May 2009 Archives

After watching Madoff & Stanford specials, I feel ill

Yesterday, I watched PBS Frontline’s The Madoff Affair about Madoff’s $65 billion Ponzi scheme.

Tonight, I watched CNBC’s Secrets of the Knight: Sir Allen Stanford & the Missing Billions about “Sir” Stanford, who apparently ripped off 30,000 clients, many of whom invested their entire life’s savings with Stanford.

That these men could steal such incredible sums from so many investors is an astonishing indictment of our financial system.

That the government failed to shut down — or even warn about — these Ponzi schemes even after receiving a stream of tips and suspicions — over many years — about each financial institution is an even more astonishing indictment of our government (SEC, etc.).

Posted by James on May 14, 2009

Alan Blinder bugs me (Part 1: The "law" of comparative advantage)

Watching Charlie Rose tonight, I was disturbed to hear Princeton economist Alan Blinder basically call Americans idiots for not understanding the so-called “‘Law’ of Comparative Advantage” (which states that individuals and countries should just produce whatever they have a comparative advantage in producing).

Well, I understand the “Law,” and I oppose unfettered free trade. The “Law” is an extremely simplified “toy” model of trade… exactly the kind of toy model economists so often create by focusing in on just one or two features of the real world and ignoring everything else. Unfortunately, Ricardo’s “Law” ignores critically important features of the real world that render suspect all conclusions drawn from it.

Blinder attacked Senator Sherrod Brown (D-OH)’s stance that free trade agreements should require a relatively level playing field (e.g., on environmental standards). Blinder seemed to dismiss Sen. Brown as a populist, know-nothing hick. Even if you buy Blinder’s comparative advantage argument (which I don’t; see below), it’s hard to understand his objection to demanding environmental standards in trade agreements: Does Blinder really think some nations possess a comparative advantage in their ability to pollute their environments or that this “comparative advantage” is why some countries pollute so much more than others? He apparently does because he said:

We don’t want a level playing field! We are the richer country. We are more productive. We ought to have, for example, compared to a poor country, higher domestic environmental standards. We ought to have higher [safety] protections for our workers.

Why should poor countries protect their environments less and protect their workers' safety less than we do? And why should American workers and employers have to compete against companies that are allowed to despoil their rivers, foul their air, kill their mine workers, turn their children into wage slaves, and cripple their dangerous machine workers?

The “‘Law’ of Comparative Advantage” sounds simple. But where did Japan’s comparative advantage in automobiles come from? Japan hasn’t produced automobiles for hundreds of years. It developed its comparative advantage. In fact, neither the U.S. nor Japan invented the automobile. France’s Nicolas-Joseph Cugnot invented the first self-propelled road vehicle, powered by steam. Scotsman Robert Anderson invented the first electric carriage. Germany’s Karl Friedrich Benz invented the gasoline-powered automobile. And Germany’s Gottlieb Wilhelm Daimler invented the first four-stroke, four-wheeled car. Doesn’t the “Law” imply one of these countries should be producing all the world’s cars? At one point in time, only Germany possessed the knowledge to build gasoline-powered cars. They should, therefore, monopolize the car industry for all time, right?

Ricardo’s toy model ignores inventions (like Henry Ford and mass production). It also ignores the fact that trade policies and business decisions change competitive advantage over time. Ricardo’s (overly) simple one-period model simply does not hold true in a dynamic model:

R. Mendez develops the argument that international trade of goods or direct investments carry within themselves convergence forces via the voluntary technological diffusion (production under license) or unintentional (imitation): the exchange of goods implies a certain exchange of ideas, but commercial trade also carries within itself divergent forces. Trade leads to specialization which modifies the dynamics of factors through reinforcing comparative advantage which strengthens economies’ specialization. The author illustrates this idea with an endogenous growth model where the dynamics (i.e. convergence or divergence of standards of living) depends on the process of ideas spreading (international transfers of technology) and of economies’ history (via their initial relative endowment).

Nor does the “Law” hold in the real world. And since the premise of Blinder’s argument for unfettered free trade is the unassailable truth of the “‘Law’ of Comparative Advantage,” the irrelevance of that simple model to the real world implies the irrelevance of Blinder’s conclusion.

The American people feel in their guts (and in their paychecks, if they still have one) that free trade is hurting them. Blinder’s blindly trusting in a model. The American people have heard the “giant sucking sound” H. Ross Perot warned of long ago. The American people’s objections to free trade aren’t completely valid either. But neither is Alan Blinder’s unquestioning faith in free trade.

Posted by James on May 07, 2009

Alan Blinder bugs me (Part 2: What's causing our trade deficit?)

On Charlie Rose, Alan Blinder also tossed out the old “We have no one to blame for our trade deficit but ourselves” argument. He claimed:

How do you get a trade deficit [this large]? You get a trade deficit when the domestic economy — the people and the government together — spend a lot more than they save. Then you have to borrow the rest from the rest of the world… The fundamental causes of the overall trade deficit (as opposed to the allocation — is it cars? is it toasters? is it wheat? — trade policy’s relevant to all of that), but the fundamental cause of the overall trade deficit is how much does society is how much does it spend and how much does it save?

One criticism of this view was raised on the show by none other than pro-free-trader and former Bush Administration U.S. Trade Representative Susan Schawb, who said we should be seeking “comparable access.” She didn’t spell out the implications of unequal access, so let me.

If — hypothetically — every country in the world banned all imports of American goods but continued exporting to the U.S., the U.S. would automatically run a trade deficit because America would be importing foreign goods but not exporting any. So the argument that the U.S. saving rate determines our trade deficit is simply untrue. Formal and informal trade barriers and exchange rates affect who buys what from where and at what price. The saving rate does change when imports and exports change, but the saving rate’s not causing those changes. Trade barriers and relative prices (exchange rates) drive purchasing decisions. The savings rate is what remains after economic actors make purchasing decisions. The saving rate doesn’t drive consumers to buy domestic or foreign products.

Here’s a clear analysis from Thomas Palley:

On average every dollar of consumption spending generates two dollars of income since the money initially spent circulates and creates jobs and more spending. Households also spend about fifteen percent of their income on imports. Now, suppose Americans increased their saving by three hundred billion dollars. That would initially reduce consumption spending by three hundred billion dollars, causing an ultimate six hundred billion dollar drop in income. As a result, imports would decline by ninety billion dollars, reducing the trade deficit to around six hundred billion dollars. Thus, a major increase in saving triggers a deep recession, and causes a modest dent in the trade deficit. Clearly, lack of saving is not the primary cause of the trade deficit.

Reducing the trade deficit requires increasing exports and decreasing imports. That requires inducing foreigners to buy more U.S. made goods, and inducing Americans to switch their spending from imports to domestic made goods. How do market economies accomplish this? They do it by changing relative prices, making foreign goods more expensive for American consumers, and American goods cheaper for foreign consumers.

To get concrete, improving the trade deficit begins with shoppers at Wal-Mart buying American goods rather than imports. They don’t do this because they have decided to save more. They do it because American goods are cheaper than foreign goods, and they therefore switch spending to American goods. That is where exchange rates enter. A depreciation of the dollar makes foreign goods more expensive to Americans, and it also makes American goods cheaper to foreigners. Which is exactly what the doctor ordered.

If exports go up, the trade deficit will improve… Saving will have increased, but not because households made a decision to save more. Rather, it is because the exchange rate changed, changing relative prices and increasing exports, and those exports are accounted for as increased saving.

The trade deficit is principally determined by our trade policies and those of other countries that affect tariffs and non-tariff barriers; exchanges rates which determine the prices of exports and imports; the state of the U.S. economy which affects our demand for imports; and the state of the rest of the world’s economy which affects their demand for U.S. exports. Trade policy and exchange rates are the way to affect the trade deficit while retaining high employment. The focus on saving is a pure distraction.

Posted by James on May 07, 2009

Analysis of Dutch society shines light on America

Many Americans — Sean Hannity immediately comes to mind — blithely and ignorantly declare our nation the greatest on Earth. Whether that’s true or not, most Americans lack sufficient knowledge of other nations to judge America’s “greatness” (whatever that means) in the NCAA rankings of countries. Understanding the strengths and flaws and quirks of one’s country requires comparison. And comparison requires more than a caricature of other countries. That’s why I so love a new New York Times article “Going Dutch”, written by an American living in the Netherlands.

It’s a long article depicting both the good (high levels of life satisfaction; health care for all; affordable housing for all; vacation pay for even the unemployed; a true 40-hour workweek) and the bad (high taxes; homogeneous, risk-averse culture; stores closed Sundays) of Holland and tries to explain how Holland developed such a strong sense of togetherness. One part of the answer: the constant threat of flooding that threatens everyone and can only be addressed through cooperation. Another part: The Dutch took their Jesus far more seriously than many American Christians seem to:

There is another historical base to the Dutch social-welfare system, which curiously has been overlooked by American conservatives in their insistence on seeing such a system as a threat to their values. It is rooted in religion. “These were deeply religious people, who had a real commitment to looking after the poor,” Mak said of his ancestors. “They built orphanages and hospitals. The churches had a system of relief, which eventually was taken over by the state. So Americans should get over ‘socialism.’ This system developed not after Karl Marx, but after Martin Luther and Francis of Assisi.”

This excerpt gives a flavor of the article:

I noted with fleeting but pleasant confusion the arrival of two mysterious payments of 316 euros (about $410) each. The remarks line said “accommodation schoolbooks.” …On looking at the payor — the Sociale Verzekeringsbank, or Social Insurance Bank — I nodded… I have two daughters, you see. Every quarter, the SVB quietly drops $665 into my account with the one-word explanation kinderbijslag, or child benefit. As the SVB’s Web site cheerily informed me when I went there in bewilderment after the first deposit: “Babies are expensive. Nappies, clothes, the pram … all these things cost money. The Dutch government provides for child benefit to help you with the costs of bringing up your child.” Any parents living in the country receive quarterly payments until their children turn 18. And thanks to a recently passed law, the state now gives parents a hand in paying for school materials.

Payments arrive from other sources too. Friends who have small children report that the government can reimburse as much as 70 percent of the cost of day care, which totals around $14,000 per child per year. In late May of last year an unexpected $4,265 arrived in my account: vakantiegeld. Vacation money. This money materializes in the bank accounts of virtually everyone in the country just before the summer holidays; you get from your employer an amount totaling 8 percent of your annual salary, which is meant to cover plane tickets, surfing lessons, tapas: vacations. And we aren’t talking about a mere “paid vacation” — this is on top of the salary you continue to receive during the weeks you’re off skydiving or snorkeling. And by law every employer is required to give a minimum of four weeks’ vacation. For that matter, even if you are unemployed you still receive a base amount of vakantiegeld from the government, the reasoning being that if you can’t go on vacation, you’ll get depressed and despondent and you’ll never get a job.

Whether you like or dislike the Dutch system, most Dutch seem to really like it: “A 2007 Unicef study of the well-being of children in 21 developed countries ranked Dutch children at the top and American children second from the bottom.” And they’re less stressed:

Dutch people take both their work and their time off seriously. Indeed, the two go together. I almost never get a work-related e-mail message from a Dutch person on the weekend, while e-mail from American editors, publicists and the like trickle in at any time. The fact that the Dutch work only during work hours does not seem to make them less productive, but more. I’m constantly struck by how calm and fresh the people I work with regularly seem to be.

Their satisfaction should give Americans who look down on European socialism pause.

Posted by James on May 05, 2009


Today’s New York Times draws attention to BlackRock’s central role in government financial crisis decision-making even as it manages $1.3 trillion in private assets and executes contracts for the government and the Federal Reserve:

BlackRock has become so ubiquitous that some lawmakers, federal auditors and watchdog groups are now asking if the firm does too much, and if its roles as government adviser, giant federal contractor and private money manager will inevitably collide.

Can a company that is being paid to price and sell troubled assets for the government buy the same kinds of assets for private clients without showing preference? And should the government seek counsel from a company whose clients stand to make or lose billions if those policies are enacted?

“They have access to information when the Federal Reserve will try to sell securities, and what price they will accept. And they have intricate financial relations with people across the globe,” Senator Charles E. Grassley, Republican of Iowa, said. “The potential for a conflict of interest is great and it is just very difficult to police.”

The question answers itself. But I became even more troubled by this article after watching CNBC’s “Meeting of the Minds: The Future of Capitalism” this morning. BlackRock CEO Larry Fink did say some good things, but he also complained that U.S. tax policy discourages investment before calling for a ZERO PERCENT tax rate on long-term investments! Can you imagine taxing earned income with regular taxes plus FICA but not taxing the unearned income of billionaires?!?!

Such crazy talk prompted even free market televangelist Jack Welch — who spent the show defending unfettered free market capitalism against government intrusion at every opportunity — to call Fink nuts for imagining a 0% tax rate on investments. Yet Fink’s company is playing a central role in governmental decisionmaking over trillions of dollars in bailouts and asset sales. And, ordinary Americans losing our jobs and our homes, Fink has the ear of President Obama.

Posted by James on May 19, 2009


Paul Krugman supports cap-and-trade legislation proposed by Congressmen Henry Waxman and Edward Markey even though, he writes, the legislation

sets up a system under which many polluters wouldn’t have to pay for the right to emit greenhouse gases — they’d get their permits free. In particular, in the first years of the program’s operation more than a third of the allocation of emission permits would be handed over at no charge to the power industry.

…[H]anding out emission permits does, in effect, transfer wealth from taxpayers to industry.

In a just world (or a true democracy), every American would be given a piece of paper providing the right to pollute 1/300-millionth of the allowable national CO2 total. Power plants would have to buy those rights from Americans or stop releasing CO2 into the air.

If Jane Smith wanted to further reduce America’s greenhouse gas emissions, she could simply rip up her certificate and America’s CO2 emissions would have to fall by 1/300-millionth. That would simultaneously make other certificates more valuable to their holders and more expensive to polluters. The CO2 emitters who create the least economic value per unit of CO2 emissions would shut down or find ways to produce with fewer CO2 emissions.

Of course, Washington is run by corporate lobbyists, so polluting companies get free pollution rights and American citizens get nothing.

Posted by James on May 18, 2009

Credit card companies using psychological manipulation to recoup loans

I just blogged about a fascinating article about credit cards in this upcoming Sunday’s New York Times Magazine. Here’s another on how credit card companies train collectors to push debtors' psychological buttons to get them to pay:

[Tracey] worked for a company that today is a subsidiary of Bank of America. Tracey had talked to Tiff several times and noticed that there was a mistake on her account — an automatic payment was going to be deducted twice from her checking account. If that happened, Tiff’s other checks would bounce.

“I told her, thank you so much for catching that,” Tiff recalled. “And then we talked for over an hour about my problems and raising kids. She was amazing. She was so similar to me. She gave me her direct number and said that I should call her directly anytime I had any questions or just needed to talk about what was going on.”

Over the next three years, Tiff paid off the entire $28,000 she owed Bank of America and spoke regularly with Tracey, she said. And the $12,000 she owed on other cards? Well, those companies didn’t have a Tracey. They never got fully repaid.

It’s a heartwarming story. Unless you’ve seen how people like Tracey are schooled in the art of bonding. What are the odds that the random customer assistant who dealt with Tiff would have so much in common with her and manage to strike such a close bond? I tried to call Tracey myself, using the information Tiff provided. But I was told she didn’t work there anymore.

One Bank of America executive acknowledged that Tiff… probably could have cut her debt in half just by asking. Much of what they’re paying, after all, is fees and interest that Bank of America itself tacked on.

“Some cardholders are not as savvy as others,” said Tony Allen, a company spokesman…

I asked Tiff if she ever asked Tracey to write off the late fees and the interest charges.

“Oh, no,” she told me. “She was so kind to me. How could I ask her for something like that?”

Posted by James on May 14, 2009

Deliberate practice

David Brooks today summarizes a hot topic relevant to every parent, educator, mentor, trainer, coach, and manager: deliberate practice.

The key factor separating geniuses from the merely accomplished is not a divine spark. It’s not I.Q., a generally bad predictor of success, even in realms like chess. Instead, it’s deliberate practice. Top performers spend more hours (many more hours) rigorously practicing their craft…

[Initially] practice would be slow, painstaking and error-focused. According to Colvin, Ben Franklin would take essays from The Spectator magazine and translate them into verse. Then he’d translate his verse back into prose and examine, sentence by sentence, where his essay was inferior to The Spectator’s original.

Coyle describes a tennis academy in Russia where they enact rallies without a ball. The aim is to focus meticulously on technique. (Try to slow down your golf swing so it takes 90 seconds to finish. See how many errors you detect.)

Deliberate practice is a special type of practice involving constant self-criticism and (ideally) critiquing by expert coaches. Deliberate practicers never settle for “good enough” but instead push for constant improvement by identifying and correcting flaws in their technique:

Our young writer would find a mentor who would provide a constant stream of feedback, viewing her performance from the outside, correcting the smallest errors, pushing her to take on tougher challenges. By now she is redoing problems — how do I get characters into a room — dozens and dozens of times. She is ingraining habits of thought she can call upon in order to understand or solve future problems.

Two other keys to greatness are passion/ambition and great coaching. Passion/ambition spurs one to deeply engage in an activity for many years. And great coaching speeds the learning process by enhancing the quality of deliberate practice through rapid expert feedback on performance.

Brooks mentions two books: Daniel Coyle’s The Talent Code and Geoffrey Colvin’s Talent Is Overrated.

I heartily recommend Malcolm Gladwell’s Outliers, which covers the same topic from a different angle (such as a discussion of Bill Gates' many lucky breaks that — combined with his drive and focus and passion — helped him achieve such incredible success). Deliberate practice is a necessary — but not a sufficient — condition for success.

Posted by James on May 01, 2009

Dem. Senator opposes public health insurance BECAUSE it would really help people

Sometimes, our “representatives” in Washington don’t even bother to pretend to care about us little people.

Senator Ben Nelson (D-Nebraska) says he opposes a public health insurance option because too many people would love it!

Nelson’s problem, he told CQ, is that the public plan would be too attractive and would hurt the private insurance plans. “At the end of the day, the public plan wins the game,” Nelson said. Including a public option in a health plan, he said, was a “deal breaker.”

…As he so often does, Nelson said, according to CQ, that he planned to form a “coalition of like-minded centrists opposed to the creation of a public plan, as a counterweight to Democrats pushing for it.”

At least Republican Congressmen make an effort to hide their corporate whoring with fake empathy and fraudulent claims about how policies favored by their corporate overlords are actually best for ordinary Americans too.

Posted by James on May 02, 2009

Financial institutions' risk preferences and investment horizons

No major news in Joe Nocera’s “Hedge Fund Manager’s Farewell”, but it reminds us once again of the immense importance of an investor’s risk tolerance and investment horizon and how our banks incented employees to gamble with other people’s money:

[Hedge fund managers] had far fewer incentives than Wall Street traders to take truly insane risks. “Ninety percent of my net worth was in [my] fund,” said Mr. Barsky, and that is true of most hedge fund managers. Wall Street traders got rich by making deals that brought short-term profits, even if they “blew up” later. Hedge fund managers who blew up hurt not only their investors but themselves. “As long as the hedge fund manager has his own capital in the fund, the risk equation is different,” Mr. Barsky said.

“When I first started in 1998, we used to send out quarterly numbers. Now investors want weekly numbers. Professor Louis Lowenstein” — the iconoclastic and recently deceased Columbia University business law professor — “has a great line in one of his books: ‘You manage what you measure.’”

…Mr. Barsky had bought [Blockbuster] stock [in 2000] — and then had written to Mr. Buffett suggesting that he buy the company.

Mr. Buffett sent back a one-sentence reply: “I’ve thought about the business a lot but have never been able to come up with a conviction as to where the industry will be in 10 years.”

“Ten years!” Mr. Barsky said. “I think of myself as a long-term investor and I have a two- or three-year horizon.”

The article also notes the incredible irony that the large Wall Street banks had borrowed way too much money even as they refused to let their hedge fund clients borrow too much:

[N]obody in government is calling for a hedge fund bailout because hedge funds losses, however painful to investors, don’t create systemic risks to the nation’s financial apparatus. As it turns out, it was the big regulated entities, the banks and investment banks, that were the problem…

[M]ost hedge funds didn’t have the kind of 30-1 leverage ratios that the big banks had. Mr. Barsky’s fund, for instance, didn’t need much leverage to carry out his long-short strategy. But even if he had wanted to “lever up,” as they say, his prime broker — that is, the investment bank that did his back-office work — probably wouldn’t have let him.

In a wonderful irony, the banks and investment banks that were themselves drowning in debt were fearful of allowing their hedge fund clients to carry too much debt.

Posted by James on May 16, 2009

Gutter journalism

Corporate/mainstream TV “news” in America is mostly junk “journalism.” Print journalism is supposedly much better.

But there’s a ton of junk in newspapers too. Consider this.

Media Matters calls our attention to a hatchet job on Al Gore that really deserves wide attention: AP reported that Gore “bragged” he read energy bill, but he was asked if he had done so:

In an April 25 Associated Press article about the House subcommittee hearings on “The American Clean Energy and Security Act of 2009,” reporter Laurie Kellman asserted that former Vice President Al Gore “bragged” when he testified, “I have read all 648 pages of this bill,” adding that Gore’s statement was “a boast that would surprise no one who caught his teacher’s-pet performance in the 2000 presidential race.” However, Kellman did not mention that Gore made his statement after Rep. Greg Walden (R-OR) specifically asked Gore and former Sen. John Warner (R-VA), his co-panelist, “Have you each read the bill in its entirety?”

In addition, Kellman misrepresented an exchange between Gore and Rep. Joe Barton (R-TX), falsely claiming that Gore “compared Barton and Bernard Madoff, who swindled investors out of $50 billion.” In fact, Gore did no such thing; rather, he compared Barton to “the investors who trusted Bernie Madoff.”

For being decades ahead of most everyone on global warming, Al Gore should be a media rock star.

For bowing out with grace after having the presidency stolen from him by one of the most disgraceful Supreme Court decisions of all time and handed to one of the worst — if not the worst — presidents in American history, Al Gore should be a media rock star.

For writing an absolutely brilliant expose of the disgraceful state of American politics — The Assault on Reason — which is superior to 99.99% of what passes for political journalism in America today, Gore should be a media rock star.

Besides, how much cooler can anyone be today than being — as Gore is — a senior advisor at Google and a director at Apple?

Finally, the media is in no position to mock anyone! For the past eight years, they failed to do their job while the Bush Administration systematically destroyed America, both our economy and our international reputation, from within. Talented and dedicated journalists are ashamed of how far their profession has fallen. But shame is not stopping the media’s many Laurie Kellmans, as Media Matters comments in AP mocks Al Gore’s lack of ignorance, from taking cheap (and factually incorrect) shots at a modern American hero:

Associated Press reporter Laurie Kellman is still pointing and laughing at Al Gore, because he bothered to read legislation that deals with his life’s work before testifying about it. What a nerd.

Had the media spent more time in 2000 and 2004 covering candidates' political backgrounds and policy positions and less time mocking Gore and Kerry’s intellectualism (not to mention Howard Dean’s “scream”), perhaps Americans could have cast more informed ballots and America and the world would be better places today.

Too many “journalists” still lack the most basic journalistic insight: that they’re charged with portraying reality, not distorting it. Good journalists also keep issues in perspective. They cover prospective presidents to give voters relevant information to answer the question, “Which person do we want in the White House?,” not “Which guy would you like to have a drink with?”

Posted by James on May 04, 2009

How NY Times economics reporter earning $120K fell 8 months delinquent on his mortgage

Fascinating story by New York Times economics reporter Edmund Andrews on how he fell eight months behind (and counting) on his mortgage. It illustrates the financial vortex millions of Americans have been sucked into by financial firms that jack up interest rates and fees on those who have trouble paying their bills. And it shows just how happily mortgage lenders were throwing money at anyone with a pulse.

His troubles began when he took out a mortgage he couldn’t afford because he was paying $48,000 of his $120,000 salary in alimony to his former wife. The bank didn’t mind lending him close to $500,000 based on his credit score and verification of assets. He did a “no ratio” mortgage that didn’t require that he even state his income. For all the bank knew, he could have had no income.

After a while, Andrews' insufficient income caught up with his excessively large mortgage and he got sucked into the financial Bermuda Triangle:

Neither [my wife nor I] was paying attention to how easy our bank had made it to build up debt. The key was the overdraft protection — more accurately described as “bounced-check loans.” Every time I overdrew my checking account by even a few dollars, the bank would tap my MasterCard for $100, helpfully deposit the cash in my account and charge me $10 for the privilege.

Patty and I were now unwittingly tapping into our credit line at a terrifying pace: $5 overdrawn because of school supplies for Patty’s daughter Emily — $100 from the MasterCard. Fifteen bucks over because of gasoline? Another $100 from the MasterCard. Groceries for $305? No problem! Uncle MasterCard would front us $400.

Our debt spiraled up faster than I had ever dreamed possible. Chase Bank had cold-called me to offer a “platinum” card with no interest charges for the first six months. I took them up on it and shifted $3,000 in debt from my old card onto the new Chase card. But instead of paying down the balance before the interest charges began, I let it balloon to $6,000. Chase had sent us blank checks that we could use to either pay bills or give ourselves cash advances. I dismissed them as a cheap trick to lure dimwits into borrowing more money. In March, I grabbed one of the checks and used it to pay down $1,000 on my more expensive credit card.

I felt like a crack addict calling up my dealer. It was April 2006, and I had just reached Bob Andrews, our once and future mortgage broker, on his cellphone…

“Bob, we’re dying over here,” I wailed. “I can’t even explain how it happened, but we’ve got these unbelievable credit-card bills, and the minimum payments add up to almost $1,100 a month. There’s no way we can keep that up.”

I had months and months of credit-card bills spread across the dining-room table, and I quickly confessed the full horror of what they contained. We were approaching $50,000 in credit-card debt alone, and it was amazing how fast and how deeply we had dug ourselves in.

Posted by James on May 14, 2009

"If we had set out to design the worst [health] system that we could imagine..."

Former New England Journal of Medicine editor-in-chief Marsha Angell has said:

If we had set out to design the worst [health] system that we could imagine, we couldn’t have imagined one as bad as we have…

Our health care system is based on the premise that health care is a commodity like VCRs or computers and that it should be distributed according to the ability to pay in the same way that consumer goods are. That’s not what health care should be. Health care is a need; it’s not a commodity.

Angell doesn’t even mention the most perverse, infuriating fact about health-care-as-a-commodity. Unlike a product in a store, with a single price for all, hospitals charge patients who can least afford to pay much higher prices for the very same treatment!

The uninsured are disproportionately poor, unemployed and uninsurable (due to advanced age or pre-existing medical conditions). The uninsured pay much more — for the exact same treatment — than wealthier people with insurance. Insurance companies routinely settle with hospitals for 20% or even less of officially billed charges whereas the uninsured are billed 100% and expected to pay in full or given only minor discounts off the totally outrageous charge master list prices that are many times higher than the hospital’s actual costs of providing services.

Posted by James on May 27, 2009

If you can't buy off enough politicians, buy ads to scare and mislead people

Since single-payer healthcare is off the table (because insurance companies have bribed too many politicians), the fight in Washington is over giving Americans the option of buying health insurance from the government. This is much less desirable than single-payer because government (i.e., taxpayers) will get stuck providing healthcare to the sickest and oldest Americans while private insurance companies will cover only the healthiest, youngest Americans. Nevertheless, a government health insurance option would be a substantial improvement over the current “system” which leaves 48 million Americans without health insurance.

Private health insurers fear competing against a government plan because it would constrain their ability to siphon dollars from Americans' pockets. Upcoming TV ads — by Blue Cross Blue Shield of North Carolina — attack the idea of giving Americans the option to buy health insurance from the government. Paul Krugman describes these fear-mongering ads:

Troubled Americans are shown being denied their choice of doctor, or forced to wait months for appointments, by faceless government bureaucrats. It’s a scary image that might make some sense if private health insurance — which these days comes primarily via HMOs — offered all of us free choice of doctors, with no wait for medical procedures. But my health plan isn’t like that. Is yours?

“We can do a lot better than a government-run health care system,” says a voice-over in one of the ads. To which the obvious response is, if that’s true, why don’t you? Why deny Americans the chance to reject government insurance if it’s really that bad?

For none of the reform proposals currently on the table would force people into a government-run insurance plan. At most they would offer Americans the choice of buying into such a plan.

And the goal of the insurers is to deny Americans that choice. They fear that many people would prefer a government plan to dealing with private insurance companies that, in the real world as opposed to the world of their ads, are more bureaucratic than any government agency, routinely deny clients their choice of doctor, and often refuse to pay for care.

Posted by James on May 22, 2009

Jim Collins: Sleep + Focus = Creativity

Jim Collins' “Good To Great” is a fabulous book. If you haven’t already, please do yourself a favor and read it.

Since I admire Collins, I read with interest a profile of Collins in Sunday’s New York Times.

Collins tracks (with stopwatches) how he spends his time. As any management guru — like Collins — will tell you, you are what you measure, so Collins unsurprisingly succeeds in his goal of spending over half his time on creative pursuits.

What grabbed my attention is Collins' tracking of his sleep and its impact on his ability to think creatively:

He sleeps with vigor, too. He figures that he needs to get 70 to 75 hours of sleep every 10 days, and once went to a sleep lab to learn more about his own patterns. Now — surprise, surprise — he logs his time spent on a pillow, naps included, and monitors a rolling average.

“If I start falling below that,” he says, pointing to the short list on his whiteboard, “I can still teach and do ‘other,’ but I can’t create.”

Mr. Hansen, his co-author on the current turbulence project, occasionally teases Mr. Collins about his relentless self-improvement.

“I always laugh about the sleep log,” he says.

I also admire Collins' ability to say “no”:

Mr. Collins also is quite practiced at saying “no.” Requests pour in every week for him to give speeches to corporations and trade associations. It could be a bustling sideline, given that he commands a top-tier fee of $65,000 to dispense his wisdom. But he will give only 18 speeches this year, and about a third of them will be pro bono for nonprofit groups.

Companies also ask him to consult. But he mostly declines…

[His] willingness to say no and focus on what not to do as much as what to do — stems from a conversation that Mr. Collins had with one of his mentors, the late Peter F. Drucker, the pioneer in social and management theories.

“Do you want to build ideas first and foremost?” he recalls Mr. Drucker asking him, trying to capture his mentor’s Austrian accent. “Zen you must not build a big organization, because zen you will end up managing zat organization.” …

“We could have had a big consulting firm and training firm and it would have been a huge lucrative machine,” he says. “But I want to answer the questions.”

Posted by James on May 23, 2009

Kill 25 million Americans = $300 million fine

If you think financial deregulation was bad, consider our aging nuclear plants!

America has over 100 aging nuclear power plants. Since the risk of a nuclear plant disaster is mostly borne by the public at large — rather than owners of the plants — owners have insufficient incentives to monitor safety.

Nuclear plant operators' incentive to monitor is much lower still because they can’t even lose the value of their investment. The Federal Government caps nuclear firms' liability at just $300 million. So, even if a reactor melts down and kills tens of millions of Americans, its operator would be liable for only $300 million:

The [Price-Anderson Act] helped encourage private investment in commercial nuclear power by placing a cap, or ceiling on the total amount of liability each holder of a nuclear power plant license faced in the event of a catastrophic accident. Over the years, the “limit of liability” for a catastrophic nuclear accident has increased the insurance pool to over $10 billion.

Under existing policy, utilities that operate nuclear power plants pay a premium each year for $300 million in private insurance for offsite liability coverage for each reactor unit. This primary insurance is supplemented by a second policy. In the event a nuclear accident causes damages in excess of $300 million, each licensed nuclear reactor would be assessed a prorated share of the excess up to $95.8 million.

So, if a reactor has, say, a 1% probability of melting down, its operator would be (financially) foolish to spend more than $3 million eliminating the risk because cutting a 1% risk down to a 0% risk is worth — to the plant owner — only 1% of $300 million. Cutting the risk in half is worth just $1.5 million.

Given such disincentives to identify and fix safety risks, it’s imperative our government force nuclear reactor owners to undertake adequate inspections and repairs. But our government has instead been letting nuclear power plant firms ignore the growing risks. Three incidents in just the past two weeks make clear the very real dangers we face:

1) From today’s New York Times:

The discovery of water flowing across the floor of a building at the Indian Point 2 nuclear plant in Buchanan, N.Y., traced to a leak in a buried pipe, is stirring concern about the plant’s underground pipes and those of other aging reactors across the country.

A one-and-a-half-inch hole caused by corrosion allowed about 100,000 gallons of water to escape from the main system that keeps the reactor cool immediately after any shutdown, according to nuclear experts.

…It has raised concerns about the monitoring of decades-old buried pipes at the nation’s nuclear plants, many of which are applying for renewal of their operating licenses. Indian Point 2, whose 40-year operating license expires in 2013, already faces harsh criticism from New York State and county officials who want it shut down…

One argument raised by New York State in opposing extension of the license of Indian Point 2 or the adjacent Indian Point 3 reactor is that crucial components are aging in ways that the operators may not anticipate or understand.

2) Just a week ago, The Pittsburgh Post-Gazette reported:

A small rectangular hole was discovered in the steel containment liner plate at FirstEnergy Corp.’s Beaver Valley Unit 1 nuclear reactor in Shippingport, Beaver County, which had been shut down Monday for refueling and routine inspection and maintenance… Company inspectors found a small patch of blistered paint and protruding rust on the wall of the steel containment liner in the circular domed reactor containment structure.

“They found a small section of corrosion,” said Neil Sheehan, a NRC spokesman. “The steel liner is a vapor barrier that would only come into use if there is an accident, but is one of the barriers that needs to be vigorously maintained.”

3) Two weeks ago, The Asbury Park (NJ) Press reported:

Workers found an elevated level of radioactive tritium in water on the site of the Oyster Creek nuclear power plant in Lacey Wednesday, according to plant officials…

“Our experts … are working to determine how that tritium might have entered” a concrete vault at the plant, according to Benson and a plant statement.

The tritium discovery came a week after the U.S. Nuclear Regulatory Commission renewed Oyster Creek’s operating license until April 2029, following a years-long fight with opponents over the condition of a corroded steel radiation barrier at the plant and other issues.

These plants have become extremely dangerous, and neither the government nor their operators understand the risks. Operators are often baffled when problems arise, unable to say when they occurred or how. This is outrageous. But operators' very limited liability incents them to ignore public safety.

If you don’t like the effects of bank deregulation, you have every right to be seriously scared by our non-regulation of aging nuclear power plants.

Posted by James on May 01, 2009

Lost decade

I was recently reminded of a message (below) I posted January 18, 2000 on my website,

Since then, humanity has continued killing one another and failing to address global warming. We’ve likely already have passed “the tipping point” beyond which it is impossible — no matter how aggressively we conserve energy and find alternative energy sources — to prevent substantial warming, catastrophic mass species extinction, and incredible disruption and loss of human life.

Most depressingly, since I posted my message, America has been part of the problem, not the solution. When I wrote “We distrust… and hate, torture and kill… those from outside our group,” I never imagined America’s president would declare “a crusade” and start torturing people.

A decade ago, I envisioned the Internet as a tool for connecting people with one another and discovering how much we have in common and the wonder of our cultural, musical, artistic and linguistic diversity.

Although the Internet enables such connections and cross-national experiences, our self-centric use of the Internet has not encouraged us to learn about those different from ourselves. The Internet offers so much news and information on topics of every kind that we can easily spend all our time reading about the ten or twenty things that most interest us, ignoring everything else. Information is now so plentiful that we can (and do) target our Web surfing narrowly, leaving us even less informed about the rest of the world than we were when we relied on ink-on-paper newspapers.

What I envisioned a decade ago was an audio-visual National Geographic. But competition for people’s attention is now so strong that such a website — no matter how well conceived and executed — would likely remain a niche website, never achieving my ultimate dream of helping humanity perceive our shared humanity and shared future that demands mutual sacrifices to keep our planet habitable.

PlanetPath Goals

I recently began PlanetPath as my hobby. By day, I work as an economist building the business intelligence consulting service at In my spare time, I collect links to news, music, photos, etc. from around the world. I hope more people will share my excitement about the rich diversity of life on this planet and my concern that we are rapidly destroying our oceans (through drift net trawling and greenhouse-induced global warming) and forests (because we clear so much land to graze cattle and to grow crops to feed the cattle).

Every human being on Earth is 99.9% genetically identical. Our nearest biological cousins, chimpanzees and bonobos, are only 98.5% identical to us. Despite humanity’s genetic homogeneity (which leads us to think, act and feel very much like one another), we humans divide ourselves along blurry cultural, linguistic and racial lines. We distrust… and hate, torture and kill… those from outside our group. Ironically, the very fact that humans worldwide fear outsiders and foreigners proves how similar we are.

PlanetPath is dedicated to encouraging everyone to feel part of a global community, learn what makes other countries and cultures special, and feel personally responsibile for protecting our planet.

All humans love music, art, gossip and dance. We appreciate good food, and we love chasing after goals, especially noble causes. [Even war itself is generally considered a noble cause… by both sides. Human nature leads us to selectively remember the good things we have done and the bad things others have done to us. Selective memory causes both sides to feel abused… which often leads to war.]

What sets humans apart from the rest of the animal kingdom is our incredible ability to think and communicate using symbols and abstract reasoning. This enables us to invent new technology and pass on our knowledge to future generations. But the speed of technological growth is creating new environmental and military dangers faster than our social institutions and cultural/historical thinking can adapt. Cultures and countries still regularly misunderstand one another and fail to reap the benefits of cooperation.

Fortunately, our track record of inventiveness offers hope. By learning about and communicating with other cultures and countries, we become better “global citizens.” If every person on Earth adopts a more forgiving, charitable, thoughtful attitude, we could collectively solve any problem. PlanetPath hopes to stimulate such a planetary dialogue.

James Lavin

January 18, 2000

Read this full blog entry for another January 2000 essay, “The PlanetPath Philosophy.”

Continue Reading…

Posted by James on May 25, 2009

Mental and social activity --> Better mental function in old age

USC launched its “90+ Study” in 1981. The program has studied over one thousand people over the age of 90 and close to 15,000 people over the age of 65. The New York Times shares some of the study’s findings in “At the Bridge Table, Clues to a Lucid Old Age”.

The article quotes UC Irvine neurologist Dr. Claudia Kawas: “It’s very important to use your brain, to keep challenging your mind, but all mental activities may not be equal. We’re seeing some evidence that a social component may be crucial.” The bridge players at Laguna Woods suggest that’s true:

“We play for blood,” says Ruth Cummins, 92, before taking a sip of Red Bull at a recent game [of bridge].

“It’s what keeps us going,” adds Georgia Scott, 99. “It’s where our closest friends are.”

The study’s findings are quite tentative, but:

“There is quite a bit of evidence now suggesting that the more people you have contact with, in your own home or outside, the better you do” mentally and physically, Dr. Kawas said. “Interacting with people regularly, even strangers, uses easily as much brain power as doing puzzles, and it wouldn’t surprise me if this is what it’s all about.”

Posted by James on May 22, 2009

Please read Bill Joy's "Why the Future Doesn't Need Us"

Several years ago, my cousin raved to me about a book promising that technological advances will soon create a wonderful future for humanity. I believe it was Ray Kurzweil’s The Singularity Is Near: When Humans Transcend Biology.

I told my cousin I had read about the book but didn’t want to read it because of its unthinking optimism. I’m fervently in the Bill Joy “Why the Future Doesn’t Need Us” camp… and have been since long before attending a lecture at Stanford at which Bill Joy spoke about his fears that had driven him to write his (then) new essay.

I’ve often wondered why many apparently smart and informed people seem to believe — almost religiously — technological advances will make our lives wonderful. When I witness science and technology advancing exponentially — or perhaps double-exponentially — I’m both astonished and fearful.

Many tech geeks with greater intelligence than I possess are sanguine — even giddy — about tech’s likely impact on our future lives. Am I foolish to fear our nearly incomprehensibly advanced future?

I don’t think so, for four reasons:

1) No one today can possibly know how technologies will advance in the next few decades, except that they will advance incredibly rapidly and in ways we cannot imagine. We are bound to develop — perhaps unwittingly — dangerous technologies. Therefore, anyone today who expresses no such fears is deluding themself.

2) Humanity has proven throughout our history that we’re willing to use any available technology as a battlefield weapon to kill other humans. America itself has dropped nuclear bombs on defenseless cities and, just this decade, tortured people. The lethality of our weapons keeps growing exponentially. We already possess multiple categories of weapons of mass destruction (WMDs). And the risk of nuclear or biological disaster keeps rising as we build more nuclear plants and more nations become capable of building nuclear weapons and as the technologies for building biological weapons keep becoming cheaper, more available, more effective, and more miniaturized.

3) Many of tomorrow’s technologies — like computers that re-design themselves faster than humans can; robot factories built by robots; genetically engineered biological weapons; nanotechnologies, etc. — are self-replicating. If released (even by accident) or unleashed (in the case of, say, robot armies), they could potentially kill billions and destroy human society. Technologies like the automobile or the iPod aren’t particularly dangerous or capable of self-replication.

4) Humanity’s ability to predict the future is horrible. Consider this new CNN article titled Why our ‘amazing’ science fiction future fizzled:

At the 1964 New York World’s Fair, people stood in line for hours to… see the “Futurama,” a miniaturized replica of a typical 21st century American city that featured moving sidewalks, computer-guided cars zipping along congestion-free highways and resort hotels beneath the sea.

Even when technology advanced, relative to today, glacially (a metaphor in need of revision, given global warming’s acceleration), we totally missed the negative dimensions of many dreamy new technologies:

Joseph Corn, co-author of “Yesterday’s Tomorrows: Past Visions of the American Future,” found an inflated optimism about technology’s impact on the future as far back as the 19th century, when writers like Jules Verne (“Twenty Thousand Leagues Under the Sea”) were creating wondrous versions of the future.

Even then, people had a misplaced faith in the power of inventions to make life easier, Corn says.

For example, the typical 19th-century American city was crowded and smelly. The problem was horses. They created traffic jams, filled the streets with their droppings and, when they died, their carcasses.

But around the turn of the 20th century, Americans were predicting that another miraculous invention would deliver them from the burden of the horse and hurried urban life — the automobile, Corn says.

The car certainly seemed an improvement over the horse-and-buggy, but humanity completely failed to predict that our new car culture might help push us to the brink of global catastrophe. And we totally failed to anticipate car-induced problems like traffic jams and the many negative impacts of urban sprawl.

Heck, even cigarettes were long considered healthy:

The Journal of the American Medical Association (JAMA) published its first cigarette advertisement in 1933, stating that it had done so only “after careful consideration of the extent to which cigarettes were used by physicians in practice.” These advertisements continued for 20 years. The same year, Chesterfield began running ads in the New York State Journal of Medicine, with the claim that its cigarettes were “Just as pure as the water you drink… and practically untouched by human hands.”

In medical journals and in the popular media, one of the most infamous cigarette advertising slogans was associated with the Camel brand: “More doctors smoke Camels than any other cigarette.” The campaign began in 1946 and ran for eight years in magazines and on the radio. The ads included this message:

“Family physicians, surgeons, diagnosticians, nose and throat specialists, doctors in every branch of medicine… a total of 113,597 doctors… were asked the question: ‘What cigarette do you smoke?’ And more of them named Camel as their smoke than any other cigarette! Three independent research groups found this to be a fact. You see, doctors too smoke for pleasure. That full Camel flavor is just as appealing to a doctor’s taste as to yours… that marvelous Camel mildness means just as much to his throat as to yours.”

That even doctors long helped market cigarettes tells you all you need to know about the likelihood we’re overly optimistic about 21st Century technological change.

Everyone should read Bill Joy’s old article.

Posted by James on May 31, 2009

Praise for my old friend Peter

Paul Krugman today writes that my old London School of Economics buddy Peter Orszag has the medical-industrial complex on the run:

Six major industry players… have sent a letter to President Obama sketching out a plan to control health care costs. What’s more, the letter implicitly endorses much of what administration officials have been saying about health economics….

[T]he industry has clearly been reading Peter Orszag, the budget director.

In his previous job, as the director of the Congressional Budget Office, Mr. Orszag argued that America spends far too much on some types of health care with little or no medical benefit, even as it spends too little on other types of care, like prevention and treatment of chronic conditions. Putting these together, he concluded that “substantial opportunities exist to reduce costs without harming health over all.”

Sure enough, the health industry letter talks of “reducing over-use and under-use of health care by aligning quality and efficiency incentives.” It also picks up a related favorite Orszag theme, calling for “adherence to evidence-based best practices and therapies.” All in all, it’s just what the doctor, er, budget director ordered.

As I mentioned earlier, I’ve completely lost touch with Peter, but I sure am proud my former friend is shaking up Washington and bringing major, positive change to America.

Posted by James on May 11, 2009

Rationing healthcare sure is lucrative!

There are a million good reasons for single-payer basic healthcare in America: fairness/morality, children’s health, healthier populace, fewer sick days, higher productivity, massive reduction in paperwork, saving the millions of trees felled to print out that paperwork, etc.

One of the strongest reasons for single-payer basic healthcare is the incredible cost savings. An entire health insurance industry exists to screen out high-risk people and deny them coverage or find excuses to not pay for their treatment (even if they’ve been insured for many years).

Here’s a good symbol of that waste: massive compensation packages for CEOs of these mostly (see below) unnecessary health insurance companies:

Ron Williams (Aetna): “Williams earned $24,300,112 in total compensation for 2008”

H. Edward Hanway (CIGNA): “Total Compensation: $12,236,740”

Stephen Hemsley (UnitedHealth Group): “Total Compensation: $3,241,042”

Dale Wolf (Coventry Health Care): “Total Compensation: $9,047,469”

Angela Braly (WellPoint): “Braly… earned more money in 2008 ($9,844,212) than in 2007 (9,094,271)”

Michael Neidorff (Centene): “Total Compensation: $8,774,483”

James Carlson (AMERIGROUP): “Total Compensation: $5,292,546”

Of course, these salaries pale in comparison with former UnitedHealth CEO Bill McGuire who received stock options worth at least $1.6 billion.

These health insurance companies do serve a useful purpose when they provide high-end medical insurance. But basic healthcare should be a right, not a privilege. And these firms — with their powerful lobbyists and massive campaign contributions — have blocked 48 million Americans from receiving even basic healthcare.

These CEOs should be ashamed to receive $9 million/year while bribing Congress and presidential candidates to keep basic healthcare a privilege rather than a right.

Posted by James on May 21, 2009

Serious threats facing China and India

The New York Times summarizes two new studies of the relationship between urban growth and disaster risk. Beyond the obvious risks to places of extreme poverty — like Myanmar and Bangladesh, which lack shelter sufficiently strong to protect against even tropical storms — the reports note risks to India and China, whose rapid economic advance might lead you to assume are reducing their disaster risks by building stronger structures.

Due to greedy builders who skimped on materials and construction quality, many of China’s new buildings are unsafe, as demonstrated by their collapse during the Sichuan earthquake that killed 5,000 to 10,000 school children, many in brand new schools that collapsed even though they were designed to survive such an earthquake.

Another threat China confronts is the extreme population density along its vulnerable coastline:

Andrew Maskrey, the [United Nations' Global Assessment Report on Disaster Risk Reduction] report’s lead author, noted… that the breakneck pace of economic growth in China since 1990 had brought tens of millions of people to the eastern seaboard, “an extremely hazard-prone area that is regularly threatened by flooding and cyclones.” “The country has not yet developed the institutional mechanisms to reduce the risk that entails,” he said.

I’ve often wondered (with a mix of grave concern and morbid curiosity) what global warming will do to Shanghai and how quickly. (For answers, Google “shanghai sea level rise”.) In photos of its beautiful skyline, Shanghai’s towering skyscrapers seem almost to sit in the ocean. How can China continue to build its transportation infrastructure around the automobile and power its power grid with coal while building its golden commercial city at the ocean’s edge? It’s truly insane! You might expect such stupidity from a free-marketeering country like America, but a major purported advantage of an authoritarian regime — like the one in Beijing — is its ability to overrule short-sighted market decisions. But I wrote a paper a decade ago urging China to develop its mass transit rather than an automobile culture. Instead, China succumbed to auto mania. Denial is certainly a problem in China:

“As a geologist, I know this (Shanghai being submerged by the sea) will happen one day, just as I know 7,000 years ago there was no Shanghai in the world,” said Zheng Hongbo, head of the School of Ocean and Earth Science from Tongji University. “Scientifically, we accept the fact; but personally we cannot, because we have emotional ties with the city.”

India similarly faces a different self-inflicted disaster:

Mr. Maskrey said, “Some time before 2050, the urban population of India will rise by 500 million people. Mumbai and Calcutta are already very poor about providing land and housing. How will they accommodate tens of millions more? And both cities are in very hazard-prone locations.”

Posted by James on May 17, 2009

Spitzer: The uberclass runs the New York Fed to benefit megabanks, not the public

Most Americans think the Federal Reserve is part of the U.S. government. It’s not. Fed banks are private bankers' banks run by and for large banks. Eliot Spitzer explains why Fed decisions are made in large banks' interests rather than the public interest:

Just as the millions in AIG bonuses obscured the much more significant issue of the $70 billion-plus in conduit payments authorized by the N.Y. Fed to AIG’s counterparties, the small issue of Friedman’s stock purchase raises very serious issues about the competence and composition of the Federal Reserve of New York, which is the most powerful financial institution most Americans know nothing about…

The board consists of nine individuals, three chosen by the N.Y. Fed member banks as their own representatives, three chosen by the member banks to represent the public, and three chosen by the national Fed Board of Governors to represent the public. In theory this sounds great: Six board members are “public” representatives.

So whom have the banks chosen to be the public representatives on the board during the past decade, as the crisis developed and unfolded? Dick Fuld, the former chairman of Lehman; Jeff Immelt, the chairman of GE; Gene McGrath, the chairman of Con Edison; Ronay Menschel, the chairwoman of Phipps Houses and also, not insignificantly, the wife of Richard Menschel, a former senior partner at Goldman. Whom did the Board of Governors choose as its public representatives? Steve Friedman, the former chairman of Goldman; Pete Peterson; Jerry Speyer, CEO of real estate giant Tishman Speyer; and Jerry Levin, the former chairman of Time Warner. These were the people who were supposedly representing our interests!

…[W]hat we have seen [from the New York Fed’s Board] is disastrous groupthink, a way of looking at the world from the perspective of Wall Street and Wall Street alone.

Posted by James on May 07, 2009's banking-industrial complex expose

Just released by A depressing, detailed analysis of how the banking-industrial complex bought deregulation and then used its newfound freedom to gamble its way to trillions in losses you and I are being forced to pay off:

The [231-page] report, “Sold Out: How Wall Street and Washington Betrayed America,” shows that, from 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made $1.725 billion in political contributions and spent another $3.4 billion on lobbyists, a financial juggernaut aimed at undercutting federal regulation. Nearly 3,000 officially registered federal lobbyists worked for the industry in 2007 alone. The report documents a dozen distinct deregulatory moves that, together, led to the financial meltdown. These include prohibitions on regulating financial derivatives; the repeal of regulatory barriers between commercial banks and investment banks; a voluntary regulation scheme for big investment banks; and federal refusal to act to stop predatory subprime lending.

“The report details, step-by-step, how Washington systematically sold out to Wall Street,” says Harvey Rosenfield, president of the Consumer Education Foundation, a California-based non-profit organization. “Depression-era programs that would have prevented the financial meltdown that began last year were dismantled, and the warnings of those who foresaw disaster were drowned in an ocean of political money. Americans were betrayed, and we are paying a high price — trillions of dollars — for that betrayal.”

“Congress and the Executive Branch,” says Robert Weissman of Essential Information and the lead author of the report, “responded to the legal bribes from the financial sector, rolling back common-sense standards, barring honest regulators from issuing rules to address emerging problems and trashing enforcement efforts. The progressive erosion of regulatory restraining walls led to a flood of bad loans, and a tsunami of bad bets based on those bad loans. Now, there is wreckage across the financial landscape.”

You can view the Executive Summary or read the entire document.

Posted by James on May 08, 2009

We're #1! US incarceration rate world's highest... ten times higher than Europe's

Can you spot the outlier below?

Incarceration rate per 100,000 population:

Austria: 108

Belgium: 95

Canada: 108

Denmark: 66

Finland: 68

France: 91

Germany: 88

Greece: 99

Iceland: 36

Ireland: 76

Italy: 75

Netherlands: 117

Norway: 75

Portugal: 108

Slovenia: 66

Sweden: 79

Switzerland: 76

United States: 751

No, that’s not a typo. The US rate is not 75.1. It’s 751. The United States incarcerates its citizens at a rate nearly ten times higher than every other industrialized democracy!

Many Americans consider China a repressive government (and it is, if you’re a political activist), but China imprisons only 119 people per 100,000.

There are several reasons why the United States, with less than 5% of the world’s population, has nearly 25% of the world’s prisoners:

Americans are locked up for crimes — from writing bad checks to using drugs — that would rarely produce prison sentences in other countries. And in particular they are kept incarcerated far longer than prisoners in other nations.

Criminologists and legal scholars in other industrialized nations say they are mystified and appalled by the number and length of American prison sentences…

Burglars in the United States serve an average of 16 months in prison, according to Mr. Mauer, compared with 5 months in Canada and 7 months in England.

Also, easily accessible guns in the United States means that violent crimes are more likely to cause death. But that’s a minor factor because U.S. prison statistics were quite similar to other nations till about 30 years ago:

From 1925 to 1975, the rate remained stable, around 110 people in prison per 100,000 people. It shot up with the movement to get tough on crime in the late 1970s.

America has built a ridiculous number of prisons, yet many are packed far beyond capacity. As a result, “California may have to cut prison population by 40 percent”:

Federal judges tentatively ruled on Monday that California must reduce the number of inmates in its overcrowded prison system by up to 40 percent to stop a constitutional violation of prisoners' rights.

Contrast that with Europe:

“Netherlands to close prisons for lack of criminals”:

The Dutch justice ministry has announced it will close eight prisons and cut 1,200 jobs in the prison system. A decline in crime has left many cells empty

Posted by James on May 26, 2009

We're short 7.8 million jobs! Why all the economic happy talk?

The New York Times' Bob Herbert says the media’s newfound economic optimism is baseless. First, the media’s fixated on the wrong statistics:

Joblessness is like a cancer in the society. The last thing in the world that you want is for it to metastasize. And that’s what’s happening now. Don’t tell me about the stock market. Don’t tell me about the banks and their perpetual flimflammery. Tell me whether poor and middle-income families can find work. If they can’t, the country’s in trouble.

And, second, the labor market reality is even more dire than headline statistics and happy talk about a reduction in the rate at which jobs are disappearing suggest:

It’s a measure of just how terrible the economy has become that a loss of more than a half-million jobs in just one month can be widely seen as a good sign. The house is still burning down, but not quite as fast…

One reason the employment losses slowed somewhat in April was that the government added 72,000 jobs, most of them temporary hires as part of the preparation for the 2010 Census. The private sector dumped 611,000 jobs. Moreover, the Labor Department revised the job losses for March upward, from 663,000 to 699,000, and for February, from 651,000 to 681,000. Some 5.7 million jobs have been lost since the start of the recession in December 2007…

7.8 million jobs would have to be created just to bring us back to where we were when the recession began. That’s because the working-age population has continued to grow since then. The economy has to create about 127,000 jobs a month just to keep up with population growth. That comes to more than 2 million jobs since the start of the recession, which you then add to the 5.7 million that have been lost.

Posted by James on May 09, 2009

What to do when robots make everything we need?

Robert Reich writes that robots are taking over manufacturing:

I recently toured a U.S. factory containing two employees and 400 computerized robots. The two live people sat in front of computer screens and instructed the robots. In a few years this factory won’t have a single employee on site, except for an occasional visiting technician who repairs and upgrades the robots.

Factory jobs are vanishing all over the world. Even China is losing them. The Chinese are doing more manufacturing than ever, but they’re also becoming far more efficient at it. They’ve shuttered most of the old state-run factories. Their new factories are chock full of automated and computerized machines. As a result, they don’t need as many manufacturing workers as before.

Economists at Alliance Capital Management took a look at employment trends in twenty large economies and found that between 1995 and 2002—before the asset bubble and subsequent bust—twenty-two million manufacturing jobs disappeared. The United States wasn’t even the biggest loser. We lost about 11% of our manufacturing jobs in that period, but the Japanese lost 16% of theirs. Even developing nations lost factory jobs: Brazil suffered a 20% decline, and China had a 15% drop.

What happened to manufacturing? In two words, higher productivity. As productivity rises, employment falls because fewer people are needed.

It’s not just manufacturing. Roombas are cleaning floors. And every time I shop at our local Stop & Shop, another check-out lane has been converted to complete automation.

Reich isn’t panicking. He says we’ll have plenty of jobs if we restructure education to ensure that all Americans can do creative, non-routine work:

Any job that’s even slightly routine is disappearing from the U.S. But this doesn’t mean we are left with fewer jobs. It means only that we have fewer routine jobs, including traditional manufacturing.

But is it realistic to think that after robots can make everything we need and run our check-out aisles, fast food restaurants, etc. that there will still be enough jobs to employ 300 million Americans — many of whom received second-rate educations — not to mention a billion people in China, etc.?

Many years ago, after being amazed by robotic progress, I realized that the mass of humans is being rendered superfluous from an economic viewpoint. As robots do more and more, people’s labor is being dramatically de-valued.

What should society do with all these “surplus” (economically) human beings? My thought back then was to structure the tax system to reward those who are able and willing to work in creative jobs while guaranteeing those unable (or even unwilling) to work in creative, high-tech jobs — the only jobs in the future — to live decent lives.

My solution: a guaranteed minimum income tax system. Everyone, including people who earn nothing, would receive a basic income from the government. People with jobs would keep their basic income plus a fraction of whatever they earned. The tax rate could be flat or progressive. The key is that no one would have to work to live a basic life. No one would starve or go without a roof over their head because their skills are incompatible with the high-creativity jobs of the future. And some of society’s rapidly increasing wealth (thanks to robots) would be shared with the tens (or hundreds) of millions of Americans unable to get jobs in the increasingly intellectually demanding workplace.

Why would anyone choose to work if they could live without working? Well, living an expensive lifestyle would require being a creative worker. And creative work is intrinsically enjoyable and rewarding. Many millionaires continue working at Microsoft and throughout Silicon Valley because they love their jobs.

Posted by James on May 31, 2009

Why we need — but won't get — real limits on bank influence-buying

During the 2008 election cycle, financial firms contributed $200 million to candidates. (The real number may be higher because substantial giving is partially concealed from the public, though probably not the candidate. For example, some fraction of the nearly $37 million given by homemakers and non-income-earners came from spouses of wealthy bankers, and candidates may be informed of the “real” source of such hard-to-trace funds): * Securities & investment firms: $152.3 million * Hedge funds: $10 million * Miscellaneous finance: $19.2 million * Commercial banks: another $9.9 million

Banks have been rewarded handsomely for their “generosity.” The TRILLIONS of dollars the U.S. Treasury and the Federal Reserve have given banks since last year have repaid banks' bribes campaign contributions many, many times over.

And I haven’t even yet mentioned the unspoken offer from banks to government officials who “regulate” them: Be kind to us, and we’ll reward you with a cushy, high-paid job after you leave “public service.” Here’s how Nobel Prize-winning economist Joe Stiglitz puts it:

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation [for working one day a week!] in the 16 months before he joined the administration… “America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”

Beyond the problem of implicit bribes to current regulators is the social pressure banks exert on legislators through lobbying by their former friends, colleagues and staffers. Banks have hired former Congressmen, staffers, government officials and bank regulators by the barrel:

Some lawmakers — including Sen. Chris Dodd (D-Conn.), the chairman of the Senate banking committee — have declined to disclose whether they have had contact with former aides now lobbying for the financial sector…

In the past year, top bailout recipients, from Goldman Sachs to Bank of America to JPMorgan Chase, have dispatched more than 100 past congressional staffers and ex-government officials to shape the bailouts to their liking. This crew of well-connected lobbyists includes ex-employees of the congressional committees on banking, finance, and commerce; one-time aides to Democratic and Republican leaders; former Treasury officials; and a past aide to Rahm Emanuel, now the White House chief of staff…

Goldman Sachs, which has more than 30 ex-government officials registered to lobby on its behalf, tapped one-time House Majority Leader Richard Gephardt (D-Mo.) to lobby his former colleagues in Congress on issues related to the Treasury Department’s Troubled Assets Relief Program. Goldman, which paid Gephardt’s firm $70,000 in the last quarter of 2008, received $10 billion in TARP funds. (As a counterparty to AIG’s disastrous credit default swaps, Goldman pocketed an additional $12.9 billion in bailout money given to the insurance firm.) Other insiders lobbying for Goldman include former SEC commissioner Richard Roberts and Faryar Shirzad, once a top economic aide to President George W. Bush.

Ex-staffers for at least 10 members of the Senate finance committee — including the committee’s chairman, Sen. Max Baucus (D-Mont.), and senior Republican member Sen. Charles Grassley (R-Iowa) — have lobbied lawmakers on behalf of big financial firms receiving billions of dollars of government assistance. And at least five members of the Senate banking committee have former aides lobbying Congress on financial matters. These include Dodd and ranking Republican Sen. Richard Shelby of Alabama.

The ubiquitous presence of these former collagues / newly wealthy lobbyists is an ever-present reminder to lawmakers of the pot of gold awaiting them at the end of the rainbow if they play ball with their future employers.

Which brings me (finally) to my point. Bloomberg today says that Washington is finally considering placing some limits on banks that have collectively received TRILLIONS in bailout funds:

For banks that need to deepen their reliance on government capital after the stress tests, officials may set limits on their dividends and political lobbying. While it’s unlikely to influence day-to-day operations, the government won’t be a “hands-off” investor and will take steps to ensure that management is “effective,” Bernanke told lawmakers yesterday.

“It’s obviously not our intention or desire to have long- term government ownership of banks,” Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a “few years” before banks can end their dependence on government capital.

Because Washington is corrupt beyond its ability to heal itself, talk of “limits on political lobbying” is merely public relations. Congress has no intention of cutting its members and staffers off from post-Washington riches. Congress may pass a law barring employees of bailout recipients from contributing to campaigns, but Congress would do so knowing the courts would likely judge the law an un-Constitutional infringement on free speech. And banks will undoubtedly continue employing former Washington insiders to lobby current Washington insiders.

The single most effective action regulators could take is to prohibit banks from hiring former lawmakers, regulators or Congressional staffers (or their spouses, children, etc.) and prohibit those government employees from working in the industry they regulated for at least five years after leaving public service. But don’t expect to see a real ban… precisely because it would be effective. If they write a law, they’ll add loopholes. For example, the limits may expire the minute a bank pays back its government aid. A law with such a loophole won’t constrain a Congressman who’s not planning an immediate retirement.

Posted by James on May 06, 2009