Tfgray’s Weblog

It’s been a fascinating few weeks. Mexico is pretty close to a Feds vs. Heads civil war, armed by us, Iraq continues to be a dangerous neighborhood, Afghanistan gets worse, and prepares to add us to the list of empires that ended their existence by invading them, screwy things continues to go on on Wall Street, with the screwers being paid handsomely by the screwees via the magic of the Bailout.

The Right has lit a major firestorm over Obama’s use of the teleprompter, which is sort of like criticizing him for being able to read. Michael Steele has declared  that his feud with Limbaugh, and subsequqent groveling was a deliberate strategy to “discover who the enemy is and who’s inside the tent.” I’m not sure whether he ascertained that Limbaugh is the enemy or “inside the tent,” but I sure wish that the interviewer had asked. Michelle Bachmann is determined to protect us against our dollars not being the world’s default currency, by writing a bill that prevents us from doing something that has nothing to do with creating a worrld currency. House and Senate Republicans unveil their budget  outline  template, or, in the words of Captain Barbossa, “More like guidelines, actually.” I really like the part about how we will get out of debt by reducing taxes by 30% on the taxpayers who allegedly pay 87% of all income tax. Palin’s high schoolish V.P. debate performance was due to her not being able to get anyone to pray with her beforehand, not due to any lack on her part. Glen Beck wrapped a dead fish on his show [I could not, for the life of me understand the point., but he seemed to think he was pretty funny naming it Larry and talking to it.] Oh, and Samuel “Joe the Plumber” Wurtzelbacher is horny.

 It’s sad to watch a once, or at least occasionally, great party (Lincoln, Eisenhower) fall into babbling incoherence. It’s even sadder to realize how much power they still wield. It’s frightening to think that there are 16 nationally elected Democrats who are willing to stand with them against President Obama’s budget.

Sometimes, reading political commentary, I think back to an early review of the Harry Potter movie, in which the writer chortled that it would be very weird to watch “an 18-year-old Daniel Radcliffe play Harry Potter in the seventh movie,” apparently not having done the basic homework of finding out that the characters age a year in each book as they progress through the Hogwarts curriculum. Today’s gem was the notion that by choosing Rahm Emmanuel as Chief of Staff, Obama was going with a Left-wing Clintonite Washington-insider agenda. Basic homework again. Rahmbo has represented Chicago in the House of Representatives since 2002 and their families (yes, that includes wives and kids) are friends.

So, like, if even that guy can make predictions, why not me? Here they are:

• John McCain will position himself as the go-to guy for the moderate wing of the Republican Party. Lindsay Graham has already positioned himself as wingman, and I suspect that Lieberman will offer himself as Third Musketeer.
• If Ted Stevens is dumped (and they don’t find the missing ballots in Anchorage that might conceivably go to Mark Begich) Sarah Palin will run for the Senate. The fact that she said she wouldn’t is proof enough for me.
• The rightward edge of the Republican Party will become a dogfight between the Social Conservatives and the NeoCons. If Palin makes it to the Senate, the SDs will coalesce behind her, if not, Huckabee. The NeoCons, not having realized that the rest of the country thinks they are criminally insane, will try at least one highly dramatic legislative stunt, which will backfire. It is also possible that the SDs will also try at least one highly dramatic legislative stunt, to similar effect.
• The moderates will stay out of the dogfight, cut deals with Obama, and wait until things sort themselves out before aligning with the winning faction.
• We will make more progress toward developing alt energy and solving global warming in the next 8 years than in the last 30.
• Someone will notice that Sarah Palin talks more than Joe Biden and call her on it publicly.

Let’s start with a comment from Polixian to a previous post:

 This should give responsible media outlets a greater opportunity to point out the history of how it is our economy got to where we are…beginning with the Community Reinvestment Act of 1977 (President Jimmy Carter); the push by the Clinton Administration to force sub-prime mortgage lenders to expand their offerings into under-qualified, high-risk groups; the money trail of industry lobbyists (esp. Freddie Mac, Fannie Mae) and their political allies (esp. Frank, Dodd, Obama, and other republicans as well); and, the efforts by the aforementioned, as well as Maxine Waters and Pelosi, to protect such industry practices via outspoken congressional opposition to reform measures.

Ok, I admit I started it, by thinking that the Bushies had pushed this to bring the maximum amount of sheep in to be fleeced by predatory lenders. It was the Liberals that started this. However, here are a couple of details that have come to my attention:

Polixian echoes the Right Wing charge that Liberal policies have forced banks to make loans to people who could not afford the payments. It is soundly rebutted here:

http://www.snopes.com/politics/obama/loans.asp

The landmark case, Buycks-Roberson v. Citibank Fed. Sav. Bank was about the bank’s refusal to make a loan to a Black woman while granting loans to whites with similar income profiles. The lawsuit sought to end redlining, the practice of refusing credit to individuals based upon their neighborhood, regardless of their ability to repay.

I spoke with Michael, my go-to-guy at work, a second-generation bank consultant, who told me he ran the math and figured out that the $700 billion figure for the bailout was based upon 7% of the $10 trillion mortgage market going south, of which $0.5 billion represents those nasty, evil, ACORN-inspired subprime loans. Po’ folks taking down the global economic system? Not hardly.

Then I ran across this, at http://www.webofdebt.com/articles/its_the_derivatives.php 

What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.

Michael puts the total US derivatives market at $180 trillion, or about 18% of the global total, and notes that the entire GDP (Gross Domestic Product) of the entire world is a measly $70 trillion. Yeah, you read that right: the derivatives market is about 14 times the entire annual income of the entire world. OK, so what’s a derivative?

Essentially, it’s a bet. Again, from Ellen Brown, who explains this stuff so clearly:

Derivatives are financial instruments that have no intrinsic value but derive their value from something else.  Basically, they are just bets.  You can “hedge your bet” that something you own will go up by placing a side bet that it will go down.  “Hedge funds” hedge bets in the derivatives market.  Bets can be placed on anything, from the price of tea in China to the movements of specific markets. 

“The point everyone misses,” wrote economist Robert Chapman a decade ago, “is that buying derivatives is not investing.  It is gambling, insurance, and high stakes bookmaking.  Derivatives create nothing.”¹  They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services.  In congressional hearings in the early 1990s, derivatives trading was challenged as being an illegal form of gambling.  But the practice was legitimized by Fed Chairman Alan Greenspan, who not only lent legal and regulatory support to the trade but actively promoted derivatives as a way to improve “risk management.”  Partly, this was to boost the flagging profits of the banks; and at the larger banks and dealers, it worked.  But the cost was an increase in risk to the financial system as a whole….²

Credit default swaps (CDS) are the most widely traded form of credit derivative.  CDS are bets between two parties on whether or not a company will default on its bonds.  In a typical default swap, the “protection buyer” gets a large payoff from the “protection seller” if the company defaults within a certain period of time, while the “protection seller” collects periodic payments from the “protection buyer” for assuming the risk of default.  CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes.  In one blogger’s example, a hedge fund could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims. 

And there’s the catch: what if the hedge fund doesn’t have the $100 million?  The fund’s corporate shell or limited partnership is put into bankruptcy; but both parties are claiming the derivative as an asset on their books, which they now have to write down.  Players who have “hedged their bets” by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets. 

The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme.  The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives “weapons of financial mass destruction.”

[This might be the time to mention that W's brother Marvin runs a hedge fund, Winston Capital Management, but I digress.]

So, what did that $700 billion buy us? Damned if I know. The credit market is still seized up, since the dominoes are still a-tumblin’ and $700 billion, as impressive as that string of zeros is after the 7 looks, is only .00000004 of the value of the total derivatives market.

And the most interesting part, as Brown points out, is that “Derivatives create nothing. They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services.”

So essentially, derivatives are fluff, wispy critters of air, the foam on the economic beer, so to speak. with as much intrinsic value as the average casino chip. And yes, there are people who have profited most handsomely from them. What to do? Soak the Rich? That would be nice, but the problem is that down the line the real money underlying the cotton candy is your IRA, my 401-K, and Mrs. McGillicutty’s annuity.

Exactly how do we untangle this?  How do we blow the foam off without spilling the beer? Nothing jumps off the top of my head, but I’m putting on my thinking cap, and I hope you will, too.

Well, if you’ve read my previous posts, you’ve probably figured out that I’m rooting for Obama, but contrary to my hopes, and John McCain’s pre-debate victory announcement (released even before he agreed to show up, can you believe it?) I’d have to call it  a draw. Obama looked relaxed and in control, as always. McCain flashed that shark-toothed grin on more than one occasion, and refused to look at his opponent. They both scored points.

I think Obama could have scored more.

• He could have pointed out more forcefully that McCain’s call for regulation on Wall Street comes only after the deregulation he championed for decades has nearly destroyed the banking system.
• When McCain went on about how well he would care for veterans, Obama could have mentioned McCain’s rating from the Disabled American Veterans (DAV), as compared to his own. McCain voted against bills favored by the DAV 16 times, with 11 votes in favor and 5 unrated. Obama voted against their positions once, in favor 17 times, with one vote unrated. However, veterans organizations are picking up that dropped stitch.
• When asked by Lehrer about spending cuts that would be forced by the bailout, Obama could have made a stronger case that the areas he wants to increase spending on are investments that will strengthen the economy and that the dangerous mismanagement of the past 8 years has jeopardised our ability to create a better future. He could also have mentioned that no one really knows if the bailout will actually cost $700B or $100B or even $1.8T,  or, after all the shouting is over actually turn a profit, and whether that profit will go to the taxpayers or into the pockets of a few corporations, as the details have not been hammered out. The end result, “too soon to tell” may have been the same, but it would have looked more reasoned and less evasive. McCain, of course, has no problem with cutting anything, ever, regardless of the consequenses.
• I think Obama tried to call foul on McCain’s support of nukes, given the senator’s consistent record of supporting nuclear power and waste disposal so long as it stays outside of Arizona, but McCain talked over him, a tried and true tactic of the Right.

The early polls, meanwhile, are showing a boost for Obama. Maybe I’m just too picky, (McCain neither lapsed into a bleepable tirade nor ran from the podium in tears) maybe the Republican psy-ops strategy of the “victory ad” hasn’t taken effect yet.

Or maybe you really can’t fool all the people all the time.

Stay tuned.

In just one day we have McCain trying to bail not only himself out of debating Obama but Palin out of debating Biden, his lying to David Letterman in order to go down the street to talk to Katie Couric (after telling Letterman he was canceling in order to go to Washington to deal with the mortgage thingie), and suspending his campaign on the high-minded pretext of needing to focus on the TARP bill right after he launched a week’s worth of slanderous mud at Obama that leaves him wide open to a retrospective on the Keating 5.

Surely, this marks the end of his presidential ambitions, right? Not quite, according to Jonathan Chait, writing in today’s The New Republic:

Last February, political scientists Brendan Nyhan of Duke and Jason Reifler of Georgia State published the results of an experiment designed to test the effects of political untruths. The results would unsettle any idealist. The first conclusion they found was that lies work. When subjects were confronted with an untrue political claim (President Bush banned stem-cell research; weapons of mass destruction were found in Iraq) respondents naturally moved toward those positions. When the lie was corrected, however, the effect of the untruth in moving opinions largely remained. The truth, in other words, is no antidote for a lie.

Their second conclusion was even more disturbing. Subjects who identified as politically conservative were not only immune to the effects of having a lie corrected, the correction made them even more likely to believe a lie. So, for instance, one group of conservative subjects was presented with a news story that depicted President Bush claiming weapons of mass destruction had been found in Iraq. A second group of conservatives was presented with the same thing, along with a paragraph noting that Bush’s statement was untrue. The second group was more likely than the first to believe that Iraq possessed WMDs. The very fact of the press challenging their beliefs seems to have made conservatives more likely to embrace them. If this finding is broadly correct, then the media’s newfound willingness to fact-check McCain will only succeed in rallying the GOP base to his side.

http://www.tnr.com/politics/story.html?id=71756e51-a09c-4b7d-b270-c6327191b341

If you read my earlier post, What Gives Neo-cons Their Power? you’ll recognize the Authoritarian mentality at work here. According to Bob Altemeyer, who did 40 years research on the subject, about 25% of us are subject to such thinking. Perhaps you’ve noticed that in the past few elections, only about 50% of eligible voters showed up at the polls, and the Right left no stone unturned making sure that the Authoritarian 25% made up half of that total. Add in the 1% or so that actually benefit from Republican policies and you have a recipe for squeaker victories for the Right.

Obama’s got the right strategy. Get out the vote.