Image by Nesster
Walk with me a while and imagine you are mad. Crazy. Insane. It’s an interesting sort of insanity–you see the world as something other than it is. You are dead convinced that people are out to get you, but these people have almost no means to harm you and fear your retaliation greatly, because you’re a powerful person and they are weak.
You believe that you are hale and hearty; but in fact you’re ghastly, obese and ill. You think you’re rich, but in fact you’re poor. You think you have the best doctor around, but in fact your doctor is worse than almost every other doctor and charges 50% more than them. You think you’re tough, and you certainly haven’t let the fact that two ninety pound weaklings seem to be able to stand up to you get in the way of that.
You think that you have the most advanced technological toys, that what you have is the best, and once you did, but these days everyone else seems to have more advanced stuff.
The illness goes deeper though, a deep decay in your brain. The parts of your brain that make most of the decisions for your body think everything is wonderful. They seem only able to take in sensations from the taste buds these days, and for the last thirty years you’ve been on a rich diet. So they think everything’s great. Your once lean body, packed with muscles, has been replaced by a flaccid one, paunchy and fat, but somehow the key parts of your brain don’t know that. They don’t feel your sore back, they don’t hear the broken down breathing and they don’t see the gut hanging over your belt.
The you I’m referring to, as I’m sure many have figured out by now, is the US. For years I’ve been writing for the US and observing it carefully, and I’ve found it one of the most interesting problems I’ve encountered in my life. Because America and Americans are very unpredictable. Now, of course, the first thing I thought was “it’s me,” and in a sense, that’s true.
Yet, here’s the thing, I have a very good record of predicting what will happen in Somalia, or Afghanistan, or Iraq. And when I get it wrong, I can look back and easily figure out why. Yet I’ve never visited any of those countries and really, know very little about them. On the other hand I grew up imbibing American media, know American history well, have visited America a number of times and spent 8 years in jobs that required me to deal with multiple Americans daily.
Odd. Very odd. And something I’ve discussed with other foreign observers of American society and politics.
The first clue to what was wrong came around the time of the Iraq war. It was obvious, dead obvious, to everyone outside of the US and to US citizens who were spending a lot of time parsing news, that the war was a joke and that Saddam had no nukes and was no threat to the US. Most Americans, however, didn’t get that. The reason, of course, was propaganda.
Fair enough. Every country whips its citizens into war hysteria with propaganda. But what was truly remarkable wasn’t that, it was that somehow the majority of Americans, over 70%, thought that Iraq was behind 9/11. Iraq, of course, had nothing to do with 9/11. Nothing.
Remarkable. Americans went along with going to war with Iraq then because they thought Iraq had attacked them and had nukes and could attack them again. A complete propaganda tissue of lies. But if you believe it all, well of course Iraq needed to be attacked.
What looked to the rest of the world as crazy was entirely logical. It was, however, still insane. If I see a tentacled monster from the fourth dimension attack me and I respond by grabbing a knife and slashing apart my next door neighbour who’s waving at me, well, I had a logical, coherent reason for what I did, but I still murdered him, and I’m still insane.
This is the first type of insanity in the US and it runs deep. I often feel like I spend more time correcting outright lies, outright propaganda, than anything else. Just this week I had to explain to a left wing blogger (who should know better) that single payer health insurance is cheaper and gives better results than private insurance system. Now in the US this is somehow still in doubt, but that’s insane–this isn’t in question, every other western nation that has single payer insurance spends about 1/3 less than the US and has as good health metrics or better either in most or all categories. This isn’t something that’s up in the air; this isn’t something that is unsettled. This is a bloody FACT.
Americans think they are the most technologically advanced society in the world, yet the US does not have the fastest broadband, the fastest trains, the best cellphones, the most advanced consumer electronics (go to Japan and you’ll see what I mean) or the most advanced green energy technology.
In the primary season Ron Paul was repeatedly cut out of media coverage and John Edwards was hardly covered. The majority of Americans thought that Edwards was running as the most right wing of the Democratic candidates. Huckabee was constantly called a populist when his signature tax program would gut the middle class and slap the poor onto a fiscal rack.
And when all is said and done, politicians are still running on slashing taxes and having that make up for itself, while the US runs a balance of payments higher than any other country post World War II has ever done without going into an economic crash.
That’s one type of insanity–thinking the world is something that it isn’t.
The second is worse, in a sense. When Diamond wrote his book on why societies collapse he came to the conclusion that it occurred when elites weren’t experiencing the same things as the majority of the society–when they were isolated from the problems and challenges the society was facing.
For 30 years ordinary Americans haven’t had a raise. And despite all the lies, Americans are beginning to get that.
But for the people in charge the last thirty years have been absolutely wonderful. Seriously, things haven’t been this good since the 1890’s and the 1920’s. Everyone they know–their families, their mistresses and toyboys, their friends–is doing well. Wall Street paid even larger bonuses for 2007, the year they ran the ship into the shore, than they did in 2006 when their bonuses equalled the raises of 80 million Americans. Multiple CEOs walked away from companies they had bankrupted with golden parachutes in excess of 50 million. And if you can find a Senator who isn’t a millionaire (except maybe Bernie Sanders) you let me know.
Life has been great. The fact that America is physically unhealthy, falling behind technologically, hemorrhaging good jobs and that ordinary Americans are in debt up to their eyebrows, haven’t seen a raise in 30 years and live in mortal fear of getting ill–because even if they have insurance it doesn’t cover the necessary care–means nothing to the decision making part of America because it hasn’t experienced it. America’s elites are doing fine, thanks. All they can taste, or remember is the caviar and champagne they swill to celebrate how wonderful they are and how much they deserve all the money federal policy has given them.
This is the second insanity of the US–that the decision making apparatus in the US is disconnected from the results of their decisions. They make sure they get paid, that they’re wealthy, and let the rest of society go to hell. In the end, of course, most of them will find that the money isn’t theirs, and that what they’ve stolen is worth very little if the US has a real financial crisis.
The third insanity is simpler: it’s the wealth effect. At the end of World War II the US had about half the world’s economy. Admittedly that’s because Europe had been bombed into oblivion, but even when Europe rebuilt the US was still far, far ahead. The US was insanely rich and powerful. See, when you’re rich you can do stupid and unproductive things for a long time. There are plenty of examples of this but the two most obvious ones are the US military and the War on Drugs.
The War on Drugs hasn’t reduced the number of junkies or drugs on the street in any noticeable way. It has increased the US’s prison population to the highest per capita level in the world, however. It has cost hundreds of billions of dollars. It has gutted civil liberties (the war on terror is just the war on drugs on crack, after all). And after 30 years does anyone seriously say “wait, this doesn’t work, it costs billions of dollars and it makes us a society of prisons?” Of course not, if anything people compete to be “tough on crime.” What’s the definition of insanity, again? Doing the same thing, over and over again, and expecting different results?
Then there’s the US military. It costs, oh, about as much as everyone else in the world’s military combined. It seems to be at best in a stalemate and probably losing two wars against a bunch of rabble whose total budgets probably wouldn’t equal a tenth of one percent of a US appropriations bill. And it is justified as “defending” America even though there is no nation in the entire world which could invade the US if the US had one tenth the military.
But the US could (not can, they are now unaffordable, but could) afford to have a big shiny military and lots of prisons, so it does. Lots of people get rich off of both of them, lots of rural whites get to lock up uban blacks and lots of communities that wouldn’t exist otherwise get to survive courtesy of the unneeded military bases and prisons which should never have been built.
Insane–believing things that aren’t true.
Insane–decision makers are cut off from the consequences of their decisions and in fact are getting reverse feedback, as things get worse for most Americans and as America gets weaker and poorer, they are the richest they’ve ever been.
Insane–so rich that no one will stop doing things that clearly don’t work and are harmful, because people are making money off the insanity.
All of this is what makes predicting the US so surreal. It’s not just about knowing what the facts are and then thinking “ok, how would people respond to that?” You have to know what the facts are, what the population thinks the facts are, what the elites think the facts are, who’s making money off of it, and then ask yourself if these facts are having any real effect on the elites and if that effect is enough to outweigh the money they’re making off of failure (how many of them have children serving in Iraq? Right, not urgent to fix.)
And then you have to go back to the facts and ask yourself “what effect will these have even if they’re being ignored.” Facts are ugly things, they tend not to go away.
All of which makes the US damn near impenetrable, often enough even to Americans.
But here’s what I do know–you can get away with being nuts as long as enough people are benefiting from you being insane. When the credit cards are all maxed out, when the relatives have stolen even the furniture, suddenly all the enablers go away and the kneebreakers or the men in white pay you a visit. At that point you can live in the real world, or you can go to the asylum.
I wonder which way the US will go?
Image by a62a68
The “surge” worked, mainly, not because of more troops, but because of more money and weapons. The Sunnis needed money and guns to fight their insurgency. They got those, in part, from Al-Q’aeda in Iraq, but by the time of the surge AQ had overstepped itself and tried to get control. It started assassinating Sunni leaders and it engaged in very indiscriminate killing, which the Sunnis didn’t like. along with engaging in some violations of the norms of war as the Sunnis saw it.
Into this stepped in the US and says “we can give you money and weapons, and all you have to do is take out the AQ people who are trying to get control of you by assassinating your leaders”. This then was the “Awakening” – guns and money for dealing with AQ and for peace afterwards.
Since the endgame in Iraq was about who would control Iraq after the US left, which was indicated by the fact that Iraqi government forces were under heavier attack than the Americans (who were attacked just enough to keep the cost high), the Sunnis said “sure.” By accepting the money and arms they got to build up to be in a better position when the Americans left—either for negotiation, or for war.
But the Shia run central government is aware of this, and in the past few months they’ve started arresting and assassinating Sunni leaders, in preparation for when the Americans leave. Remember, the Sunni government forces aren’t that impressive. Their last independent major operation was in Basra against the Sadrists, and until American forces intervened and Iranians played diplomat, they were losing.
So Maliki is trying to get his licks in and weaken or break the Sunnis before the Americans leave.
As a result you’re seeing a spike in attacks, because the Sunni Awakening leaders don’t want to be arrested or killed, strangely enough. You aren’t seeing all out warfare yet, because the Sunnis know the US will step in, since the US is helping Maliki with his crackdown, and the Sunnis want to save their forces for the real showdown: over who controls Iraq after the US leaves, or perhaps more accurately, who gets how much of the oil revenues.
Iraq is not stable. The problems in Iraq were papered over with money. But now that the money is going away, and Maliki is violating the terms of the American brokered truce, the papered over problems are re-emerging.
Endnote: In addition to the Awakening, the Sadrists standing down, the completion of ethnic cleansing in Baghdad, Iranian intervention, and the British withdrawal from Basra all contributed. But in terms of the Sunnis, money and guns for peace was the primary consideration.
The FDIC Is Levying Money From Banks To Spend: Not For “Confidence”
Brian Angliss notes that the FDIC is levying a huge 20 cent per 100 dollars on deposit at the bank fee. He notes that the largest banks, having received lots of TARP money, will be able to pay that off using their taxpayer money, while smaller banks will get hammered and may either go under or be forced to cut back on jobs, branches and so on.
But Brian seems to take the FDIC’s announcement that they are doing this to improve confidence at face value. I think, rather, the FDIC has made this sudden cash grab for a different reason: it needs the money for Geithners plan to buy up toxic assets.
Remember that the FDIC is providing most of the cash of the first part of the plan, up to 850 billion dollars worth of it. That’s a lot of money. Of course, the levy won’t raise that much, but it can and will be leveraged to buy up the toxic assets. So what is taken away from the banks will be given back, in the form of removing toxic assets at overvalued prices.
The question though, is which banks will benefit. By and large, so far, the largest banks have received the majority of help from the Feds. If assets are not proportionally bought from all the banks (and they won’t be) this could well lead to exactly what Brian fears—money being taken from small banks disproportionately, which will damage them and cause many to fail.
One my friends has been wondering why some men treat women so badly, including battery, rape and murder and seem to feel that their actions are totally justified and natural.
There’s no simple answer, I suspect, but I think one part of it is hinted at by this:
Young children think about gender in the same way they think about species of animals. They believe, for example, that a boy’s preference for football is innate, as is a girl’s preference for dolls, just as cats’ behavior is innately different from dogs’…
…The study’s findings confirm prior research, which has shown that adults and children alike think different species have deep biological differences, for example, that innate differences cause dogs to behave differently from cats. This study also found that it’s not until children are at least 10 that they treat gender and species concepts as distinct from one another, as adults do. At that age, they also understand that environment plays a role in gender-related behaviors.
I think a lot of people never really get over this. In the same way that for most of history and indeed today in many places stranger is the equivalent of alien or enemy, to many men (and women, but with less devestating effects) the other gender isn’t even really human. As such, just as with strangers in traditional societies, whatever is done to them is moral, because they aren’t even of the same species. There is no real sense of connection, of empathy shared on commonality.
The only way to break through this is usually to say “what if it were your daughter/mother/sister, but men often put those women into a special category and don’t generalize.
I should add that female contempt for men, is often palpable, and I’ve heard many women use the word man in a way that indicates they consider the entire gender beneath contempt, and men innately weak (which is amusing, because many men think the same of woman.) Of course, very few women use that contempt as an excuse for battering, raping and killing men.
The Chrysler Bankruptcy May Not Be As Smooth As Hoped
Chrysler went into bankruptcy because creditors wouldn’t agree to be wiped out. They may believe that they will do better in front of a bankruptcy court, or some of them may have credit default swaps (CDSs) and have wanted Chrysler to go under so they would be paid off at full dollar (which points out another problem with CDSs, that they make bondholders more willing to force companies into bankruptcy.)
The government’s plan is to have a quick 30 to 60 day bankruptcy, shed the debts, and come out of it with the United Auto Workers owning 55%, the US government 8%, the Canadian and Ontario sharing 2% and Fiat receiving 10% with the possibility of more.
But bankruptcy court is not a sure thing. The bankruptcy judge will have discretion and there are laws to be followed. It is by no means a sure thing that this plan will survive contact with the court. The debt holders will go to the judge and argue that they deserve to own much more Chrysler or that it should be broken up and that their claims take precedence.
I don’t know if they’ll succeed. Certainly the government will put all their weight behind the current plan.
The next question, then, is GM, where the same calculation is playing out: a lot of debt holders think that they can do better in bankruptcy than through the government plan. How the bankruptcy judge starts ruling in the first days of Chrysler’s bankruptcy will have a lot to do with whether GM debt-holders crumble. If the judge seems ready to ram through the government plan, then GM probably won’t go bankrupt. If he isn’t, it probably will. Assuming of course that enough debt-holders don’t have CDSs covering their GM debt. If they do, well, it’s in their interest to crash the company no matter what.
Rather than square off in a bloody battle over war crimes, let’s return decent train service to the Midwest and test out the German maglev (magnetic levitation) system — the 360 mph trains — and connect Chicago and St. Paul-Minneapolis, Cleveland, Detroit, Omaha, Kansas City.
Sometimes I do fear that satire, while not dead, might be mortally wounded. As for Keillor, never understood why everyone loves him, since most of what he writes is pap.
I’d say it’s the right thing to do, though what will really matter is what the government does once it’s in control. This is what should have been done to the banks, in effect. Just take them over, put your own board in charge and go to it. As for giving the UAW a big stake, that’s only fair, as their pensions, health care salaries and very jobs are at stake, and indeed, the workforce will be cut by another third.
For banks, the equivalent would be to give depositors and bondholders a share, turning them into what amount to mutual companies (where the customers own the company.) Not the worst idea in the world, but it won’t happen.
[Source: Corrente]
Addendum: Apparently the UAW will get 55% of Chrysler. Clever man, Obama. If he’d just made the UAW eat all these concessions for nothing, he would have reaped a lot of hatred. My hat’s off to him on this one.
Image by takebackpackistan
The Taliban and their ilk, on the other hand, are able to seat themselves in towns and villages across Pakistan without much difficulty largely because they do not come empty-handed. In a country that has a literacy rate of around 30 percent, the Islamists set up madrassas and educate local children for free. In districts where government hospitals are not fit for animals, they set up medical camps—in fact, they’ve been doing medical relief work since the 2005 earthquake hit Northern Pakistan. Where there is no electricity, because the local government officials have placed their friends and relatives in charge of local electrical plants, the Islamists bring generators. In short, they fill a vacuum that the state, through political negligence and gross graft, has created.
To combat the Taliban’s incursions further into poverty-stricken parts of the country, Pakistan’s government only has to do its job less leisurely. That’s the frightening truth.
Napoleon once said that the moral is to the physical as ten is to one. My simple rule of thumb for determining who will win civil and guerilla wars is “who is the government?” Now if I were to ask 100 people who the government of northwest Pakistan is, 99 would probably say “the government of Pakistan.”
No. Government is what government does and Taliban is the government in most of that region. The organization which supplies security, social services and law is the government, and it doesn’t matter who is recognized by foreign powers. This is a mistake which the West makes over and over and over again, most recently in Somalia when the US greenlighted and aided in the destruction of Somalia incipient government, the Islamic Courts Union, plunging the country back into even worse anarchy than before, and pretending that the foreign chosen “interim government”, which had no popular support, was actually a government.
Now Napoleon didn’t say the moral is to the physical as infinity to one. If you’re badly enough outgunned and outnumbered, well, being the government may not be enough, especially if you’ve only been the government for a brief time.
This is why a lot of analysts believe that Pakistan can never “fall”, because the Pakistani army is very powerful.
I am far less sanguine. The army has shown very little willingness or ability to fight the Pakistani Taliban. It is unclear to me that the Pakistani army is willing to fight the Taliban, at least all out and if ordered to do so that it would obey that order, either at the top level, or at the operational level. Which is to say, just because the “President” orders it to do something, doesn’t mean it will, and even if the military took back over through another coup (quite likely) that officers and even line soldiers are willing to be used against the Taliban, when the Taliban is actually a more effective government than they one they ostensibly serve.
The legitimacy of a government comes from doing what a government does. The Pakistani “government” is less of a government to most of the country than the Pakistani Taliban. The danger is that it will continue to expand into places where the Islamabad government is not actually acting as a government, till it controls most of the countryside and some of the smaller cities. From there it will likely reach an accommodation with the army.
Although they aren’t communists, this is classical Maoist style countryside to city guerilla strategy. By the time the major cities fall, they will be all that is left, completely isolated from the rest of the country.
The Pakistani army is powerful, but it is only an army, not a government.
Government is as government does. If the current Pakistani government wants to stay in charge, Fatima is right, it needs to do its job. If it doesn’t, those who are willing to do the job will take over.
Endnotes:
1. Fatima does have an axe to grind with the other faction of her family, but that doesn’t make her statements inaccurate.
2. Certainly Juan Cole is correct that the government is not likely to fall in the next 6 months to a year. In fact it might never fall, per se. Despite the fact that Hezbollah is more powerful than the Lebanese central government, that government still exists.
With the release of the stress test methodology(pdf), let’s take a look at what the stress test is, what it isn’t and how it’s done.
What the Stress Test Is, is a test of the whether the 19 bank holding companies with more than 100 billion in assets have enough income and reserves to survive till the end of 2010, with enough reserves left at that time to make it through 2010. Banks were required to report their expected income for the next two years, then that was compared to their reported expected losses for the duration.
The Stress Test Is Not a test of whether or not, if a given bank holding company were liquidated right now, it would be worth more than 0 dollars. As such, it is not, primarily about mark-to-market accounting. The question is now “are the banks solvent”, the question is “can they keep operating and if not how much money do they need to keep operating?” In household terms, think of it as “can they pay their bills”, not “what is their net worth?”
The assumption is thus that all loans will be held to maturity and not sold on the market. What matters, then, is the income on those loans and how likely those loans are to default. Income is thus loan income minus defaults, taking into account any ability to recover losses. (For example, if a homeowner defaults on a mortgage, how much will the bank receive when it seizes and sells the house?)
Something over 150 people worked on the test on the government side. They were divided into teams by asset and income areas, such as “Commercial Real Estate Loans”, “First and Second Lien Mortgages” and “Credit Cards and Other Consumer Loans”. Each of these teams evaluated the submissions off all the Banks for that area.
Using the Banks Own Models
An initial criticism of the Stress test was that it used the banks own financial models-the same models which didn’t predict this mess in the first place. That’s mostly, but not entirely correct. The banks run the numbers based on their models, but they have to give the assumptions underlying those models to the supervisory teams. If the teams don’t agree with the banks model, they can insist on changes. How much they have done so, we don’t know, but there is some indication in the methodology that the teams did their own analysis of likely losses. For example, when referring to mortgages, the methodology reports that:
Certain attributes, in particular FICO, LTV bands, vintage, product type, and geography, were found to be strongly predictive of default. These attributes were used to further evaluate submissions by the firms, and where necessary, loss estimates were adjusted to better reflect portfolio characteristics in a consistent way across firms.
There are also indications that the teams found some substantial differences in underwriting standards between firms, and have taken that into account as well. Nonetheless, given that this was done in a 2 month period, with a little over a 150 people reviewing 19 massive banks, the teams would not have been able to develop their own models and could only have tweaked the bank models.
Economic Scenarios
The losses taken into account were based on two economic scenarios, a scenario based on median economists forecasts at the time the Stress Test was first planned, and a more adverse scenario. The first scenario has already been superseded by events, as the economy is performing worse than mainstream economists expected. The more adverse scenario has not yet been exceeded, but, for example, it models 8.9% unemployment in 2009, and current unemployment is running at 8.5. It is highly unlikely, in my opinion, that unemployment will not rise more than .4% in the rest of 2009 unless it’s for technical reasons like people despairing so much of finding a job that they just stop looking entirely.
What this means is that even if one accepts the models might be accurate after the examiners fiddled with them, losses will probably be higher than expected.
Banks that don’t pass will be required to raise enough capital to make it through the time period. They can try and do that on private markets, or the government may step in and provide capital. In addition, they can ask the government to convert its preferred shares into common stock, which will reduce the company’s expenses.
Concluding Remarks
The stress test is flawed, but not worthless. The economic forecast used was overly optimistic, and given that mainstream economic forecasts have been consistently off throughout the crisis, this should have been expected. The staffing may be sufficient to do superficial analysis, but this is by no means a real audit, in which hundreds of examiners swarm over each bank to discover whether or not the top end numbers they are supplying are accurate or if their accounting and underwriting has been weaker than declared or if there has been outright fraud.
While examining underwriting standards is useful, examining actual random cases in a professional audit to see whether or not underwriting standards had actually been followed would have been far more useful and predictive of future losses. To some extent, looking at comparative loss rates between banks can substitute for this, but only partially, as it is backwards looking rather than forward looking.
Bank default and valuation models are highly suspect, as well. As a rule the models used during the collateralization process did not sufficiently account for default clustering (i.e. for the fact that in a recession or depression a lot of people default in a short time period) or for the fact that there were housing or securitization bubbles. Those models have to be corrected for each particular class of securitized loan, since each one had its own model. Crude approximations were no doubt put in place by the teams and perhaps by the banks, but there’s still plenty of reason to question the models being used.
Given these flaws the stress test is only indicative, not final. Certainly any bank which fails them definitely needs money, but it may need more money than indicated by the test. Likewise banks that pass will likely not be viewed as out of the jungle, unless they pass with flying colors.
Likewise, the methodological paper was quite vague. The stress test will not be trusted without more specifics, and when results are released we will need firm numbers, not just the final numbers “needs X amount of money” or “passed” but the assumptions on default rates broken down by year, location of loan, type of loan and so on so that independent analysts can come to their own conclusions. Failure to do so will mean that the banks and Treasury are saying “trust us”, and unfortunately, at this point, no one does. Given the known flaws of the stress test, independent verification will be required
Sara Robinson, discussing the different parenting styles of liberal and conservatives notes that Conservative parenting can wind up teaching that:
they do have boundaries — but only to the extent that they’re personally willing to fight and able to defend them.
Let me put this another way, one you may be familiar with.
“you have only the rights you are willing to fight for”.
This is the lesson that liberals who didn’t have a parent with a conservative parenting style often don’t understand. There are no such things, as a practical matter*, as innate rights. They do not exist in the real world. You have only the rights that other people earned for you, usually by fighting, suffering and dying. And as a group, you keep only the rights you are willing to fight, suffer and perhaps even die for.
Any “right” you are not willing to fight for is not a right, it is a privilege given to you by the powers that be, which can be revoked by them at any time it is convenient to them with no consequence to them.
* Yes, in theory there are innate rights. In practice, there aren’t.
