Lecture Notes: May 2008

Lecture Notes: 9-30-08

Upper class Warfare Part VII: Political Discourse Part III

$700,000,000,000 sounds like a lot of money. But when you consider that Mr. Paulson proposes to float $12 trillion worth of securities on a pool of liquidity of just $700 billion the question becomes is the $700 billion enough? What Mr. Paulson wants to do is establish a market for the securities. Why? In order to establish a market price. Why? So the holders of the securities will be able to assign a market price to their securities, a so called Mark to Market value. (Jonathan Weil of Bloomberg calls this Mark to Paulson Accounting.)

In this scheme the $700 billion is only incidental. It is needed to establish a “market” so the $12 trillion in securities can have a market value established. It is possible that this plan will make things worse for some holders of the securities if the Mark to Paulson “market” price is lower than what the owners had valued the securities on their books, as the director of the CBO, Peter Orszag, has warned. (CBO Head: Bailout Could Make Crisis Worse. The Washington Post reports, The Financial Times and New York Times also report on Orszag's comments.)

Most people think that the bailout is about the $700 billion being paid out to someone, a bank perhaps, never imagining that the true objective for the Paulson Plan is the $12 trillion in mortgage back securities. The $12 trillion is said to be “frozen” because no one trusts the paper as long as the housing market continues to plummet. Because it can not be traded it is worthless.

As I write this the stock market has lost $1 trillion in market value falling 6.98% or 777 points. For a long time stock traders “trusted” valuations of 25 to one. That is they thought it fair to value a stock at $25 for every one dollar in expected earnings. This is the price/earnings ratio. This when the market was at 14,000. More recently the price/earnings ratio has decreased to $20 to one. Historically the average price/earnings ratio has been $10 to one. So you can see the market has a long way to fall.

Will Mr. Paulson ask for a few trillion to buy stocks that have fallen into disfavor? Try and establish a “market” price for them too? After all if you thought the pricing was just temporarily “wrong” and that values will soon return then you would have only to weather the storm for a few days or weeks and wait for values to resume their former positions.

But what if these market conditions are not to quickly correct. What if the nation has been living beyond its means for a generation? What if there has been a stock bubble just as there has been a housing bubble? What if houses are not going to quickly return to their former values?

Suppose that we are at peak oil in a country that has assumed cheap energy. Suppose we must start paying off that mountain of debt we have accumulated instead of buying goods and services from one another or more likely from the Chinese. Suppose companies that were earning $5 a share will now only be able to earn $1. And suppose the correct valuation of those shares is 10/1 not 25/1.

What if we are facing a once in a century down turn? A black swan event.

Well then we should introduce Mr. Paulson to Mr. Market.

Over the next few days we are going to separate out the capitalists from the rest. It was easy to be a capitalist when everything was going up. Houses, stocks, everything.

But now what will you think when the market corrects stocks just as it has corrected houses? You have gotten so fat and lazy are you sure you want to be a capitalist anymore?

It was easy when prices were rigged to always go up. I mean it was easy if you had a home, and stocks, if you were part of the oligarchy.

But now what are you going to do? Try socialism?

For myself I am going to remain a capitalist even during the Second Great Depression.

So come and get me Krasny, Owens, Weiner. Imus? Do your worst. Fools. Cowards.

Lecture Notes: 9-25-08

Upper class Warfare Part VI: Political Discourse Part II

$700,000,000,000 is what Mr. Paulson wants. For this sum he promises to collect worthless paper for us. Worthless because the housing bubble has burst and the paper was written, and even guaranteed, based on the assumption that housing prices would always go up. This is the assumption upon which the paper was underwritten.

And who were these people who made this assumption that prices would always go up and never go down? Well they are people like Mr. Paulson himself. For eight years he was the head of a Wall Street firm that made just this underwriting assumption. Mr. Paulson assures us that this is the best deal he could get for us. No equity position, no interest, just the worthless paper.

One wonders what kind of deal Mr. Paulson would have come up with if he had been working for us these past eight years and not Goldman Sachs. He would not have earned his reputed $700,000,000. But then that is the point. Where do his natural loyalties lie? With whom?

In deed why should we accept the representations of a man who thought housing would always go up? He was mistaken then why not now? Is he working for us now?

One of the largest owners of the worthless paper is the Treasury itself, due to its recent acquisition of Fannie and Freddie. Then too there are the guarantees that Fannie and Freddie improvidently made to other holders of the worthless paper. All through the bubble these two organizations, these government sponsored entities, churned out this worthless paper, as if they were on autopilot feeding the bubble. Now with the Treasury’s takeover responsibility for these guarantees falls to us. An obligation of untold hundreds of billions.

Was there no management examining the underwriting assumptions? Considering the risks? No.

We could now consider the managers of the government sponsored entities, how much they were paid, how they used their influence on Congress. We could take time to consider how all of these individuals, at Goldman Sachs, Fannie Mae, the Congress form a class of people who have been pursuing their own interests at the expense of the American people. And we could go on to argue that Mr. Paulson’s deal is really better seen as a product of this class interest than a fair appraisal of the situation with our interests in the uppermost.

But I don’t want to talk about the oligarchy right now.

What I want you to see is how confused the nation is. All through the bubble management not just at the government sponsored entities but at Goldman Sachs, and Lehman and Morgan Stanley, and Bear, and in Congress, the oligarchy taken as a class, failed to see the housing bubble. Continued to issue worthless paper and even issue guarantees on that paper right up to the present moment. Yes even now after the bubble has burst.

See how slowly things move. The realization, dimly at first, then slowly dawning into full consciousness, that all these people, some making millions of dollars, were simply wrong. Consider that Mr. Paulson thought that housing could go on up forever. He really thought so. To describe them as being part of the oligarchy implies bad faith. What I am asking you to consider is that our oligarchy was acting in good faith, they really thought they could issue this paper and housing would go on up forever, that everything would be fine.

Strange, no?

I am asking you to step back from this current crisis and to see it as just one more example of how our society deals with problems. Recall the Israeli retired colonel, head of El Al security in the 1970’s, who tried to get the FAA to secure the doors on the flight decks of passenger airliners. Our oligarchy didn’t think it important until 9-11-01.

Consider Iran. It is a country which has been hijacked just as assuredly as if someone had pulled out a box cutter and slashed the throat of a flight attendant. Day after day Iran is working to get the bomb. Though Tel Aviv is the first target, New York is the second target. And what is our oligarchy doing about Iran? Nothing.

They assure us everything will be fine. But didn’t they say the same thing about the housing bubble?

Didn’t they tell you that our National debt did not matter because “we owe it to ourselves” then later because it was “just numbers on paper?” And what about Social Security and Medicare? Here again the oligarchy tells us not to worry. Everything will be fine.

Well I am here to tell you everything isn’t going to be fine. The bomb is real. And our oligarchy is mishandling the problem just as they mishandled the housing bubble, just as they failed to secure the cockpit doors.

And the best way to bring about this realization is for us to focus on the current crisis on Wall Street. A second great depression is coming and it does not really matter if you take an equity stake in the firms you bail out or not. But as you watch it unfold think about the oligarchy and how well they have performed. Then remember the bomb.

Lecture Notes: 9-15-08

Upper class Warfare Part V: Political Discourse?

“We are at or near the bottom.” --- Henry Paulson, June 2007

I guess if you are Secretary of the Treasury you can say whatever you please. Soon Mr. Paulson will be retiring from office and will no longer have to concern himself with affairs of the American people.

Contrast Paulson’s words with those of the British Secretary of the Treasury: “In a candid interview in today's Guardian Weekend magazine, Darling warns that the economic times faced by Britain and the rest of the world "are arguably the worst they've been in 60 years". To deepen the sense of gloom, he adds: "And I think it's going to be more profound and long-lasting than people thought."” (Nicholas Watt, The Guardian, 8-30-08)

Why is Mr. Darling able to speak candidly and Mr. Paulson is not? Is the political culture in Britain different from that of the USA? Perhaps Mr. Paulson thought he was required by his position to put a positive spin on economic conditions. But why doesn’t Mr. Darling? Then again Mr. Paulson may have actually thought we were at the bottom in 2007. This is the problem with political discourse --- we do not know when people are saying what they really believe, nor do we know what they really believe is true or false. (Note that in the market this is not a problem. People in the market back up their words with their money. If they say they like something we expect them to prove it by putting their money where their mouth is.)

Or contrast Mr. Paulson’s words with those of a private observer: “"Definitely, it (the dollar) is not a safe place to be invested in, as real inflation is closer to 10 or 11 percent than the actual inflation numbers given by the U.S. government," Hennecke said on "Worldwide Exchange". The end result of the global economic slowdown may be the U.S. announcing national bankruptcy as the government cannot afford the bailouts that it promised and the market will not bail out the government. "We expect a depression in the United States. We expect a depression, very possibly, also in Europe."” (Martin Hennecke, senior manager of private clients at Tyche, told CNBC on Thursday.)

Notice that Mr. Hennecke says the government is lying about the real rate of inflation. (If the government used the same method of calculating inflation as was used up until 1983 inflation would be reported at 10 to 11 percent. The government changed its reporting in part to keep the cost of indexing under control. For example Social Security is indexed to inflation such that if inflation were to be reported as 10 or 11 percent the government would have to pay much more than if they lie about inflation and report it as only 4%.) If Mr. Hennecke is right then what does this imply for our political discourse? Where is the transparency? How can we have an honest discussion if the government’s own statistics are deliberately distorted?

An easy solution to this problem of public discourse is simply to say that Mr. Paulson, Mr. Darling, and Mr. Hennecke are discussing the future so therefore of course they will have different views. In this we have the same situation as in the market. People disagree. But if Mr. Paulson and Mr. Hennecke were in the private market we would not ask why they disagree. In the private market it would be enough to know they disagree. If you think we are at the bottom in 2007 you put your money with Mr. Paulson. Or if you think true inflation is 10%, that the American people have lived beyond their means for a generation, that debt has gotten beyond their ability to repay, that the government itself is on the verge of bankruptcy, and that a second great depression is the necessary result, then you take Mr. Hennecke’s advise.

But transfer this discussion into the public realm and we must ask why they are saying what they are saying. Who benefits; was the old Roman question. A question to which there could be but one reply: For the good of the people. Thus Mr. Paulson might say that even though he did not really think we were at the bottom in 2007 he said we were at the bottom for the good of the people; to help keep prices up. In like manner it might be argued that Mr. Darling even though he really believes we are facing a grim economic down turn he should have nonetheless followed Mr. Paulson’s example and put a positive spin on the facts.

What I find so compelling about the collapse of the housing bubble is how it forces itself into reality. For example Mr. Paulson is no longer talking about the bottom of the market. And when the coming depression begins to grip the economy the political discussion will only then begin to address the down turn. But until it forces itself into being the depression will be discussed by government ministers in the same way they discussed the housing bubble. Some will doubt it because they really doubt it, others will lie, some will spin, still others will say what they think they are supposed to say. This is the problem with political discourse.

It is not just that Mr. Paulson was wrong, the problem is that we do not know what he was thinking. We do not know why he said we were at the bottom in June 2007.

To know why he said what he said we would need to know a great deal more about Mr. Paulson. What else does Mr. Paulson believe? For example does he approve the tax deduction on mortgage interest? Even though the wealthy receive most of the benefits? Does he think that the tax exemption for the first $500,000 in capital gains on a home, in a country where the average home is valued at $200,000, is fair and equitable? Does he approve of ethanol subsidies notwithstanding the fact that it takes more energy to make than it produces? Does he support nurse practitioners to lower the cost of medicine? Does he support vouchers in education? Etc.

We would have to have the answers to these and a great many more questions in order to understand why he said we were at or near the bottom in June 2007. This is one reason single issue politics is so abysmal. On any given issue it is practically impossible to know the motivation of any particular political actor. This is why I, when I was involved in politics, first with the Math Project, and then later with the New Ruskin College Project, (see Math Project and New Ruskin College Project archives at the Moynihan Memorial Library), I always dealt with all the issues which were before my target audience: the Senate. If they were dealing with the issue then I had to make it my business to also deal with the issue. More than just being topical I tried to enter into a dialogue.

For example, I had to discuss vouchers, and what a market oriented education might look like, and explain that if market forces were allowed to work in education, technology would have been better utilized. And all of this had to be covered while discussing whether we should invade Iraq to liberate Kuwait. What I did not foresee was that if you are involved in a great many issues one becomes the target of people with political views contrary to one’s own.

So Yvonne was persuaded to betray me to her friends at KQED. And when I protested the people at KQED other of her friends contacted my employers and had me laid off. Michael Krasny at KQED contacted Rose Guilbault at AAA and had me laid off there. Ron Owens at KGO used his influence at Access to get me laid off there. Melanie Morgan at KSFO used her influence at Cen Cal to have me laid off there. (see CEN CAL Letters at the Moynihan Memorial Library) Owens or Weiner (aka Savage) used their influence at Farmers to harass me there. Don Imus harassed me at GAB. Weiner broke into my rooms at the Colonial Motel and photo copied the note book and harassed me for several days before giving the note book to others at KGO and KSFO. (see The Stolen Notebook at the Moynihan)

It suffices to say that this sort of harassment and intentional interference with contractual relations severely limits political discourse. How much of what is said, or not said, is because of the real fear of being targeted by the likes of Krasny, Owens and Weiner?

As we peer into the future we see Iran, a nation hijacked by radicals, developing the bomb, we see the emergence of the second great depression, the emergence of bio-weapons, and all of this must be discussed within a political discourse of such narrow breadth that the truth can barely slip in.

Lecture Notes: 08-11-08

Upper Class Warfare - Part III Proud Houses

The baby boom generation bought the American Dream and by the beginning of this century the competitive drive to own ever larger Mc Mansions finally ended with the bursting of the housing bubble as we have seen. The plan, if plan there was, apparently was for 76 million baby boomers to sell their houses to 48 million Generation X’ers. At the height of the bubble the portion of Americans who were homeowners reached 69%. As explained in Part II this is not coincidental. The bubble required ever more buyers to be brought into the market. For every Mc Mansion sold a buyer had to be found for the apartment which had just been converted into a condominium.

The bubble burst from sheer exhaustion. The supply of buyers was exhausted. And the credit line of those market participants was also exhausted. The American savings rate is now negative. It is estimated that the losses from mortgage defaults will total as much as two trillion dollars; this when the total capital of the banking system is $1.3 trillion. The average American family in addition to all those house mortgages which are daily exceeding the market value of their homes, and by ever larger margins, now has $8,000 in credit card debt, and all this debt is the private debt only.

We have been as profligate in our public finances as we have in our private finances. Let us not forget the national debt which is $32,000 per person and that public indebtedness grows when the Social Security System and the Medicare System are combined bringing the total debt to some $175,000 per person.

Household income has been flat in the 21^st century for all income groups yet housing more than doubled in the twenty metropolitan composite of the S&P/Case-Schiller index. (see figure Lecture Notes 08-15-08 in Lecture Hall) Income simply could not support further expansion of the housing bubble. Therefore bust.

“Froth” --- Dr. Greenspan

Right now there are 19 million housing units of all types vacant on the market, 35% above normal, according to David Rosenberg North American economist with Merrill Lynch & Co. Of these 4.5 million were previously occupied homes and were listed for sale at the end of June, according to the National Association of Realtors. Of these 750,000 were bank owned. These numbers could easily treble as homeowners start walking away from their mortgages that exceed the market value of their homes. And Dr. Greenspan himself thinks we are not near the bottom. It was Dr. Greenspan who denied the existence of the bubble and whose policies were primarily responsible for the bubbles dramatic increase during the Twenty First Century. “The damage was done earlier, beginning when the Greenspan Fed lowered interest rates in 2001 after the bust of the technology bubble, and kept them too low for too long. They kept cutting the federal funds rate all the way to 1% through 2004, and then raised it gradually instead of quickly. This fed the credit and housing bubble . . .” (Nouriel Roubini, Barrons, 8-2-08)

The New York Times reported: “Most of the economists who were interviewed blamed Alan Greenspan, the chairman of the Federal Reserve from 1987 to 2006, for his unwillingness to clamp down on either the technology stock bubble or the run-up in housing prices.” (Abha Bhattarai, New York Times, 8-5-08)

Yet in fairness to Dr. Greenspan it must be acknowledged that Australia, Great Brittan , Ireland, and Spain have all experienced similar housing bubbles. A generation came of age and bought houses with an acquisitiveness not seen before in history. It is difficult not to believe that something more than merely shelter was being pursued. Were they grasping at something less tangible? What was it they were looking for? Was it an attempt to find community? To try and differentiate themselves from their peers? Or to try and out do their parent’s home? All the proud houses were symbols of a success they longed for and could make tangible by simply signing a mortgage document. As the bubble continued it was easy to come to think of the home as a kind of saving account or retirement account. The national media encouraged the frenzy to buy homes or trade up. Time magazine on its cover showed happy homeowners watching their home take flight. There was no downside. No risk. Why had no previous generation discovered this way of wealth creation?

Madame Bovary Life Style

That the housing bubble was driven to such heights by people whose incomes were static or, in the case of the lower income groups, actually declining, is evidence of how available credit had become. A deliberate policy decision was made in Washington by the Clinton Administration to lower lending standards to push up the percentage of Americans who were “homeowners.” Never mind that they were owners only in the narrow sense that their names were on the mortgage papers. Many of these mortgages were no down payment loans with no principle and below market interest for 2 or 5 years. Everything depended on prices going up higher and higher.

With the negative savings rate, and accumulating debt public as well as private it is difficult to see how much longer Madame Bovary can go on. Everything our oligarchic elite could do to rig the market to the advantage of homeowners has been done: tax sheltering of income for homeowners, tax sheltering of capital gains, government subsidized loans, exclusionary zoning and building codes to reduce supply, any thought of savings has been abandoned, and now most recently with a $300 billion Housing Bill to help 400,000 homeowners. But in the end the market has tossed these attempts to rig the housing market aside as if they were so many toys.

And I think people are beginning to see that they have been mislead. There is no such thing as a consumer society. There is only a society in which people work and plan for the future and save money to finance their projects or there is profligacy and no savings for the future and society disintegrates. In the end Madame Bovary committed suicide.

Lecture Notes: 07-31-08

Upper Class Warfare - Part II Laissez-faire

The housing bubble’s collapse is the biggest economic news story since the Great Depression. Yet it is still not understood. I can recall quite clearly when it was debated if there was a housing bubble or not. I warned against it. But I recall one belligerent fool going on the air on Kudlow and Company or some such broadcast and saying sassily “I don’t think there is a housing bubble . . . I don’t think people have bought homes they can not afford . . . I don’t think builders will overbuild . . . etc. etc.”

Where is that fool now? Mr. Franklin Raines collected $26 million for rigging the “bonus” compensation system at Fannie Mae. Dr. Greenspan has retired to his pension too. Soon Mr. Bush will retire to his government pension. Recall that it was Mr. Bush who said that the deficit was just “numbers on paper.” (Let them eat cake.)

I have to smile at the press coverage to the effect that the “victims” of “predatory lending” were lured into debt by dishonest agents and brokers. As if their misfortunes now result from a few bad actors. It is so typical of American Journalism to focus on the specific case, the man in the street interview, but miss the totality of the story. And this, your misdirection continues even as the biggest story since the Great Depression continues to unfold.

These “victims” are not incidental to the story they are integral to the scheme. The story of the bubble is the story of millions of such people caught up in the frenzy of the times. The speculative bubble is like a pyramid scheme. It requires new people, new money, to be constantly brought into each new cycle of the swindle. These “victims” are merely the last marks to have been brought into the con before the collapse. The housing bubble was one gigantic Ponzi scheme. The people who told you otherwise were lying to you or fools, or both. And now when they tell you we are at the bottom they are lying again.

And even though now it is collapsing you still can not look at it and see it for what it was. Dr. Greenspan and Franklin Raines were at the top of the scam, the oligarchic masterminds, the newspaper “Home Section” was the means of finding the marks, the real estate agents were the front men, the mortgage brokers the bag men, and so on and so forth. Can’t you see that it was not sustainable from the beginning?

You have been mislead. Tricked. Lied to. And by the way this isn’t the bottom not even close. In the months ahead you will be reporting about the “walk-a-ways.” These will be the marks who got in just a little earlier than your subprime “victims.” As the collapse continues the walk-a-ways will start to perceive that they too are underwater by tens of thousands of dollars and sinking. So they will walk away from their mortgages and homes. This will cause house prices to fall still further. See this is the reverse of the up cycle. As prices fall lower more will walk away.

So what caused the speculative fever in the first place? Greed. And a government more than willing to feed the fever with discounted guaranteed loans. The oligarchic elite who rule this country concluded that if home ownership is good then why not everyone a homeowner? Then too the journalists failed to report on the bubble until it was too late. Of course the journalists are homeowners themselves and may have had a vested interest in promoting the up cycle of the pyramid scheme.

I am trying not to take pleasure in the collapse of the housing bubble. But it is satisfying to see one’s forecasts and warnings come to pass. When I think about how the average person was priced out of the market. How as a group industry and government conspired to drive up prices out of reach of average people. At one point at the height of the bubble only 8% could afford the median priced home in San Francisco. At the time I wrote questioning who was looking out for the bottom 80%. No one cared it seems that the price of land and housing were being driven up out of reach. Not the government. Not the journalists. Not even most people for 60% were “homeowners” and therefore part of the Ponzi scheme themselves.

So this market correction is not just an economic correction it is also a moral correction. For all of you who did not care about the consequences of ever higher prices on your fellow citizens you are now corrected by the market. For those of you who thought you could rig the market by using government to drive prices higher and higher, you are now corrected. For foremost in your calculations was greed, your personal gain from the manipulated market, and for this you are corrected.

The correction will not go on forever and ever. Housing has an intrinsic worth, a sustainable value, and the market left to itself will find this value. Eventually equilibrium will be achieved. Your interference with the market, your tax subsidies, subsidized guaranteed loans, your exclusionary building and zoning codes only delays and distorts the market.

Who will pay for the $300 billion Housing Bill just signed by Mr. Bush? A disproportionate amount will be paid by renters, that 40% of the population not favored by the oligarchy. The Bills sponsors hope that 400,000 “homeowners” will be helped by the Bill. Yet foreclosures and walk-a-ways will be numbered in the tens of millions. But eventually the truth will come out. Laissez-faire.

"All medical facilities and organisations must do everything they can to enhance the level of readiness," Yisraeli said in the letter published by the ministry on Monday. Six, Five, Four . . .

19 CAUSES FOR WAR:

Staff Sgt. Daniel B. Cafourek	Watertown, South Dakota	Eglin AFB, Florida
Sgt. Millard D. Campbell	Angelton, Texas	Eglin AFB, Florida
Senior Airman Earl F. Carrette Jr.	Sellersburg, Indiana	Eglin AFB, Florida
Tech Sgt. Patrick P. Fennig	Greendale, Wisconsin	Eglin AFB, Florida
Master Sgt. Kendall K.J. Kitson	Yukon, Oklahoma	Eglin AFB, Florida
Airmen 1st Class Brian W. McVeigh	Debary, Florida	Eglin AFB, Florida
Airman 1st Class Brent E. Marthaler	Cambridge, Minnesota	Eglin AFB, Florida
Airman 1st Class Peter J. Morgera	Stratham, New Hampshire	Eglin AFB, Florida
Tech. Sgt. Thanh V. Nguyen	Panama City, Florida	Eglin AFB, Florida
Airmen 1st Class Joseph E. Rimkus	Edwardsville, Illinois	Eglin AFB, Florida
Senior Airman Jeremy A. Taylor	Rosehill, Kansas	Eglin AFB, Florida
Airmen 1st Class Joshua E. Woody	Corning, California	Eglin AFB, Florida
Capt. Christopher J. Adams	Massapequa Park, New York	Patrick AFB, Florida
Capt. Leland T. Haun	Clovis, California	Patrick AFB, Florida
Master Sgt. Michael G. Heiser	Palm Coast, Florida	Patrick AFB, Florida
Staff Sgt. Kevin J. Johnson	Shreveport, Louisiana	Patrick AFB, Florida
Airman 1st Class Justin R. Wood	Modesto, California	Patrick AFB, Florida
Staff Sgt. Ronald L. King	Battlecreek, Michigan	Offutt AFB, Nebraska
Airmen 1st Class Christopher Lester	Pineville, West Virginia	Wright-Patterson AFB, Ohio
Source: The Pentagon

The Sunday Times July13, 2008

President George W Bush backs Israeli plan for strike on Iran

As Tehran tests new missiles, America believes only a show of force can deter President Ahmadinejad

US fears Israeli strike against Iran over latest nuclear claim