Monday, November 19, 2007

the next china plot

one has to wonder if china doesnt plan to appreciate their currency when the global economy slows, allowing them to become the new US in the global economy? they could replace us as the consumer ....

I often think of how the american century is unwinding before our eyes. the legitimacy of the US is questioned because of iraq and our incompetence handling basic domestic issues like katrina and home lending. our authority is dying along with the international institutions we built to excercise our influence: the world bank and imf. meanwhile, we're starting to accept european accounting standards, and we're exporting financial volatility -- less than 10 years after financial crisis in asia shook our markets.

it may seem impressive how fast the decline has occured, and how quickly the chinese have risen. but both developments were in the works for decades.

now we're approaching a series of events:

1-a possible recession in the US, but not the rest of the world. this probably hasn't happened in over a century. it would be a clear indication the US is no longer the global leader.

2-olympics in beijing: china clearly will use this as an occasion to enhance their position as a "big guy" in the world. they will increasingly position themselves as arbiters and players in big situations previously dominated by the US or other powers.

3-revaluation of the yuan. this could be the most important thing of all. ranking by purchasing power parity, the US accounts for about 20% of global GDP. china is 17-20%, depending on whose numbers you use. when china revalues, they will send a surge of money into OTHER countries.
the presence of the chinese consumer has yet to be felt in the world, where the american consumer has been dominant for decades.

the american consumer as driven the trade deficit wider as companies looked overseas for cheaper production. this has resulted in a gradual transfer of global GDP from the US to the rest of the world.

but now our trade deficit is actually shrinking.. we're becoming less of an importer. china could go from being a huge exporter to a big importer very soon. all they have to do is revalue.

this means china has the ability to quickly diplace the US as the market that drives the global economy. once they revalue and import more, they can step up and replace us as the dominant voice in the world.

for a long time, I wondered why they were so dense, and allowing their economy to overheat. but know I understand:

they know the inflation isn't bad enough to cause real problems yet. they have the olympics ahead of them... these chinese communists have played us very well diplomatically and politically. we have built them into being our equals, and now they plan to surpass us. we can be sure they will revalue in a manner that does the most to enhance their power. waiting for the US to enter recession, and then using their buying power to save the world economy would make a lot of sense. they have done everything right so far. why not expect the same this time?

the big story in coming years will be american decline. monuments will collapse, and crush victims under them... a moment of huge global change is at work right now. a shift is happening now on a metaphysical, hegelian level. it deserves reflection and respect. for next several decades, a new kind of world will emerge. there is no going back to good ol' america like we did in the 1980s -- when oil was cheap and our moral authority clear... when interest rates were falling and productivity surging...

now there is another player our size, plus others like russia, india and brazil. our supremacy is only just beginning to crumble.

for the first time in perhaps centuries, america is no longer in the ascent. I do not yet know what this means, but have to think it won't be good for our society and culture. we should look to the UK for some indications of what happened in the 1950s and 1960s as their empire disappeared.

Thursday, November 15, 2007

a mortgage mushroom cloud in ohio?

this article caught my eye today. it has the potential to undo a large chunk of our financial assets and cause a broad freezeup in lending:

some parts from Gretchen Morgenson's story in NYT:
Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize. ...
Saying that Deutsche Bank’s arguments of legal standing fell woefully short, the judge wrote: “The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”

here's what worries me:
these trusts all use the same language and concepts, essentially. wall st firms churn these things out like sausages. if there are problems with one or two, there are almost certainly problems with plenty of others. something like this is like seeing a roach. there's never only one. the mortgage industry has been doing business as usual for a long time.

I then spoke to a high ranking industry insider with a background in securitization. he said everyone in his office was very worried about the case. and, he assured that it was just "a few cases." just a couple of bad-apple loans that weren't recorded right. it sounded to me like the self-delusional statements of people having a nightcap on the titanic.

however, the article made it sound like in none of the cases in question had the banks obtained the physical notes before filing foreclosure. one wonders if they might not simply find a way to obtain them first to clean this whole matter up.

one way or the other, given the size of the securitization movement, if this does goes to the worst scenario it would be a catastrophic for the entire dollar-based fixed income market.

on more thing worth remembering is that lawyers are going to start going after the financial industry. an important risk-management expert just told me that, and it makes sense. the asbestos, tobacco etc wells have run dry. they will now attack wall street, asset managers, etc. that also means that all the legal genius that prevailed in other cases will now be used to unwind mortgages and everything else. that will be another headwind for financials.

Tuesday, November 13, 2007

ending the blaze of gun fire

the sad case of Khiel Coppin in brooklyn highlights the broad problem of trigger happy police.

some may say the problem is racism in the police ... even tho that probably has some lines of truth, it's the real cause of the problem. the real issue is that multiple police officers emptied entire magazines into another human being. while they might technically be able to justify it with fear of what he was carrying, going 100% to the max isn't necessarily right either.

I think the worst thing about these situations, like the other one in the bronx a few months ago, is that multiple cops fired vast amounts of rounds. where's the need for these kinds of extremes.

I fear it is natural once they start shooting. that's why we need to introduce scale into the use of force.

I propose that all patrol cars carry some kind of nonlethal weapon such as rubber bullets etc and that one of the 2 officers must use that weapon, while the other uses the pistol.

the nonlethal weapon would be fired first. if it doesn't work, he dies.

this way, the suspect can still be killed if needed. but the nonlethal device, such as a taser, or beanbags in a shotgun... will neutralize the perceived danger.

it just seems that the first shot fired shouldn't be a lethal one. the cost is too high, and error too possible.

Wednesday, November 7, 2007

the fat slug

I am having a facinating evening watching charlie rose, tavis smiley and somekind of charlie-rose like talk show on bloomberg with mike schneider. first, btv had the mayor of trenton on. he struck me as a very promising black politician in his early 40s. he could have the stuff to go places. his apparent support of gun control, however, worries me.

rose's guests were richard armitage and joseph nye and smiley have lawrence wright, whose book about american operations in afghanistan seem to have a pulitzer. the overall impression I got from everything was that american agency is in shambles. here I mean agency in the most abstract sense of action. armitage mentioned how foriegners now actively question american competence. wright mentioned how the FBI has refused to hire arab americans, even after they complete military service, rejecting them as security threats.

my impression has always been the federal govt is like a swaggering marine corps sgt who needs to take charge of a situation in which he knows little. but, as a marine corps sgt, he must command authority from the start. so you begin with a combative, self-righteous sense of confidence. think of how ike coldly dissed churchill's wishes for an attack through the balkans. look how FDR forced the brits to drain their reserves, knowing it would leave them incapable of keeping their empire after the war.

while these actions might have been the right things to do, they were discharged with a stiff and obnoxious air that permeates everything the federal government does. just entering the federal building in lower manhattan is like entering some kind of hell built in the 1960s. it just feels like such a miserable, slow place where few people reach anything near their potential as human beings. I have a vision of federal employees setting up camps across california during the depression, battling segregation in the 1960s, defeating hitler, spreading wealth and health around the world.

these endeavors were all so full of goodness that you didn't have to be nice, or particularly great, to be heroic. but there was always ugly side. after all, the fedgovt has failed in every social mission from the very first -- taking care of the american indians.

in fact, the govt probably reached a peak of effectiveness sometime in the 1950s or 1960s in the wake of WWII, when a clear sense of mission shaped the country. but since then it has been downhill. the 1960s are interesting because you have tremendous failure at the macro level with a badly understood conflict. but on the ground it was a marvelously run war in which we achieved continuous victories.

the federal govt's managment of the country is the same way. now more than ever, the nature of our society should be clear: we live in an country full of artificial and sprawling communities that are terribly inefficient and unhealthy. people face long commutes, constant traffic and unnecessarily high basic living costs such as car insurance and gasoline. there is a reason for this: in the 1930s, when oil was practically free and housing was crushed by vicious deflation.

the logical response was keynes's: spend as much as possible. so, we fed europe and encouraged a form of economic development that required individual citizens to own and finance a complex and expensive array of assets. suburban living created demand for home appliances, cars and all the other consumer products. but it was deliberately wasteful. over time, the spending was increasingly financed with debt. and that's where we stand now.

sitting on top of most of our problems is the fat slug of the govt, just sitting there, causing problems. it is too slow and confused to do anything but sit there, with huge weight crushing down on all bystanders....

now is the time the rest of the world may learn they no longer require our leadership.

Sunday, November 4, 2007

how to fix corporate boards

today's nyt story about the failures of merrill lynch's board to understand what risks the company faced in the credit markets highlight once again why it's time for real reform at boards, which have never been structured in the long-term interests of our economy or society.

first of all, corporations are people without conscience or morality. their statutes require them solely to seek maximum profit. while there is nothing wrong with this, it's worth noting that it can create moral hazard by encouraging and rewarding very short-term thinking. this is nothing to begrudge. it should be taken for granted that CEOs will seek to commit fraud. the assumption shouldn't be that executives are ethical people driven by a sense of right. after all, the rules governing corporations REQUIRE them to seek maximum profits at the expense of all other considerations. once we know it's the case, why not create another agency to counter that initiative and keep the organization balanced.

secondly, we now exist in a global capital market. over the next few years, we see more and more financial intermediation move to other jurisdictions. as decades of US domination ends, other countries' legal systems and regulations will gain credibility versus our own. before, foriegners had to accept our way of doing things because they had no choice. in the future, they will be able to choose the jurisdiction with the best and most ethical rules. investors will recognize which countries have the best rules and those markets will trade at premiums, which will draw more capital. while sarbanes oxley might be one of the big factors driving issuers away from the US, we need to think holistically about the overall situation and what permits all the misdeeds -- from abuses at RJ Nabisco in the late 1980s to Enron to Merrill Lynch -- renegade senior management teams that grew increasingly bad the longer they were in power.

thirdly, capitalism is becoming the world's philosphy. we are probably entering a period that will last another 20-30 years in which much of the former underveloped world will rise as market economies and modern financial intermediation spread. especially with chinese leadership and support, capitalism will spread. instead of relying on ineffectual organizations like the UN with governance problems of their own, corporations and business appear some of the best ways to improve human life in the future. other kinds of pressure will emerge from blogs and NGOs. but the vanguard of history will be corporations.

as a result of these considerations, I think the best way to start dealing with the corporate board problem is to create a corps of people to become independent board members. we could recruit a series of professors, community leaders, accountants, policemen, lawyers, military officers, and journalists. each company board of say 12 would have to include 3-6 such independent directors, who would rotate every 1-2 years. these outsiders would be prohibited from recieving compensation from the company or owning its shares, or those of any others (maybe.. not sure about how expansive this should be)

we could come up with a series of qualifications to find the right kinds of outside directors. they would be charged with maximizing the company's long-term success (maybe they could be paid in very long-term stock ownership). their main job would be to guard against the abuses that inevitably arise from any imperial CEO.

another potential offshoot of this idea would be for boards to have staggered compensation packages, that break the directors into factions so they have different kinds of priorities -- some short term profiteering and others long-term sustainability.

but the message from all these experiences are clear: boards work, but can be better. we've had a so-so system for decades. just like now people are demanding higher quality food, more efficient cars and healthier lives, it's time to raise the bar in terms of how companies are run. for our financial system to move on to the next level, we need to boards to fulfill their missions more completely. only by breaking up people's interests can you get them to look at things from multiple points of view.

Thursday, November 1, 2007

a semantic slip towards tyranny?

I just saw this today in the ny post:

November 1, 2007 -- In an unprecedented verdict, a jury yesterday found a Bronx gangbanger guilty of an "act of terror" for fatally shooting a 10-year-old altar girl outside a christening party.
For the first time, a prosecutor in New York state applied a post-9/11 terrorism statute to a street gang.
Jurors found Edgar Morales, 25, guilty of first-degree manslaughter as a crime of terrorism under the Anti-Terrorism Act of 2001.
As a result, he faces life behind bars when sentenced next month.
Had Morales been convicted of ordinary manslaughter in the first degree for the Aug. 18, 2002, shooting, he would have to serve no more than 25 years.
"They terrorized the community," juror Linnea Daniels said after a monthlong trial and four days of deliberation at Bronx Supreme Court. "They weren't invited to this party. Once you fire shots and the crowd scurries, that is an act of terrorism."
The mother of little Malenny Mendez, who was shot in the head when The St. James Boys street gang opened fire on a group of men they mistakenly thought were rivals, shed tears at the verdict.
Antonia Gutierrez said Morales - who she believes shot her daughter - got what he deserved.
"As far as I'm concerned, he could rot in jail," she said.
Bronx DA Robert Johnson said, "These were callous acts that resulted in the life of an innocent child being snuffed out. The jury's finding of terrorism is significant in determining an appropriate punishment."
Defense lawyer Dino Lombardi said he plans to file post-trial motions and probably an appeal challenging the use of the terror statute.

I have to wonder if I'm not the only one to worry about this. now this law only deals with a real violent crime. but if enforced and accepted over a few years, it will become easier for other laws that target "terrorism." it's just a bit worrisome.

once we lose a literal respect for our laws, everything starts to slip. that's why I worry about things like the spread of gay rights... once they gain traction, the old institutions that opposed them start to die out... mainly white christian religion. other religions that are equally anti-gay remain such as orthodox judaism and islam. the end result is we wind up with a society where christianity is weaker and islam is stronger. that's not good for anyone, including gays.

the truth is that when you look seriously at history and society, there's not much link between people being treated fairly and them being free or living well. the chinese and jews were badly mistreated in late 19th century america and had equal or greater success than priviledged whites. blacks had more stable communities in the 1920s under jim crow than after the civil rights movements. (one reason for this could be that people behave better when they are mistreated up to a certain degree. it makes them humble and appreciative of good things. it also makes them work hard. when you are nice to people for who they naturally are, they can become ornery and too self loving.

anyway, instead of treating the constitution and our republic as religions and dieties to be honored, we think of it as something to follow in rough spirit only. all those technicalities about things like who has jurisdiction where, we just try not to think about. basically, we put our own wishes before those of the Founding Fathers. they loved us and wanted us to have a stable country... these were people like john adams, franklin, madison, washington.

instead slip through one lie after another, claiming the interstate commerce clause allows things like the ADA or endangered species act. we allow the presidentially-supreme court to cite the bill of rights to strike down state laws, even though the bill of rights was designed to protect the states against the national government. we find that the word "coin money" can be extended to printing worthless paper fiat.

these are the kinds of steps we've taken in this country for years. when the constitution doesn't allow something, we won't make the effort to amend it rationally -- we simply ignore it and pretend it means something different. we think women should be able to have abortions, so we pretend the constitution says something it doesn't. we've disregarded the text for so long it means almost nothing now. so what will we turn to when we need the freedoms inherent to a free republic? our years of self-serving intellectual dishonesty have taken the bones out of our champion. states are beholden to the federal government. all power is focused in a poorly run national state that is reaching the final stages of a multi-decade bull market. it has surged in size and power. we're only at the beginning of reckoning with this monster.

anyway, I just saw mike huckabee on charlie rose. he was very interesting and defintiely could have some promise in 2012.