naked capitalism

I hate taking issue with Matt Taibbi. I’m a huge fan of his writing and think he has done more to cause the big bd banks discomfort than any single writer.

But even someone as skilled as Taibbi occasionally has the writing equivalent of a bad hair day. And his post, “A Victory for the Public on Foreclosures?” is an example. And his misreading matters precisely because he has so much cred with the public that is unhappy with Big Finance.

Taibbi has taken up cheerleading the Schneiderman involvement in a Federal investigation committee as major progress and also amplified the messaging that the current version of the release in the mortgage settlement deal (which by the way is still more of a mystery than it ought to be) is a good deal. As we will discuss in due course, even a narrow deal around robosigning is in fact NOT a good deal.

I need to get a bit granular since quite a few folks on what passes for the left have gone into hopey dopey liberal mode. This is EXACTLY what the Administration wanted. A mere gesture, appointing Schneiderman to a part time job co-chairing an under-staffed investigation, when the committee members who are likely not to be on the same page as him have the advantage of being in DC where the troops will be located and knowing their way around the relevant bureaucracies. The ONLY hope Schneiderman has of pulling this off is lots of very noisy, sustained pressure, NOT going all gooey-eyed at a blast of Administration PR.

This isn’t the first time that Taibbi has had a lapse of judgment. He bought the unadulterated Obama spin, as this this 2007 piece and this 2008 article attest. An extract from the latter:

We’ve become trained to look for the man behind the mask…

But I’m not sure there is a mask when it comes to Barack Obama…

I hear Obama tell audiences about his grandmother and her time working on a bomber assembly line during World War II. Intellectually I know it’s the same thing — but when you actually watch him in person, you get this crazy sense that these schlock ready-for-paperback patriotic tales really are a big part of his emotional makeup. You listen to him talking about his grandfather waving a little American flag on the Hawaiian beach as he watched the astronauts come in to shore, and you can almost see that these moments actually have some kind of poetic meaning for him, and that he views his own already-historic run as a continuation of that pat-but-inspirational childhood story — putting a man on the moon then, putting a black man in the White House now.

The beginning of Taibbi’s post excerpts a list in a Huffington Post story that was cribbed and somewhat edited from a post by Mike Lux on Daily Kos. But Lux regularly does messaging for the Administration. It would have been a good precaution to verify his account.

Now, alert NC readers, notice how effective this propaganda technique is from the original Lux post:

1. No release on any fair housing, fair lending, or civil rights claims.
2. No release on any Federal Housing Finance Agency or Government-Sponsored Enterprise claims.
3. No release on any Consumer Financial Protection Bureau claims (which would admittedly be modest, since the Bureau was only established in July 2011).
4. No release on tax liability claims.
5. No release on criminal liability claims.
6. No release on SEC claims.
7. No release on National Credit Union Association claims.
8. No release on FDIC claims.
9. No release on Federal Reserve claims.
10. No release on the “vast majority” of origination claims.
11. No release on the “vast majority” of securitization claims, including all claims of state pension funds.
12. No release on legal liability surrounding Mortgage Electronic Registration Systems (MERS).

Look impressive, no? You’ve been three card Monted. Nearly all of the items on the list are NOT what the worries about the release are over. Some examples: No one ever thought there would be a waiver on putbacks, which are claims being made now by the FHFA. The IRS has made it abundantly clear that that it is not going to go after REMICs (if they did, they’d cause big losses to every RMBS investor in the US, which in turn would set off an avalanche of litigation). It’s an extremely useful threat, but since no one in the Administration is interested in threatening the banks as a way to bring them to heel, there is no real need to provide a waiver. And SEC liability? Schneiderman was willing to trade that away because it is pretty meaningless on mortgage originations. The subprime party ended by June 2007, and the statute of limitations is effectively five years. The 2006 originations are fee and clear (note there IS ongoing liability, as we have stressed, for annual trustee certifications, but no one seems very interested in that). And in earlier posts I’ve discussed how I never thought MERS was on the table (as in MERS liability sits with MERS).

Put it another way, if the list has read something like:

1. No release for selling purple cows to Martians
2. No release for operating a perpetual motion machine without a license
3. No release for jaywalking in Manhattan
4. No release for going back in time and killing Shakespeare

it might have been easier to catch the ones that no one thought were germane to the negotiations.

Now, let’s play “gotcha.” I have not idea what is in or not in the release (and as we will discuss shortly, the AGs themselves seem to be not so clear on this matter). But notice how FTC claims are not on the list. They are picked up only as of when they were transferred to the CFPB. Yet the FTC was THE central actor in busting the last outbreak of servicer bad behavior, by Fairbanks in 2003. As Tom Adams wrote:

Back in 2003, Fairbanks Capital billed itself as the largest servicer of subprime mortgages. It was also a stand alone servicer, in that it was not in the business of lending.

In a high profile case within the mortgage industry, the Federal Trade Commission brought an action against Fairbanks for violating the FTC Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act (RESPA) . Fairbanks was accused of a host of improper servicing activities that will sound remarkably familiar to anyone following the foreclosure and servicing issues in today’s mortgage markets. Among the transgressions, Fairbanks was alleged to have:

-failed to post payments in a timely manner, resulting in additional late fees or interest,
-charging for forced place insurance,
-assessed improper fees, such as for attorneys, service, appraisals, FedEx,
-misrepresented the amounts owed by borrowers,
-submitted misleading or false information to credit reporting agencies,
-failed to report disputed charges to credit reporting agencies,
-failed to respond to borrowers written requests for information or investigation into charges, and
-failed to make timely payments of escrow funds for insurance and taxes.

Similarly, I see no mention on this widely-touted list of where consumer fraud claims stand. HAMP fraud was widespread and Attorney General Catherine Cortez Masto is including HAMP consumer fraud in her expanded lawsuit against Countrywide for violations of its consent decree.

I sincerely doubt that consumer fraud claims and FTC claims are being included in the proposed waiver. I’m just using that to illustrate you can’t take that list at face value.

And that’s before we get to the issue that we still don’t know what “vast majority” of origination and securitization claims mean. As anyone who has worked on contracts can tell you, seemingly innocuous language can often be very powerful.

Far more important, even if you accept this messaging at face value, the deal is NOT a good deal. Taibbi acts as if the BANKS will be paying the $25 billion bandied about as a settlement number. Earth to base, this is yet another three card Monte trick. The number to keep your eye on is the cash portion. That’s a moving target, but it is clearly under $5 billion.

In fact, what everyone keeps skipping over is that the bulk of the value of the deal is in principal mods, and the deal is set up so that mods on mortgages that the banks don’t own will count at a 50% rate. Guess what, other people’s money is ALWAYS preferable to your own money, so the only mods the banks will do on their own mortgages are ones they would have done anyhow.

So the effect of this deal is:

1. To have MBS bondholders (pensions funds, 401 (k)s, insurers) pay for liability that belongs to the banks

2. To transfer from those investors to banks as second lien holders. The big four banks still have hundreds of billions of dollars of second liens, mainly home equity loans. If you write down the first lien, it makes the second lien more valuable.

Let’s look at how this might work in practice. Say you have a borrower that has a first lien that is now worth 120% of his house at current market prices and a second lien worth and additional 15%. He gets his first lien written down to 105% of his home value. Guess what, he is still seriously underwater but he now has more cash to pay his bank-held second. How much has he been helped, really? If he can afford the hit to his credit score, he really ought to ditch the house. The mod only serves to make that a tougher call.

Now a letter by Nevada AG Masto raising questions about the deal, and it appears second liens are being addressed to a degree, but I don’t find the bits I see very encouraging. For instance, she mentions that banks get a credit for extinguishing a second lien that is over 180 days delinquent. She isn’t sure what that means. And more important, this is not as big a concession as it might sound. Banks historically have not pursued deficiency judgments on primary mortgages, let alone seconds. They have started of late, but even that probably means less than their PR would have you believe. The US has had very lax enforcement of debt collection laws, but that is being tightened up both via the CFPB starting up and some new Administration initiatives. I suspect what we will see is a year or two of efforts and scary stories (meant to deter those thinking of defaulting). It’s a good bet that the banks will go back to their former practice of rarely going after these borrowers because you seldom get much from people who are under financial stress, and it costs real money to pursue them.

In addition, the consensus view among the boosters is that robosigining is not such a big deal, so we ought to be happy to waive that in isolation. But look at how Catherine Cortez Masto is using that abuse to go in a very systematic manner up the servicing ladder, from managers of robosigners that she is prosecuting criminally to Lender Processing Services. As we have argued repeatedly, LPS served as a liability shield for the major servicers. If Masto gets to discovery on LPS, the odds are high that she will be able to establish that servicers were well aware of the abuses that LPS was engaged in as their agent and the banks were effectively colluding with LPS.

In other words, clear cut, institutionalized abuses are a great way to engage in the classic mob prosecution strategy of targeting the foot soldiers to get them to give you the dirt on the entire network. Why would you give up such a valuable chip when you don’t know the extent of the abuses? But ex Masto, there is a remarkable lack of willingness among attorneys general and regulators to dig hard into what the banks are doing and see where that leads. For instance, Richard Cordray, newly appointed head of the CFPB, said that he is not going to pursue bank violations of the Servicemembers Civil Relief Act because it looked like mistakes and the banks said they had stopped doing that. Huh? How do you know it was a mistake unless you investigate? The fact that Jamie Dimon was so eager to make this problem go away quickly suggests otherwise.

The other bizarre element of this cheerleading is that the current deal stinks for any state ex maybe California. Why should ANY state participate when they have no idea how much they will be getting, and $15 billion of $25 billion earmarked for California? The fact that Republican Pam Bondi of Florida, a state hit even worse by the aftermath of the bubble than California, is hectoring California’s Kamala Harris to sign on says clearly that Bondi is more concerned about protecting the banks than about her state’s citizens. That can be the ONLY conclusion you can reach for any state that joins this lopsided pact.

If the Administration had really changed its stance on bank misdeeds, you’d see it putting the settlement on hold until the investigations led by Schneiderman had been concluded. The fact that they mortgage settlement is proceeding on schedule says this the Administration is, as before, trying to cover up its bank-favoring actions with better propaganda.

This is the transcript of an interview with Michael Hudson in an Australian film, discussing a 1966 incident:

MH: They increased it largely by having Alan Greenspan create the Greenspan Commission to look at social security and pushing the myth that social security had to be funded out of pre savings, so American labour was essentially taxed 11% between itself and the employers to pay social security and this vast increase in social security taxes was used to lend to the Government(US) to provide it with enough money to slash taxes on the rich and that was Greenspan’s ploy.

He was rewarded by being made head of the Federal Reserve for his actual hatred of labour and his desire that you had to reduce living standards in order to increase the profits of capital.

And so Greenspan was sort of the hack that was hired.

When I was on Wall Street, Greenspan was hired as part of a study I was doing on the balance of payments of the Oil Industry. And one day my boss, John Deaver came into my office and said he really worried about Greenspan being a part of this report because he was known as a hack that always gave …his clients what they wanted instead of something actual.

So he (JD) gave me Greenspan’s figures on depreciation of oil producing refinery assets in Europe and asked me to find out where the faking is? He said he couldn’t believe that Greenspan by himself wouldn’t of just faked the figures and it took me about a week to figure out where the faking of the figures came out (from) and that was Greenspan had simply picked up depreciation rates relative to output for the United States and projected them onto Europe.

So I went over and talked to his assistant Lucille Woo and she said “it’s all implicit, all implicit” and I confronted her with it and she said “Yes that’s what we did”!

And so, Greenspan was indeed ‘talked off the study’ and we met… John Deaver, David Rockefeller and myself and I was told…Greenspan was such a little bastard that if they fired him, he’d hold a grudge against Chase Manhattan for years and they told me to be the guy to give him the news that we couldn’t use his (laughs) statistics on it and I was a 25 year old economist at the time and he hardly new me at all, so I was the guy that…subsequently became known as ‘the man who fired Alan Greenspan’.

Florida man who tied dumbbell to pit bull’s neck gets 40 days in the doghouse McClatchy (hat tip Buzz Potamkin)

Volcanic eruptions emerge as lead cause for Little Ice Age Christian Science Monitor

Portrait of the Trust-Buster As a Young Man George Washington. A Men’s Health cover set of pecs.

Lamberth and the art of judicial writing McClatchy (hat tip Buzz Potamkin)

EU summit: UK and Czechs refuse to join fiscal compact BBC (hat tip Marshall Auerback)

Latest ECB data shows how bad things have become in Euroland Bill Mitchell

EU Nears Confrontation Over Greek Rescue Bloomberg

Portuguese storm gathers as EU leaders fight over Greece Ambrose Evans-Pritchard, Telegraph

Banks set to double crisis loans from ECB Financial Times

Driver ‘said he provided protection for the Murdochs’, court told Independent (hat tip Buzz Potamkin)

Gingrich won’t win, and Bibi will be in a lose-lose situation Haaretz (hat tip reader May S)

Financial Systems and Italian Cruise Ship Captains Global Economic Intersection

Romney’s attack tactics anger rivals Financial Times

Second Year In, Republican Governors Back Off New York Times

New York police spokesman comes under fire Associated Press. Buzz Potamkin: “He deserves this. A truly bad, evil person.”

Dozens of Port Authority jobs go to Christie loyalists NorthJersey

New Fund Hopes to Prove Thesis of Outspoken Analyst New York Times

Banks Fight to Exempt Half of Swaps Books Bloomberg (hat tip mathbabe)

U.S. Gets Tougher on Debt Collecting Wall Street Journal. Of course, Obama waits till right before the election.

Treasury Investigates Freddie Mac Investment New York Times. Ahem. How often have you seen Treasury jump immediately on a news story to launch an investigation? I can’t think of a single previous instance under Geithner. We’ve been told Geithner is enormously frustrated at his inability to bring DeMarco to heel. Not that we think DeMarco’s stance on principal mods or pushing foreclosure timelines is correct, but this does not pass the smell test (see our post for the longer form discussion).

Obama Bluffs on ReFi? Bruce Krasting. I’m not a fan of DeMarco, but BK makes a plausible case re refi plan posturing.

US economy stumbles MacroBusiness. Quelle surprise!

More Great Moments in Libertarian History: Ancient Sumerian Word For “Libertarian” Was “Deadbeat”, “Freeloader” (Updated!) Yasha Levine, eXiled. OMG, you cannot make this stuff up! From last week but still worth reading.

Liability Release Not the Only Stumbling Block in Foreclosure Fraud Settlement Dave Dayen, Firedoglake (hat tip reader Aquifer)

Journalists—this Writer Included—Swept Up in Mass Arrest at Occupy Oakland Mother Jones

Occupy protests in Oakland and New York: a weekend of police clashes Guardian (hat tip Lambert)

Occupy Monsanto with Farmers: Jan. 31, Foley Square (NYC) Food Freedom (hat tip reader Aquifer)

A veteran Wall-Streeter confronts the Occupy movement Stephen Roach, Financial Times. You have to read this. Roach is reduced to near terror by having to talk to people who are Not One of Us.

‘Davos consensus’ under siege Gideon Rachman, Financial Times

Antidote du jour. By Thurmyeye:

Rod Hill and Tony Myatt are Professors of Economics at the University of New Brunswick in Saint John and Fredericton (respectively). Their new book, The Economics Anti-Textbook is available from Amazon. They also run a blog at www.economics-antitextbook.com.

Interview conducted by Philip Pilkington.

Philip Pilkington: Your book seems to me a much needed antidote to the mainstream economics textbooks and can either be read alone or together with them. I think that’s a great approach because it allows students to become familiar with what is being taught in the classroom but also allows them to take a critical perspective on this material. So, let’s start with the format of these textbooks. In the book you say that they “cloak themselves in an aura of objectivity”. You then relate this to the fact that economics is not a value-free discipline and contains necessary ideological judgements. Could you talk about this a bit?

Tony Myatt: That’s correct. We say the texts cloak themselves with an aura of objectivity while at the same time implicitly (and repeatedly) making value judgements that reflect a particular ideology. Indeed, one of our main objectives in our Anti-Textbook is to provide overwhelming evidence of that. We believe that students subjected to the mainstream textbooks sense the bias in those texts (and the courses that rely on them) and it turns them off. They realize they are being sold something. They don’t like being bamboozled. Evidence for this is provided by the recent walkout from Mankiw’s introductory economics course. Even though the students could not elaborate very clearly the nature of the bias (in the letter they wrote explaining their actions), which unfortunately made them seem quite naive, those students were correct that the bias is there. One might say they intuitively sensed it.

Delightfully for us, Mankiw replied to these students in his New York Times column, saying “I don’t view the study of economics as laden with ideology…It is a method rather than a doctrine….a technique for thinking, which helps the possessor to draw correct conclusions.” Notice the wording he uses, “correct conclusions.” If there were “correct conclusions” to be drawn from using the economic method of thinking, there would be a consensus among economists on most positive economic questions. And while the mainstream texts always claim that such a consensus exists, the evidence suggests otherwise. I’m not just talking here about the profession’s response to the financial meltdown and the ongoing economic crisis, but even more mundane questions such as the effect on unemployment of an increase in the minimum wage. So, Mankiw is simply showing his own bias by implicitly claiming a consensus, by saying there are “correct” conclusions to be drawn.

Our perspective is that there is an ideology that pervades mainstream economics, especially in the way it is currently practiced and taught. There is an important point here: that we can distinguish between neoclassical economics itself, and the mainstream practice and teaching of neoclassical economics.

The point is that it is more difficult to argue that there is a bias in neoclassical economics itself. The neoclassical paradigm is remarkably malleable. It is capable of transforming itself, of shedding many an unappealing feature in the hands of ‘this analyst’ or ‘that analyst’ or ‘this paper’ or ‘that paper’. Moreover, the boundaries of mainstream neoclassical economics are blurry. It is not clear, for example, whether recent work on ‘limited rationality’ lies within the neoclassical paradigm or is a direct assault upon it. As another example, the work on imperfect information by Joseph Stiglitz overthrows many of the neoclassical presumptions about the efficiency of otherwise competitive markets, and the harmfulness of government intervention, and we see his work as being squarely within the neoclassical paradigm. One could even use neoclassical economics to show the importance of community ties and social cohesion, even though in the normal practice and teaching of neoclassical economics these things are totally ignored.

That’s why we called our book an “Anti-Textbook”. The mainstream textbooks are remarkably uniform and do reflect a narrow range of world views. This is a much easier target to attack. And the mainstream textbooks do reflect the core beliefs of mainstream economists that inform their policy prescriptions.

Your question to us was to explain why we feel economics is not a value-free discipline and necessarily contains ideological judgements. We can answer that question. But first, to understand what we did in our book, let’s answer the easier question of why textbooks must necessarily contain ideological judgements.

The textbooks necessarily contain ideological judgements because they are necessarily selective. They must include and emphasize some things and exclude or downplay others. They ask certain questions and not others. They place some topics and questions in the forefront, and put others in the background or leave them out entirely. Those decisions reflect implicit value judgements about what is interesting and important. No ‘objective’ account is possible. For most people – including many economists – this is not a controversial claim.

So, our methodology, our way of getting around the amorphous nature of the neoclassical paradigm, is to focus on the mainstream neoclassical textbooks themselves. We point out their biases of omission and commission. We notice when claims are made without any supporting evidence, or when the so-called evidence is irrelevant or out of date. We notice when two thirds of the text assumes perfectly functioning markets which prohibits (by assumption) the importance of power.

This focus on the textbooks does not mean that we feel there is no bias in neoclassical economics itself. Far from it. Every approach has a bias just as all economists have a bias. Our perspective is that it’s best to acknowledge that fact at the outset. But I’ve said enough. Better let Rod have a turn…

PP: The issue of power is an interesting one. I think what many students who feel instinctively critical of economics courses note from the outset is that the theories taught imply some sort of level playing field. Yet, you would have to be blind not to notice divisions of class and race in even the most prosperous societies. Could you talk about this a bit?

Rod Hill: I think power is central to understanding the reality of economic life. For that reason, it’s important that it be effectively obscured in the principles texts as students are taught how to ‘think like an economist’. The texts typically manage this very well, although I’m sure their authors have no conscious intention to set out to do this. (This remarkable aspect of our propaganda system helps to make it so effective.)

The texts do indeed imply a sort of ‘level playing field’ between buyers and sellers in both markets for goods and services as well as in the labour market. This follows from the central place that’s given to the supply and demand model (which is “short-hand” for the perfectly competitive market).

There, everyone is a ‘price taker’. There is no room for businesses to use their bargaining power to squeeze workers’ wages, to prevent workers from unionizing, to force down their suppliers’ prices, or to raise their selling prices once they’ve eliminated their competition. (Think Walmart.)

But ‘market power’, the ability to push the price away from a hypothetical competitive level, is just the tip of the power iceberg. At least the texts acknowledge this form of power, even if they downplay it. If students think for themselves, they could realize the practical irrelevance of the perfectly competitive market structure. More likely, at least with those who stick with economics, they will start to see the world as composed of competitive markets, regardless of their actual structure. Indeed, some textbooks explicitly justify this by asserting that most markets are ‘competitive enough’ to be approximated by perfect competition.

Most aspects of power remain discreetly out of sight in the texts, even though, as you say, you’d have to be blind not to see them in real life. I like to paraphrase a line from Ben Bagdikian’s The Media Monopoly: the texts can’t tell you what to think, but they can tell you what to think about.

So while they focus students’ attention on these powerless markets, they say little or nothing at all about the power of the wealthy, or the businesses they own, and how they can influence the ‘rules of the game’. As Ha-Joon Chang reminds us in the first chapter of 23 Things They Don’t Tell You About Capitalism, there is no such thing as a ‘free market’: all market exchange takes place within a set of rules and institutions and those matter to market outcomes. But any serious discussion of what determines them would draw attention to the links between economic and political power. It would also provide an extra reason to be concerned about the rapid growth of economic inequality in many countries.

In the world of the texts, the managers of profit-maximizing firms allegedly spend all their time trying to hire the right combinations of labour and capital while spending no time trying to increase profits by influencing laws and regulations. In the world of reality, small armies of lobbyists and corporate lawyers work to do just that, even helpfully drafting laws for busy legislators whose political campaigns they help to finance.

Incidentally, the one notable exception to this in the texts is the discussion of regulating monopoly. The story is that regulators are often ‘captured’ by the industry they are supposed to regulate so that with government screwing up (as it often does in textbook examples) no regulation might be the better option. An ideologically convenient story!

Other aspects of power are also absent. The firm is largely treated as a black box, so authoritarian relations within it are ignored; questions of economic democracy do not arise. The analysis of trade and foreign investment ignores the effects of the relative power of different countries.

I can’t prove how all this affects students. But in my own case I feel I was effectively blinded for an embarrassingly long time to many of these obvious aspects of the world.

PP: And how do you think the textbooks go about hiding these sorts of assumptions?

Rod Hill: In a way, I think the texts hide these assumptions in plain sight while using the magician’s trick of focussing the students’ attention elsewhere. When the supply and demand model is introduced, the texts don’t stress the unrealistic assumptions of the perfectly competitive model (perfect costless information, no geography so that all transactions take place on the head of a pin, no one has any power over prices, no product differentiation). In part, this is because these are deemed to be not important for the questions being asked.

Students’ attention is directed to questions where the model’s predictions seem to accord with common sense: demand goes up, prices rise; costs go up, prices rise, and so on. The student might think this looks plausible and, for much of the text and the course, it’s the only game in town.

But the model also predicts ‘no advertising’, ‘no political contributions by firms’, ‘little or no research and development spending’, ‘all sellers sell identical goods for the same price’ , and ‘people doing the same work get the same wages’ in the labour market. However, no questions about those things are asked, so the predictions are not confronted by the evidence that would refute them. Students would have to figure this out for themselves. And not coincidentally, these questions also raise issues of power: firms’ power over consumers, firms’ power in the political arena, firms’ power over their workers.

So independent-minded students could ask these questions, but (unless they stick around long enough to go to graduate seminars) they are not shown any way of thinking about them in their principles of economics class.

Tony Myatt: And I’d add to that it’s not just a question of emphasis – that the texts assume perfectly competitive markets for three quarters of the book. It’s also a question of placement and progression. The usual progression is an early chapter on methodology, which emphasizes that the realism of assumptions doesn’t matter – it’s predictive power that matters. This is followed by a section often called ‘How Markets Work’, which applies demand and supply to every conceivable type of market. If students are paying attention they might notice that the results of these applications are usually treated as facts – not predictions that need to be tested against the evidence – and certainly not treated as predictions that need to be compared against the predictions of alternative models. And this is a real irony: having sold the student on the unimportance of the realism of assumptions and the overriding importance of predictive power, the texts don’t follow their own methodology. They never take the business of comparative model testing seriously. And for practicing economists, we know that’s where the real fun begins.

Emphasizing (or assuming) perfect competition is the same as assuming away power because in this market structure there are no ‘large’ market participants who can exercise influence over either market outcomes or political outcomes. Neither buyers nor sellers have influence over prices. Sellers are small and lean, just covering their costs. On their own, they lack resources and the incentive to lobby politicians. Such firms would also lack resources to invest heavily in research and development. And this is another irony, because technological change is the one thing that you could say capitalism has done well. Yet, the texts emphasize a market structure that is incapable of explaining this exact feature!

PP: You say that no alternative models are taught in the classroom. I’ve heard this criticism raised many times before and it has always struck me as rather strange. In just about every other social sciences class it is a prerequisite that the lecturer teach the major different approaches, to do otherwise would be considered biased. In your opinions, how do economists get away with this where others cannot?

Tony Myatt: Well, we need to be careful here. Other models of market structure besides perfect competition are taught. Monopoly, monopsony, imperfect competition, and oligopoly are all taught. But they are placed towards the end of the book. Later, when we need to explain the distribution of income, or the benefits of trade, the texts return to assuming perfect competition, to the demand and supply framework, as if that intervening stuff never happened. The argument is that perfect competition is simpler, and is good enough as a first approximation to all markets. But perfect competition is actually a lot more complicated than monopoly. Why not apply monopoly as a first approximation? But that would have a huge ideological impact. It would mean that power, cronyism, and exploitation are potentially important. It would mean that the economy doesn’t necessarily operate efficiently (as a first approximation), and that unions don’t necessarily cause inefficiencies. It would mean that there is a potentially much bigger role for government regulation. And the point is, when discussing a particular topic – international trade say – the texts don’t say “if we assume perfect competition we get these predictions; if we assume imperfect competition we get these predictions; now let’s compare the predictions to the facts”. This is thought to be too complicated, too advanced. But this is a cop out, a dereliction of duty, and is inconsistent with the methodology which the textbooks purport to endorse.

So, while other models of market structure are taught, they are downplayed. On the other hand, no other paradigms are taught. The mainstream textbooks only contain information about the neo-classical paradigm. How do they get away with this?

Again, it’s a question of keeping things simple. They argue they don’t want to confuse the student. It’s hard enough to teach neoclassical concepts without further confusing students with critiques of what they are learning. There’s a nice video of Stephen Marglin addressing the Occupy Harvard movement where he discusses this. (Here’s the link http://www.youtube.com/watch?v=Pf0-E8X-GHo ). He tells how, in his “critical perspectives” introductory economics course, he begins by teaching the neoclassical theory. Then he introduces several critical perspectives. And he acknowledges that this is a huge undertaking. He acknowledges that it takes most students most of their time to get their heads around the neoclassical concepts. But he also acknowledges that in most economics departments there is never a good time for the critique. If it’s too hard for first-year economics students, it’s certainly too hard for high-school students. And then graduate students need to have a ton of maths packed into the curriculum, so there’s no time there. So, as he says, “economists are all for critical thinking, just not today…tomorrow.”

In fact in my own “critical perspectives” course I use our Anti-Textbook. I teach the mainstream material (that’s the first part of each chapter). And the students teach the Anti-Text material (the second part of each chapter). They enjoy shooting me down! So far, it seems to work well. But I’ve been fortunate to have a small class.

Rod Hill: I’d just add that the dominance of the neo-classical paradigm (at least in the English-speaking world) means that there’s less internal pressure within the profession to provide other viewpoints in a principles course than there might be in, say, sociology. Lecturers trained only in neo-classical economics are comfortable using textbooks that contain only that viewpoint.

Most students come to their undergraduate studies in economics with no knowledge of different approaches so they are not in a position to ask ‘Hey, what would ecological economics have to say about that?’ They rely on their instructors to tell them what economics is.

I remember as an undergraduate stumbling upon a copy of Galbraith’s The New Industrial State in a used book shop, reading it and finding it interesting, and wondering ‘Why have I not heard about this in my courses?’ But I rarely asked such questions and had no access to the kind of guidance that we’re trying to provide in The Economics Anti-Textbook.

A new ProPublica story, “Freddie Mac Betting Against Struggling Homeowners,” treats the fact that Freddie Mac retains the riskiest tranche of its mortgage bond offering, known as inverse floaters, as heinous and evidence of scheming against suffering borrowers.

The storyline in this piece is neat, plausible, and utterly wrong. And my e-mail traffic indicates that people who are reasonably finance savvy but don’t know the mortgage bond space have bought the uninformed and conspiratorial ProPublica thesis hook, line, and sinker.

We need to get into a bit of detail to explain what is wrong with the ProPublica account. The structuring of Freddie and Fannie bonds is to deal with interest rate risk (remember, there is no credit risk since the bonds are guaranteed by the GSEs). This is well established technology, dating back to the early 1980s.

The undesirable feature of mortgages is their prepayment risk. Every country ex the US has features in mortgages that restrict or prohibit prepayment risk (the most common is having mortgages be floating rather than fixed rate). Prepayments are very unattractive to bond investors, since the time you are happiest as a fixed income investor is when interest rates fall, since your bonds go up in value. But if you hold a simple mortgage pass-through, the bond will disappear due to prepayments.

So the structuring of a CMO (collaterlialized mortgage obligation) creates a series of normal looking bonds from the cash flows from mortgage securities: some fixed interest rate bonds of various maturities (created at a lower interest rate than the yield on the mortgages) and one medium-term maturity fixed rate bond which is then decomposed into a floating rate bond and an “inverse floater” which consists only of the inverse of the interest rate payments on the floating rate note (for instance, if the coupon on the bond from which it was decomposed was 6% and the rate on the floater is Libor + 8 basis points, or .08%, the inverse floater would pay at 6% – (Libor + .08%).

There are some dirty little secrets of inverse floaters. The first is that because the other parts of the deal are very to extremely easy to sell, various features of the deal structure are tweaked to favor the inverse floater, plus the other components are often sold at premiums, meaning some additional cash flow can be diverted to the inverse floater. This is useful because the inverse floater is colloquially called “toxic waste.” It is very difficult to sell and usually retained by the originator because it is hard to explain, hard to model, and has widely divergent payouts depending on what interest rates and prepayments do.

The second dirty secret is that all the feature tweaking makes inverse floaters a good bet on average. On a $100 million bond deal, you might expect $2 million of the value to be in the inverse floater. All the eagerness of the other buyers for the other pieces means you can probably rejigger terms during the deal structuring for it to be expected to be worth $3 million. If you are smart and disciplined, you book it at $2 million, so that if things work out, you look like a hero. and if events pan out otherwise, you look like less of a goat.

Now let’s turn to the bizarre ProPublica piece. It starts with the wrongheaded premise that retaining the inverse floater is unusual and a sign that Freddie is “betting against homeowners.” Now it is true that owning an inverse floater means that you are happier when mortgages don’t prepay. But the GSEs in general don’t want homeowners to prepay. Yet another dirty secret of the mortgage business is that it is the MOST creditworthy investors who refi to take advantage of lower rates, over and over again. The weaker ones don’t because they can’t (the credit mania period of 2004-2007 was an exception to this long standing pattern).

In addition, it is not clear what Freddie’s net position is. Both Freddie and Fannie have a long standing practice of hedging their prepayment risk. Their hedging activities are so massive as to have macroeconomic impact. They are “pro cyclical” meaning they tend exaggerate interest rate moves, pushing them down faster when they are falling and forcing the higher when they are rising. Greenspan was concerned about the distortions caused by the GSE’s hedging in 2003 and was relieved when the Freddie and Fannie accounting scandals led to them having their loan growth restricted, since it kept a big problem from getting even bigger. John Dizard of the Financial Times discussed this problem in early 2008:

The core problem for the housing GSEs is, and has been, the prepayment option embedded in US fixed-rate mortgages. That has meant that the term of the GSE assets extends or contracts depending on whether homeowners can refinance at an advantageous rate. However, most of the long-term debt on the liability side of the GSE balance sheets has a fixed term. So the GSEs must more or less continually offset this imbalance between the average maturity of their assets and liabilities through the derivatives market, specifically the interest rate swap market. Otherwise the mark-to-market losses would overwhelm their small equity bases.

So ProPublica misses completely that the GSEs have long been engaged in a massive program of interest rate hedging.

The implication is that it is meaningless to look at the inverse floaters in isolation; you’d need to look at the composition of all of Freddie’s exposures to reach any conclusions as to what sorts of wagers, if any, they are taking. Looking at one position in isolation is meaningless.

And if you read the article carefully you can see even with its cherry-picking, ProPublica’s case is weak. It tries to argue that the inverse floaters “raise concerns” and represent “a conflict of interest.” It argues that Freddie is refusing to refinance high interest rate loans to help the performance of its inverse floaters. Yet look at the language:

Freddie Mac set out to make gains for its own investment portfolio by using complex mortgage securities that brought in more money for Freddie Mac when homeowners in higher interest-rate loans were unable to qualify for a refinancing.

First, any “bet” on refinancing would be made in Freddie’s treasury department, which is separate from its business side (ProPublica includes this notion in the story as the rebuttal from Freddie, and I’ve worked with enough financial firm treasury units to find that credible).

And look at the sort of “evidence” that ProPublica uses to try to argue that Freddie is being unfair:

Jay and Bonnie Silverstein describe themselves as truly stuck in a bad mortgage. They live in an unfinished development of yellow stucco houses north of Philadelphia. The developer went bankrupt.

The Silversteins bought this home before the housing market crashed, and then couldn’t sell their old house. They now say that buying a new home before selling the old one was a mistake — a painful one. Stuck with two mortgages, they started to get behind on their payments on the old house.

“It wound up taking us years to sell that house, so we had two homes and two mortgages for two-and-a-half years,” Jay Silverstein says. “It burned up my 401(k) and drained us.”

Jay Silverstein has a modest pension, and they haven’t missed a mortgage payment on their current home. Still, they are struggling. They could make the monthly payment on their new home if they could just refinance — down from their current interest rate of near 7 percent to today’s rates below 4 percent. That could save them roughly $500 a month.

“You know, we’re living paycheck to paycheck,” he says. A lower rate “might go a long way toward helping us.”

I hate to sound heartless, but their credit recored would clearly show that they have defaulted on their mortgages on their old home. They are NOT a candidate for a refi. They MIGHT be a candidate for a principal mod (which is what banks traditionally did for underwater but potentially salvageable borrowers). The ProPublica reporting here is completely disingenuous.

Even if the allegation in the ProPublica article is correct, that the GSEs have positioned themselves to be betting on a lower than normal rate of refis, based on the weak credit condition of GSE borrowers, the evidence they present says the causality runs the other way: that based on GSE standards, a bunch of borrowers who would normally refi can’t because their credit condition has deteriorated. And the GSEs have positioned their book accordingly.

ProPublica is not necessarily wrong to say that Freddie has a conflict of interest, but it is hardly a secret: it is between minimizing losses to taxpayers and saving struggling borrowers. It is fair to question whether it is balancing those interests correctly. Critics allege that the GSEs are taking very aggressive measures to maximize their short term profits in order to deliver lower losses to taxpayers, and that in turn is leading to policies that a lot of critics are deeming to be short-sighted. For instance, New York Fed president William Dudley said in a speech earlier this month an analysis by his staff showed that taxpayers would get better returns longer term from having the GSEs do more principal mods, and we’ve separately argued multiple times that principal reductions are in many cases better solutions than foreclosures (which the GSEs have been pursing aggressively) or refis (which typically offer lesser payment relief and still leave most borrowers underwater).

So that begs the question: why does one Scott Simon from PIMCO charge, at the top of the article, that he was “shocked” that Freddie was engaging in the well established, common practice of retaining inverse floaters, and seemed stunningly unaware of the fact that the GSEs have always engaged in hedging strategies to manage their prepayment risk? One is forced to conclude that he either does not know this space or has some reason to run a disinformation campaign. We’ve heard that the Administration is deeply frustrated with FHFA head DeMarco’s resistance to slowing foreclosures and taking other measures to throw the GSEs’ full weight behind saving the housing market. And the people who have the most to lose from the GSEs doing more refis are not the holders of inverse floaters, but the holders of high coupon Fannie and Freddie bonds from 2006 to 2009. So perhaps Pimco has decided to do the Administration a favor by supporting an anti-GSE line, or perhaps has shorted those high coupon bonds, anticipating that the GSEs would be made to step in to rescue the housing market, and are upping the pressure to make that trade works out.

But no matter what the explanation is, ProPublica does not have a smoking gun, and it’s embarrassing to see them get this one so wrong.

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Your Excellency, I am pleased to present the requested report on the economic outlook for the Great Southern Province of China, currently referred to by the local population as “Australia”. For convenience I will refer to the country by this older name. We will now turn to the outlook.

A Fork in the Economic Road …

The commodity boom has created a “two track” economy – as your Excellency know economists prominent in the media love glib “sound bites”. The mining and commodity boom benefits a small part of the economy whilst simultaneously creating problems for other parts.

The mining and energy sector account for less than 10% of the Australian economy. This is smaller than the Australian finance sector or manufacturing industry.

Mining and mining-related sectors, such as construction, manufacturing and services industries which benefit from mining activity, make up about 20% GDP. These sectors will contribute approximately two-thirds of the projected 4% GDP in 2011/12. The remaining 80% of economy will contribute one-third of growth.

Mining employs 1.5% of the workforce reflecting its capital intensive nature. Unfortunately, a portion of the equipment needed is imported adding to the current account problem, especially in the short run. A combination of high domestic costs and the strong Australian dollar means that a significant portion of project related work is now done offshore.

The revenue earned and the overall contribution to national income does boost the economy and creates employment. But dividends and interest payments to overseas investors reduce the amount of earnings that stays in Australia.

The concentration of mining activity in Western Australia and Queensland also creates imbalances within the domestic economy. Skill shortages in mining means rising salaries, attracting workers from other industries and placing pressure on general wage levels. It also exaggerates property price increases in some areas. This creates inflationary pressure that forces the Reserve Bank of Australia to raise interest rates.

The rising demand for Australia’s mineral exports also pushed up the value of the Australian dollar. Since deregulation in 1983, one Australia dollar has purchased, on average, around 77 US cents. The commodity boom and Australia’s high interest rates relative to the rest of the world increased the value to around 95 to 100 US cents, peaking at around 110 US cents.

The high Australian dollar places exporters at a cost disadvantage and also makes it difficult to compete with cheaper imports. Affected sectors include key Australian export industries that are significant employers such as education services, tourism and manufacturing. Australia may lose up to 170,000 manufacturing jobs over the next 10 years, almost double lost jobs in the past decade.

Unhappy Homes…

The domestic economy remains lack lustre. Consumers are affected by significant debt levels and weak wage growth. Public spending has fallen reflecting pressure to return the budget to surplus. Business investment has been weak, reflecting sluggish demand.

Debt levels remain high. Between 1991 and 2011, household debt rose from around 49% to 156% of disposable income. In 1989, when mortgage rates were 17%, the ratio of interest payments to disposable income was 9%. Currently, despite the fact that mortgage rates are around 7.5%, the ratio has increased to around 12%. As households increase savings and reduce debt, consumption is lower contributing to slower growth.

Slow growth in credit, reflecting households reducing debt and problem in the banking sector, also constrains growth. Employment in manufacturing, retail and financial services is weakening, with major employers announcing layoffs.

There are other unresolved problems. Housing prices remain high based on traditional measures such as affordability and rental returns.

According to the latest Economist survey (published on 26 November 2011), Australian house prices were overvalued by 53% based on rents and 38% measured against income levels relative to long run averages. According to The Economist, Australian home prices are overvalued by at least 25% based on the average of these two measures. The level of overvaluation is greater than in America at the peak of its housing bubble.

As your Excellency personally experienced during his visit to Australia, no subject excites greater passion among the locals than house prices. This is a staple of conversation and people excitedly compare the size of their mortgages and the value of their accommodation. There is heated disagreement between those who believe that house prices will not fall and other who forecast substantial price falls.

The real issue is over investment in housing stock, which produces low or nil return. Encouraged by complex subsidies, large amounts of capital are locked up in housing, unavailable for more productive wealth creating activities such as new industries.

In international rankings, Australia regularly performs poorly in competitiveness, productivity and innovation. This is inconsistent with the national character, which prides over achievement in competitive sports. Australia believes it can “punch above its weight”.

In a recent paper entitled “Productivity – The Lost Decade”, economist Saul Eslake found that Australia’s productivity growth during the 2000s was 0.50% below that of the 1990s, when it was broadly comparable to the OECD average. Between the mid 1990s and the mid 2000s, annual labour productivity declined from 2.8% to 0.9% per annum. Over a similar periods, broader measures of productivity that incorporate capital as well as labour fell from 1.6% to near zero.

The GE Global Innovation Barometer ranked Australia 16th out of 30 countries, well behind the leaders like the US and Japan. While 18% of local business leader, perhaps blinded by patriotism, nominated Australia, only 2% of global senior business executives citing the country as an innovation champion.

The GFC also significantly reduced the wealth of individuals, especially retirees. The value of their investments declined. At the same time, income and returns from investments also declined. The “wealth effect” limits consumption but also encourages those planning for retirement to increase their savings.

These problems mean that Australia’s non-mining sector is forecast to grow at a modest 1% per annum, compared to the mining sector which is forecast to grow at 5%.

Where are We Now…

Your excellency, the country is a fest of complacency. Locals are convinced that there is no end in sight for the mining boom driven by China’s growth. They believe that they are protected against the problems in Europe and elsewhere. Anyone who points out the risks is dismissed as a pessimist and doomsayer.

Despite the recovery, many parts of the economy, other than the buoyant mining sector, remain subdued. The stock market, although not an accurate measure of economic health, remains over 30% below its levels before the crisis. Interest rates for 3 and 10 year government bonds have fallen sharply to record lows, reflecting increased pessimism amongst investors about economic prospects.

Australia remains vulnerable. A slowdown in Chinese growth and fall in commodity prices and volumes would affect the economy adversely. Australian history suggests that mining booms are finite and end suddenly causing significant disruption.

Problems in sovereign debt and attendant pressures on banking system may decrease available funding and increase borrowing costs for Australian banks and companies. Overvalued house prices and high household debt increases vulnerability to an economic slowdown, with an accompanying rise in unemployment or to higher mortgage rates. A credit crunch or recession could cause house prices to fall worsening domestic conditions, which would in turn affect domestic banks.

The perfect storm for Australia would be the coincidence of those events.

Australia has some flexibility. Public debt around A$250 billion is a modest 22% of GDP providing flexibility to stimulate the economic. But this capacity can be over estimated. Prior to the GFC, Ireland’s debt levels were modest around 25% of GDP but the need to bailout troubled banks and the collapse of the real estate market led to debt levels increasing rapidly.

Australian interest rates are relatively high (official rates are 4.25%), providing flexibility to cut borrowing costs to buffer any shock. The currency is flexible and a fall in value of the Australian dollar would help cushion any weakness, as was the case in 1997/1998 Asian crisis and again in the GFC.

Your Excellency will also be aware that Australia Treasurer Wayne Swan was recently anointed as the world’s best Finance Minister. His skills may assist in navigating through any crisis, should such an event occur. But it is worth noting that a previous Australian Treasurer received similar accolades in 1984, only to subsequently preside over a deep recession, which “the country had to have”.

Your Excellency has requested my recommendations for whether we should launch our bid for Australia, to be renamed the “Great Southern Province of China”. I believe that we should await developments. We should be able to acquire Australia at a cheaper price in the not too distant future.

Yours truly

The Chinese Envoy

I’d heard from German speaking readers about the Der Spiegel report of an SEC investigation in its German edition over the weekend and they’ve now released it in their English language version.

Der Spiegel is careful about its sourcing, so readers should take this account seriously. The story is about the overall litigation risks facing the German powerhouse, the SEC investigation is a mention in passing (hat tip reader Mary L):

Meanwhile, the US Securities and Exchange Commission is also investigating Deutsche Bank, SPIEGEL reports. According to financial regulatory sources, the bank launched one CDO transaction called “START” in which it allegedly allowed the hedge fund of US speculator John Paulson to choose junk mortgage securities against which he could speculate — without the other investors knowing about it.

Goldman Sachs settled a suit with the SEC in a similar case for $550 million, SPIEGEL reported.

Why is there probably less here than meets the eye? For this investigation to be taken seriously, SEC enforcement chief Robert Khuzami would have to resign. He was the general counsel for the fixed income area at the time when the deals in question were undertaken (contra Der Spiegel, START was a program of synthetic CDOs, not just a single deal, just the Goldman Abacus trade that was the focus of an SEC lawsuit was actually just one of 25 Abacus trades). It would not be sufficient for Khuzami to recuse himself from this investigation. Staff would still be concerned about how the probe might affect their ultimate boss.

In addition, the fact that Paulson approached Deutsche Bank has been in the public domain since October 2009, when Greg Zuckerman’s book, The Greatest Trade Ever, was released. It discussed in detail how Paulson approached Goldman, Deutsche Bank, and Bear Stearns about constructing synthetic CDOs so Paulson could bet against the subprime market cheaply. This is how Scott Eichel, a senior Bear Stearns trader, saw it:

“We had three meetings with John, we were working on a trade together,” says Eichel. “He had a bearish view and was very open about what he wanted to do, he was more up front than most of them.

“But it didn’t pass the ethics standards; it was a reputation issue, and it didn’t pass our moral compass. We didn’t think we should sell deals that someone was shorting on the other side,” Eichel says.

If this conduct was so questionable that the SEC thought it made sense to sue Goldman in April 2010, why was Deutsche not sued then or shortly thereafter? Why is the SEC only “investigating” nearly two years later?

Irruption of snowy owls in MI Free Press (Cap’n Magic).

All Thoroughbreds Have Same Ancestor ABC (Aquifer).

Western industrials feel a Chinese burn FT (SW).

The Jobs Guarantee and MMT Core. A multi-part resource on this WPA-like policy, with responses to John Carney and Cullen Roche, among others.

First hand description of events in Oakland on Saturday (Skippy). Can’t vouch for the provenance, but it reads like the work of a subject matter expert.

UPDATE A second description on Saturday’s Oakland events. I’m told by a source who had a number of live streams going that this article is more accurate on sequence, mainstream or no (and one of the reporters was arrested).

Report: Block Bloc assaults streamer during #SolidaritySunday march New York Observer. Diversity of tactics, donchya know. And solidarity for me, but not for thee.

A skeptic’s guide to non-violent resistance. “The great irony is that most dictators would have an easier time dealing with an armed insurgency (where anything goes) than with a mass nonviolent campaign (where anything the dictator does could backfire).”

Honest Appalachia (furzy mouse). Awesome site for Appalachian whistleblowers.

“The banking industry still has a lot of work to do in terms of rebuilding trust” Bloomberg. Vikram Bandit, Davos co-chair.

Davos amenable to future date change to avoid clash with Chinese New Year. Senior officials were absent.

“Davos is Davos” WSJ. Until it’s not.

A specter is haunting Davos. Number 9. Number 9…

Davos unmentionables: Portuguese debt and the price of oil BBC.

Topless bodies found in Davos panel Pravda. Diversity of tactics!

Davos does Big Data GigaOM.

Female attendance at Davos highest ever Bloomberg. 17% as opposed to 9% ten years ago. Alrighty, then.

Sixty years of economic change in one graph Atlantic (MS).

Downward mobility in New York City Bloomberg.

Complexity and transparency in finance mathbabe (SW). Rejoinders to Steve Waldman.

Government checks don’t bounce Macrobusiness. Buy helicopters!

Libertarians for public goods Noahpinion. And this is my other brother, Rackand.

If Obama’s serious about his Fraud Unit, he’ll check out this road map in Pravda. We don’t know how the FU will be set up, but here are the tells to watch for: Subpoena power, Senate hearings, a substantial budget, and a forum for crowdsourcing and whistleblowing. For The Droner, that last point is going to be a very heavy lift.

You can even get stucco WSJ (JC). Oh, how you can get stucco.

How foreclosure works in the UK. It’s ugly over there.

RBS bonus veto would have caused “chaos” BBC. Oh the humanity!

Smedley Butler addresses the Bonus Army Washington’s Blog. The original 99%.

National Park service breaks discipline, tases Occupier at MacPherson Square (DCBlogger).

OPD breaks discipline, arrests reporters Mother Jones.

OPD decisions must go through court monitors, a step closer to federal takeover Bay Citizen (Francois T). Wonder what the monitors think of the OPD’s role in the weekend’s events?

Port of Longview signs off on ILWU and EGT settlement Lower Columbia Daily News.

Cambodia’s New Look Travel and Leisure (MS).

62 banksters have raised at least $9.4 million for Obama and the DNC Salon. Populism!

Tammany on the Delaware The Record (SW). Then again, think of Corzine.

Detroit retiree, 69, supplements his income by living off the land Detroit News.

Victorian delicacy enjoys revival Daily Mail (MS).

Best product reviews EVAH (CJ). A have-to-have if you plan to follow Election 2012.

Antidote of the day: Hat tip, the great MJS.

By Marshall Auerback, a portfolio strategist and hedge fund manager

News stories continue to suggest that Greece once again appears on the verge of reaching a deal with its private sector creditors on how much of a loss they would be willing to accept on their bond holdings. The latest numbers suggest a 70% write-down. A pretty striking comedown for what is supposed to be a “voluntary default” and, hence, not subject to the triggers of a credit default swap on Greek debt.

Naturally, the spin surrounding the proposed agreement is that this is a “one-off” and that other troubled periphery nations shouldn’t even begin to think of securing a comparable deal. But the inherent tension between securing a write-down on Greek debt which more closely mirrors the disaster which is now the Greek economy, and the desire to minimise the potential contagion effect is rearing its ugly head already, and may help to explain some of Germany’s recent machinations.

Peter Spiegel of the Financial Times published the German government’s proposal for Greece’s “improvement of compliance” with the terms of the bailout, and all of a sudden Greek PSI positively pales in comparison. According to Germany’s proposal, whatever the result of the PSI deal, Greece would need to “legally commit itself to giving absolute priority to future debt service” and “accept shifting budgetary sovereignty to the European level”. If the Greek government is not willing to do this, the troika would presumably turn off the taps of bailout money and Greece would default. With no access to market or official financing, Greece would be forced to exit the eurozone.

Now, polls appear to indicate that a bunch of the Greek middle classes might actually welcome EU control over their finances, as opposed to a bunch of corrupt Greek politicians, but overall, it’s almost certainly guaranteed to trigger a violent reaction. In any case, given that a deal with Athens is seemingly so close, why did Berlin choose this particular moment to make this demand, and place the entire deal potentially at risk?

I think we have to look beyond Greece for the answer to that question.

One suggestion by Megan Greene is that Berlin’s proposal is a by-product of the unintended consequences of the ECB’s three year long term refinancing operation (LTRO):

If eurozone banks have as much access to cheap, three-year ECB funding as their collateral allows, perhaps Germany and the troika have decided that eurozone banks can survive a Greek default.

In the absence of the ECB hoovering up all of Greece’s debt via its Securities Market Programme (“Not gonna happen; wouldn’t be prudent,” as George Bush the Elder/Dana Carvey might have said), Greece is, as Greene argues, clearly insolvent and would likely have to leave the eurozone to eventually return to growth. The German proposal, argues Greene, may have accelerated the inevitable.

But there’s another, more sinister interpretation. The question which has been persistently asked since the debt renegotiations started with Greece is: what will stop Portugal, Ireland, or indeed Spain from demanding the same deal? And I continue to believe that Spain is the domino which is too big to fail. Its liabilities are too big to be covered by the existing firewall established by the EFSF and ESM. An expansion of the LTRO might address the solvency/banking crisis, but not the broader problem of deficient aggregate demand, high unemployment, and rising social turmoil.

So to repeat the question: how do you preclude Portugal, Ireland and, indeed, Spain from asking for the same deal as Greece, if the negotiations succeed?

Answer; you can’t. So the Germans throw a politically impossible demand in front of the Greeks, in effect saying, “No more money unless you effectively surrender your national sovereignty.” And that’s the implied warning ahead for the other periphery countries which look to secure the deal currently on the table for Greece.

In effect, the Germans (behind the auspices of the troika) are saying, “It’s fiscal austerity on our terms. You try to renegotiate like the Greeks and we take you over. The other alternative is that you leave.”

Anschluss economics, plain and simple.

Is this too harsh an assessment? Well, when their national interests are at stake, the Germans are perfectly prepared to shed the “good European” persona and play hardball. Think back to how the Bundesbank engineered the departure of Britain from the ERM back in the early 1990s, and you’ve got the template for today. By publicly suggesting that sterling was overvalued and refusing to offer support to the British pound (in contrast to its subsequent defence of the French franc), then BUBA President Helmut Schlesinger virtually assured the UK’s ejection from the Exchange Rate Mechanism. Let’s face it: history shows that Germany doesn’t do “subtle” very well. This looks like a blitzkrieg, plain and simple. Spain, Ireland, Portugal and Italy – you have been warned.

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Your Excellency, I am pleased to present the requested report on the economic outlook for the Great Southern Province of China, currently referred to by the local population as “Australia”. For convenience I will refer to the country by this older name.

Deep dependence on our great nation means Australia’s future is inextricably linked to China. Given that the white European colonisers historically feared the “yellow peril”, the irony of the situation will be not lost on the Politburo. Despite recent engagement with us and the rest of Asia, Australia’s focus seems confused. The country’s head of state remains an octogenarian British Queen. Australia also believes its security is guaranteed by the United States of America with whom it has extensive defence links.

The locals continue to believe in both in its sovereignty and also its bright economic prospects.

Escaping Acronyms…

The popular narrative is that Australia escaped the GFC (global financial crisis – the locals are acronymic) through their own planning.

The country was certainly in a better position to cope with the problems. The Federal government did not have much debt. However, some State governments have significant borrowing. Governments also systematically shifted some of their debt into public private partnerships (“PPP”). Because of the strategic nature of this infrastructure, these projects de facto enjoy the indirect support of governments. Private household debt is also high.

At the start of the crisis, Australian interest rates were relatively high, providing greater flexibility.

But Australia did not escape the crisis unscathed. One major bank lost nearly a billion Aussies (colloquial term for the Australian dollar, the local version of the Renminbi). Investors, including a number of charities and local councils, suffered significant losses from investments in various financial products. A number of highly leveraged infrastructure and commercial real-estate investors failed.

Local banks escaped the problems of their overseas counterparts. The near death experiences in the recession of the early 1990s encouraged them to stay home eschewing overseas adventures and complex financial structures. That said, another year or so, they would not have been so lucky.

The local banking regulator, APRA (Australian Prudential Regulation Authority), and politicians take credit for the banks being relatively unaffected. This is curious given that banking regulations are largely uniform around the world. One can only assume that Australia has superior regulators and politicians to the rest of the world – an example of “Australian exceptionalism”.

In reality, Australia’s swift recovery was driven by large cuts in interest rates, government guarantees for banks, government stimulus and a commodity boom.

The central bank reduced interest rates (from 7.25% per annum to 3.00% per annum). The fall of 4.25% per annum translates into a fall in monthly mortgage repayments of nearly 30 % or around $7,000 per year on a 20-year mortgage of $250,000. A government guarantee on bank deposits and borrowing ensured that financial institutions were insulated from many of the problems.

Government spending minimised the effects on the real economy. Cleverly directed cash transfers to lower income households rapidly stimulated the economy. As part of the ESP (Economic Stimulus Package), government spending on education, housing and infrastructure was also increased. Some of the spending was not well directed. Environmental initiatives, subsidies for home insulation to reduce energy consumption, have proved less than successful.

The long-term benefit of some spending is questionable. Your Excellency, the school across from my office has been refurbished with new gold signage and a brand new fence replacing the aluminium one that was perfectly serviceable. The economic return on this investment is unknown.

The main driver of the recovery has been a commodity boom. This is not a new phenomenon in Australian history. It can be traced back to the famous gold rush of the 19th century when many of our countrymen travelled to Australia in search of their fortunes.

Boom…

Former Prime Minister of Australia Paul Keating, a prominent Sino-phile, recently remarked that Australians were luckier than most races having been give an entire continent. He might have added that it was also remarkably rich in mineral wealth.

Australia has benefited from a substantial increase in demand for and prices for its mineral products. The country is enjoying its best terms of trade (measured as Price of Exports divided by Price of Imports, showing the quantity of imports that can be purchased theoretically from the sale of a fixed amount of exports) in 140 years. Australia’s terms of trade have improved by 42%, just since 2004.

The commodity boom is driven by a sharp increase in demand, supply constraints because of under-investment in mineral production and associated infrastructure and some unexpected effects of the GFC.

In the 1990s, as a result of persistently low prices, mining companies did not invest sufficiently in expanding production capacity or infrastructure, such as transport, refining or processing capacity. The increase in demand from purchasers, particularly emerging economies, quickly created bottlenecks and shortages. This led to sharply higher prices as well as improved volumes for many commodities.

The GFC also boosted investment in commodities. As traditional investments fared poorly (stocks, interest rates and property prices all fell), investors switched to hard assets, like commodities. The underlying logic was that these were real assets with genuine underlying uses rather than the fictions created through financial engineering.

Low interest rates also assisted demand and prices as it cost less than before to buy and hold commodities, which paid no return.

As central banks commenced printing money in an effort to restart growth, investment in commodities increased further as investors sought a hedge against the risk of inflation. Former Board member of the Reserve Bank of Australia, Professor Russell McKibbin suggested that perhaps as much as 40% of the improvement in Australia’s terms of trade was driven by US and European monetary expansion.

As your Excellency knows, one of China’s priorities is to preserve the value of its foreign exchange reserves, currently around US$3.2 trillion. The bulk of these funds are invested in US dollar, Euro and Yen denominated securities. To reduce the risk of losses as these securities lose value due to the actions of governments to devalue the currency against the Renminbi, we have executed your instruction to purchase and stockpile large amounts of strategic commodities.

Boomier…

The economists, who failed to forecast the rise in commodity prices or the GFC, now speak of a “super” boom lasting decades. The boom is more fragile than currently understood.

As growth in China and other emerging countries decelerates, demand for commodities is likely to slow. High prices have encouraged investment in expanding existing mines, building new mines and additional infrastructure as well as exploration. As new capacity and supply comes on stream, there will be pressure on prices.

At your Excellency’s suggestion, we have extensively studied the commodity purchasing strategies of Japan in the 1980s. Based on this analysis, we have actively cultivated new sources of supply of essential commodities. This will enable us to play suppliers off against each other to achieve more favourable prices in the long term. Westerners place great store in contracts, such as long term agreements to purchase minerals at agreed prices. In the Chinese way, these are, at best, statements of intention based on conditions existing at the time of agreement. If conditions change, then we will, like the Japanese, renegotiate the arrangements in our favour.

Australian mining entrepreneurs and politicians point to a massive pipeline of projects, which will underpin Australian prosperity. The Australian Mines and Metals Association estimate that there is A$427 billion of resources in train, including A$146 billion in Liquid Natural Gas alone. A$236 billion of projects are current under way with a further A$191 billion awaiting approval.

There is also A$770 billion of infrastructure spending required to renew and develop Australia’s economic and social infrastructure. This will compete with commodity projects for funding. Chairman of Infrastructure Australia Rod Eddington has warned that financing will not be available for many projects. Infrastructure Australia has identified a smaller list of priority project totalling A$86 billion.

Commodity projects depend on demand for the product and also on the ability to finance it. Deterioration in money market conditions and also problems in the banking system mean that the availability of funding is becoming more restricted and expensive. If previous commodity booms are a guide, then many of these projects may not eventuate.

Sinophilia…

Around 23 % of Australian exports now go to China. The real quantum is higher as some Australian exports to Asia are then re-exported to China.

China currently faces significant challenges. Our two major trading partner – Europe and America – face serious problem which will lead to a slow down in our own exports. Recent statistics, such as the volatile Purchasing Managers Index that measures manufacturing activity, suggest a sharp slowdown. In turn, this will affect our suppliers such as Australia by way of lower demand and also lower prices for commodities.

Unlike 2008, our capacity to respond to any slowdown is reduced. Then, we increased lending through our policy banks to boost demand. In 2009 and 2010, we were able to grow loans by around 30-40% of our GDP to drive growth. Unfortunately, party cadres have not used the money wisely in all cases, resulting in some unproductive investment and bad debts for the banks. The need to support our banks and cover their bad debts will restrict our ability to support the economy.

As your excellency is also aware, around US$ 800 billion or 25% of our US$3.2 trillion in foreign exchange reserves is invested in “risk free” European government bonds. Continued losses in these investments and on investments in US government bonds also further restrict our flexibility. Our economic growth will be slower then widely anticipated.

European Tsunamis…

Australians believe that physical distance from Europe and proximity to China and Asia affords protection from European debt problems.

Despite record terms of trade and high export volumes, Australia continues to run a current account deficit with the rest of the world of around 2-3% of GDP, around US$30-40 billion per year. This must be financed overseas. Sovereign debt problems and the resultant problems in the banking system will affect international money markets for some time to come. Australian borrowers will face reduced availability of funding and increased borrowing cost.

Before the crisis, Australian bank deposits totalled 50-60% of loans made. The difference was funded in wholesale markets, generally from institutional investors.

In 2007, deposits made up around 20% of bank borrowing down from 34% a decade earlier. Domestic wholesale borrowing and foreign wholesale borrowing were 53% and 27% of bank balance sheets. Following the GFC, increases in the cost of overseas funding and regulatory pressure, Australian banks significantly reduced their loan to deposit ratios, with deposits now around 70% of loans. They also reduced their dependence on international borrowings.

Nevertheless, Australian banks face significantly international re-financing pressures, needing around A$80 billion in 2012. Around A$35 billion are AAA rated government guaranteed bonds which will need to be financed without government support, unless the policy changes. In addition, the banks have a further A$28 billion worth of bonds that mature in the domestic markets

In the period before the GFC, Australian banks relied on securitisation to raise cheap funding from overseas. When these markets closed, Australian banks used debt guaranteed by the Federal Government to raise funds. With the guarantee now not available, Australian banks are increasingly using covered bonds to raise funds.

Covered bonds are secured over specified assets such as a pool of mortgages, giving investors priority over depositors. Regulators have limited the quantum of covered bonds permitted to a maximum of 8% of assets, limiting the ability of banks to use this form of financing.

To date, covered bonds have not proved a cheap source of finance for banks, as originally envisaged. Inaugural international issues by ANZ and Wespac have cost around 1.50% over inter-bank rates. In early 2012, the Commonwealth Bank issued at around 1.75% over interbank rates in the domestic markets. Given that the covered bonds enjoyed the highest rating of AAA, the funding cost for Australian banks for unsecured borrowings would be around 2.00-2.50% over inter-bank rates, a sharp increase over the last 6 months. This higher cost will be passed on to customers at some stage.

In testimony to a parliamentary committee, John Laker, the head of APRA, acknowledged the funding challenge. He hoped that improvements in market conditions would allow the Australian banks to access the overseas funding required.

Money Too Tight To Mention …

Facing reduced availability and higher cost of funding, Australian banks may reduce loan volumes and increase rates to customers.

The problems of international banks, especially European banks, previously active in financing local businesses, will compound the problem. These banks are required to increase capital to cover losses, including those on their sovereign bond investment. As they can’t or do not want to issue equity at deeply discounted prices and the limited investor appetite for such issues, the banks may sell assets or reduce lending to raise the required capital. Estimates suggest that these banks could have to sell (up to) $2.5-3.0 trillion in assets, resulting in a sharp contraction in availability of credit.

Before the GFC, European banks provided around 35% of loans to Australian corporations. This has fallen to around 16% in 2011 and is likely to decline further as a result of losses on sovereign bond holdings, pressures on bank capital and increases in US$ funding costs. European banks are actively looking to sell all or a portion of their Australian loan portfolios to alleviate the pressures. They are also cutting back on new lending to Australia clients, focusing on their home markets in Europe.

The reduced participation reflects losses on sovereign bond holdings, pressures on bank capital and increases in US$ funding costs. European banks are actively looking to sell all or a portion of their Australian loan portfolios to alleviate the pressures. They are also cutting back on new lending to Australia clients, focusing on their home markets in Europe.

Given that Australian companies will need to re-finance around A$80 billion of maturing loans in 2012, these pressures are not welcome. The problems of European banks, active in commodity financing, may reduce the supply of credit to the sector by about 25-30%, which would impact Australia’s resources businesses.

The contraction of credit will also affect Australia indirectly. The withdrawal of European banks from Asia and other emerging markets is affecting the ability of companies to finance trade and investment projects. This affects Australian exports.

In 2007, European banks and US banks accounted for 30% and 10% of loan in Asia-Pacific. This has fallen by around half to 15-16% for European banks and 5-6% for US banks. The level of participation is likely to shrink further as a result of the problems of these banks. Troubled French banks account for about 11% of maturing loans in Asia Pacific. It is unlikely that these banks will maintain their level of commitment. Asia-Pacific banks have taken up the slack but are not sizeable enough to fill the gap completely.

Australian companies overseas earnings also face significant pressure due to economic weakness in Europe and its affect on the other markets. A proportion of Australian retirement savings are invested overseas. These will also be affected by the problems in Europe and internationally.

The European crisis has affected Australian public finances. Falls in income and capital gains have reduced tax revenue. The government is cutting expenditure and tightening taxes to offset the reduction in revenue. Falls in income on retirement savings, reduced business investment and general loss of confidence is likely to adversely affect the domestic economy. Australia may not escape the possible European tsunami.

By Washington’s Blog

SOPA, PIPA, ACTA … What’s Next?

We just beat back SOPA and PIPA with the web blackout.

Now everyone is talking about ACTA. But – because ACTA is complicated, and is just starting to receive coverage – most are not sure exactly what ACTA really is, or why we should be concerned about it.

We’ll give you an executive summary of what you need to know.

Instead of giving you the specifics about what’s actually in the bill (we provide links at the end for those who want to know), we’ll explain why the procedure used is a recipe for disaster.

Why are we stressing procedure over substance?

Because, as awful as ACTA is, there are other horrible bills such as the Trans Pacific Partnership Agreement waiting in the wings … which may be even worse than ACTA.

Unless we understand the rotten, anti-democratic process which is causing these bad bills to be introduced, we will be caught off-guard by the introduction of one draconian bill after another … and we will lose the fight for Internet freedom.

(The problem is that powerful men are making laws in secret to protect their interests.)

Hollywood Tries to Ram U.S. IP Policies Down the Throat of Europe

On the most superficial level, ACTA is an attempt to ram American intellectual property policies down Europe’s throat.

As the Electronic Frontier Foundation’s Eva Galperin told me:

The United States will continue to use multi-national treaties negotiated in secret without the consultation of civil society or other key stakeholders as a way of ramming US IP policy down the throats of other countries.

But this is a superficial analysis. Specifically, it is also an attempt to ram Hollywood’s interests down the throats of the American people … and Congress.

A Handful of Powerful Men Are Trying to Railroad Democracy and the Constitution to Protect Their Interests

The fastest way to understand ACTA is to look at the way in which its backers have tried to trample the normal democratic processes in the U.S., Europe and elsewhere in order to railroad it through.

As an international treaty, ACTA is supposed to be ratified by the American Senate and other appropriate government legislatures. But this is not at all what has happened.

Instead, ACTA has been negotiated for years in secret, without disclosing its contents – let alone seeking approval from – Congress or other legislatures.

In the United States, for example, President Bush and President Obama hid ACTA negotiations under the veil of “National Security”, thus keeping it away from prying eyes … including Congress.

Republican Congressman Darrell Issa says that ACTA is more dangerous than SOPA:

As a member of Congress, it’s more dangerous than SOPA. It’s not coming to me for a vote. It purports that it does not change existing laws. But once implemented, it creates a whole new enforcement system and will virtually tie the hands of Congress to undo it.

Democratic Senator Wyden has argued for years – in letters to USTR ambassador Ron Kirk, President Obama, and the administration’s top international law expert Harold Koh. – that adoption of ACTA is unconstitutional unless without Senate approval.

For example, Wyden wrote last October:

Regardless of whether the agreement requires changes in U.S. law, the executive branch lacks constitutional authority to enter a binding international agreement covering issues delegated by the Constitution to Congress’ authority, absent congressional approval.

The Member of the European Parliament who was appointed to be the rapporteur for ACTA in the European Parliament (Kader Arif) quit last week in protest. Arif said:

I want to denounce in the strongest possible manner the entire process that led to the signature of this agreement: no inclusion of civil society organisations, a lack of transparency from the start of the negotiations, repeated postponing of the signature of the text without an explanation being ever given, exclusion of the EU Parliament’s demands that were expressed on several occasions in our assembly.

As rapporteur of this text, I have faced never-before-seen manoeuvres from the right wing of this Parliament to impose a rushed calendar before public opinion could be alerted, thus depriving the Parliament of its right to expression and of the tools at its disposal to convey citizens’ legitimate demands.”

Everyone knows the ACTA agreement is problematic, whether it is its impact on civil liberties, the way it makes Internet access providers liable, its consequences on generic drugs manufacturing, or how little protection it gives to our geographical indications.

This agreement might have major consequences on citizens’ lives, and still, everything is being done to prevent the European Parliament from having its say in this matter. That is why today, as I release this report for which I was in charge, I want to send a strong signal and alert the public opinion about this unacceptable situation. I will not take part in this masquerade.

As Harvard professors Jack Goldsmith and Lawrence Lessig wrote in the Washington Post in March 2010:

The much-criticized cloak of secrecy that has surrounded the Obama administration’s negotiation of the multilateral Anti-Counterfeiting Trade Agreement was broken Wednesday. Theleaked draft of ACTA belies the U.S. trade representative’s assertions that the agreement would not alter U.S. intellectual property law. And it raises the stakes on the constitutionally dubious method by which the administration proposes to make the agreement binding on the United States.

***

Normal constitutional procedures would require the administration to submit the final text of the agreement for Senate approval as a treaty or to Congress as a “congressional-executive” agreement. But the Obama administration has suggested it will adopt the pact as a “sole executive agreement” that requires only the president’s approval.

Such an assertion of unilateral executive power is usually reserved for insignificant matters. It has sometimes been employed in more important contexts, such as when Jimmy Carter ended the Iran hostage crisis and when Franklin Roosevelt recognized and settled expropriation claims with the Soviet Union.

***

The president has no independent constitutional authority over intellectual property or communications policy, and there is no long historical practice of making sole executive agreements in this area. To the contrary, the Constitution gives primary authority over these matters to Congress, which is charged with making laws that regulate foreign commerce and intellectual property.

***

When the George W. Bush administration suggested it might reach a deal with Russia on nuclear arms reduction by sole executive agreement, then-Sen. Joe Biden wrote to Secretary of State Colin Powell insisting that the Constitution required Senate consent and implicitly threatening inter-branch retaliation if it was not given.The Bush administration complied.

Congress should follow Biden’s lead. If the president succeeds in expanding his power of sole executive agreement here, he will have established a precedent to bypass Congress on other international matters related to trade, intellectual property and communications policy.

***

Congress should resist this attempt to evade the checks established by our Framers.

Over 75 law professors – some of them quite prominent – wrote a letter to President Obama in October 2010 stating:

ACTA’s negotiation has been conducted behind closed doors, subject to intense but needless secrecy, with the public shut out and a small group of special interests very much involved. The United States Trade Representative (USTR) has been involved in negotiations relating to ACTA for several years, and there have been drafts of portions of the agreement circulating among the negotiators since the start of negotiations. Despite that, the first official release of a draft text took place only in April, 2010. And following that release the USTR has not held a single public on-the-record meeting to invite comments on the text. Worse, in every subsequent meeting of the negotiating parties, the U.S. has blocked the public release of updated text.

***

This degree of secrecy is unacceptable, unwise…. Rather than seeking meaningful public input from the outset, your Administration has allowed the bulk of the public debate to be based upon, at best, hearsay and speculation. Yet, ACTA is a trade agreement setting out a range of new international rules governing intellectual property; as the G-8 called it, a “new international framework.” It is not (the claims of the USTR notwithstanding) related in any way to any standard definition of “national security” or any other interest of the United States similarly pressing or sensitive. The Administration’s determination to hide ACTA from the public creates the impression that ACTA is precisely the kind of backroom special interest deal – undertaken in this case on behalf of a narrow group of U.S. content producers, and without meaningful input from the American public – that you have so often publicly opposed.

Second, the Administration has stated that ACTA will be negotiated and implemented not as a treaty, but as a sole executive agreement. We believe that this course may be unlawful, and it is certainly unwise.

Now that a near-final version of the ACTA text has been released, it is clear that ACTA would usurp congressional authority over intellectual property policy in a number of ways. Some of ACTA’s provisions fail to explicitly incorporate current congressional policy, particularly in the areas of damages and injunctions.[1] Other sections lock in substantive law that may not be well-adapted to the present context, much less the future.[2] And in other areas, the agreement may complicate legislative efforts to solve widely recognized policy dilemmas, including in the area of orphan works, patent reform, secondary copyright liability and the creation of incentives for innovation in areas where the patent system may not be adequate.[3] The agreement is also likely to affect courts’ interpretation of U.S. law.[4]

The use of a sole executive agreement for ACTA appears unconstitutional.[5] The President may only make sole executive agreements that are within his independent constitutional authority.[6] The President has no independent constitutional authority over intellectual property or communications policy, the core subjects of ACTA. To the contrary, the Constitution gives primary authority over these matters to Congress, which is charged with making laws that regulate foreign commerce and intellectual property.[7] ACTA should not be pursued further without congressional oversight and a meaningful opportunity for public debate.

The USTR has insisted that ACTA’s provisions are merely procedural and only about enforcing existing rights. These assertions are simply false. Nearly 100 international intellectual property experts from six continents gathered in Washington, DC in June, 2010 to analyze the potential public interest impacts of the officially released text. Those experts – joined by over 650 other experts and organizations – found that “the terms of the publicly released draft of ACTA threaten numerous public interests, including every concern specifically disclaimed by negotiators.”

***

Academics and other neutral intellectual property experts have not had time to sufficiently analyze the current text and are unlikely to do so as long as there is no open public forum to submit such analysis in a meaningful process.

***

Finally, we are concerned that the purpose that animates ACTA is being deliberately misrepresented to the American people. The treaty is named the “Anti-Counterfeiting Trade Agreement”. But it has little to do with counterfeiting or controlling the international trade in counterfeit goods.

***

Our conclusion is simple: Any agreement of this scope and consequence must be based on a broad and meaningful consultative process, in public, on the record and with open on-going access to proposed negotiating text and must reflect a full range of public interest concerns. For the reasons detailed above, the ACTA negotiations fail to meet these standards.

Indeed, just as most copyright lawyers actually oppose SOPA and PIPA, the secrecy and dishonest end-run which has characterized the ACTA process mean that the main U.S. and international intellectual property organizations have had no input into the drafting of ACTA.

We Can Still Stop It

While ACTA has already been signed by dozens of countries, it will not go into effect unless the European Union parliament ratifies it in a couple of months.

We can still stop it. And see this and this.

* Note: Many others have given substantive critiques of ACTA. See this, this, this, this, this, this, this and this.

Live streams covering one of at least 26 cities where Occupiers are marching tonight in support of OccupyOakland.

Here’s the #SolidaritySunday twitter feed. See also, as ever in matters Oakland, OakFoSho. I don’t think the numbers are that big. But the synchronization is impressive.

Hat tip, Greg Mitchell.

In Manhattan, some arrests, a warning of Black Block presence. I can’t find a streamer in Oakland who’s up right now, and I’d like one. Readers?

UPDATE Confusing. Dynamic; I’ve been swapping feeds in and out as they disappear or start showing old stuff. I guess I should say beware of the idea that a live feed is unmediated; the issue of whether to allow streamers has been a continuing one in Oakland.

By lambert strether is an old school blogger from Corrente.

I make no apology for a late post on the SOTU; the SOTU, as Charles Pierce points out, was a campaign speech, so those of us who still listen to the teebee or the radio are going to be hearing the talking points and tropes deployed by Obama last Tuesday drone out over and over and over the airwaves at least until November 6.

Let me be clear: I did listen to the speech, and all the way through, too. One can hardly blame Obama for leading with his strongest card: He transmogrified killing the unarmed Osama Bin Laden, then dumping his corpse into the sea, into a surefire applause line. We’ve been here before; after all, Obama’s “Osama bin Laden is not a threat to this country” isn’t all that different from Bush’s “Let’s put it this way: they are no longer a problem to the United States and our allies”, and really, who over the age of six ever expected anything else? After that first fine, careless rapture, at least.

No man, no problem! True, Obama doesn’t swagger, but that’s just a cultural marker, and one of the techniques Ds use to fool themselves into thinking they’re still the good guys.

No, it wasn’t Obama glorifying a not-especially-clean hit as a campaign talking point that bugged me; what bugged me is what follows. Obama segued into a paean to teamwork as exemplified in the military:

These achievements are a testament to the courage, selflessness and teamwork of America’s Armed Forces. At a time when too many of our institutions have let us down [note lack of agency], they exceed all expectations. They’re not consumed with personal ambition. They don’t obsess over their differences. They focus on the mission at hand. They work together.

Imagine what we could accomplish if we followed their example.

And Obama circles back to the same point and expands on it toward the end of the speech:

Which brings me back to where I began. Those of us who’ve been sent here to serve [mankind?] can learn a thing or two from the service of our troops. When you put on that uniform, it doesn’t matter if you’re black or white; Asian, Latino, Native American; conservative, liberal; rich, poor; gay, straight. When you’re marching into battle, you look out for the person next to you, or the mission fails. When you’re in the thick of the fight, you rise or fall as one unit, serving one nation, leaving no one behind.

One of my proudest possessions is the flag that the SEAL Team took with them on the mission to get [kill] bin Laden. On it are each of their names.

All that mattered that day was the mission. No one thought about politics. No one thought about themselves. One of the young men involved in the raid later told me that he didn’t deserve credit for the mission. It only succeeded, he said, because every single member of that unit did their job — the pilot who landed the helicopter that spun out of control; the translator who kept others from entering the compound; the troops who separated the women and children from the fight; the SEALs who charged up the stairs.* [Decorously, Obama fades out before the money shot.] More than that, the mission only succeeded because every member of that unit trusted each other — because you can’t charge up those stairs, into darkness and danger, unless you know that there’s somebody behind you, watching your back.

So it is with America.

Well, no. Not entirely “so.” Personally, I find the willingness of people to come together voluntarily, even anonymously, to feed the hungry, clean their space, or provide those thirsting for knowledge with books, equally admirable, if not more admirable. Certainly, for those who do more than profess Christianity for political gain (cf. Matthew 6:2-6), the communism of everyday life [PDF] (cf. Matthew 25:35-36) must be preferable to militarism, however idealistically conceived.

And no, not entirely “so” for soldiers, either. (Here I’m following a train of thought initiated on George Washington’s blog.) When soldiers enlist, they take this oath (10 U.S.C. § 502):

“I, XXXXXXXXXX, do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; and that I will obey the orders of the President of the United States and the orders of the officers appointed over me, according to regulations and the Uniform Code of Military Justice. So help me God.”

See the word “mission” there anywhere in the Oath? Thought not. So where does it come from? Not from Jon Favreau, actually, but from the 2003 version of“The Soldier’s Creed”, a deliverable of the Warrior Ethos program authorized by Army Chief of Staff Eric K. Shinseki.** Here’s are the first lines. (The reference numbers are mine.) You’ll notice how Obama’s rhetoric builds on this:

[1] I am an American Soldier.

[2] I am a warrior and a member of a team.

[3] I serve the people [not the Constitution] of the United States, and live the Army Values.

[4] I will always place the mission [not the Constitution, or the regulations, or the UCMJ] first

The Army, in “What do the words really mean?” offers the following gloss:

…. [2] I am a Warrior and a member of a team. Being a warrior, you will be trained to fight and defend yourself. As a team member, you live to serve the team. To maximize the team’s capability, all team members must work toward a common goal – mission accomplishment; if one member fails the team, the mission could fail.***

[4] I will always place the mission first. The mission always comes first [not the Oath] – even if it means you must sacrifice something – even if that something is your life.

Well, what could go wrong? Clearly the Warrior Ethos is completely at odds with the Oath; one might view Bradley Manning as living out that contradiction.

What then is a “mission”? To find out, I consulted Joint Publication 1-02, Department of Defense Dictionary of Military and Associated Terms [PDF]:

mission — 1. The task, together with the purpose, that clearly indicates the action to be taken and the reason therefore. (JP 3-0) 2. In common usage, especially when applied to lower military units, a duty assigned to an individual or unit; a task. (JP 3-0) 3. The dispatching of one or more aircraft to accomplish one particular task. (JP 3-30)

“… A duty assigned.” Note (again) lack of agency. Who’s doing the assigning? A position (General) or a person (General XXXXXXXXXX)? Hard to say, isn’t it? However, I’d come down on the side of a person. After all, football teams are composed of players, and not positions.**** So, the Creed looks like an embryonic system of personal fealty, to me. History shows that militaries — and societies — that are organized on these lines are not without their disadvantages.

Now, I grant that I’m working only from texts: The SOTU, the Oath, the Creed, and a Pentagon Glossary. I’m not working from the ground, and I don’t have one-degree-of-separation relations with anyone in the military. (Readers?) That said, surely I am not the only person who finds Obama’s invocation of The Warrior Ethos as a model, not only for institutions that exceed expectations, but for individuals in civil society, more than a little disturbing?

End of Part I.

NOTE * Fine use of anaphora (“the…. the… the…”), one of Obama’s favorite rhetorical devices. Occasionally, Favreau rivals Nooners.

NOTE ** Here are the pre- and post-2003 versions. The differences are instructive. Pre-2003:

I am an American Soldier.
I am a member of the United States Army – a protector of the greatest nation on earth.
Because I am proud of the uniform I wear, I will always act in ways creditable to the military service and the nation it is sworn to guard.

I am proud of my own organization. I will do all I can to make it the finest unit in the Army.
I will be loyal to those under whom I serve. I will do my full part to carry out orders and instructions given to me or my unit.

As a soldier, I realize that I am a member of a time-honored profession—that I am doing my share to keep alive the principles of freedom for which my country stands.
No matter what the situation I am in, I will never do anything, for pleasure, profit, or personal safety, which will disgrace my uniform, my unit, or my country.
I will use every means I have, even beyond the line of duty, to restrain my Army comrades from actions disgraceful to themselves and to the uniform.

I am proud of my country and its flag.
I will try to make the people of this nation proud of the service I represent, for I am an American Soldier.

Post-2003, as above:

I am an American Soldier.
I am a Warrior and a member of a team.
I serve the people of the United States, and live the Army Values.
I will always place the mission first.
I will never accept defeat.
I will never quit.
I will never leave a fallen comrade.
I am disciplined, physically and mentally tough, trained and proficient in my warrior tasks and drills.
I always maintain my arms, my equipment and myself.
I am an expert and I am a professional.
I stand ready to deploy, engage, and destroy, the enemies of the United States of America in close combat.
I am a guardian of freedom and the American way of life.
I am an American Soldier.

At least in ROTC, Warrior Ethos is included in performance reviews; see page 38 [PDF].

NOTE *** Do horizontally scaling organizations face this issue?

NOTE **** Note also that warriors unlikely to be hedged round with the careful institutional safeguards so evident in the Oath that soldiers take (see Federalist #26 generally and at “the scheme of disciplining the whole nation must be abandoned…”).

Did you know cheetahs ride shotgun? Jalopnik (hat tip reader Lance)

Sea lions found shot on Puget Sound, US officials say BBC :-(

Ritalin Gone Wrong New York Times

Study: Multitasking hinders youth social skills CNN Quelle surprise!

Cancer Chief Seeks to Solve 24 ’Great’ Mysteries Bloomberg

Twitter bows to pressure over censorship Financial Times

Call for EU to control Greek budget Financial Times. In case you missed it…

Greek Gunboat Diplomacy Eupdate and More ECB/EFSF Anna Gelpern, Credit Slips

Greek Debt Talks Again Seem to Be on the Verge of a Deal New York Times

Europe has just weeks to act, warns Chancellor George Osborne Telegraph

Does the renminbi matter? Evidence from China’s disaggregated processed exports VoxEU

California Jews Shake Down Mel Gibson For Reparations RevoltofthePlebs (hat tip reader 1 SK). Yet another beauty contest between Cinderella’s ugly sisters.

Stressed? It’s the new normal Gillian Tett, Financial Times

Obama’s Faux Populism Sounds Like Bill Clinton Truthout (hat tip reader Marshall)

Is Thomas Friedman More Incoherent Than Usual? Dean Baker

What a Strong Servicer Settlement Looks Like Abigail Field

Mayor Quan’s Police (again) Meet Occupy Oakland with Flashbangs, rubber bullets, tear gas FreakOutNation (hat tip reader Deontos)

It Has a Fancy Name, but Will It Get Tough? Gretchen Morgenson, New York Times

Citi to Cut Bonuses in Investment Bank About 30% Bloomberg

Antidote du jour. Speaking of cheetahs:

By Douglas K. Smith, author of On Value and Values: Thinking Differently About We In An Age Of Me

Earlier this month, Matthew Yglesias of Slate tweeted “EXCLUSIVE: The activities of individual business executives have no relationship to the level of economy-wide employment.”

It’s hard to choose what is most ridiculous here: The adolescent “EXCLUSIVE”? The Olympian “no”? Or, the sophomoric logic? (Yglesias to world: you just cannot prove beyond a reasonable doubt that the activities of one teeny-weeny, single, stand alone business executive have any relationship whatsoever to ‘economy-wide’ employment!! See!! Gotcha!! And, yes, I – with my high school sophomore level of maturity — really am smarter than everyone else!!!)

All of which reminded me of ‘useful idiots’: people who are propagandists for causes and goals they do not understand, and who are used cynically by leaders of those causes.

Urban legend says Lenin was the first to coin ‘useful idiots’ with reference to Western sympathizers of Communism – but no one has ever confirmed this. Lenin’s version of communism as a threat to democracy, the rule of law and capitalism is in the dustbin of history now.

In its stead, though, democracy, the rule of law and capitalism itself face the monster of corpocracy. The corpocrats control huge swaths of the global – and US – economies (finance, energy, housing, health care, etc), are the paymasters of legislative, executive, judicial and agency officials from all levels of government (local, state, federal and international), and heavily influence the nonprofit sector as well. Corpocratic power dominate both major US parties as well as mainstream media – and, no surprise, dictate the ideas that do – and do NOT – move through the Overton Window from unthinkable and radical to sensible and popular foundations for policy.

And, the corpocrats need useful idiots like Yglesias to warm hearts and provide ‘tough love’ to the 99% being prepped for misery. Yglesias apparently is only too happy to carry water for them. And, his ignorance of empirically and ethically sound economics in favor of superficial headlines from the orthodox version ensures that he’ll fail to grasp the actual causes and goals of those who must laugh themselves silly over his microfilm-thin ‘coverage’.

All this was enough to drive Mike Elk up a wall – not just over the silly tweet, but also Yglesias’ ‘tough love’ proclamation that the US needs an ‘asshole” (Yglesias’ word) like Mitt Romney to administer suffering because, in Yglesias’ celebration of Romney, that’s just the sort of thing Romney has learned by being a ‘bad guy’ capitalist. Read Elk carefully and you’ll see that he’s beside himself over the travesty of an outlet such as Slate providing this useful idiot Yglesias a perch that Slate describes as ‘covering’ economics.

Hey Slate, Elk basically bemoans, how about requiring Yglesias to ‘discover economics’ before allowing him to cover it?

That would be wonderful. But, it wouldn’t be nearly as much like the useful idiocy that, apparently, Slate wishes to promote as content safe for sponsorship. For Yglesias (and Slate) to do the bidding of the corpocracy, it’s best that he not probe too deeply. Otherwise, he’d risk bumping into inconvenient truths that wouldn’t sit well with the children’s book version of capitalism that is his actual ‘beat’ – and the propaganda preferred by Slate’s advertisers.

In Yglesias’ world of economics and capitalism, ‘good guy’ innovators – e.g. Apple – creatively destruct. And, yes, sadly, some people suffer. Or, as Yglesias grandiloquently intones: “Almost every successful business career is built on the ashes of doomed factories, pink-slipped workers, and towns laid to waste.” But, boys and girls, you see it’s all okay because the ‘good guy’ capitalists, gosh darnit, create jobs too. And, oh by the way, the ‘bad guy’ capitalists such as Mitt Romney are necessary evils. Why? Well they are sort of like surgeons who save lives by cutting out huge parts of the body. Holy snikeys Batman, Ygleasias admits, he’d personally much rather be the cape-wearing good guy capitalist than the garbage clean up bad guy capitalist. But, the cold truths and harsh realities of economics and capitalism require both these heroes. That’s what and how economics and capitalism work. And, Yglesias is here to explain it all to you on behalf of the good and bad guy capitalists who, after all, are just doing God’s work.

Elk points out that useful idiots like Yglesias cannot bother with logical, knowledge-based or, even, factual inconsistencies. For example, just as a matter of logic internal to Yglesias’ own claims: When business executives lay waste to whole towns, how is it that they nonetheless have no impact whatsoever on economy-wide matters such as jobs?

Or, move from logic to facts. In Yglesias’ children’s book of capitalism, good guy capitalists such as Steve Jobs and Apple create just as many jobs – even more!! – than the jobs destroyed by the firms who fail to innovate. In actual ‘facts about the real world’, it turns out the vast majority of jobs Apple created went to folks outside the United States who labor for little pay and in dangerous conditions so that the products of their labor can be sold on credit to U.S. consumers who are unemployed, underemployed, ill paid and in debt because of the predictable behaviors and strategies of both good guy and bad guy capitalists.

That’s just one take on all this. I welcome NC readers to dip into Elk’s comments as well as the Yglesias’ tripe about Romney and share your own thoughts in comments:

• What are the causes and goals for which Yglesias propagandizes without any understanding of those causes and goals?

• Who are the individuals – and entities — that cynically use idiots like Yglesias to propagandize on their behalf?

• Who are the folks out there who waste their time and endanger themselves by reading this nonsense?