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Sunday, May 31, 2009

Whither U.S. Policy in the Middle East

US foreign policy needs to get real on Lebanon. Hezbollah made a reckless mistake in provoking Israel. Shame on Hezbollah for bringing this disaster upon Lebanon by embedding its “heroic” forces amid civilians. I understand Israel’s vital need to degrade Hezbollah’s rocket network. But Hezbollah’s militia, which represents 40 percent of Lebanon, the Shiites, can’t be wiped out at a price that Israel, or America’s Arab allies, can sustain — if at all.

According to experts, you can’t go into an office in the Arab world today without finding an Arab TV station featuring the daily carnage in Lebanon. It’s now the Muzak of the Arab world, and it is toxic for us and our Arab friends.
Despite Hezbollah’s bravado, Israel has hurt it and its supporters badly, in a way they will never forget. Point made. It is now time to wind down this war and pull together a deal — a cease-fire, a prisoner exchange, a resumption of the peace effort and an international force to help the Lebanese Army secure the border with Israel — before things spin out of control. Whoever goes for a knockout blow will knock themselves out instead.

Will Syria play? Syrians will tell you that their alliance with Tehran is “a marriage of convenience.” Syria is a largely secular country, with a Sunni majority. Its leadership is not comfortable with Iranian Shiite ayatollahs. The Iranians know that, which is why “they keep sending high officials here every few weeks to check on the relationship,” a diplomat said.
So uncomfortable are many Syrian Sunnis with the Iran relationship that President Bashar al-Assad has had to allow a surge of Sunni religiosity; last April, a bigger public display was made of Muhammad’s birthday than the Syrian Baath Party’s anniversary, which had never happened before.

Syrian officials stress that they formed their alliance with Iran because they felt they had no other option. One top Syrian official said the door with the U.S. was “not closed from Damascus. [But] when you have only one friend, you stay with him all the time. When you have 10 friends, you stay with each one of them.”
What do the Syrians want? They say: respect for their security interests in Lebanon and a resumption of negotiations over the Golan. Syria is also providing support for the Sunni Baathists in Iraq. The Bush Administration tried fight everyone at once and get where it needs to go. The Obama administration should not make that mistake. There will not be a peace force in south Lebanon unless it’s backed by Syria. No one will send troops.

Republican's Ingenuous Social Security Revisions

Social Security is an insurance plan, i.e. an annuity. It is being misrepresented by Pres. Bush as an investment plan. Were social security to become an investment plan, it would be the worst of both worlds. 1) There would be be a substantial reduction in the insurance, 1) the return after deducting the enormous switch over costs would be below that of social security. In essence, the Republican plan with PRA's would force American's to do just what financial experts caution is the worst thing to do-time the market. No one can know how the stock market will be in the year/month/day one has to retire. Unlike a true investment plan where you can buy or sell when you want, no one has control over when one retires. Events that force retirement-firings disability, premature death-are not within the control of the "owner" of the Republican Plan. Let's illustrate with a person born in 1985. At age 65, she would normally retire, i.e. 2050. Under Social Security her annual retirement would be in current dollars (about $20k per year) X 75% to account for the likely benefit cut=$15k. Under the RepublicanPlan, about half ends up in a PRA so only $7500 is guaranteed under modified social security. If the other $7500 is invested in the SP500 Index, but if the Index is in bear market condition at her retirement age, i.e. 60% of value, she would get only $4500 from her PRA plus only $7500 from modified Social Security or $12k vs. $15k, a 20% reduction which would drop her below the poverty line. The Index could be at 150% at some point, but there is no way to determine if that will be near or at retirement age. And, even if it is 150%, if that is at a time of firing, disability or premature death, unless those events occur near retirement age, the 50% premium will probably not make up for the 20% reduction. .If she is fired (1 chance in 4) or disabled (1 in 3), half way to retirement, her combined benefits under the Republican Plan will be less than half of $12k, probably about $5500 v. $15k, a 63% cut which would be totally devastating. In the case of premature death, any survivor benefits would be reduced by a greater or lesser amount depending on where the Index was at the time of death. .No civilized society would put its citizens in such jeopardy.

Sunday, May 17, 2009

Geithner's Folly: Huffington Press 3/1/09

President Obama took a huge political risk in his budget by proposing to put another $750 billion at Geithner's disposal to save the banks. Before the banking system is returned to health, we will need this much money and more. But if that money is dripped out in modest increments, as has been the pattern to date, the banks will only continue their slow bleed.

Eventually, the administration will get around to nationalizing the big banks, because it has no choice. Officials can prettify this reality by calling it a receivership or a conservatorship. But the exercise, done properly, will entail shutting down Citi in its present form, getting the bad assets off the bank's books, sharing the loss with Citi's creditors, breaking up Citi, and getting a sound bank functioning again.

The government may well need to do this with one or more other large banks, including Bank of America. And it can't achieve this by proxy using existing management. Civil servants accountable to the public need to run the operation. The Treasury has no such mission and no such staff. Only the Federal Deposit Insurance Corporation has hands-on experience taking over, cleaning out, and running failed banks. The mission will need to be entrusted either to the FDIC or to a new agency created for the purpose. If the government needs to hire more people, plenty of Wall Street veterans are looking for work. With different masters and different motives, their technical competence is more than adequate.

The government can either act quickly, the way the Swedes did when they faced a similar financial collapse; or the government can belatedly take banks over after delaying and trying half-measures, the way the Japanese did it. The Swedish economy got back on track and the banking system was returned to private ownership in fairly short order. The Japanese economy bled for a decade.

Why is Geithner dithering? Because he is asking the wrong question. The question he is posing is: how can the government save Citigroup? The right question is: how can the government rebuild the banking system?


The Economics of Innovation is finally getting public policy attention proportional to its impact on the economy. David Landes, "Unbound Prometheus....” Cambridge Press, 1969, demonstrated this point. Innovation since has not impressed many economists per Robt. Gordon's "Does the New Economy Measure up to the Great Innovations of the Past."NBER WP 7833, Aug, 2000.

The recent effort to use technological innovation to solve the energy problem is showing promise in the transportation sector in the form of hybrid cars, but they still use gasoline. Much hope has emerged that biofuels would prove to be the innovation of major status that will solve the problem

Unfortunately, most worthy policy initiatives (bio fuels no exception) were exploited by the Bush Administration for the purpose of lining the pockets of GOP legislators and their constituent voters, namely the notably red states of the farm belt. Much of the commercial effort is focused on ethanol. with a push from Congressional reps in farm states that grow corn, the initial raw material of interest in producing ethanol. The prospect of replacing an imported fuel with a home grown one is an added benefit. But there is less to ethanol, unfortunately, than meets the eye. First, a standard barrel (42 gal.) of ethanol is only worth 28 gal of gasoline because it contains only 80k BTU’s. Vs. 119 k for unleaded regular. Second, the US has abundant corn, but lacks the copious amounts of natural gas needed to produce ethanol. A gal. of ethanol requires 36k BTU’s of natural gas which as risen from $3 per mil. BTU’s to $14 per.(Pimentel, D., “Ethanol Fuels, Energy Balance, Economics and Environmental Impacts are Negative, Natural Resources Research, June 2003 v.12.20. Further, 100% of the US corn crop could produce only 7% of the fuel consumed by US cars annually. Moreover, ethanol fuels need 15% gasoline (i.e. E85) to prevent damaging car engines. which must be enhanced to tolerate the fuel. Regarding externalities, the 20 lbs. of CO2 generated by gasoline production is not significantly different from that generated by ethanol production.

To reduce the natural gas requirements required and the effluent generated by ethanol, cellulose from corn stalks, grain straw and grasses offers promise given it requires a bit more than half the natural gas than does corn.(Brown, L, “Plan B2.0: Rescuing a Planet Under Stress and a Civilization in Trouble, Norton, 2005). It siphons off no edible food supply and generates both fuel and from emitting heat sufficient to boil water electric power. The natural supply of cellulose type plants in Brazil has expedited the production of low cost ethanol. As to externalities, this production process generates little to no CO2. Therefore, it’s the fuel mix of hybrid that may hold the key to its innovative impact. Since there are more profits for farmers in corn based ethanol production, don’t expect the Bush Administration to set policy that leads to the much more cost effective plant derived cellulose ethanol production. Since there has been virtually no economic policy leadership during the eight years of suffering under the Bush Administration, i.e., no transportation (autos, airlines) or energy policy, even a perverted corn based ethanol initiative will be touted by the GOP as visionary energy policy.

The Price Is Not Right

Published NYT:: March 31, 2009

I don’t expect much from the G-20 meeting this week, but if I had my wish, the leaders of the world’s 20 top economies would commit themselves to a new standard of accounting — call it “Market to Mother Nature” accounting. Why? Because it’s now obvious that the reason we’re experiencing a simultaneous meltdown in the financial system and the climate system is because we have been mispricing risk in both arenas — producing a huge excess of both toxic assets and toxic air that now threatens the stability of the whole planet.

Just as A.I.G. sold insurance derivatives at prices that did not reflect the real costs and the real risks of massive defaults (for which we the taxpayers ended up paying the difference), oil companies, coal companies and electric utilities today are selling energy products at prices that do not reflect the real costs to the environment and real risks of disruptive climate change (so future taxpayers will end up paying the difference).

Whenever products are mispriced and do not reflect the real costs and risks associated with their usage, people go to excess. And that is exactly what happened in the financial marketplace and in the energy/environmental marketplace during the credit bubble.

Our biggest financial-services companies, some of which came to be seen as too big to fail, engaged in complex financial trading schemes that did not adequately price in the costs and risks of a market reversal. A.I.G., for instance, was selling insurance for all kinds of financial instruments and did not have anywhere near adequate reserves to cover claims if things went badly wrong, as they did. And our biggest energy companies, utilities and auto companies became dependent on cheap hydrocarbons that spin off climate-changing greenhouse gases, and we clearly have not forced them, through a carbon tax, to price in the true risks and costs to society from these climate-changing fuels.

“When the balance sheet of a company does not capture the true costs and risks of its business activities,” and when that company is too big to fail, “you end up with them privatizing their gains and socializing their losses,” Nandan Nilekani, the co-chairman of the Indian technology company Infosys, remarked to me. That is, everyone gets to rack up their private profits today and pay them out in current bonuses and dividends. But any catastrophic losses — if the company is too big to fail — “get socialized and paid off by taxpayers.”

This is why we need new banking regulation that reins in the leverage and speculative trading that big banks and insurance companies can undertake so they never again become simultaneously too reckless to regulate but too big fail and taxpayers are forced to pay off the toxic assets they accumulate. And this is also why we need a tax on carbon — so we and our power utilities don’t become permanently addicted to cheap coal that makes for lower electricity prices today but spits out toxic greenhouse gases that have to be paid for by future generations tomorrow.
That’s what “Market to Mother Nature” accounting is all about. It begins with the premise that the distinction between the G-20 and the Copenhagen climate change negotiations is totally artificial. They are just flip sides of the same global problem — how we as a world keep raising standards of living for more and more people in ways that will not, as byproduct, have both the Market and Mother Nature producing huge amounts of toxic assets.

The old system, which has reached its financial and environmental limits, worked like this: We built more and more stores in America to sell more and more stuff, which was made in more and more Chinese factories powered by more and more coal that earned more and more dollars to buy more and more U.S. T-bills that got recycled back to America in the form of cheap credit to build more and more stores and more and more houses that gave rise to more and more Chinese factories. ...
This system was a powerful engine of wealth creation and lifted millions out of poverty, but it relied upon the risks to the Market and to Mother Nature being underpriced and to profits being privatized in good times and losses socialized in bad times. This capitalist engine doesn’t need to be discarded; it needs some fixes. For starters, we need to get back to basics — accountable lending, prudent saving, reasonable leverage and, most important, more engineering of goods than just financial products.

Some of our biggest financial firms got away from their original purpose — to fund innovation and to finance the process of “creative destruction,” whereby new technologies that improve people’s lives replace old ones, said the Columbia University economist Jagdish Bhagwati, in an interview in The American Interest. Instead, he added, too many banks got involved in exotic and incomprehensible financial innovations — to simply make money out of money — which ended up as “destructive creation.”

“Destructive creation” has wounded both the Market and Mother Nature. Smart regulation and carbon taxation can heal both

Obama’s Ersatz Capitalism

Published: NYT March 31, 2009

THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.

The Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.

Let’s take a moment to remember what caused this mess in the first place. Banks got themselves, and our economy, into trouble by overleveraging — that is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations.

The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was “off balance sheet” financing.

In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.
The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option. Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.
Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.

Joseph E. Stiglitz, a professor of economics at Columbia who was chairman of the Council of Economic Advisers from 1995 to 1997, was awarded the Nobel prize in economics in 2001.

Major Barriers to Improvement of Education are External to the Schools

Public Interest Center (EPIC)
School of Education, University of Colorado at Boulder

Education Policy Research Unit (EPRU)
Arizona State University

Poverty and Potential:
Out-of-School Factors and School Success
David C. Berliner
Arizona State University

Executive Summary

The U.S. has set as a national goal the narrowing of the achievement gap between lower income and middle-class students, and that between racial and ethnic groups. This is a key purpose of the No Child Left Behind act, which relies primarily on assessment to promote changes within schools to accomplish that goal. However, out-of-school factors (OSFs) play a powerful role in generating existing achievement gaps, and if these factors are not attended to with equal vigor, our national aspirations will be thwarted.

This brief details six OSFs common among the poor that significantly affect the health and learning opportunities of children, and accordingly limit what schools can accomplish on their own: (1) low birth-weight and non-genetic prenatal influences on children; (2) inadequate medical, dental, and vision care, often a result of inadequate or no medical insurance; (3) food insecurity; (4) environmental pollutants; (5) family relations and family stress; and (6) neighborhood characteristics. These OSFs are related to a host of poverty-induced physical, sociological, and psychological problems that children often bring to school, ranging from neurological damage and attention disorders to excessive absenteeism, linguistic underdevelopment, and oppositional behavior.

Also discussed is a seventh OSF, extended learning opportunities, such as preschool, after school, and summer school programs that can help to mitigate some of the harm caused by the first six factors.

Because America’s schools are so highly segregated by income, race, and ethnicity, problems related to poverty occur simultaneously, with greater frequency, and act cumulatively in schools serving disadvantaged communities. These schools therefore face significantly greater challenges than schools serving wealthier children, and their limited resources are often overwhelmed. Efforts to improve educational outcomes in these schools, attempting to drive change through test-based accountability, are thus unlikely to succeed unless accompanied by policies to address the OSFs that negatively affect large numbers of our nations’ students. Poverty limits student potential; inputs to schools affect outputs from them.

Therefore, it is recommended that efforts be made to:
• Reduce the rate of low birth weight children among African Americans,
• Reduce drug and alcohol abuse,
• Reduce pollutants in our cites and move people away from toxic sites,
• Provide universal and free medical care for all citizens,
• Insure that no one suffers from food insecurity,
• Reduce the rates of family violence in low-income households,
• Improve mental health services among the poor,
• More equitably distribute low-income housing throughout communities,
• Reduce both the mobility and absenteeism rates of children,
• Provide high-quality preschools for all children, and
• Provide summer programs for the poor to reduce summer losses in their academic achievement.

Berliner, David C. (2009). Poverty and Potential: Out-of-School Factors and School Success. Boulder and Tempe: Education and the Public Interest Center & Education Policy Research Unit. Retrieved May 16, 2009, from

Friday, May 01, 2009

One Republican vote required for SCOTUS

According to Time Magazine, at least one minority party vote is required before a judicial nominee can be reported out of the judiciary committee.

Both sides of the aisle spent all week lamenting/celebrating Arlen Specter's party switch and the potential for a 60 vote Democratic majority in the Senate. But Specter's swap leaves the Senate Judiciary Committee without its most prominent GOP moderate. In any other committee that wouldn't matter but in the Judiciary Committee one minority vote is needed to report out nominees to the bench, from the committee's rules

If this is true, please explain to me why we have justices Scalia, Roberts, Thomas, Alito, etc. on the bench? Just more proof that the Democrats never used the power the had when they were in the minority (too wimpish to fight). You can bet Obama will never get a Supreme Court nominee through unless he is to the right of Scalia.