterday, he was on a British program(tx zh) with fund manager Hugh Hendry and Gillian Tett of the FT. Hendry gives Sachs a smackdown he so richly deserves. But notice how the neo-defender of the poor, immediately dismisses any idea of bondholders taking losses and with a great grin approves the austerity measures now being undertaken in Europe and soon to be imported here. Even Ms. Tett takes issues with Mr. Sachs defense of failed capital. Understand, this debate is about one of the most important issues facing this country in the next few years.

The Best and the Brightest II would focus on the unaccountability of power in the United States. If power is unaccountable, there is no self-government. Democracy, despite what our economists and political class think, really does have immense value.

The Great Global Ponzi Finance Con

Oh-Oh-Oh, someone's really smart
Complete Control, let me see your other hand
Total C-O-N
Control
Total C-O-N
Control
That means you!
-- The Clash

A classic Ponzi scheme always need new money. Once new money stops flowing in, the whole con collapses. During decades of "innovation", the Great Global Ponzi Finance Con classified the need for new money as "liquidity." In 2008, just as in any good Ponzi scheme, once the new money -- liquidity -- dried up, the whole thing began collapsing. So, the Fed, the planet's leading liquidity provider, stepped in, providing trillions of dollars of liquidity. Sure, there's always a thin line between the healthiest banking system and a Ponzi effort, and the Fed was established to provide liquidity in times of crisis. However, the line between a healthy banking system and full-on Ponzi scheme was obliterated with Wall Street's innovations. The Fed's unprecedented and extraordinary liquidity flows make the American taxpayer the last pocket in the Great Global Ponzi Finance Con. Today, the only question is how long will the American taxpayer remain the final patsy.

Many financial "innovations" created more and more liquidity in the financial system. One important scheme that has added more liquidity, and just as importantly added greatly to the system's instability, has been the growth of the tri-party repo system, with JP Morgan and the Bank of New York Mellon as middlemen. Now simply, the system allows someone to borrow on securities before their maturation, making them liquid, and increasing leverage in the system. Plus, it is short term borrowing, increasing systemic instability. The Fed has a readable paper, if you want to know the intricacies of the system. The important point isn't how it works, or in the case of 2008, when it completely collapsed, how it doesn't, the important point is prior to the mid-1980s this system didn't exist. The Fed writes:

The tri-party repo structure developed in the mid-1980s in response to the desire by Cash Investors to have collateral held by third party agent. The tri-party market continued to grow as the Clearing Banks invested in infrastructure advancements that allowed Dealers and Cash Investors to optimize their use of the platform. At peak levels in 2008, over $2.8 trillion in securities were being financed through the U.S. tri‐party repo market.

That's $2.8 trillion of liquidity, short term liquidity, growing from less than a trillion in 2002 to almost 3 trillion in 2008. Add to this; securitization, derivatives, low interest rates, and mortgage refinance, all in one way or other helping flood the financial system with liquidity. We now have a system addicted to liquidity. Excess liquidity is detrimental to both the financial system and the real economy. Most importantly, it blows bubbles in asset pricing. No one wants to let that excess liquidity just sit there, you want to "invest" it, and that greatly distorts the pricing system. Once the pricing system is completely distorted, you get plenty of malinvestments. Once not only the financial system, but the real economy becomes addicted to excess liquidity, problems begin to occur. You have an increasingly difficult time distinguishing between what might be simple problems of short-term finance and what are very much issues of insolvency. If you just keep pumping more and more liquidity into an insolvent entity, you only further distort the economy.

This is the great problem we currently face with the global financial system. In order to avoid dealing with any sickness, we keep adding more liquidity, increasingly clogging the system with more dead money. The great liquidity bubble has distorted global assets, the real economy, and now it is creating problems for currencies. We increasingly can't tell what is healthy or solvent, from what is sick or insolvent. It is difficult to tell good debt from bad, thus good money from bad. In Europe, we watch the liquidity pushers trying to solve the problems caused by excess liquidity with more liquidity, once again revealing the underlying Ponzi nature of the system. The US is the largest liquidity pusher, the Fed the greatest culprit. With the dollar as the global reserve currency, this has exasperated the Ponzi bubble across the globe, no greater place than Europe.

The Bank of International Settlements has an excellent report(tx zerohedge) from a few months back, which shows how reliant the Europeans remain on the dollar. Meaning in times of crisis such as 2008 and now, Europe desperately needs the US Fed, so much for the Euro. BIS states:

The funding difficulties which arose during the crisis are directly linked to the remarkable expansion in banks’ global balance sheets over the past decade. Reflecting in part the rapid pace of financial innovation, banks’ (particularly European banks’) foreign positions have surged since 2000...European banks’ need for short-term US dollar funding was substantial at the onset of the crisis, at least $1.0–1.2 trillion by mid-
2007.

Events during the crisis led to severe disruptions in banks’ sources of short-term funding. Interbank markets seized up, and dislocations in FX swap markets made it even more expensive to obtain US dollars via swaps.

So, two things here, first, along with the great rise in liquidity has come, as shown with the tri-party repo scheme, a great rise in short-term lending. Secondly, Europe and the rest of the world remain completely dependent on the dollar, or more accurately, the American taxpayer, who remains the last pocket for the Great Global Ponzi Finance Con.

The most amazing statement in the BIS report about the banks piling on debt is, "the associated currency exposures were presumably hedged off-balance sheet." Hedging, derivatives, the idea of "investing insurance" are all the final and essential components of the our Great Global Ponzi Financial Con, all the more ludicrous as the processes themselves make the system more unstable. It misleads all into thinking no one need take losses, and that folks is Ponzi thinking.

The question is how to end the Great Global Ponzi Finance Con. Two things need to be done and they must be done simultaneously. First, the financial system needs to be shrunk by at least half, and the best way to do that is to drain the liquidity out of the system. This means making things less liquid -- less trade-able -- a greater reliance on long-term opposed to short-term finance, less securitization, and finally an ending of the too prevalent practices of hedging and derivatives. We are doing none of this.

Secondly, the system must be brought into account, meaning a lot of bad debt needs to be destroyed. This will be deflationary, but the way to mitigate its impact is as money is destroyed in the Ponzi system, create more and put it directly into the real economy, keep people employed, and begin to invest in the future. In the end, Ponzi finance benefits only one group, Wall Street. The American taxpayer needs to quit playing the last patsy.

on republics

But, as statesmen, even these better aristocrats were not much less remiss and shortsighted than the average senators of the time. In presence of an outward foe the more eminent among them, doubtless, proved themselves useful and brave; but no one of them evinced the desire or the skill to solve the problems of politics proper, and to guide the vessel of the state through the stormy sea of intrigues and factions as a true pilot. Their political wisdom was limited to a sincere belief in the oligarchy as the sole means of salvation, and to a cordial hatred and courageous execration of demagogism as well as of every individual authority which sought to emancipate itself. Their petty ambition was contented with little. -- Theodor Mommsen, History of Rome(the quote describes the political class of the Roman republic's last decades)

A century ago, Theodor Mommsen was globally renown for his history of the Roman republic. For some reason, the book pretty much went out of print around WWII and never came back. Which is unfortunate, for Mommsen's chronicles of the last decades of the republic are extremely relevant history for contemporary Americans. Remember, the Roman republic flourished from 500 BC to 50 BC, when it fell at the hands of Caesar. Of course today, if ever an American thinks of Rome, they undoubtedly think of Imperial Rome, the age of the emperors and its inglorious fall chronicled by Gibbon. Yet, Gibbon's history begins where Mommsen's ends. The fall of the Roman republic was well known to America's founders and its lessons well contemplated, for unlike Imperial Rome, the republic fell at the height of its economic and military power. By the end, Rome's politics were eminently corrupt and the weight of the empire they conquered collapsed the unique system of self-government they had created.

With most recent examples of the health care bill, the financial industry bill, the continued electoral buying and selling of our elected officials, and the growing ineptitude and corruption of our government agencies, the most recently reported the MMS, who are responsible for regulation of the oil industry, it is obvious for all care look, we are on the same path of the Roman republic. And just as Rome, our political class' petty ambition is content with little. Mommsen wrote history's cold verdict on the republic's fall:

But, when a government cannot govern, it ceases to be legitimate, and whoever has the power has also the right to overthrow it. It is, no doubt, unhappily true that an incapable and flagitious government may for a long period trample under foot the welfare and honor of the land, before the men are found who are able and willing to wield against that government the formidable weapons of its own forging, and to evoke out of the moral revolt of the good and the distress of the many the revolution which is in such a case legitimate. But if the game attempted with the fortunes of nations may be a merry one and may be played perhaps for a long time without molestation, it is a treacherous game, which in its own time entraps the players; and no one then blames the axe, if it is laid to the root of the tree that bears such fruits. For the Roman oligarchy the time had now come.

In his last years, Mommsen gave a series of lectures on Rome's early emperors, when asked why he didn't put them together in a book, he declared, "It's too depressing." The Roman republic's decline took course over seven decades, from the Gracchi, maybe the republic's last true reformers, to Caesar. The real question for us is, unlike the Romans, will we stand up and reform our unique system of self-government, that has provided so much to us all, or as Rome, will it simply succumb to a neo-Caesar. I've come to empathize a great deal more with the republic's last great defender, Cicero. I used to consider him completely politically inept, but over the years, through experience, I have developed a much greater sympathy for the environment in which he toiled. Cicero wrote,

Long before our time the customs of our ancestors molded admirable men, in turn these men upheld the ways and institutions of their forebears. Our age, however, inherited the Republic as if it were some beautiful painting of bygone ages, its colors already fading through great antiquity; and not only has our time neglected to freshen the colors of the picture, but we have failed to preserve its forms and outlines

on growth and democracy

Where every man is a sharer in the direction of his ward-republic, or of some of the higher ones, and feels that he is a participator in the government of affairs, not merely at an election one day in the year but every day; when there shall not be a man in the State who will not be a member of some one of its councils, great or small, he will let the heart be torn out of his body sooner than his power be wrested from him by a Caesar or a Bonaparte. ...As Cato, then, concluded every speech with the words,"Carthago delenda est," so do I every opinion with the injunction, "divide the counties into wards.
-- Thomas Jefferson

Robert Zoellick has a piece in the FT that is so wrong headed it should be read. Mr. Zoellick personifies the American apparatchik of the past several decades. He comes from the Republican side with a resume that includes stints in James Baker's Treasury, Fannie Mae, Goldman Sachs, Enron, Project for a New American Century(neo-con advocates for the Iraq occupation), staff of George W. Bush's White House, and now head of the World Bank. Mr. Zoellick represents a status quo that is desperately trying to continue us down a path of failure. Mr. Zoellick's argues we need to continue down this path, and unfortunately everything that has been done to this point in reaction to the global financial/economic crisis has been exactly that. However, it is imperative we begin moving in a new direction.

Mr. Zoellick writes:

Riots, debts and the creeping fear of a looming Lost Decade – no wonder there is pessimism in Europe. But what we are seeing is not just “financial crisis, part two”; it is “sustainable growth challenge, part one”. The difference has implications for policy. Get the diagnosis wrong and the wrong treatment will follow.

So far, the world has focused on fiscal contraction and debt, but these are only half the story. The world and Europe also need a return to robust growth. Without it the fiscal adjustments will be more painful and the politics more unmanageable.

"Robust growth", there lies the problem. Mr. Zoellick then goes to point out that growth has been greater in developing countries over the past several decades than in the developed world, which is correct. He writes:

Financial crises can spur reform. Last year as developed economies focused on Keynesian changes in demand, Asia-Pacific economies were advancing reforms – especially in services – to generate higher growth. As developed economies focused on financial regulation and a broader reregulatory movement, Asians were considering how deregulation might foster innovation and jobs.

You could write volumes picking this apart, but I'll take two things. The developed and developing world face different challenges. The developing world is moving from agrarian societies to industrial societies. Growth by definition will be stronger there. They need to build up infrastructure including energy, transportation, industry, sewage, housing, etc. These are all capital intensive and score well on our traditional industrial growth measures. In the developed world most of this was already accomplished over the past century, many of these systems require simple maintenance, which by definition leads to less extensive growth.

In the second sentence on deregulation, Mr. Zoellick exemplifies the intellectual dishonesty so prevalent amongst our apparatchiks. Mr. Zoellick advocated and participated in the great deregulation of the American financial sector that led to many of the great problems we currently face. Most significantly, it was the deregulatory financailization of the American economy that was the primary factor in the deindustrializaiton of America, leading to the great global financial crisis we find ourselves. Mr. Zoellick ignores this and with a sleight of hand tries to convince that the weak regulatory measures taken to this point in response to a failed deregulated financial system are now part of the problem.

He concludes:

There is a broader lesson: in 2008, the crisis was US-led; in 2010, it is European. For both the US and Europe, it is developing countries that point to the way ahead. It is time we took note.

Where he is right the crisis was US led, yet, he refuses to acknowledge it was caused by the very policies he advocated and implemented for several decades, and his solution is simply nonsensical. The idea the developed US can mimic the developing world is a big a nonstarter as the idea the developing world can mimic the European and more importantly the US development models. There's plenty of reasons why the latter is not possible, but the most important and essential one is this model was based on cheap oil, and there is no more cheap oil.

It wouldn't be so bad if Mr. Zoellick simply represented failure, but he represents the failure of entrenched power in our mega-corporations and centralized governments. They continue to push thinking and actions detrimental to both the United States and the rest of the world. We in the United States are going to have understand growth will be no magic elixir to get us out of our problems, in fact, we don't need it. What we need is a reformation of our political economy. A reformation that understands the industrial model must now be transcended, just as agrarian society was transcended by the industrial revolution. Many of the values, institutions, and ways of industrial society need to be evolved, most importantly the idea of industrial growth.

We have a classical decadence of our political system, in that the things which made us great have been discarded or twisted. The most important being the dis-empowerment of the citizenry. We need a renaissance of this republic, a bringing forth and recognition of the values of being citizen. To do that we must reform power, bringing it out of the hands of the apparatchiks and back to the citizenry. We have tremendous wealth in this country that is being wasted. We don't need more growth, more stuff, we need to redesign much of our established infrastructure. We need to move from the growth economy to the design economy. We don't need more jobs, we need to cut the work week and devolve and involve decision making. We need fewer consumers and more citizens.

oil and water

Our decision about energy will test the character of the American people and the ability of the President and the Congress to govern. This difficult effort will be the "moral equivalent of war" -- except that we will be uniting our efforts to build and not destroy.

If we wait, and do not act... We will feel mounting pressure to plunder the environment. We will have a crash program to build more nuclear plants, strip-mine and burn more coal, and drill more offshore wells than we will need if we begin to conserve now. -- Jimmy Carter, 1977

I haven't written about the Gulf oil disaster. I've tried to be adopt that great modern American attitude and simply ignore it, but as John Adams stated in his defense of the British soldiers involved in the Boston Massacre, "Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence." Facts are indeed stubborn things and the facts about our oceans are not simply stubborn, but sublimely desperate. Twenty years ago, I was working in San Diego advocating the implementation of better treatment facilities before the dumping of sewage into the Pacific. I had a public debate at a college and the opposition simply stated, "It's no problem, the current carries it away."

I replied, "To where?"

And he said, "It gets diluted, it's not a problem."

And that has been our attitude toward the oceans, the whole planet in truth, but the oceans were the last real wild, far too vast for us to screw-up. But about twenty years ago, the facts started coming in, gruesome facts. Here's the stubborn facts in an excellent short presentation by Scripps Jeremy Jackson. I cannot recommend it more highly. It is not in anyway pleasant, but facts are stubborn things.

Once you watch this video, you'll see in the big scheme of things the oil gusher is just the latest atrocity. It is one caused by our addiction to oil, which will, as any addiction does to any addict, eventually destroy us. The question is what are you, not DC, not BP going to do about it? It is your addiction. So, if you think you're concerned about this oil mess, then make it an opportunity to do something. Park your car one day every week -- carpool, public transit, walk, ride your bike. Once you figure out your life isn't going to end, then park your car for two days. If you're not going to do this, don't bother writing your elected official or complaining about the oil companies, this is your addiction, it is your problem.

Of course, as Carter pointed out, our oil addiction has many more implications, -- war and peace, economic, political -- but they are all dependent on the planet, the natural systems which conceived us, and if we continue in our quest to destroy these systems, it will destroy everything on top of it. Mr. Jackson concludes his talk:

In the final analysis the thing we really need to fix is ourselves. It's not about the fish. It's not about the pollution. It's not about the climate change. It's about us and our greed and our need for growth, and our inability to imagine a world which is different from the selfish world we live in today. So, the question is will we respond to this or not? I would say the future of life and the dignity of human beings depends on our doing that.

Facts are stubborn things. So, what are you going to do?

Devalue and Export II

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the Bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst yourselves, and when you lost, you charged it to the Bank... Beyond question this great and powerful institution has been actively engaged in attempting to influence the elections of the public officers by means of its money...

You tell me that if I take the deposits from the Bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin. Should I let you go on, you will ruin fifty thousand families, and that would be my sin. You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, I will rout you out."

Andrew Jackson on The Second Bank of the United States which was the Central Bank of his day.(tx jesse)

Michael Pettis has a real excellent piece(tx yves) on the state of the global economy. You should really take the time and read this. It paints a very problematic view of the global economy from the essential understanding that at some point accounts have to balance. This is rule #1 of accounting and one of the few real rules of economics, whether you're running a capitalist or communist system. The piece shows why the idea the world is going to devalue and export our way out of this mess is simple idiocy. The recently announced Euro "solution" is one step further over the deflation cliff. Best, it was just announced Mr. Geithner is heading over to rally Europe, which might very well be the historical equivalent of Custer behind the last hill before Little Bighorn exclaiming, "What Sioux nation?"

Mr. Pettis concludes for the US:

So that leaves the US. Most policymakers around the world – while publicly excoriating the US for its spendthrift habits – are intentionally or unintentionally putting into place polices that require even greater US trade deficits.

This cannot be expected to happen without a great deal of anger and resistance in the US. The idea that suffering countries should regain growth by exporting more to the world, and that rapidly growing surplus countries should not absorb much of this burden, will only force the US into even greater deficits as US unemployment rises to reduce unemployment pressure in Europe, China, Japan and elsewhere.

I would be surprised if the US accepted this with equanimity. On the contrary, I expect it will only exacerbate trade tensions and ensure that next year the dispute will become nastier than ever.

We are repeating the 1930s, but that's what happens when after you repeat the 1920s. You don't allow the global financial system to become a massive bubble, because bubbles pop and then you get deflation, that is economic physics. But our doctrine economics is theology, it is a system of thought built around power, apologizing for power.

"Dude, where's the Dharma"(tx yves again) has an excellent piece comparing Ms. Merkel to Martin Luther and does a good job showing how our financier class are excellent manipulators of our so-called "free-markets." The Dude writes:

The Church of Free Capital's creed states that prices set by market speculators (i.e. big finance) are, in a sense, divinely inspired, leading to the best outcome. That big finance has been taking home an increasing share of decreasing profits has not shaken faith in the creed among speculators, but it has angered capital providers in Germany sufficiently to provoke a protest and policy schism.

This isn't the first time Germany has protested the policies of a major Church. Interestingly, both protests, in a sense, included the imposition of capital controls.

Roughly five hundred years ago, a monk named Martin Luther sent a list of complaints- the 95 theses- to his Catholic superiors. His main complaint was about indulgences, whereby a Catholic could buy redemption from sin. "Why does the pope," Luther argued, "whose wealth today is greater than the wealth of the richest Crassus, build the basilica of St. Peter with the money of poor believers rather than with his own money?"

We need a reformation.

a nerve struck

Shot by both sides
On the run to the outside of everything
Shot by both sides
They must have come to a secret understanding
-- Magazine

The world's biggest pusher of derivatives was complaining yesterday. JP Morgan stated:

“If the [Lincoln] amendment stands, you are going to have liquidity and credit provided by the US banks in the derivatives space contract and that cannot be good for the market,” he said. “It is a very troublesome situation.”

“We are on a dangerous path,” he added. “This change, for the US banks alone, will make the US financial system less competitive when compared to its international peers.”

Hmm, sounds like a nerve was struck. There's plenty of problems with Lincoln's amendment, the whole Senate finance industry bill is garbage, so too the House's, but not in the way this statement implies. The fact is the financial industry has to shrink, by at least 50%, which means there's going to be a lot less "liquidity". It's the only way you're going to tie money back to the real economy. Derivatives are the biggest fraud component of our last decades' Ponzi finance. How often have we heard all the derivatives cancel each other out? So no losses for anyone? That folks is the definition of Ponzi finance. Anyway this is a weak, nonetheless welcomed, statement by Morgan on a weak bill, if something was actually being done you couldn't get Jamie Dimon off television proclaiming the end of capitalism and a new dark ages, that's when you'll know the servants have turned against their masters.

As far as competition with our "international peers" look at the little brouhaha caused by the Deutsche Frau. Ms Merkel added today,

The German leader recalled that at the height of the global financial crisis that struck in 2008 powers in the Group of 20 rich and developing nations agreed "every product, every actor and every financial center must be regulated -- we promised people that."

"Now, after one and a half or two years, people are saying: what came of that?" she added. "At some point we have to provide the proof and say, 'come here, we've done it.' This point shouldn't be too far away."

She's an ex-commie, which means she probably understands much better than our Wall Street Ponzi operators what happens when you have a system that can no longer account, and a vast charade is conducted for one end only, keep those at the top secure. In the end of this Ponzi game, Ms Merkel has discovered there are indeed losses, and the financiers want to stick them on the government, that is, you the taxpayer. In the United States, the political class thinks that's just great. Ed Harrison of Credit Writedowns has a very succinct analysis:

But, you know and I know the predator state is alive and well; just look at so-called health care reform and the giveaway to healthcare insurers worked out in back rooms with no real cost adjustments. Clearly we need to be moving away from stimulus happy talk to focus on malinvestment. As long as the overleveraged and outsized financial sectors are being propped up in the UK and the U.S., I don’t see the point of talking about large deficit spending.

In a world in which stimulus is going to be used as an excuse to maintain excess consumption, prop up zombie companies and forestall an inevitable deleveraging, all the while increasing public sector debt, I say no thanks.

Call me when we are no longer living in a predator state. Then, you can talk about stimulus.

Comes the Jubilee.

Some Good News and a Lot More of the Same

Why not phone up Robin Hood
Ask him for some wealth distribution
All over people changing their votes
Along with their overcoats
-- Strummer/Jones

If yesterday's a harbinger of November, we'll be switching out Congress from the inept corrupt part of the political class to the somewhat pixilated corrupt part of the political class. Well at times, you take what you can get. I did what I don't do much, read and watched some of the "pundits", who were all trying to figure out if the vote was Dem/Rep, Lib/Cons blah, blah blah. This is an easy one folks, it's the YOU SUCK! vote, which now portends to be reaching new heights in its third election cycle since birthing in 2006. At some point, if this is going to turn into something more than a self-defeating swap of one side of the political class for the other, it needs to be turned into something positive, but that won't be this November, have at it, spare no incumbent.

Next, the Deutsche Frau has shown something missing in Western politics, a spine. Ms Merkel, to cries of doom, wailing, and a great gnashing of teeth from Wall Street, London and other centers of ill repute, banned naked short selling and naked CDS on government debt. Now, I thought naked short selling was already verboten, but it seems every few months someone declares it so again. The bigger deal is the CDS, which may begin to give a handle on the idiocy of derivatives. For two years, I've advocated the first step for financial stability: declare all derivatives null and void. The Germans move in the right direction and Bunds surged. Bunds, Treasuries, the Yen, and if in the short term, you have a taste for the barbaric, gold, interesting times for sure.

Meanwhile, Bloomberg(tx jan) has an excellent piece on how the banks have been fleecing municipalities, that would be you dear taxpayer, when they issue bonds. Yves Smith asks, "Is corruption by the banking classes now such a normal state of affairs that no one bothers to take note unless the perps are called before Congress and made to squirm?"

Wall Street's favorite whipping boy, Goldman Sachs is back in the news. The NYT delves further into Goldman's fleecing of their clients, and by no means is it just them, they just presently are indicted co-conspirators of the great criminal conspiracy Wall Street has become. Yves provides greater background writing,

Some of the firm’s corporate clients are increasingly uncomfortable with how Goldman will use the information the firm gains from its business dealings (meaning its corporate finance relationships and underwritings, where the banker is expected to treat its customers as a relationship, not a trade) for its own profit, particularly to bet against the client. This would have been completely unthinkable when I was briefly at Goldman (the early 1980s); Sidney Weinberg would spin in his grave if he could read this story.

Finally, the FT reports Chris Dodd weakened even more, if that's possible, the financial industry's Senate bill, turning any action on derivatives to our captured regulators.

That's the way it is May 19, 2010.

The Devalue and Export Mantra

If you remember in Ben Bernanke's book about the Depression, he took the monetarist's revisionist line that the currency devaluations of the late 1920s and 1930s, part of the era's "beggar thy neighbor" policies, was a good thing. In fact, he even noted it would have been best if everyone had devalued all at once. We're finding out this is more monetarists' tripe, but not before extensive damage continues to be wrought. If only I had a dime for every time I've read in the last year that every country was going to devalue and export their way out this mess. We are witnessing the insolvency of much established economic thought, yet just like the banks, no one wants to recognize it. The faith is strong, if we just keep doing the same thing, it will eventually work.

In fact, this is what got us here, but I'm not talking about the last two years. The events playing out have their foundations in decades of actions, really centuries, the important point, they are not going to be solved overnight. The more "leading" economists jabber, the more they place their feet right in their mouth. And of course, if economists are placing their feet in their mouths you know Mr. Krugman must be right out in front. He's been a tremendous advocate of universal devaluation and exporting, except for the Chinese, in response to the collapse of the corporate globalization model he's advocated for three decades. Remember, Mr. Krugman won his Nobel for his equation showing mega-corporate global trade was win-win-win for all, but yesterday he wrote about Europe(capitals his):

WAGES IN THE PERIPHERY NEED TO FALL 20-30 PERCENT RELATIVE TO GERMANY.

Which part of the equation was that? Oh, that's right, if only they could devalue and export, but they can't do that because of the Euro, so really its the Euro's fault. Happily enough, the Euro continues its descent causing the Chinese great concern, because if China can't export to Europe, that puts a crimp in their twenty-year old development model, leaving the US to take up the slack, as everyone else in Asia wants to devalue and export. Which get's to Ben's big problem. While he has pumped furiously for the last two years, he seems to have forgotten the US remains the global reserve currency, and if you devalue the defacto standard, everything devalues with it, which gets you, oddly enough, a more or less multilateral devaluing, with one exception. When money around the world starts losing value, people get nervous and what do they do, they rush to what they previously considered safe, in this case the dollar, and the dollar goes up, and thus devaluing and the doubling of exports in five years becomes to say the least problematic.

We are witnessing a global economy with massive distortions, conventional wisdom has little to say and even less to offer the future. Instead we get more of the same, a completely dysfunctional financial system, rapidly undermining money itself.

Such a Sad Joke

A couple days ago the NYT ran an article with the headline, Debit Fee Cut Is a Rare Loss for Big Banks. Today, Yahoo Finance has an interview with CEO of Huntington Bancshares and asks him about the the NYT labeled loss. First, he can barely conceal a grin. Second he states:

The amendment as I understand it allows the regulators to take a position. There's nothing mandated, per se. So, we have a lot of confidence the regulatory environment has made very prudent decisions over time and will do so in the future.

"Very prudent decisions"! Now if you have the stomach, that's close to the funniest remark yet made on "financial reform". How can we talk about adding more regulations when we've had a "regulatory environment" that has completely failed and remains so entirely captured by the industry, the industry is "confident" with all decisions made by them?

Then of course there's the NYT. A few years back, Gore Vidal had an excellent piece in The Nation comparing the NYT to Pravda, in this particular case with their tortured sanctioning of W's election over Al Gore. Vidal writes:

The late Murray Kempton once noted that although the New York Times likes to pose as being above the battle, this position has never stopped the Times, once the battle's fought, from sneaking onto the field and shooting the wounded...

In the old Soviet Union, various Russian friends were often surprisingly well informed about the world despite the fact that their view of it was largely shaped by their New York Times, Pravda. When asked how do you find out what's really going on, they would give secret smiles: "You must know how to read Pravda." Now the USSR is gone and we are on our own, trying to sort out our Pravda's often contradictory mendacities...

Please folks, read the NYT responsibly.

No Joe Kennedys

If I should fall from grace with god
Where no doctor can relieve me
If I'm buried 'neath the sod
But the angels won't receive me
Let me go boys, Let me go boys
Let me go down in the mud
Where the rivers all run dry
-- Shane MacGowan

If you had asked anyone who knew him, and that includes his family, they would of told you Joe Kennedy was a son of a bitch. Old Joe made a lot of money in the 1920s doing the exact things the financial reforms of the 1930s outlawed. He got out of the market right before it crashed, the story being, when his shoe-shine boy gave him a stock tip, he knew the jig was up. Yet, FDR appointed Joe Kennedy the first chair of the new Securities and Exchange Commission. When people complained to FDR that old Joe was a crook, FDR replied, "Takes one to catch one." Yet, the fact is there wouldn't be one person who would argue Joe Kennedy didn't do an excellent job establishing the SEC and creating the foundation of an agency that would help create financial stability for the next half-century.

Search around, there seems to be no Joe Kennedys amongst are financier class today, just a bunch of greedy narcissistic bastards, which goes to show on the larger scale of things SOBs are of higher character than greedy bastards. Though it's more than that. Joe Kennedy had a larger identity, an identity that included being a citizen. This republic, not just markets, meant something to him, not simply something in a larger abstract sense, but something inside himself. That's missing today, not just in our financiers, but across our political class, where naked ambition rules a very low game. And understand something about ambition, and you can see this particularly with the inability to confront the financial problem, ambition is not courage.

Yves Smith has a real nice piece on how the financial game is playing out in DC. Simply nothing much is going to come of it. I've said for a long time you can tell how effective financial reform is going to be in how they deal with derivatives, because they're simply not needed, as Yves points out, what they are doing is simply a charade. The FT has a good piece stating how Democrats are figuring out how to cave on the fighting for her survival curve ball Blanche Lincoln threw everyone on derivatives. The best is this little tidbit on conventional DC wisdom:

Senate aides expect the derivatives provision, which is opposed by the Federal Reserve and the Federal Deposit Insurance Corporation, to be changed after the primary but polls have showed that Ms Lincoln’s election race might go to a run-off next month, potentially complicating what most people see as a necessary modification.

There you go Bubba, just give Ms Lincoln your vote, so she can go back and stick it to you. This lot really has no shame. How can our financiers have any respect for this republic, when the political class has none? Which brings us to Jesse's Cafe Americain's piece aptly titled, The US Intelligentsia and Middle Class are in the Firm Grip of Fear, Fraud, and Denial -- well put. The piece deals with the degradation of our politics, commenting on an excellent piece by James Galbraith:

Writing from the 'disgraced profession' of economics, James K. Galbraith speaks of the unspoken, the many frauds and deceptions underlying the recent financial crisis centered in the US. Many will read this and shake their heads in agreement, but will be unable to take the next logical step and internalize the implications of the depth and breadth of the dishonesty that enabled it then, and continues to sustain it, even today. Galbraith is asking 'why' and framing a further inquiry into the consequences of this unwillingness to reform.

Galbraith concludes his piece,

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

If we cannot hold power accountable, we no longer have self-government. Joe Kennedy, a real SOB, understood this.

Evolving the EU

Over the last few years, the evolving EU has been met with a number of growing challenges, none greater than the present monetary problem. There's been tremendous good gained from the European experiment, which stood centuries of conventional wisdom on its head. However, just as Napoleon retreated from Russia lamenting the "thin line between the sublime and the ridiculous," today's Europe crossed to the ridiculous last weekend. When Barack Obama can with a day of phone calling(tx yves) get you to adopt the same scrupleless botched bank/bondholder bailout previously foisted upon the US by saying:

Dealing with the markets was like dealing with a military enemy... You had to use “overwhelming force”. He also offered help from Washington to buy up euros for dollars and ease the pressure on European central banks,

you've reached the ridiculous. Listening to the Obama administration on financial matters is the equivalent of listening to the previous Bush administration on matters of world peace, you just don't want to do it.

In order to "fix" Europe, they now want to centralize budget processing, which "for [the] euro-area means deeper and broader surveillance, in particular with regard to macroeconomic imbalances." This is the expected though exactly wrong response. Presently, the EU represents the dead-end of Western politics, centralizing and institutionalizing this failure will only guarantee future calamity. If Europe is going to continue their peaceful unification revolution, they're going to have to begin thinking anew.

The post-war Europe project has been a noble effort and has met with many successes, but it now runs up against two massive forces that portend its failure: centralizing political power and corporate globalization. Much like the early 20th century coporatization, and thus centralizing, of the American economy initiated a centralizing reaction by government with the New Deal, Europe increasingly meets their unification problems, many in reaction to corporate globalization, by increasing centralization. This is the wrong response, though by no means unique to Europe. We have watched the same wrong-headed, knee-jerk response in the United States over the years as the Federal government meets each new challenge by creating a new "czar."

At this point, the failure of Europe is the failure of corporate globalization. The financial industry has been the leading edge of corporate globalization and its most recent massive and continuing failure necessitates not a propping-up, but a new direction. Europe's moves to open borders, transparency, and open networks need to be met with political openness, transparency, and most importantly, the evolving of a distributed networked politics. The question is how to do this? Open source software development and the distributed network design of the Internet offer models of order vastly different than traditional centralized hierarchies prevalent in our political economy. In the immediate future, our greatest challenge will be to hold-off a rush to centralize and institutionalize failure, unfortunately in financial matters, we are well along a path to doing just that.

The sheer complexity and the overwhelming tsunami of information of our time makes hierarchical centralized order at best problematic, and at worst authoritarian, prone to catastrophic failure. We have much to learn from the world around us. There is no centralized hierarchical control of ecological systems, order derives from the bottom up. In the burgeoning science of complexity we learn distributed order and diversity offer much greater stability than homogeneity and hierarchy. This is the revolution upon us.

Greider, Gold, and Oil

Alternet has an excellent interview with Bill Greider on money, the Fed, and reviving our democracy -- most highly recommended. A couple of the highlights:

On money creation:

I would say the Fed created it, that's what central banks do. What do I mean, "created it"? They type keyboard numbers, the money comes into existence, and ends up at a bank.

I literally think this is the watershed where Ben Bernanke reminds me of the Wizard of Oz, when little Toto pulls back the curtain, and you see Frank Morgan in the control booth frantically turning dials and pulling levers. His voice comes ringing out from the screen, "Silence, the great Oz has spoken," and Dorothy says, "Nonsense, you're only a man pretending to be a wizard." That's what happened at the Fed. To my delight, it offers a moment where we have a chance -- only a chance -- to reopen the question of democracy.

I know quite a lot about the Federal Reserve, I've followed it over 30 years, and I make this provocative argument: democracy could have saved us from this collapse -- which naturally all so-called responsible people deny.

Reforming money creation:

If people want this cleared up, go to the Constitution. Article One is about the Congress, and Section Eight gives the power to create money and regulate its value to the Congress -- not to the White House or the Treasury. It doesn't even mention a central bank.

I want to return to first principles and say, the Congress needs to reclaim its authority in the Constitution to supervise the creation and regulation of money. Now it could delegate that of course -- members of congress are not going to count the actual bills on the floor of the House. But that would necessarily restore democratic principles to the central bank function.

Disintermediating Wall Street and the Banks:

If you could get responsible stewardship in Congress, you could move to something similar in the modern era. Instead of simply creating money and turning it over to the banking system, in toto, you would very publicly devote a portion of new money created to specific projects that the government builds for the broad general interest. High speed rail, for example, is something people can understand. You can harness the money power to broad public use.

This last point is important for two reasons. First, if we hope of doing anything in this country, we are first going to have to clean-up, revive, and reform the Congress. Second, money needs to be tied in some ways to the real economy, separating hard infrastructure projects from the vagaries, greed, and idiocies of Wall Street is a good idea. The question of how money is tied to the economy grows in importance each passing day as more fiat currency is dumped into the black-hole in an attempt to support bad debt. The reactionary position to this is to pile into gold, which is nonsensical, nonetheless... Remember in the late 1920s, the last time global currencies had existential problems, Keynes lost a bundle betting against gold. As he said, he "forgot gold was a fetish." Webster defines fetish as,

a : an object (as a small stone carving of an animal) believed to have magical power to protect or aid its owner; broadly : a material object regarded with superstitious or extravagant trust or reverence
b : an object of irrational reverence or obsessive devotion
c : an object or bodily part whose real or fantasied presence is psychologically necessary for sexual gratification and that is an object of fixation to the extent that it may interfere with complete sexual expression

I would say Keynes was using fetish as defined by "a" or "b", however if you've ever talked to some real goldbugs "c" could also very well apply. The reverence for gold remains completely irrational, which in increasingly irrational times will only drive up its price. But you know, if you think gold is going to become a basis for currency in this world again, well, better to buy a few AK-47s and a bunch of canned goods, because there won't be much of an economy left. So, probably not wise to bet against gold, but better to invest in real things of real value and invest some time in politics fixing this mess.

Which gets us to the real economy. The IEA has cut their oil forecast:

In its monthly oil market report, the Paris-based agency said it expects total crude demand globally this year to average 86.38 million barrels a day, representing a 220,000 barrel-a-day downward revision from April and growth of 1.9%, or 1.6 million barrels a day, from 2009.

The IEA cautioned that the global economy still faces a great deal of uncertainty due to the fallout from sovereign-debt concerns in places like Greece. Those concerns have pushed crude prices sharply lower over the past week. Prices in the U.S. traded up about 15 cents at $76.55 a barrel Wednesday.

The modern economy worships oil, not gold, which is a little less irrational. If oil use isn't growing, don't expect much economic growth. It still seems a better bet we are in deflationary, not inflationary era, IMF austerity in Europe may very well assure this, while much of the money the Fed is pumping into the system is "dead" or crippled. The one good thing out of this economic slow down; oil use declined, unfortunately not enough for us to avoid the disaster in the Gulf. We're not going to get out of the mess pumping more oil, one reason, it's just not there. Tying money to energy, that would be a good idea to help begin the necessary reform of our economy.

The Curse of Bigness: Reform will be Distributed

Both liberty and democracy are seriously threatened by the growth of big business. Today the need is not so much for freedom from physical restraint as for freedom from economic oppression. Already the displacement of the small independent businessman by the huge corporation with its myriad of employees, its absentee ownership, and its financier control, presents a grave danger to our democracy. The social loss is great; and there is no economic gain. Political liberty, then, is not enough; it must be attended by economic and industrial liberty.

There is no such thing as freedom for a man who under normal conditions is not financially free. We must therefore find means to create in the individual financial independence against sickness, accidents, unemployment, old age, and the dread of leaving his family destitute, if he suffers premature death. For we have become practically, a world of employees; and, if a man is to have real freedom of contract in dealing with his employer, he must be financially independent of these ordinary contingencies. Unless we protect him from this oppression, it is foolish to call him free. -- Louis Brandeis

The other evening I was watching Bill Maher and observed something unprecedented. Maher's guest, historian Alan Brinkley, brought up, for the first time I have ever heard on television, Louis Brandeis' insight on the "curse of bigness" in political economy. Brandeis was a leading figure of the early 20th century Progressive era, who understood the Jeffersonian imperative that democracy was inherently decentralized and individuals needed political/economic independence if they were to be citizens of any system of self-government.

Maher raised the topic in relation to Brinkley's writing on the 1930s Percora Commission, which uncovered the tremendous amount of fraud underlying the collapse of the financial system in the late 1920s and early 1930s. Brinkley has also written on the great compromise of the New Deal, which was to lay aside concerns of economic concentration in a trade-off for centralized regulation. Over time this has proved fatally flawed -- big corporations took over big government.

Unfortunately, the discussion on bigness was immediately dismissed, first by Brinkley, who unfortunately turned to representing effete liberalism, throwing-up his hands and claiming nothing could be done. Then secondly by the lizard-like former Bush speech writer David Frum. I will say again, the intellectual dishonesty of our political class is horrendously nauseating, and make no mistake, it's bipartisan. Mr. Frum stated no need to worry because, "The Fortune 1000 employ fewer people than ever." True, but they also control a greater piece of GDP than ever. In 2006, "Revenue from Fortune 500 companies as a proportion of GDP has risen from 39 percent in 1955 to 73.4 percent this year." At the same time, the percentage of the American workforce employed by the Fortune 500 has fallen to just 8%. The vast vast majority of people in this country do not work for the Fortune 500 or Fortune 1000. Each year the majority competes for an ever smaller share of the economic pie, which is what Mr. Frum left-out. You can also add the six biggest banks in this country control over 60% of deposits. This is plain and simple is oligarchy.

We are only going to get reform of our political economy by breaking up power, decentralizing both corporate and government power. Mr. Brinkley is not alone in throwing-up his hands and claiming nothing can be done, nonetheless, the breaking up of bigness is the only legitimate reform, the rest is simply a charade. Can you imagine if the generation that birthed this republic had thrown-up their hands and claimed, "There's nothing to be done about the King, he's too big!" This attitude infests our political class, who unlike the majority of citizens, actually do work for the Fortune 500.

The American system was established with power decentralized. Today, we have an advantage over both the founding generation and Mr. Brandeis', we have learned new ways of organization, we understand beneficial order can be gained from the bottom up. For example, distributed networked organization has revolutionized electronic media, offering lessons for our entire political economy. But it must be instilled with political will and courage, as Mr. Brandeis stated,"Progress flows only from struggle."

Cash from Chaos

The trillion dollar(use dollars because the Euro is kind of a joke) European bailout may as well be stamped made in America. The bubble re-inflation techniques pioneered by the Fed and Treasury were brought full scale to Europe, heck the Fed even reopened their swap program so it could dump dollars directly into Europe. The Fed reassured stating, "They face little risk in these loans, because their counterparties are central banks and not foreign financial institutions." Good to see someone still has a sense humor.

The IMF was brought in to dump more dollars. One can only say good thing a few months back they doubled the emergency fund, so they won't have go back to the US Congress for this installment. Anyway, Mr. El Erian says it best, "Europe has taken it to a completely new level and dimension. We are now in unchartered waters when it comes to how all this will impact the secular workings and make-up of the eurozone." One might add the world as a whole.

It's certainly gotten the desired impacts in the markets. But we've known this for awhile, when central banks make money cheap and then begin buying garbage, asset prices go up. A little puzzling how when interest rates stay low and money is printed those particular currencies rise in price too, well it's the best of all possible worlds, isn't it?

There's going to be no growing out of this debt for the US, "Old Europe" and Japan. We seem to ignore the fact that the rate of growth in all these areas has declined over the past three decades. Just piling up more debt indentures us all deeper to the past. John Hussman has an excellent and succinct analysis:

Looking at the current state of the world economy, the underlying reality remains little changed: there is more debt outstanding than is capable of being properly serviced. It's certainly possible to issue government debt in order to bail out one borrower or another (and prevent their bondholders from taking a loss). However, this means that for every dollar of bad debt that should have been wiped off the books, the world economy is left with two - the initial dollar of debt that has been bailed out and must continue to be serviced, and an additional dollar of government debt that was issued to execute the bailout.

Notice also that the capital that is used to provide the bailout goes from the hands of savers into the hands of bondholders who made bad investments. We are not only allocating global savings to governments. We are further allocating global savings precisely to those who were the worst stewards of the world's capital. From a productivity standpoint, this is a nightmare. New investment capital, properly allocated, is almost invariably more productive than existing investment, and is undoubtedly more productive than past bad investment. By effectively re-capitalizing bad stewards of capital, at the expense of good investments that could otherwise occur, the policy of bailouts does violence to long-term prospects for growth. Looking out to a future population that will increasingly rely on the productivity of a smaller set of younger workers (and foreign labor) in order to provide for an aging demographic, this is not a luxury that our nation or the world can afford.

"Failure" and "restructuring" mean only that bondholders don't get 100 cents on the dollar. We can continue to bail out the poor stewards of capital who voluntarily made bad, unproductive investments, and waste our future productivity in order to make those lenders whole, or we can turn the debate toward deciding the best strategies for restructuring existing debt.

No! No! couldn't possibly have the bondholders take any losses, better to squeeze the bottom and the middle to pay every penny of bad debt and bailout. The IMF has now arrived in Greece, soon to follow across the rest of Old Europe, fun is over as the Good Doctor said a few years back. And you good Americans worried about the black helicopters, they ain't nothing compared to when the boys from the IMF show up. Of course, we here in the US don't need the IMF, we have Pete Peterson, Bob Rubin, and Barack Obama.

A Revaluation of Value

From a possible future.— Is a state of affairs unthinkable in which the malefactor calls himself to account and publicly dictates his own punishment, in the proud feeling that he is thus honoring the law which he himself has made, that by punishing himself he is exercising his power, the power of the lawgiver? He may once offend, but by his voluntary punishment, he raises himself above his offense; he not only wipes out his offense by candor, greatness and calmness, but he adds to it a public benefit. -- Friedrick Nietzsche

Could there be a more antithetical ethos to our Wall Street masters of the universe or our political class? In this tragic era of comic ubermensch, such a possible future seems further off than a century ago. Completely in opposition to his popular image, Nietzsche is one of the important and necessary democratic thinkers of history. I was reminded of this today reading the NYT review of a new Nietzsche biography written by another infamous modern ubermensch, Francis Fukuyama, a great anti-democratic figure. Mr. Fukuyama came to the American intellectual forefront with his book, The End of History, which in no sense was meant to be ironic, thus making it simply ridiculous. He's a prominent figure of the reactionary school of "neo-conservatives", who have caused this republic untold damage, and he is a propagator of anti-democratic screed, couched as ideas on "liberal democracy". None of this keeps him from holding a prestigious chair at an eminent center of the American foreign policy establishment, John Hopkins University, nor regularly appearing in the NYT. He deems himself some sort of a philosopher.

Nietzsche was an anti-metaphysician, and, as he claimed, he philosophized with a hammer, which is funny. Nietzsche is very funny and if you read him and you're not laughing, you're missing the plot. As an anti-metaphysician, the good metaphysicians, such as there are, dismiss him, as they rightly point out, he has nothing to offer them. The bad philosophers, of which the 20th century is littered, pull out little tidbits and try to build upon them elaborate new scandalous schools. Upon reading any of them, you know why Nietzsche declared he wanted no disciples.

Mr. Fukuyama, as all bad metaphysicians, immediately grabs the easiest misinterpretation of Nietzsche, his thought of the "eternal re-occurrence." There was nothing metaphysical about this. It was an idea for life. In fact, it was completely anti-metaphysics. It is the idea that each of us should live as though we had only one life, which would be repeated exactly as lived, endlessly. It is difficult to come to conclusions about Nietzsche's thinking as a whole. He himself said he was busting down in order to rebuild, but he never got to that point before he collapsed. Of course, this doesn't stop Fukuyama from taking the great popular generalizations on Nietzsche's thinking and throwing them forward and twisting them for his purpose. Further down the piece, Mr. Fukuyama really lets loose in a way that exemplifies the tremendous intellectual dishonesty at the top of so much of our society, and what can only be described as the debauched thinking at the heart of neo-conservatism. He writes:

Nietzsche, however, hoped for a future hierarchical society in which the labor of the many would support the greatness of the few, one in which the cultural cacophony of contemporary liberal societies would be replaced by the solidarity of a single, common culture...But understanding Nietzsche’s project as a cultural rather than a political one should not blind us to its terrible implications. For while one might be able to create a small-scale community based on common and voluntary commitment to art, as Wagner sought to do in Bayreuth, scaling up such a project to society as a whole, with all its de facto diversity, would require dictatorial political power. The mystical origins of Nietzsche’s Dionysian community are an open invitation to the unleashing of irrational passion that is perfectly happy to squander the life of any individual standing in its way. Ayatollah Khamenei is indeed a much better model of Nietzsche’s future leader than the power­less Dalai Lama.

This is a purposeful misunderstanding of Nietzsche's thought, even more so any democratic society. Can you imagine America's great poet of democracy, Walt Whitman claiming diversity required dictatorship? So too, the leaves of grass? At the bottom of Nietzsche's thought is the very democratic understanding of the necessity of the independent individual. It is the great paradox of democracy, independent individuals creating a cohesive social whole. Nietzsche spent much effort revealing the empowerment of the individual is in many ways antithetical to much of the canon of Western thought and morality, which is in many ways an ethos of subservience. Nietzsche tore at the fetters on the individual, asking how would you rebuild society if you were to place the independent individual at its foundation and then rebuild. Is that not democracy? Now, Nietzsche certainly was romantic and took great poetic license, and there's little argument he had a taste for the myths of history's great men. But his tearing down and looking to rebuild society based on life and empowered individuals is exactly what we must do if we are to evolve democracy.

Does Mr. Fukuyama understand this or is he just another simple reactionary to Nietzsche's hammer? It is difficult to tell. The neocons on the whole are an extremely intellectually dishonest bunch, who like to throw around the words and symbols of our decayed republic in an active effort to even more greatly undermine it. He accuses Nietzsche of embracing "hierarchical" society, while the "liberal democracy", that is our coporatocracy he previously labeled "the end of history" is as hierarchically structured a political economy as history has seen. Fukuyama's final insult is to say:

Postmodernism, deconstructionism, cultural relativism, the “free spirit” scorning bourgeois morality, even New Age festivals like Burning Man can all ultimately be traced to him.

As low a blow as you can level at Mr. Nietzsche, the great posthumous critic of the 20th century. In his final years, Nietzsche began work on a series of book he described as a "revaluation of values" -- the attempt to rebuild. He didn't come close to finishing it. But others took it up, and instead of the effete rabble listed above by Mr. Fukuyama, one of the most notably successful was Martin Luther King, who is the antithesis of the neo-conservatives' intellectual dishonesty, militarism, and anti-life authoritarianism. In his 1967 speech against the Vietnam War, Dr. King calls for a "revolution of values" stating:

I am convinced that if we are to get on the right side of the world revolution, we as a nation must undergo a radical revolution of values. We must rapidly begin the shift from a thing-oriented society to a person oriented society. When machines and computers, profit motives and property rights, are considered more important than people, the giant triplets of racism, extreme materialism, and militarism are incapable of being conquered.

Nietzsche never said it better.

It's not a bug, it's a feature

If you're after getting the honey
Then you don't go killing all the bees
-- Mescelaros

So, I just saw the CEO of the NYSE on CNBC, he said at the point of the big drop today, a bunch of programs were putting in trades and they weren't answered, so they kept dropping the prices. Hey-Ho, if your trading at the speed of light you can drop to zero pretty fast, wouldn't that upset a lot of people! Anyway, he said they stopped trading for a minute half and got the trades answered and things went back up.

The fact is today so much market activity is electronic algorithm based, and not just stocks but across the boards. The real deal is to trade, churn baby churn, that's where you make money, what the stock market or any other trading market has to do with helping the real economy, outside of last twenty years of making people who own stocks feel good, one would be hard pressed to answer. After all, bubble asset prices are an essential element of trickle down economics.

The whole rise off the spring lows of 09 has been on pretty low volume, "some" would say quite manipulated. The folks at ZeroHedge -- a quant-lot -- have been saying that any downturn would immediately dry up liquidity and the door for getting out would shut pretty fast, but they've been down all afternoon, which is funny, but their perspective should be interesting.

Europa

Things are beginning to get interesting in Europe, the FT reports:

The spectre of counterparty risk, last seen in dramatic form in the wake of the Lehman collapse, is returning to the European banking sector in an early warning sign that some banks may collapse in the wake of the eurozone’s sovereign debt crisis.

A key measure of bank risk, the overnight index swap spread on futures contracts in the eurozone, rose to a record high this week. This measures the premium over “risk-free” overnight rates of three-month rates, which carry greater credit risk...the ECB should be concerned about the contagion of the banking sector as visible in the widening of spreads in credit default swaps, which measure the risks of default, and OIS spreads.

Once again, instead of bringing stability, insurance, spreading risk, or whatever horseshit Wall Street wants to propagandize, derivatives are the equivalent of gasoline on the fire. The FT writes:

These trends are similar to the height of the financial crisis following the collapse of Lehman Brothers in September 2008, although dealers stress the markets are a long way from the seizure experienced at that time. Interdealer brokers say they are still seeing some lending over three months and beyond.

Who could have thought another panic could be brewing as everyone was still patting themselves on the back for "solving" the first one? Maybe instead of J P Morgan's Jamie Dimon infamous proclamation a few months back that these are natural occurring events of every five or six years, we can instead expect them every five or six months? Of course the "solution", once again soon to be even more strongly promoted:

“As a buyer of last resort, the ECB should shift to QE and start buying government bonds.”

I'm sure our friends the Europeans can get Mr. Bernanke to kick-in too. We have at this point a completely unstable and out of control global financial system, which besides making exorbitant profits for a few, provides little value for anyone else, in fact it's toxic. We have innovated back to some mutant form of 19th century finance. The Central Banks now play the same role in panics as JP Morgan and other financiers of that time, except unlike the predatory capitalists of the era, they extract no pound of flush. There's no destruction of the junk. No accounting. Everything is just bought up dollar for dollar or Euro for Euro, with the fairy tale belief that at some point values will be regained and with the reality of losses being eaten by the taxpayers, call it Bolshevik capitalism.

We need a fundamental rethink of money and that's not happening.

Politics of finance: Newport v Omaha

While the politics of finance in DC isn't very interesting, it is after all a company town, run by company vassals, the politics of finance itself gets more interesting. PIMCO came out last week in regards to Greece and said time to start thinking about bondholder losses, which would seem to be an attempt to make money good some bonds, thus begging the question what is the bad money. You don't want to be left holding it.

A few months ago, PIMCO's Bill Gross was talking about piling into German Bunds, which the Germans being the Germansis the safe haven of Europe. Then today in his latest monthly report, Mr. Gross takes a hammer to Spain saying:

Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!

Phew, this while the Europeans are desperately trying to say they've contained the damage in Greece and the Spanish Prime Minister decrying talk of Spain debt problems as "madness." Mr. Gross also takes a much deserved mallet to the rating agencies, who were, and remain major culprits in the fraud that is far too much of Wall Street. Mr. Gross states amongst other things:

The result has been the foisting of AAA ratings on an unsuspecting (and ignorant) investment public who bought the rating service Kool-Aid that housing prices could never really go down or that countries don’t go bankrupt.

HO-HO, that's good stuff. On the other side of this equation is the wizard, sage, welfare king of Omaha or whatever is you want to call Mr. Buffet. He's owned a big chunk of Moodys for a long time while they were paid by Wall Street to give bogus ratings. It's made Warren a lot of money and he's grateful. Mr. Buffet sees no reason why any of the game should change, saying recently the ratings agencies were "incredibly wonderful businesses" and their "pricing power is significant," which is all good as long you don't end up holding any of their dreck they've stamped AAA. Mr. Buffet also had nice words for the boys at Goldman, after all his investment proved lucrative once it was made good by the AIG bailout, that is, your tax dollars. I digress into the petty world of DC and the trifle misunderstandings between financial masters and their servants.

Mr. Buffet wants to keep the ponzi game going, while Mr. Gross thinks the jigs up, and the question is how to make some money good, should be of interest to all.

We're All Ponzi Now

Bad money drives out good.
-- Thomas Gresham

Another week, another Greek solution. Greece's fellow Europeans pledged a $146 billion for the latest global bailout. The best part of the story is how it was done, showing the European monetary system is full-on Ponzi at this point. Bloomberg(tx credit writedowns) writes,

The EU and the International Monetary Fund, which is co-financing the bailout, also agreed to set up a bank stabilization fund. With downgrades threatening to render Greek bonds ineligible as collateral for its loans, the European Central Bank today said it will accept all Greek government debt when lending to banks.

First, this is against the monetary union rules, but hey, finance, we have learned, is above the law. Secondly folks, understand what's happening here. Greek debt on its own would be worth a lot less if not for the bailout. But in order to get the bailout, the EU and IMF are allowing the ECB to take the very government debt which is being upheld in value by the bailout money. That folks is Ponzi finance, which should be familiar to you all because it's exactly what the Fed has been doing.

Yves Smith has an excellent -- must read -- piece on the Fed's Ponzi game and why our "representatives" are opposing Fed accounting, because dear tax payer, in any Ponzi scheme, the pigeon, that would be you, must be kept in the dark, otherwise they wouldn't give up their money. Now a good Ponzi scheme is all fun and lucrative for those first in, especially when you have so many still to be readily plucked, but things have gotten out of control and it's increasingly difficult to tell good money from bad.

Which brings us back to Greece and Mr. El-Erian of PIMCO:

“It is far from assured that this program will forcefully counter contagion risk,” said Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co. in Newport Beach, California, which runs the world’s biggest bond fund. “Heavily exposed creditors” may try to head off potential losses and sell bonds, “increasing the pressure on core European governments to also provide a backstop for Portugal and Spain.”

You see, it's getting hard for even money "sophisticates" to tell good money from bad. This is the reason, Mr. El-Erian came out last week saying it was time for bondholders to start taking losses, as it's better to take some controlled, knowable losses, than to watch the very, very ugly panic of the global financial elite when they all try to unload at once. The bubble has engulfed the global monetary system. Make no mistake, it will eventually pop.