Upholding the Illusion

Upholding the illusion that America’s financial system is simply going through a crisis which can be resolved is becoming increasingly more difficult for the U.S. government. After an enormous bailout package, a stimulus package worth about 6% of GDP and guarantees of bad assets worth much more than that, the government has nothing to show in terms of recovery.


It is also an illusion that many U.S. financial institutions are not already nationalized. AIG has received $150 Billion from taxpayers. The company has far more in losses, and it will report what is expected to be the biggest losses in U.S. financial history on Wednesday.


AIG has now asked for more taxpayer money, although the government already owns 80% of the company.


Citigroup has received $45 Billion from taxpayers, and is now asking for much more. Citigroup is only worth about a fourth of that, around $10 Billion, so why the hell are there any shareholders left other than the U.S. government?


The U.S. government’s ideological opposition to nationalization has wound up costing American taxpayers 4 or 5 times more than what a nationalization would have cost.


Citigroup’s shares are as I just mentioned worth $10 Billion, yet taxpayers have paid the company $45 Billion just so that the shareholders won’t lose their investments (of which there is only 10% left since Citigroup’s stock lost 90% of its value), and so that the executives won’t have to be fired.


It would have been a lot cheaper to simply buy all the stock. Cheaper yet would have been the only morally sound thing to do: wipe out shareholders and nationalize the bank.


Furthermore, banks are failing across the United States every week now, and the FDIC (which nationalizes such banks every week so that they can be liquidated and/or sold off) has had to hire more staff, and is currently bringing people back from retirement.


The U.S. government also has a secret list of which banks are in serious trouble, and are in imminent danger of failing. Many have called for this list to be made public, but the government refuses.


In addition to all this, the U.S. government is engaging in the sort of “creative accounting’ that played a large role in creating this crisis. It is trying to sweep all the losses of big institutions under the rug by “not estimating assets too conservatively” as Geithner has stated.


What that means is that when the government has given taxpayer money to big banks and other institutions, it has valued their assets much higher than the market (which values them at zero), creating the illusion that these institutions are much better off than they really are.


Also, the government has helped institutions like AIG to set up “special purpose entities” where the company can hide bad assets away from the balance sheet, again creating the illusion that things are much better than they really are. This is what Enron did, and a lot of people went to jail after that…


All these efforts are obviously counterproductive and ultimately detrimental. The government is lying about many things relating to the financial crisis, but most people don’t realize it. Why is the government doing this? Well, I think it feels that it MUST uphold the illusion that the system can indeed go on as it has before. If it cannot, what is the alternative?


They know what the alternative is: a European-style regulated society where citizens are guaranteed a standard of living rather than being left to hope for that standard amidst cycles of boom and bust. In a country where all politicians are either right or right-wing, this is a terrifying prospect.


I recently realized that the upholding of illusions is exactly what Keynes based his theories of spending and crisis management on, and that’s why it makes perfect sense for Keynes’ theories to be back in the spotlight.


It is widely believed that Keynes developed his theories in response to the Versailles Treaty after World War I, and the treatment of Germany in economic terms.


The Versailles Treaty made it so that Germans’ standard of living went lower and lower each year after it was enacted. This, according to Keynes, destroyed confidence among Germans, and the economic crisis started feeding off itself (which is something that was echoed by Ben Bernanke in a speech before Congress today).


So, after the war, Germans were obviously bankrupt. Even so, thought Keynes, they should keep spending, and if they could not, the government should enable them to do so. Even if you don’t have money to spend, you must uphold the illusion that you do, by borrowing money to spend, otherwise the economic crisis will get worse. That is in essence what Keynes thought.


Expressed in that way, Keynesian economics sounds like a really bad case of “keeping up appearances”, don’t you think? Upholding the illusion is what it is all about.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

A Better Stimulus Package - Research and Education

Obama’s recent stimulus package will help to plug a lot of holes in state budgets across the country. It will also marginally improve the infrastructure situation. However, 40% of the package is made up of tax cuts, and for that and other reasons, I believe that it will be very unsuccessful in actually helping the economy recover.


I believe that the road to economic recovery for the United States is not one of tax cuts or stimulus packages, but one which made this country great in the first place: massive spending on scientific research and education.


I do not believe in trickle-down economics, like the Reagan/Bush/Clinton policies, because that theory is based on a belief that excess money, spent by wealthy individuals, floating around in society, will somehow create wealth for all citizens.


I also do not believe in Keynesian economics, like the stimulus package, because that theory is based on a belief that excess money, spent by the government, floating around in society, will somehow create wealth for all citizens.


You can probably tell where I’m going with this: the basic flaw of both trickle-down and Keynesian economics is that the money that the government spends and/or controls in other ways has no direction or purpose.


I’m not saying that the government should tell people what to spend money on, or that there isn’t a large role for the so-called “invisible hand” for people in society. I’m saying that when the government spends money, it must do so with a specific purpose, and do it well.


There are two important issues to consider when delving deeper into this: economic growth and job creation. These are favorite expressions of politicians, but most politicians have only a vague idea of what they actually mean.


Economic growth occurs when something is added to society. If someone gets up off the couch and starts growing potatoes, he or she has contributed to economic growth. Economic growth does not occur if the government gives someone a tax cut or chooses to spend tax money on road maintenance.


Job creation occurs when someone hires an unemployed person and pays that person’s salary with the revenue from increased production. When the PC was invented and Silicon Valley hired thousands of people, that was a perfect example of actual job creation.


Job creation does not occur when the government hires someone to work on road maintenance or when a company hires someone and pays the salary out of money left over from a recent tax cut. (the government could create jobs by actually starting their own business enterprises, but that is rather unusual).


Hence, both trickle-down and Keynesian economic policies are ineffective for economic growth and job creation, especially in times of crisis. In order to actually spur job creation and economic growth, you need something specific, something new, and American history provides excellent examples.


After World War II, The United States started spending massive amounts of money on higher education and scientific research. Young people were able to go to college for free, and scientific researchers were making strides like never before. This enabled the U.S. to go to the moon, invent vaccines and computers, and become the most industrially and economically powerful country in the history of the world.


In sector after sector, The United States became the world leader with the help of education and research, and this laid the foundation for the immense prosperity that the country still enjoys today. Unfortunately, since Nixon, all that prosperity which was originally created by everyone in society, has been funneled only to the top.


It would be very difficult to make the case that these industrial advances came about as a result of trickle-down, low tax economics. Nor could it be argued that Keynesian economics was behind it, because it was not used.


It is crystal clear that America’s prosperity mainly came about as a result of massive government spending on research and education, and it is to this that we must return.


In order to actually create jobs, and to achieve actual economic growth, the U.S. government should:


- make college education much cheaper, and free for as many people as possible


- fund research into as many areas as possible and help industries with the practical application of research results


- create national standards in the most important school subjects, such as the natural sciences and English


- end the system where local schools depend on local real estate taxes, and centralize funding for schools


These are only a few ideas for a new stimulus package with a real potential to help the American economy, and there are myriads of other things that could be done quite easily. A stimulus package full of tax cuts will do nothing to help the American economy recover, but research and education will.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Government Incompetence and the Creation of the Crisis

The vast majority of severe economic crises start with an unexpected bursting of a speculative bubble. These speculative bubbles are usually very complex, and are made more potent by complex financial instruments that only the people who created them can understand. This is also the idea behind these complex instruments; it will make them seem worth more than they are because people don’t realize what they are made up of.


During crises in the past, governments have always been unable, or in the case of the U.S., unwilling, to keep up with the ever increasing complexity of the financial instruments. In the end, that leads to a situation where nobody knows what anything is worth, so prices can only go down.


In the panic of 1873, which led to the “Long Depression”, speculation in complex bonds relating to railroad construction was a large contributing factor. Before the “Great Depression”, traders were mailing complex trades across state borders in order to evade any financial regulation (which only existed as local law at the time).


In the crises in Sweden and Japan in the 90s, complex financial products related to real estate speculation were almost fully responsible for the crisis, as they are in the crisis in The United States today.


As I mentioned above, governments are usually unable to keep up with financial markets when complex financial products are being created. This is mainly a result of the lack of competence within the government, and a lack of understanding of the financial markets on behalf of its staff. George W. Bush was famous for having repeatedly mixed up inflation and deflation. More importantly, however, the SEC has been largely absent in recent years.


Many traders that I have talked to here in New York, as well as traders in the media, say that they have never once been contacted by the SEC in any capacity over the last decade. This is especially true for the most complex trading, including trading with mortgage-backed securities and CDOs “squared” (don’t ask). Similarly, the ratings agencies were left alone to prosper as they saw fit.


The long-term commitment to self-regulation has obviously contributed a lot to the current situation. And U.S. politicians have failed the country in more ways than one in the creation of this crisis. Self-regulation becomes a vicious cycle in the following way: when the government does not engage in regulating, it loses the capacity and competence to do so.


Hence, after two decades of self-regulation, the U.S. government has no idea what’s going on in the financial markets because they haven’t touched them, studied them or regulated them. The SEC has under 4,000 employees, which I’m guessing is less than the amount of shoe shiners in New York City. Needless to say, this lack of competence is very problematic in trying to deal with this crisis.


An unfortunate “solution” to the problem of not being able to deal with a complex financial crisis has been to bring in the people who created the crisis in order to solve it. Of course, these people have their own agendas, and are easily able to enrich themselves as taxpayers pay money to resolve the crisis. This is the “solution” currently being pursued by Obama and Geithner, which has already turned out to be very detrimental, as taxpayer money has been thrown into a black hole, only to enrich individuals on Wall Street.


The much talked about Swedish solution to the crisis also dealt with this problem. In Sweden, executives were fired, and representatives from the financial industry were not made a part of the team that would clean up the mess, or at least they were included to the smallest extent possible. The Swedish government had to create competence within its agencies in order to deal with the problem and get the best deal for taxpayers. It did so mainly with the help of academia.


The belief that the government can never be competent enough to engage in issues such as these is misguided. When it comes to the IRS, the U.S. government is very competent. The IRS has vast, in-depth knowledge of anything that pertains to taxes, domestically and abroad, and in immensely complex arrangements. I’m not saying that the IRS is perfect, but that the SEC MUST become more like it. The IRS has over 86,000 employees, which is more than 20 times as many as the SEC.


The SEC is, at present, completely incompetent. The people that are advising Obama and Geithner are nothing but self-serving Wall Street insiders, as the people who advised Bush and Paulson also were. The Obama administration and the Treasury need to turn to international and domestic academia (except for those who used to work on Wall Street) and to Sweden, Japan, The IMF and The World Bank for help in resolving this crisis. By gradually building competence, the U.S. can hope to avoid some of these problems in the future.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Taxpayer Bonuses to Failed Bankers... Is Obama Serious??

Chris Dodd is s sneaky fellow. Towards the end of the stimulus package negotiations, he snuck a provision in, severely limiting bonuses for executives receiving taxpayer money through the TARP or in other ways.


Tim Geithner has filled his cabinet with ex-Wall Streeters, so he and the Treasury have been fighting, tooth and nail, against limits on executive pay, just like Paulson did. Dodd’s provision was meant to counter the Treasury.


Now Obama has sided with the Treasury, and is trying to come up with ways for taxpayer money to be paid to these executives.


On Fox News on Sunday, senior Obama adviser David Axelrod said that the administration will: “seek changes in the government's approach to executive compensation”. That can only mean one thing: Obama will refuse to implement to provisions that he will sign into law on Tuesday.


Obama is prepared to break the law in order to give failed bankers million dollar bonuses paid by taxpayers! As someone who supported Obama fully, I am now left speechless, only able to say: are you serious Obama!!??


If a corporation feels like its executives deserve multi-million dollar bonuses and is willing to pay that, I have no problem with that. And if that corporation keeps paying the bonuses even in the face of multi-billion dollar losses, that is also fine with me. It’s just stupid, and I don’t understand why the shareholders accept that.


However, when the corporation receives taxpayer money, it is very much my problem how that money is being spent.


This is a really, really serious crisis. In Florida, there are actual bread lines. In Nevada and California, local governments have designated and fenced in land for people who live in their cars, reminiscent of the “Hoovervilles” of the Great Depression. Food banks are out of food in the Northeast, and the beggars in New York City are no longer mostly made up of addicts.


The President of The United States is currently weighing these problems against the need for multi-million dollar bonuses to failed bank executives. You have to ask yourself if he has lost his mind.


The heat is turning up in the battle for taxpayer money and the continued roll of Wall Street in the American economy. On outlets for Wall Street employees like CNBC and Fox News, the rhetoric is really changing dramatically.


The financial sector seems united in a battle against taxpayers, eerily reminiscent of crises in countries with financial oligarchies and mafia control like South Korea and Russia. The gloves have come off, and the financial oligarchs seem to be winning. People on these networks, such as Larry Kudlow and Charlie Gasparino, are absolutely mocking efforts to use taxpayer money to help taxpayers, as opposed to giving it to individuals on Wall Street.


For decades, The United States has been dictating what countries receiving aid from the IMF should do during bank crises. The advice has always been the same when corrupt countries have been receiving aid: fire bank executives, nationalize banks, and under no circumstances give the banks money with no strings attached.


Now, The United States is going down the very road it has warned against so many times, and the results have already proven to be disastrous. Bankers and other Wall Street executives are demanding taxpayer money while hiding even the slightest hint of the extent of their losses. They have insiders from Goldman Sachs, Citigroup and many other firms in the Treasury, and they are even using TARP money to lobby for these things.


I don’t know what Obama is thinking at this time. What he’s actually doing, though, is taking food from the mouths of starving Americans and putting the money in the pockets of bank executives who have brought down the American financial system.





Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Road to Sweden, or the Road to Japan

As I have mention before, this crisis is NOT unprecedented, which the U.S. government keeps claiming. The reason that they’re claiming this is partly that they don’t understand it, and partly that they won’t admit how much trouble the banks are in. I can understand the latter to some extent; admitting this would probably create a panic.


The two crises in Sweden and Japan in the 90s had the following attributes:


1. The banks became insolvent because of bad assets


2. The bad assets were hidden off their balance sheets, meaning that they could not be seen by the public or the government


3. The bad assets were made up of complicated financial products related to real estate speculation


Sound familiar? We have here three almost identical crises, and two different approaches in dealing with them: the Japanese way or the Swedish way.


The Japanese way resulted in “Japan’s lost decade”, with huge job losses, capital destruction and an immense waste of taxpayer money. A sustained weakening of the Japanese economy occurred, which harmed Japanese competitiveness greatly.


The Swedish way certainly created short term pain for the country, but the net result of the crisis was an actual profit for the taxpayers, a sustained budget surplus and an eventual lowering of the national debt. In short, the country came out of the crisis stronger than before.


Another thing that, by now, may sound very familiar to Americans, is how the Japanese dealt with their crisis. They did the following: gave the banks hoards of money with no strings attached, bought bad assets, attempted to have a public/private partnership in buying up bad assets (which Geithner just recently suggested), passed multiple stimulus packages and lowered interest rates to zero.


Japan did all this, and everyone now agrees that none of it worked, otherwise they would not have had a “lost decade”…. The country’s crisis was not resolved until they did what Sweden instead did. The Swedish government did the following:


- Ruthlessly combed through the books of the banks to weed out which banks could be saved, and which could not be


- Nationalized the ones that were deemed to be able to survive, and let the weak ones fail


- Wiped out all shareholder value and fired bank management


- The government had to actually learn all there is to know about the assets, so that they could be sold at the highest price. They did not simply let stock market “experts” dole out money to their buddies.


Prior to the rescue, the Swedish Parliament had passed a law giving it the right to do all these things if a bank’s equity in relation to its debts fell below 2%. Many U.S. banks are far below that threshold now.


So, the U.S. government has two very clear alternatives: one that has been proven to work, and one that has been proven to be disastrous. It doesn’t get much clearer than that.


The U.S. government is currently furiously pursuing the disastrous course.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Geithner Proposal - On Second Thought

Initially, I thought the Geithner plan seemed pretty stupid and unfinished. I still believe it is both of those things, in its essence, but I have come to realize that it actually has some merit, albeit through unintended consequences. Bear with me and I will explain.


First of all, the Geithner plan is a direct descendant of the Paulson plan, which makes it fundamentally misguided and immoral in nature. Also, the most counterintuitive of arguments is its main premise: that private investors will want to buy toxic assets that are worthless because the same investors turned their backs on them.


Now, the important thing to remember is that there are different kinds of so-called toxic assets. I’m not sure who came up with the term, but it seems to mean that nobody wants to buy the assets, that they have somehow become “contaminated”.


In most cases, they are contaminated for a reason, such as that they are made up of mortgages for houses that have actually been torn down or have lost more than half of their values. In other cases, however, the assets are sort of guilty by association.


In the eyes of a capitalist economy, whether or not an asset is actually destroyed or just guilty by association does not matter; an asset is only worth what someone is willing to pay for it.


If Geithner’s plan can help to separate out the two kinds of assets and entice investors to buy the ones that are not as bad, then the plan will have achieved something. An asset like this would have to be something rather special though. It would have to be:


- unrelated to the housing market


- unrelated to the continued existence of firms that are very near bankruptcy, which includes many banks


Also, the buyer would have to have a long-term strategy, because there is simply no way that the stock market will achieve any stability, probably for years to come. I have no idea how many assets that fit all these criteria there are at this time, and I don’t think anyone has.


Circling back to what I said in the beginning about unintended consequences, what I have just described is not what the plan meant to do. Geithner wanted investors to buy the assets that in fact have been destroyed, and that will happen when hell freezes over.


Another important point that I’d like to mention, and one that I will come back to soon, is the reason for this confused and unfinished plan. What most people don’t realize is that politicians have no idea what’s going on. They don’t know what these assets are, how they came to be, or how to solve the problem of them being worthless.


I happen to work in a large office building in midtown Manhattan, and ever since Bear Sterns failed, I have seen officials from the government running around in my office building and other buildings, talking to experts in financial trades, banking regulation and more, trying to understand what is going on.


Long story short: it’s not something you learn over a few doughnuts.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

There ARE Solutions to the Banking Crisis

Treasury Secretary Geithner presented his new financial rescue plan on Tuesday, which impressed no one. The plan was confused, unfinished and intellectually contrafactual. In this posting, I will expand on my solution to the banking crisis, which involves a system of what are called “covered bonds” along with the creation of new banks.


After the plan was introduced and poorly received, Geithner defended himself by saying that there was “no historical precedent” to this crisis. Nothing could be further from the truth. Simply giving the banks taxpayer money to spend as they please, a.k.a. the “Bush/Paulson/Geithner solution” is what lacks a historical precedent, simply because it’s so infinitely stupid.


Geithner, along with what seems to be the entire American political and economic establishment seems to be completely in the dark in terms of economic research and economic history. I’m saying that there are many precedents to this crisis, and that there are many precedents on how to solve it.


There are 2 main, related problems that must be solved as soon as possible:


1. the banks are insolvent, and


2. the mortgage securitization market is dead


The banks are insolvent because they own worthless assets that nobody wants to buy. Geithner’s plan involves trying to convince private investors to buy these worthless assets, but the reason they’re worthless is that these same investors didn’t want to have anything to do with them in the first place.


The assets are like rotten apples in a fruit stand, and however much such apples are promoted, I think it’s pretty safe to say that few people will ever by them.


The mortgage securitization market is the market where banks sell off mortgages to private investors in the form of mortgage-backed securities, which is the same thing as the assets I mentioned above.


Nobody wants to participate in the mortgage securitization market anymore because housing prices have imploded, so the market is dead with little chance of being revived any time soon. In other words, if housing prices don’t go up, the mortgage securitization market will continue to be dead.


Now to my suggestions of solutions to these problems. In a catastrophic banking crisis, the solution has in the past been either nationalization or the creation of new banks.


Nationalization is the more common solution, but if a bank’s debts are five times its market value, what is the point of rescuing it by nationalizing it? Spending five dollars to make one dollar doesn’t make a lot of sense… In light of the banks’ situation, nationalization would be the least severe destiny awaiting them. It would, however, be extremely expensive for the taxpayer.


Because the U.S. Government is ideologically opposed to nationalization, my bet would be that Bank of America and Citigroup (along with many smaller banks) will have the same fate as Lehman Brothers.


Instead, I believe that the creation of new banks is the appropriate solution. This was done in the 1800s in the United States during a catastrophic banking crisis. Under this plan, the government would simply set up a new bank, inject it with money for lending and write strict rules on how it can operate. That would instantly create a stable, prudent and dependable bank.


The government would then sell off 49% of the shares to private investors and keep running the bank according to prudent standards until the crisis is over. At that point, the bank can be sold off completely.


Instituting a system of covered bonds would be a good solution for the mortgage market. This is a very stable system that has been used for hundreds of years in Europe. Basically, all the banks would get together and put all their mortgages in a giant pool.

As soon as one mortgage defaults, it is immediately taken out of the pool, and the loss is shared by all the banks at once. All the mortgages, meaning the investments that the banks have made, are hence “covered” by all the participants in the system.


Under this system, the mortgages remain on the banks’ balance sheets. It is a collaborative effort, as well as being a system where each bank has to take responsibility for its own lending practices. This system encourages prudent lending standards by all participants, stabilizes the housing market in general, and improves the trust in the financial system.


We need to think in new ways about the crisis, which Geithner acknowledged in his speech, but he is so ignorant that he does not know of any solutions like the ones I just described.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

What to do with the Banks?

Allow me to explain, in plain language, what the whole discussion about the troubled banks is about. A lot of the banks, most notably Bank of America and Citigroup, are already insolvent. The only reason that they haven’t had to file for bankruptcy is that they’re claiming that their assets are worth much more than they actually are.


The banks are saying: our assets are worth a lot, but nobody is willing to pay anything for them now, but the value of them will go up in the future, so give us money now.


The very foundation of a capitalist economy is that any asset, whether it’s a house, a painting or a complex financial product is only worth what someone is willing to pay for it. In a communist economy, the government decides what assets are worth, but that is not, as we all know, how things are done in the U.S..


The assets that the banks are claiming to be worth so much money are actually completely worthless, because nobody is willing to pay anything for them. They’re like houses in a ghost town.


According to financial regulation you have to “mark assets to market”, which means that you have to value them according to what people are willing to pay for them, which is in line with the capitalist economy. However, the banks are hiding all these assets away from sight of regulators, investors and the public, so that they can get away with not doing this.


They do this by putting worthless assets in what they call “special purpose entities”, which do not appear on the balance sheet. It’s as if someone were to have a secret credit card with a huge balance that they have hidden away from their spouse, while telling that spouse that they have no debts.


Currently, the U.S. government is trying to figure out how they can relieve the banks of these assets (of which the government actually has no idea how much there are, or of what they are made up). Tim Geithner will present a plan tomorrow at 11 a.m., and the most important factor in this plan is that the government will try to buy these worthless assets from the banks.


What they have to do, in actual fact, is to decide a price of the assets, just like communist governments used to do. It is strange for the government to engage in communist economic policies in order to save capitalism. The taxpayers will pay for the assets, but whatever price is above zero is too high, so the American taxpayer is without question being ripped off big time… again.


The money which is available for use in this plan is $350 Billion. That is nowhere close to being enough for the banks so that they can avoid bankruptcy. The only thing this does is to buy time. It buys time for these worthless assets to go up in value again, and that is the only way that the banks can remain in their current forms.


Will the assets recover the value that they used to have? Absolutely not. Using the analogy of the house in the ghost town again, the ghost town would have to turn into a boom town in just a few months. I’m not aware that something like that has ever happened.


To simplify things quite a bit, you could say that one of these bank assets is made up of 1,000 houses in a low-income area of Cleveland (where the sub prime crisis is extremely severe).


By now, all of them will have lost at least 50% of their value, 200 of them will have been torn down, and 500 of them are empty (and the empty ones have lost 80% of their value due to looting and other things).


If each house were worth $20,000 in the beginning, the bank asset would have been worth $20 million. After the value destruction that I outlined above, the face value of the asset would be only $5 million. In addition to that, such an asset is priced based on the future expectations of it, which I need hardly mention are not good. Hence, nobody wants to buy it, and it is in fact worthless.


This decrease in value from $20 million to $5 million in a short time is the essence of the banks’ problems. In many cases, the situation is far worse than what I have described above, but I’ll try to keep it simple for now.


Hence, this bailout, like the other ones, is totally misguided and has no prospects of working. Why are they doing this anyway? Because the prospect of nationalization is too ideologically offensive to American politicians. Nationalization would lead to all the shareholders losing their money, and the bank executives would be fired.


Several banks will have to be nationalized sooner rather than later anyway, regardless of further bailout attempts. As I said, the reason for this is simple: the value of the bank assets will not go back up. I don’t favor nationalization because I think that would be too wasteful and expensive, but instead, I favor the creation of new banks, as I wrote in January.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Proportional Representation - The Iraq Example

George W. Bush claims to have created a new democracy in the Middle East: Iraq. One of the most interesting things about this is how it was done, and how the government and the voting system was set up. Surely, if a democratic “liberator” country topples a regime in the name of democracy, it would want to create a new democracy in the country as a mirror image of itself. In the case of Iraq, however, this was not done.


Proportional Representation has become the system of choice for virtually all developed countries in the world, except in the Anglo-Saxon countries. When the United States toppled the Iraqi regime and installed a new political system, the American model of government was not chosen. Instead, Proportional Representation was chosen.


All that Proportional Representation is, is a system that counts every vote and awards seats in Congress based on how many votes a certain party gets. Can it get any simpler than that? If you get 40% of the vote, you get 40% of the seats. End of story. In The United States today, however, if you get 40% of the vote, you may get 0% of the seats. The American voting system inevitably leads to the following outcomes:


1. Only two parties can ever take part in the political process, even if those two parties are not even close to enjoying support from a majority of the population.


2. Politics is not driven by issues, such as whether or not to provide national healthcare. Instead, the personality of politicians and the amount of money a politician has are without question the two most important factors.


3. Co-operation between the parties (a.k.a. bipartisanship) occurs, so that neither of the parties can ever be challenged by a new party. This can also be described as a political cartel. For a new party to come onto the political stage, one of the old ones would have to disappear.


If the United States government had suggested the American voting system for Iraq (also known as the winner-takes-all voting system), there would have been a nationwide outrage and eventually, very likely, a civil war. The reason for this is that, inevitably, only two parties would have made it into the Iraqi parliament, one of which would have ruled everything.

Clearly, there would have been one Shia Nationalist Party and one Sunni Nationalist Party. The Shia Nationalist Party would have won the majority and ruled completely. The Kurds would not have been represented at all, nor would any other minority, like the Christians.


In a deeply divided and diverse country like Iraq, it would have been disastrous to have only one ethnic group rule the whole country, which is what would have happened under the winner-takes-all voting system. The other groups would most likely have been repressed to a point where rebellions started occurring. The Kurds would have rebelled against the usage of oil money, the Sunni would have rebelled against religious intolerance, and so on.


By giving the Iraqi people Proportional Representation, The United States ensured that every Iraqi was given a voice, regardless of ethnicity, region or income. This made the likelihood of civil war infinitely smaller, and gave the new country a chance to work its problems out. It remains to be seen whether that is possible, however, but a fair voting system is obviously of the utmost importance.


The United States is also a deeply divided country because of geography, ethnicity and old divisions going back to the civil war. There is an incredibly strong anti-government sentiment in this country that is unmatched in the rest of the world, leading to a situation that many foreigners would describe as semi-anarchistic. The American people do not want to work together, and they do not share the same goals.


I believe that the reason for this is that the American people cannot be represented proportionally because of the winner-takes-all voting system, as Iraqis can. As a result of this, doing nothing seems like a better option than having one group rule over all the others. In the United States, an unfair voting system has gradually led to a governmental paralysis.


For all those groups of voters whose interests are not shared by the political elite, there is no way to gain a political voice, because their party would have to be big enough to eradicate either The Republicans or The Democrats from the political scene, which is obviously easier said than done.


The only rational thing these people can do is to be critical of government action in general, which is what they have done for over 200 years now…



The main reason that I write this blog is that I consider the American (as well as the Canadian and British) system of government to be undemocratic. Even George W. Bush knows that the American voting system is undemocratic, otherwise he would have seen to it that Iraq was given this system too.


The biggest problem, however, is that the American people are not aware of what consequences the current voting system has, or that there is something called Proportional Representation, and that is why I’m writing all this.






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The Shimon Peres Proposal

The New York Times reported yesterday that the President of Israel, Shimon Peres, had come up with a suggestion for dealing with fraud and other abuses on Wall Street. During a Sabbath dinner last week, Peres reportedly proposed that, instead of giving huge bonuses to executives of failed banks and Wall Street firms, large bonuses should be given to federal employees who sniff out the next Bernie Madoff or expose the next financial derivatives scheme à la Lehman Brothers.


The proposal is a very good one, and it goes deeper than what it seems like on the surface. It is not the most sophisticated of political tools, but it is one that most people can understand and embrace. It may not be fair to other federal employees, but desperate times call for desperate measures.


The core of the problem is bad governance. For decades, people who have worked as federal regulators have only done so long enough to make their next career move: to work on Wall Street with ten times the salary. This makes regulators unmotivated and decreases the skill of the regulatory institutions in general because of poor staff retention numbers.


Also, financial regulation is simply a game of cat and mouse, where regulators try to keep up with Wall Street’s innovations, but always lose. The reason: Wall Street employs ex-regulators who know how to structure everything relating to financial transactions so that they will be kept under the radar.


The situation for federal regulators is very similar to that of Mexican policemen who can’t feed their families on their salaries and turn to the drug trade to make much needed money. I don’t think the families of regulators are starving, but when prosperity is put into a relative context, as it always is, they might as well be. The incentive to move to Wall Street is simply far too great.


People who work for the United States government are actually not that poorly paid from a comparative perspective. They get a fair salary and pension, a good amount of vacation time, good work hours and are allowed time with their families. In most respects, working for the U.S. government closely resembles working in a middle-class job in the EU, where all jobs, whether private or government paid, come with such benefits.


So, theoretically, I disagree with the fact that financial regulators should be paid much more than other federal employees. However, this is a crisis if gigantic proportions, and because Wall Street is the biggest part of people’s financial well-being, problems with fraud and schemes can rock the foundations of society.


I hereby suggest a few more details to the Shimon Peres proposal:


- give regulators who expose fraud and schemes a share of the fines in the eventual court settlement


- increase incentives for the already enacted whistle-blower compensation with respect to Wall Street firms


- consolidate all financial regulatory agencies into one huge agency


- consolidate all financial regulation into clear, simple, federal legislation (this is definitely easier said than done)






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Turning Prime Into Subprime - For Taxpayers

A disturbing new trend is slowly emerging as banks are responding to the crisis and the political climate. Banks and Wall Street firms have obviously made billions from the bailouts because of taxpayer donations, but it has taken them a while to figure out how to benefit from the crisis and rip off taxpayers with a new business model. Now they seem to have figured that out.


Politicians have been angry with the banks for not lending more money to the public. Since the banks got the bailout money, they have been sitting on it and only been spending money on “essentials” such as bonuses and dividends.


What is happening now is that they actually are starting to lend. They are giving 30-year fixed rate mortgages with very low interest rates. This is also the centerpiece in a new recovery plan put forth by the Republicans. Making these loans seems like something a very healthy bank would do, so in light of the fact that most of the major banks are effectively insolvent, how are they doing that?


Recently, it has come out that Wells Fargo is giving 30-year fixed rate home mortgages in Portland, Oregon, with an interest rate of only 3.875%. Considering that interest rates everywhere else are much higher, these loans are completely unrealistic from a business perspective. In addition, Oregon’s real estate market is not exactly booming, so the loans are quite likely to go into default.


Today, Citigroup announced that it was going to use $36.5 billion in bailout money to provide home loans for the public. $10 billion of that will be backed by the government entity Fannie Mae. Citigroup has not announced interest rates or other details as far as I’m aware, but the important thing to remember is the combination of using bailout money and government-backed entities to guarantee the loans.


I believe that Wells Fargo and Citigroup are doing the same thing: making loans that are likely to go into default using taxpayer money while taxpayers guarantee the loans if the default.


This is very similar to how the subprime loans were created. When making those loans, the banks didn’t care at all whether the loans would go into default; they just took the fees for making them, and then sold off the loans.


This is the same thing, and from a taxpayer perspective. This amounts to a triple or quadruple whammy.


First, taxpayers pay for the unbelievable mistakes the banks made, then they pay CEO bonuses, then they pay to start up the subprime scourge again, and finally get sent the bill from Fannie Mae and Freddie Mac. When will we stop digging a deeper hole for ourselves???






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Response to Crisis - Kleptocracy

Obama has certainly done many good things since he took office. However, as I feared last year, his appointments in the economic field are proving disastrous. Timothy Geithner and Larry Summers were two terrible choices that represent a direct continuation of the utterly failed policies of Greenspan and Paulson.


A kleptocracy is a political system run by thieves. The only beneficiaries in the system are the thieves themselves, and the public is left robbed. At this point in American history, Wall Street appears to have taken over democracy completely, and is somehow able to dictate the terms no matter who is in the White House or in Congress.


A kleptocracy usually includes large elements of bribes, corruption and extortion, without which the government cannot function. Around the world it is often said that The United States has the “best politicians money can buy”. Indeed, that is how it is, and Wall Street has bought these politicians over many years now. Politicians cannot run their campaigns without these donations, so the relationship is unavoidably symbiotic.

Kleptocratic regimes are usually associated with countries such as Uganda and Congo, so why is the U.S. a kleptocracy? Because Wall Street controls the agenda and gets all the benefits.

We are now approaching the third or fourth bailout attempt with the exact same theme: outright taxpayer donations to failed Wall Street firms and banks and their stockholders.


Everybody can see that it’s not working, so why is the Obama administration suggesting another one of these bailouts: the bad bank solution!!?? The bad bank solution entails simply giving banks taxpayer money to cover their losses, with no strings attached. And believe me, that money will never be seen again. It’s going to go into a black hole of losses, built up by fictitious profits, but now exposed and imploded.


To engage in something so morally offensive and intellectually misguided as the bad bank solution only has one explanation: the system is totally corrupt. Why else would the government embark on a bailout that everyone knows won’t work?


I blame Timothy Geithner and Larry Summers for continuing the kleptocratic system. Their only concern seems to be the continuation of the supreme rule of Wall Street in American democracy. Geithner specifically said today that the current financial system must be preserved.

If they are going to rob the taxpayers, it would actually be better if they robbed the money and spent it on luxury goods. That would at least provide some jobs for people, or prevent luxury goods companies from having to lay people off. Maybe a “Thain renovation” would be appropriate?






Moreover, I advise that the winner-takes-all voting system should be destroyed.