Thursday, October 30, 2008

Starbucks doubles fair trade commitment

It's a small step, but it's a step forward: Starbucks is doubling its Fair Trade commitment. In 2009, it will purchase 40 million pounds of Fair Trade coffee.

Monday, October 27, 2008

Possible rift among Anglican conservatives

Thinking Anglicans reports that the Diocese of Sydney has voted to allow deacons to preside over the Eucharist. All other Anglican churches and most (maybe all?) mainline denominations only allow ordained priests to preside.

The Diocese of Sydney is very conservative as to the ordination of women and on matters of sexual orientation. They are also probably the most Evangelical diocese in the whole Anglican Communion.

For those readers who aren't Anglican, the Anglican Communion is a confederation of churches that embraces a diversity of theological viewpoints. One of the areas on which Anglicans disagree is churchmanship. High church Anglicans prefer liturgies very similar to Roman Catholic ones. Low church Anglican liturgy will incorporate many Evangelical elements.

In the US and Canada, the churches that have broken away from the Episcopal Church and the Anglican Church of Canada have often splintered along lines of churchmanship. Continuing Anglican churches in the US, such as the Anglican Catholic Church, are high church. The United Episcopal Church of North America left the Anglican Catholic Church over alleged discrimination against low churchmen, although they have since reconciled. The Reformed Episcopal Church left the main Episcopal church because of concerns over the "loss of Protestant and Evangelical witness".

We may soon see similar fracturing among Anglican conservatives. I find it hard to be sympathetic, honestly. An article in Episcopal Life Online mentions that Archbishop Peter Jensen is reluctant to license lay people to preside at Eucharist at present because of his affiliation with GAFCON, a group of conservative Anglicans.

Interestingly enough, a number of liberal readers of Thinking Anglicans strongly disapprove of Sydney's move. My sense is that the majority of Anglican liberals in the US tend to be Anglo-Catholic (high church). I've come to appreciate high church liturgy, but my outlook is fundamentally low church. English conservatives, I believe, tend to be low church.

That said, my opinion is this. Jesus was not ordained and he was not a Christian. Jesus specified to the disciples that they were to break bread and share wine in his memory. The church specified requirements as to who may administer what sacraments. However, those requirements have the weight of tradition only. Tradition shouldn't be discarded lightly. Our friends in Sydney decided to modify tradition substantially in light of their own needs. The Episcopal Church decided to modify tradition substantially when it consecrated Gene Robinson. As such, we shouldn't condemn Sydney on this issue. We should condemn them for their homophobia.

Interestingly enough, while Sydney refuses to ordain women, they do license women as deacons. This is a step forward for women in the Diocese. And I hate to sound condescending, but even a small step forward is a step forward.

Commentary on the piece about oil drilling in Wyoming

In 2004, Earthworks and Oxfam International put out a joint report, Dirty Metals, detailing the human rights abuses and environmental damage caused by the mining industry. One of their contentions was that mining as an industry brought very few economic benefits to the local population.

In Western countries at least, wages for skilled workers in extractive industries can be pretty generous. However, the CNN story I posted last shows that the money might not be worth the environmental degradation and the breakdown in social cohesion.

Furthermore, some day, the oil, gas or minerals will run out and the companies will leave for the next deposit. Both the mining and energy industries can cause significant environmental degradation. The Oxfam report made it clear that mining companies had usually not paid their fair share to clean up after themselves, especially not in the Global South. I'd expect no better of the energy companies.

And what will happen of the boom towns when the minerals or the energy run out? Residents of Michigan should think of Flint and Detroit.

I'm not saying that the world should do without energy. However, unsustainable development is wrong.

US case against Omar Khadr falling apart

Alternet describes how the U.S. government's sham case against Omar Khadr is deservedly falling apart.

Following the outspoken resignation of former prosecutor Lt. Col. Darrel Vandeveld and the Pentagon's desperate decision to drop charges against five prisoners to prevent Vandeveld from testifying for the defense, the latest news to rock the Commissions is that the trial of Omar Khadr -- a supposedly flagship case, along with that of the Yemeni Salim Hamdan, who received a surprisingly light sentence after a trial this summer -- has been delayed until after the administration leaves office.

This is a bitter blow for the government, which has been pushing to prosecute Khadr for war crimes since 2005. Its first attempt failed, when the Supreme Court ruled that the whole enterprise was illegal, but after the Commissions were bandaged up by Congress and resumed their ghoulish existence in 2007, Khadr was once more put forward for trial.

This was in spite of the fact that his tenacious lawyers -- both military and civilian -- have questioned the very basis of the "war crimes" charges (which essentially transform combatants in war into "terrorists"), and have unearthed evidence (despite systemic obstruction) that Khadr may not have been responsible for the main crime for which he is charged (throwing a grenade that killed a U.S. soldier). Focusing on the fact that Khadr was just 15 years old when he was seized in July 2002, they have also persistently pointed out the cruel folly, injustice and illegality of prosecuting a juvenile for war crimes, when the UN Convention on the rights of children in wartime, to which the U.S. is a signatory, requires juveniles -- those under the age of 18 when the alleged crime took place -- to be rehabilitated rather than punished.

Last week, in pre-trial hearings, they reprised some of these arguments, and also sought access to seven interrogators, from various intelligence agencies, who, they insist, extracted coerced confessions from Khadr, who was severely wounded, while he was detained in the U.S. prison at Bagram airbase in Afghanistan, before his transfer to Guantánamo. According to the lawyers, the information extracted from Khadr under duress was then used as the basis for interrogations at Guantánamo using more "sterile" and "benign" techniques, in much the same way that the administration has attempted to cover up its torture of Khalid Sheikh Mohammed and other "high-value detainees" in secret CIA custody by using "clean teams" of FBI agents to extract new confessions in Guantánamo.

Oil and gas drilling in Sublette County, Wyoming, US

Alexandra Fuller writes a commentary for CNN Money about the dark side of drilling in the US.

SUBLETTE COUNTY, Wyo. -- Across the United States, an increasingly panicked rush to extract every last drop of domestic oil and gas seems inevitable. Our already unimaginative energy policy and insatiable addiction seems to have been further reduced in election-year hysteria to bumper-sticker thoughtlessness - "Drill, baby, drill."

It's a slick line, but I live in Wyoming and here's what that bumper-sticker mantra looks like up close.

Roughly 26 million acres in the Rocky Mountain West have been leased by oil and gas companies in the last nine years. By far the greatest share of those leases has fallen to Wyoming. A quarter of the state's land surface has been leased -- more leases than anywhere else in the nation (including Alaska). And nowhere in the state has seen more drilling activity than Sublette County, a hitherto isolated community of 6,000 souls inclined toward the west-central part of Wyoming.

When the oil companies came courting some eight years ago, boasting of new technologies which would allow them access to previously untouchable minerals, most Sublette County residents welcomed them enthusiastically. Those citizens who cautioned moderation were routinely dismissed as "anti-development" or "greenie" (a powerful slur out west).

Sublette County sits in a high basin cradled by three ranges within the Rocky Mountains. Its waterways constitute the headwaters of the Colorado River. Its high plains play host to the Greater Yellowstone Ecosystem's wintering big game. Until a decade ago, the air and water were among the purest in the country.

"I've trapped, hunted and ridden horses over most of this land," says John Fandek, a local ranch hand and vocal opponent of this recent drilling activity. "If you'd told me, ten or fifteen years ago that development of this nature could happen here, in one of the last remaining wild areas in the lower forty-eight states, I wouldn't have believed it."
Talkback: Should America expand oil and gas drilling?

Oil companies initially proposed drilling wells 80 acres apart on the high plains so that critical wildlife habitat would remain relatively intact (a well pad covers seven acres). But over time, they have eroded that initial spacing down to as few as five acres so that some areas of the high plains are now solid industrial development. Moreover, in spite of initial promises to the community to be "good neighbors," they work with relative impunity.

Surprisingly few laws are in place to protect communities. For example, the oil companies don't have to comply with the Clean Water Act, neither are they at all restricted from drilling on previously protected critical big game winter range. Their drivers are exempt from Department of Transportation laws that limit the number of hours a driver may be behind the wheel. In Wyoming, oil rigs are classified as mobile units of pollution and are therefore exempt from laws that would otherwise regulate their collective pollution. Industry is even protected from revealing what chemicals go into their drilling fluid.

As a result of this lack of regulation, the air in Sublette County has become so polluted that regular toxic-air alerts warn vulnerable residents to stay indoors. Additionally, more than a dozen water wells on the high plains have recently tested positive for highly carcinogenic hydrocarbons. Cancer rates are now reported to be the highest in the state and, for many days of the year, a thick, brown stain of pollution hangs against the mountains, sometimes obliterating them from sight altogether.

Rapid development has also brought growing pains to the communities. Incidences of drug abuse, domestic violence and other crimes have escalated. A 2006 report approved by the Sublette County attorney begins, "Reported crimes and arrests have been increasing at an exponential rate since the year 2000 and have shown to be highly statistically correlated with gas and oil-field activity." The study shows the crime rate rising by 30 per cent from 2004 to 2005, a period when drilling activity increased by 15 percent.

"There has always been some energy development in Sublette County, but nothing like this. This is unsustainable, irresponsible, devastating," says Fandek who began working on the rigs here in the 1960s, back when limited technology ensured that drilling kept pace with the environment's ability to absorb the impacts.

"What is notable to me," says Fandek, "is that the more hysterically they drill, the more the price at the pump goes up. Millions of acres under lease in the last eight years and still the price climbs. When will people see, and politicians admit, that increased drilling does not translate to cheaper fuel?" Fandek soon quit the oil patch for a lifetime of work on various ranches. "The decision to leave the rigs didn't make me rich in the ordinary way," Fandek says. "But I've never counted wealth in ways that you can take to the bank."

The oil companies speak of the infrastructure and positive development that they have brought to the community and it is true that they have injected a lot of money into the county.

They have helped build a web of roads into the previously roadless high plains. They have contributed to a new drug-counseling center, a domestic-abuse shelter, a new sheriff's office, an indoor swimming pool and a new jail.

"None of which were badly needed before the boom in any case," Fandek points out. There are four new banks and a new car dealership in town. For the first time in their history, Sublette County has everything that money can buy.

"But we have lost what money can't buy," says Fandek. "Clean air, clean water, our sense of place and our sense of self."

Because it's nothing new, there is a name for the lawlessness and depression that comes with the dubious gift of a mineral boom -- Gillette Syndrome. More than 30 years ago, the psychologist El Dean Kohrs coined the term to describe the ills then being visited upon the booming coal town of Gillette, Wyoming.

Perhaps it would be appropriate to coin a phrase to describe the refusal to learn from our past mistakes, "Sublette Syndrome."

Wyoming-based writer Alexandra Fuller is author, most recently of "The Legend of Colton H. Bryant." To top of page

Friday, October 24, 2008

Myanmar's lost year

This NY Times article was posted a couple weeks back.

Myanmar is still in pretty bad shape.

In fact, the State Peace and Development Council, as the military government renamed itself in 1997, is stronger now than a year ago, having profited from high global food and fuel prices. A few signs of conspicuous consumption by the small urban middle class — satellite TV dishes, hip-hop music and fashions — are seeping down from the much smaller class of multimillionaire businessmen directly tied to the junta’s chairman, Than Shwe.

Meanwhile, the broad mass of 50 million people remain among the poorest in the world. Myanmar ranks 132 out of 177 countries in the 2007 United Nations Development Program’s Human Development Index. Most experts, who doubt the government’s statistics, think the reality is worse.

Myanmar is also one of the only countries to be publicly denounced for human rights abuses by the otherwise confidential and neutral International Committee of the Red Cross. According to Amnesty International, more than 2,100 political prisoners languish in Myanmar’s jails, about 1,000 having been locked up in the past year.

But more than ever, satellite TV and the Internet are making people aware of their government’s glacial pace of progress. One young woman told me that during last year’s uprisings, she was on the streets one day, shouting antigovernment slogans, and the next day stayed in, fearing a stray bullet, as she watched the blood-soaked crackdown live on Al Jazeera television.

Additionally, China seems uninterested or unable in pushing Myanmar's government to make accommodations to democracy.

Democracy advocates in exile hold out hope that China, which is Myanmar’s largest trading partner and its ally on the United Nations Security Council, could become the linchpin for changes in the regime.

But most Burmese I spoke with on my two-week visit didn’t think China would ever yield to Western pleading for it to play such a role. Business with China is booming, in fact, partly because tighter Western sanctions have made the junta more dependent on China for diplomatic support, as well as arms and consumer goods.

The same can be said of the Association of Southeast Asian Nations, or ASEAN. Myanmar's government continues to export jade. Mainland Chinese and diaspora Chinese in Southeast Asia continue to use jade jewelry.

Prospects for improvement in Myanmar's political situation look dim. Admittedly, pressure from China and ASEAN might not do the trick. North Korea is known as the hermit kingdom, and Myanmar is basically similarly isolated. However, as long as the Chinese government and ASEAN continue to ignore the junta's continuing atrocities, Myanmar will remain a stain on their human rights record.

Thursday, October 23, 2008

Alan Greenspan concedes he “made a mistake” in trusting that free markets could regulate themselves without government oversight

In an NY Times article, Alan Greenspan conceded he “made a mistake” in trusting that free markets could regulate themselves without government oversight.

But in a tense exchange with Representative Henry A. Waxman, the California Democrat who is chairman of the committee, Mr. Greenspan conceded a more serious flaw in his own philosophy that unfettered free markets sit at the root of a superior economy.

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.

Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”

Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.

“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

On the contrary, it's been obvious for years that markets cannot effectively regulate themselves in all circumstances, or produce socially desirable results all the time. Alan Greenspan should have known but he chose to ignore the evidence.

Saturday, October 18, 2008

Wall Street Journal: Bernanke is fighting the last war

In an interview with Brian Carney of the Wall Street Journal, Anna Schwartz argues that the U.S. Federal Reserve and Treasury are going at solving the crisis the wrong way. She argues that the problem is a crisis of confidence - i.e. banks don't trust the creditworthiness of potential customer or other banks enough to make loans - but that the Fed is attacking the crisis as if the problem was a liquidity crunch, i.e. not enough money.

The latter was true during the Depression. She argues that it isn't true now, and that the Fed and Treasury should have executed the original bailout plan, which involved purchasing mortgage related securities from banks. Instead, the Fed has cut interest rates and the Treasury is making direct investments in banks. If she's right, the Fed and Treasury are basically keeping afloat firms which should be insolvent.

She further argues that accommodative monetary policy (i.e. expanding the supply of money by keeping interest rates low) produces asset bubbles (e.g. tech and housing bubbles), and that central banks should maintain cautious monetary policies so that they don't develop. She takes issue with Alan Greenspan, who once said, "There is a fundamental problem with market intervention to prick a bubble. It presumes that you know more than the market." In other words, he probably believes that central banks can not safely deflate an asset bubble.

Schwartz doesn't explicitly say in the article that a central bank should intervene to deflate an asset bubble (probably by raising interest rates). However, I believe she implies that central banks should not allow them to inflate in the first place. If she is right that the Fed and Treasury are currently fighting the wrong battle, then we might expect another asset bubble to inflate down the road. It's impossible to predict what it will be, although one person I talked to speculated that it would be in the alternative energy industry.

I do not specialize in macroeconomics and cannot thoroughly assess the soundness of Schwartz's arguments. I suppose only time will tell.

Schwartz, 92, (still!) works at the National Bureau of Economic Research. She co-authored the book A Monetary History of the United States with Milton Friedman; the book chronicled the history of the Great Depression.

Friday, October 17, 2008

Joe the Plumber and tax advice

Much was made over the situation of Joe, a plumber in Ohio mentioned repeatedly in the last US Presidential debate. Joe claimed to want to buy a plumbing business that was making over $250,000 a year. He wondered if Sen. Obama's plans would raise his taxes.

Economix, the economics blog for the NY Times, explains some aspects of accounting and tax code that relate to Joe. If his business is indeed making over $250,000 in profit (not revenue), his taxes would go up under Obama. Under McCain, they would fall. However, small businesses making profits over $250,000 annually are quite rare. The Tax Policy Center believes that only about 2% of small businesses would be taxed at a higher rate.

Additionally, taxation in the US (and most countries) is done by bracket. For US income tax, one pays 10% on the first $8,000 or so of personal income, 15% on the next $8 or 9 thousand, and so on. In Joe's case, only profits that come above whatever the cutoff is would be taxed at the higher rates Obama is proposing for the top two corporate or personal tax brackets.

Readers further interested in the horrendously complicated US tax code can dig into the article for the difference between S- and C- corporations.

In any case, the US Bureau of Labor Statistics reports that the mean annual wage for a plumber is just over $47,000. Joe's operation is reported to be a two person shop in other news articles. Obama is indeed proposing to cut personal income taxes on the majority of the US population and corporate taxes on most small businesses.

Thursday, October 16, 2008

More satire

Toxins found in car of Russian human rights lawyer who represented Anna Politkovskaya

Vials of mercury were found in the car of Karinna Moskalenko, a lawyer who represented Anna Politkovskaya, a journalist who investigated Russian atrocities in Chechnya, among other things. Politkovskaya was murdered, and there's reason to believe it was an assassination.

Pretrial hearings into Politkovskaya's killing began Wednesday at a Russian military tribunal, but Moskalenko was unable to be there as she was ill.

Anna Stavitskaya, another lawyer representing the Politkovskaya family, said the mercury might have been part of an attempt to intimidate Ms. Moskalenko.

In New York, the Committee to Protect Journalists said it was “deeply concerned” about her welfare, citing news reports saying Ms. Moskalenko “was the target of an apparent poisoning in Strasbourg” and “had felt weak for several days.”

Ms. Moskalenko spends much of her time in Strasbourg, in eastern France, pursuing cases at the European Court of Human Rights, according to the radio station. Some of her cases have been on behalf of Chechens complaining of human rights abuses. She has represented Mikhail B. Khodorkovsky, the jailed oil tycoon. According to the Committee to Protect Journalists, Ms. Moskalenko’s clients included Garry Kasparov, the former chess champion who has become an opposition political leader in Russia, and Mr. Litvinenko, the former K.G.B. officer.

At the hearing in Moscow, a judge refused a request by lawyers for Ms. Politkovskaya’s family that the session be delayed because of Ms. Moskalenko’s illness.

Two Chechen brothers, Dzhabrail and Ibragim Makhmudov, are accused of conducting surveillance of Ms. Politkovskaya. A former police officer, Sergei Khadzhikurbanov, is accused of providing technical help. All three deny the charges.

Ms. Politkovskaya’s supporters argue that a third Chechen, suspected of shooting her, is on the run.

The court failed to decide whether to allow news media access to cover the trial, which is being held at a military court in Moscow, the authorities say, because of Mr. Khadzhikurbanov’s former ties to law enforcement.

Ms. Stavitskaya said that while she would like the trial to be opened to journalists, she did not think the court would allow it.

“They have no basis for closing the trial,” she said. “We want this to be accessible to the people, so that they can reach their own conclusions.”

The next hearing is set for Nov. 17, with jury selection scheduled for the following day.

Muhammad Yunus: let the system correct itself

Muhammad Yunus, interviewed by Businessweek, disapproves of the government assisting the financial system in the US. He believes the market can and should correct itself. He also believes the markets should restructure themselves along the lines of social businesses, like his own Grameen Bank.

The guy has a PhD in economics from Vanderbilt University in the US, and is a Nobel Peace Prize winner. He's no fool. However, I disagree that the markets in the US have the capacity to think along the lines of social businesses.

Wednesday, October 15, 2008

Executive compensation rules probably won't hold down CEO pay

CNN Money explains that the executive compensation rules used in the latest financial rescue package (where the government is investing directly in banks) probably won't hold CEO compensation down significantly.

Tuesday, October 14, 2008

Bailout part 2

The U.S. Treasury has changed course and is investing directly in banks. Retail banks are typically levered 10 to 1, meaning $10 of debt per dollar of equity, equity being retained earnings or direct investments. The government is purchasing preferred stock in all the major US banks, which goes directly to equity. In theory, this will enable each bank to lend out up to 10 times the amount invested.

Preferred shares pay dividends to the owners, which in this case are US taxpayers. The terms are not punitive to existing shareholders, but they do protect the taxpayer. Additionally, there are some executive compensation restrictions for banks who participate (and the large banks like Bank of America, Citigroup and JP Morgan don't have a choice but to). The restrictions look fairly reasonable. Other banks may apply to participate. The Treasury decided to force this on the largest banks so as not to give the impression that any one of them is weak and spark a crisis of confidence.

The government will be using $250 billion to do this. Presumably, purchasing dodgy assets is still an option on the table. It turns out that it was the right thing for Congress to decide to give the Treasury the option to do this; Paulson initially requested authority only to purchase dodgy assets. Even if Congress had immediately signed off on Paulson's original request, it doesn't look like the Treasury would have been able to move fast enough so that Paulson's less invasive original plan would have sufficed. It was unclear what assets the Treasury was going to buy and what it might pay. It could have taken too much time to decide that. Investing directly in the banks was a lot quicker; it looks like Paulson just called everyone in and got them to agree.

At present, I think the plan looks reasonable. It remains to see what the effects will be. The Dow may have been up 900 points yesterday, but over short periods the markets can react in unpredictable ways.

Edit: The preferred shares yield 5% for the first 3 years and 9% thereafter. This encourages companies to redeem the shares. The government also gets warrants to purchase a certain number of shares at current market prices. This essentially means taxpayers get the opportunity to profit some time down the road - assuming nothing goes horribly wrong.

5% is below the rates that banks were able to borrow at before the crisis. The US government is able to borrow lower than that, though, so this part of the program is generating a small return. The US Treasury's website shows that the US government would be paying around 2% if it issued new 3 year Treasury bonds.

The Community Reinvestment Act

The Community Reinvestment Act is a U.S. law whose objective is to encourage financial institutions to make loans in low to moderate income (LMI) geographic areas. There is a socioeconomic and racial justice angle to this, as banks might otherwise take deposits in LMI neighborhoods and loan them out in richer neighborhoods. This represents in some ways an outflow of capital from poor people to finance crap for rich people.

Banks would have their loan patterns reviewed by regulators. There were no specific penalties for noncompliance. However, CRA ratings were made public. Regulators were allowed to consider performance under the CRA when approving or rejecting merger or other expansion requests. Regulatory changes under the Clinton administration allowed community groups better access to CRA information and increased rights to protest against banks. In the US, community group protests can have significant regulatory impact. Of course, minority communities often get trampled; for example, they may be frozen out of the hearing process when an industrial or waste disposal company is attempting to clear a hazardous waste site.

The notoriously right-wing Investors Business Daily has an editorial attempting to blame US government interference in the markets on the subprime crisis. They include the Community Reinvestment Act, saying that it forced lenders to loan increasing amounts of money to people who couldn't pay it back. The corollary is that the CRA must then have contributed to the increasing number of defaults that caused the subprime crisis. One conservative commentator accused accused Congress of forcing lenders to substitute identity politics for financial prudence.

Although there is mixed information about the effectiveness of the CRA at increasing affordable loans to LMI households, I doubt that the CRA contributed in a significant way to the subprime crisis.

There is a mutual fund, the CRA Qualified Investment Fund (CRAIX) that invests in securities that support community development activities. Investments in the fund are deemed to be qualified under the CRA; CRA-subject financial institutions can invest in the fund to meet some of their CRA obligations.

Year to date as of 10/13/08, according to Morningstar data, the fund is up 1.49%, which is 9% ahead of intermediate term bond funds. In 2007, the fund was up 5.8%, which was 1.1% ahead of intermediate term bond funds. If borrowers in CRA loans couldn't pay, then we would not expect the fund to have performed so well this year. 9% ahead of its peer group is a lot, placing the fund in the 2nd percentile of peer funds this year. That means it's outperforming 98% of similar funds.

Additionally, the law firm Traigler and Hinckley has published a study on CRA loans in the 15 largest US metropolitan areas. They find that, using 2006 data, banks making loans in their CRA assessment areas were much less likely to make high cost loans, charged less on the high cost loans they did make, and were more likely to retain those loans in their portfolios. Securitization has contributed significantly to the subprime crisis; it reduced the incentive for lenders to be thorough about checking creditworthiness. As the CRA Fund demonstrates, those CRA-qualified loans that did get securitized seem to be performing well (at least, the ones the fund bought). The fact that banks are less likely to make high cost loans is also significant.

Additionally, Aaron Pressman reminds us in his blog for Businessweek that 50% of all subprime loans were made by independent mortgage lenders not subject to the CRA. Another 30% were made by subsidiaries of banks or thrifts that were also not subject to the CRA.

The burden of proof, then, is on the folks with an agenda against making affordable loans to LMI householders to show that the CRA made a significant contribution to this crisis. It's telling that at the beginning of the last Presidential debate, the candidates were asked how the bailout plan was going to affect them. John McCain, who answered first, started by criticizing Fannie Mae and Freddie Mac. These firms definitely were mismanaged, but they don't bear the lion's share of the blame and were completely unrelated to the bailout. The conservatives with an agenda will always try to shift the blame to government entities and regulations, but we shouldn't be fooled.

I'll try to say more later about the actual effectiveness of the CRA at causing affordable lending to LMI households. The data isn't quite as clear there.

Monday, October 13, 2008

Morningstar: GM-Chrysler deal wouldn't drive value

In this video, Morningstar analyst David Whiston contends that a merger of GM and Chrysler wouldn't create any value for shareholders. He feels that the unions aren't likely to approve it unless they feel a refusal will drive one or both companies into bankruptcy. As a result, the companies aren't likely to reduce a lot of costs through synergies. A Businessweek article contends that a restructuring to form a viable company would severely harm Michigan's economy.

Whiston doesn't seem to dismiss the possibility that the US government will bail out GM and wipe out equity holders at the same time. Whiston feels that if the deal doesn't go through and if GM can't raise money through a stock offering or an external investment, they would be in financial distress by the middle of 2009.

Auto makers depend on a large network of dealers in the US. A bankruptcy by one or more of the Big 3 would have a ripple effect of driving many dealers into bankruptcy.

From a public policy perspective, one needs to consider if the auto manufacturers are an irreplaceable part of American industry. I don't think they do. The US is lucky to have a highly diversified economy. If GM, Ford, or Chrysler declare bankruptcy, I would hope the US government doesn't backstop them. It would be very painful, but it would be a terrible strain on taxpayers. From a national perspective, the best thing to do is probably to ride it out. If we assume that GM goes under, Ford may take some of their market share if it starts selling its popular European models in the US.

Unfortunately, the auto companies still form the backbone of the state of Michigan's economy. Unemployment is around 10% already. The state needs to diversify its economy, but if the mid-2009 prediction is right, it's already too late. Michigan's economy will be devastated.

Additionally, labor unions have played a significant role in opposing abuses of labor rights by business. That's not to say that the United Auto Workers haven't also played their part in mismanaging the companies (demanded far too high salaries, opposed higher fuel standards). However, they would be severely weakened if one of the Big 3 were to go. That would weaken their ability to oppose business abuses.

Now that the Dow is up 500 points we can afford to follow Jesus

I'm thinking of a conversation in the Vice Presidential debate. The candidates were asked what they would have to give up now that the US is putting down 700 billion dollars and more.

As usual, all the Presidential and Vice Presidential candidates were pretty vague. Joe Biden (Democratic VP candidate) said, though, that the administration might have to cut foreign aid.

If they cut foreign military aid, I wouldn't object. But the fact is that the US spends very little on foreign aid. In 2005, USAID's own site says that US foreign assistance was $27.5 billion. 14.2% of that went to the US Dept of Agriculture and 18.5% to the Dept of Defense. The former is probably the government purchasing food from farmers and giving it to poorer countries. The latter is military aid that probably went to purchase weapon systems from American manufacturers. In other words, just under a third of US foreign aid goes back to US entities, and the true amount of foreign aid is a drop in the bucket.

Even with the stock market crash, the US can well afford to follow Jesus' command: what you did to the least of these, you did to me.

Edit: No telling what's going to happen tomorrow, but the Dow was up 900 points at the close, not just 500. I guess we'd better follow Jesus really hard.

Singapore's barring of some activists prompts a protest

From From the New York Times. No two ways about it - this action by Singapore's government represents cowardice, not a desire for security.

WASHINGTON, Sept. 8 — The World Bank and the International Monetary Fund, two organizations that repeatedly praise the role of “civil society” activist groups in poor countries, have protested a decision by Singapore to bar representatives of several such groups at their meeting with the leaders of poor countries next week.

The action by Singapore was taken out of fear of protests and violence, according to the Singapore police. But several of those barred were invited by both the World Bank and International Monetary Fund to attend the meetings as part of a general effort in recent years to reach out to nongovernment organizations.

“We believe that all individuals who have been accredited to the annual meetings should be allowed to attend,” the two organizations said Friday. “We strongly urge the Singapore government to act swiftly and reverse their decision on entry and access to the meetings for these representatives.”

The State Department spokesman, Sean McCormack, said the United States understood Singapore’s concerns about security and recognized its sovereign right to handle it the best way it saw fit. But he called on Singapore “to be as flexible as possible” and let those groups accredited to attend do so “and express their views.”

Singapore generally has a low tolerance for political protests and unruly behavior, sometimes invoking extremely punitive laws against foreigners. The government previously banned outdoor protests at the meeting.

Accordingly, several groups have organized protests on the nearby island of Batam, a part of Indonesia, but it was not clear whether Indonesia would let them take place.

Leaders of the bank and the fund, established after World War II as the guardians of economic stability and poverty reduction, are due to meet with scores of finance ministers next week. Treasury Secretary Henry M. Paulson Jr. is to represent the United States, along with Ben S. Bernanke, chairman of the Federal Reserve board.

The move by Singapore was especially embarrassing for the bank’s president, Paul D. Wolfowitz, who has made his appeals for proper “governance” a cornerstone of his 15 months at the bank and called on poor countries around the world to strengthen the role of nongovernment organizations.

The annual meetings of the two organizations have been a focus of protests over the years by dissidents demonstrating against trade, environmental and economic policies of the richest countries of the world. Such protests have nearly shut down some meetings but in recent years the protests have been peaceful.

Both the World Bank and the International Monetary Fund have tried to quiet the rebellion by inviting groups to their meeting. For next week’s session, they have accredited nearly 500 representatives from more than 45 countries, they said Friday.

Among the individuals barred from Singapore was Antonio Tricarico, coordinator of an Italian group, Campaign to Reform the World Bank. The barred groups included the International NGO Forum of Indonesia, or Infid; Focus on the Global South, based in Thailand; and the World Development Movement, based in Britain.

“It’s completely astonishing,” Mr. Tricarico said, “in particular because the World Bank welcomed us to go and even our government cleared our participation.” He said he had never been involved in any violent protests.

The Singapore police issued a statement saying that the annual meetings of the bank and the fund would “attract the attention of many, not least those who may want to use the ready platform and presence of the international media to stage events that will pose a security threat to Singapore.”

Steven R. Weisman reported from Washington and Wayne Arnold from Singapore.

Sunday, October 12, 2008

A potential merger weighs on Detroit

The New York Times and other newspapers are reporting that General Motors is in preliminary talks with Chrysler to merge. It should be emphasized the talks are preliminary. I also heard that GM had approached Ford earlier.

My personal take is this: two declining auto manufacturers become one declining auto manufacturer. Great idea!

Still, many Detroiters believe it would be better for G.M. to swallow Chrysler before an outsider.

“Should this happen, look for a lot of bloodshed,” wrote one person who posted a comment on a local Web site called “However, it is better than another alternative — a Chinese company buys up Chrysler.”

It is just another measure of the impact of the old Big Three on a city that once symbolized the manufacturing muscle for the nation.

“Ten years ago, Detroit was under intense pressure, but it always had access to money to borrow in the market,” said Mr. Casesa. “Well, that’s just not true anymore. In this case, being poor has taken Detroit’s swagger away.”

Empowering women in Afghanistan

NY Times has a video on how women are gaining empowerment in Afghanistan.

Sunday, October 05, 2008

NYT Op Ed: Swedish spoken here

Tom Friedman writes an op-ed for the New York Times that every American should read. An excerpt:

I would also bet that more and more of the foreign investors who come our way are going to want to buy hard, tangible assets — skyscrapers, real estate and real companies — not just mutual funds, T-bills, bank stocks or other equities. No problem. Americans own assets all over the world; foreigners have long owned substantial positions in U.S. companies. That’s globalization — and now you are going to see globalization and financial integration on steroids. It should help us, but also change us.

“The next round of capital that comes in from abroad is going to be much more demanding and move into real assets,” argued Jeffrey Garten, professor of trade and finance at the Yale School of Management. “Being a bigger debtor nation means losing even more of our sovereignty. It means conducting our economic policies with an eye toward whether others approve. It means bearing the advice and criticism that we have dispensed ad nauseam to other countries for over half a century. It means far more intensive consultations with other capitals on our fiscal policies and our monetary policies.”

At the same time, added Garten, “Corporate decisions will become more sensitive to international factors, in part because more non-Americans will be on the governing boards.” Ultimately, this could make American industry even more globally competitive — but for those who can’t pass global muster or enlist global collaborators, the consequences could be harsh.

US appeas NJ Muslim cleric case

The Associated Press reports that the US Immigration and Customs Enforcement department is appealing the case of Mohammed Qatanani to the Board of Immigration Appeals.

In a case that could erode hard-won trust between Muslims and law enforcement, the government is appealing the case of a Muslim leader who won his fight to remain in the United States.

U.S. Immigration and Customs Enforcement wants the Board of Immigration Appeals to review the decision to stop the deportation of Mohammad Qatanani (KAH'-tah-NAH'-nee), a leader accused by some federal officials of having terrorist ties but praised by others as being an important ally.

Qatanani, 44, won his fight to gain permanent U.S. residency in September, when a federal immigration judge determined the government's case against the Palestinian was too weak to prove he had any ties to extremist groups.

I hope that the US Muslim community will remember to distinguish Immigration and Customs Enforcement from regular law enforcement. ICE is a bunch of rabid dogs.

Friday, October 03, 2008

A Memo found in the Street

From Barrons.

Uncle Sam the enabler.

To: Washington, D.C.
From: Wall Street
Re: Credit Crisis

Dear D.C.,

WOW, WE'VE MADE QUITE A MESS OF THINGS here on Wall Street: Fannie and Freddie in conservatorship, investment banks in the tank, AIG nationalized. Thanks for sending us your new trillion-dollar bailout.

We on Wall Street feel somewhat compelled to take at least some responsibility. We used excessive leverage, failed to maintain adequate capital, engaged in reckless speculation, created new complex derivatives. We focused on short-term profits at the expense of sustainability. We not only undermined our own firms, we destabilized the financial sector and roiled the global economy, to boot. And we got huge bonuses.

But here's a news flash for you, D.C.: We could not have done it without you. We may be drunks, but you were our enablers: Your legislative, executive, and administrative decisions made possible all that we did. Our recklessness would not have reached its soaring heights but for your governmental incompetence.

THIS MEMO PROVIDES A BRIEF HISTORY OF your actions that helped create this crisis.

1997: Federal Reserve Chairman Alan Greenspan's famous "irrational exuberance" speech in 1996 was somehow ignored by, um, Fed Chairman Greenspan. The Fed missed the opportunity to change margin requirements. Had the Fed acted, the bubble would not have inflated as much, and the subsequent crash would not have been as severe.

1998: Long Term Capital Management was undercapitalized, used enormous amounts of leverage to purchase all manner of thinly traded, hard-to-value paper. It failed, and under the authority of the Federal Reserve a "private-sector" rescue plan was cobbled together. Had these bankers suffered big losses from LTCM, they might have thought twice before jumping into the exact same business model of undercapitalized, overleveraged, thinly traded, hard-to-value paper. Instead, they reaffirmed Benjamin Disraeli's famous aphorism: "What we learn from history is that we do not learn from history."

1999: The Financial Services Modernization Act repealed Glass-Steagall, a law that had separated the commercial-banking industry from Wall Street, and the two industries, plus insurance, came together again. Banks became bigger, clumsier, and hard to manage. Apparently, risk-management became all but impossible, even as banks had greater access to larger pools of capital.

2000: The Commodities Futures Modernization Act defined financial commodities such as "interest rates, currency prices, and stock indexes" as "excluded commodities." They could trade off the futures exchanges, with minimal oversight by the Commodity Futures Trading Commission. Neither the Securities and Exchange Commission, nor the Federal Reserve, nor any state insurance regulators had the ability to supervise or regulate the writing of credit-default swaps by hedge funds, investment banks or insurance companies.

2001-'03: Alan Greenspan's Fed dropped federal-fund rates to 1%. Lulled into a false belief that inflation was not a problem, the Fed then kept rates at 1% for more than a year. This set off an inflationary spiral in housing, and a desperate hunt for yield by fixed-income managers.

2003-'07: The Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability. The borrower's ability to repay these mortgages was replaced with the lender's ability to securitize and repackage them.

2004: The SEC waived its leverage rules. [Ed: see below] Previously, broker/dealer net-capital rules limited firms to a maximum debt-to-net-capital ratio of 12 to 1. This 2004 exemption allowed them to exceed this leverage rule. Only five firms -- Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley -- were granted this exemption; they promptly levered up 20, 30 and even 40 to 1.

2005-'07: Unscrupulous home appraisers found that they could attract more business by inflating appraisals. Intrinsic value was ignored, so referrals kept coming in. This helped borrowers obtain financing at prices that were increasingly unsupportable. When honest appraisers petitioned both Congress and the bureaucracy to intervene in the widespread fraud, neither branch of government acted.

THERE'S ACTUALLY A LOT MORE we could add to these items. We could mention impotent supervision of Fannie and Freddie by the Office of Federal Housing Enterprise Oversight; the negligent oversight on ratings agencies; the Boskin Commission's monkeying around with how inflation gets measured; the "Greenspan Put," etc.

We could mention former Fed Governor Edward Gramlich, who warned about making home loans to people who could not afford them, and who said the runaway subprime-mortgage industry would create problems in housing and the credit markets. But Gramlich was up against a Fed chairman who apparently believed that markets can regulate themselves. (Gramlich died last year, three months after the housing bubble started to deflate.)

We on Wall Street do not deny our part. We created these securities, we rated them triple-A, we traded them without understanding them. Now that they have gone bad, we are real close to getting the rest of the country to take them off our hands.

Thanks, D.C. None of this would have been possible without you.

Very truly yours,
Wall Street

Editor: The NY Times has an article that discusses in more detail the SEC relaxing capital requirements. It looks like the big investment banks lobbied hard, and the SEC failed to give full consideration to the issue. Additionally, the SEC acquired some oversight authority over the investment banks but failed to exercise it. They simply let the banks oversee themselves. Of course, this turned out to be a mistake.

Sen. McCain's heated statement that SEC Chairman Christopher Cox should be fired may have been on point after all, but it's an issue that should have come up earlier.

Wednesday, October 01, 2008

Brother, can you spare a loan?

Outrage at the prospect of bailing out Wall Street fat cats, Americans flooded their representatives' offices with angry calls. The emergency legislation that would have committed up to $700 billion to purchase mortgage backed assets failed.

The problem is, this isn't quite about bailing out fat cats. For one, the companies most responsible for the mess have generally gone bankrupt, been effectively nationalized, or been taken over by other companies: AIG, Lehman Brothers, Fannie and Freddie, Wamu, etc.

Second, the main issue right now is that banks are not lending to businesses. Businesses depend on credit. You need a loan to start a business. Your business draws on a line of credit to pay for its inventory before converting that to sales.

The New York Times reports that numerous small businesses are facing a credit crunch. Many have problems getting credit. Interest rates on existing lines of credit are increasing rapidly.

Although experts do not yet have hard data about how the financial turmoil of the last few weeks may hamper entrepreneurs’ access to capital, many were already having difficulties getting financing before the escalation in the credit crisis.

By now, financing options for all stages of the small-business cycle are limited. Typically, start-ups and unprofitable companies have relied on credit cards and home equity loans. As their businesses thrived, they often turned to bank credit lines. And when it was time for the next big growth spurt, they usually got a small-business loan. But all of these options are less feasible now than they were a short while ago.

For example, after a quarterly survey of senior loan officers in July, the Federal Reserve reported that 65 percent of domestic banks said they had tightened their lending standards for small-business loans over the previous three months. At the same time, 70 percent told the Fed that they were charging more for those loans.

And in an August opinion poll, two-thirds of entrepreneurs told the National Small Businesses Association that their companies had been hurt by the credit crunch. Todd McCracken, the organization’s president, said that members tended to own larger and more profitable businesses, so he thought that the credit crunch was probably having an even greater impact on America’s small businesses.

The third issue is that the Treasury is probably not going to buy these assets at a price which makes the banks whole enough that they can go back to giving lavish bonuses. If the banks sell at current market prices, which reflect the price someone might pay in a panicked fire sale, they will need to take large writedowns and raise lots of additional capital. Ben Bernanke, chief of the Federal Reserve, proposed to pay a price which reflects an investor holding the security until it matures - still less than face value, but more than market value. Once they lose the securities from their balance sheets, banks will be more able to lend money to consumers and businesses.

A recent article on Alternet sharply criticized the "bailout", which should more appropriately be termed a rescue.

I find a number of Alternet's criticisms to be off-base. I might address them in future. However, we need to resolve the credit crisis, as this NYT article points out.

The current, more serious stage of the crisis began two weeks ago today, after the collapse of Lehman Brothers and the Fed’s takeover of the American International Group. Those events created a new level of fear. Banks cut back on making loans and instead poured money into Treasury bills, which paid almost no interest but also came with almost no risk. On the loans they did make, banks demanded higher interest rates. Over the past two weeks, rates have generally continued to rise — and these rates, not the stock market, are really what you should be watching.

The current fears can certainly seem irrational. Most households and businesses are still in fine shape, after all. So why aren’t some banks stepping into the void and taking advantage of the newly high interest rates to earn some profit?

There are two chief reasons. One is fairly basic: bankers are nervous that borrowers who look solid today may not turn out to be so solid. Think back to 1930, when the American economy seemed to be weathering the storm.

The second reason is a bit more complex. Banks own a lot of long-term assets (like your mortgage) and hold a lot of short-term debt (which is cheaper than long-term debt). To pay off this debt, they need to take out short-term loans.

In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending that short-term credit. This, in a nutshell, brought about Monday’s collapse of Wachovia and Glitnir Bank in Iceland. To avoid their fate, other banks are hoarding capital, instead of making seemingly profitable loans. And when capital is hoarded, further bank failures become all the more likely.

The crucial point is that a modern economy can’t function when people can’t easily get credit. It takes a while for this to become obvious, since most companies and households don’t take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further.

The rescue plan is no guarantee. However, doing nothing isn't an option either. The U.S. did nothing in the Great Depression, which is why that turned out so monumentally badly. Japan responded very slowly to its crisis in the 1990s, and the 90s are known as the lost decade in Japan.

We can debate some specifics. Conservative economists propose having the government capitalize the banks by buying preferred stock - that would inject capital directly into the banks. This could work, but there could be an issue of moral hazard, or of failing to punish the banks for their missteps. Liberal economists propose allowing the government to assume control of the mortgages directly and renegotiate the terms. This could destroy banks' trust in the mortgage process, making them less likely to lend in the future. It would also be a challenge to administer.

The original plan proposed by Hank Paulson seems a bit of a compromise. I don't think there's an ideal response in this situation, but I do take severe issue with the distrust on the Left of Paulson. The Alternet article seems not to distinguish him from the rest of the Bush administration. Admittedly, Bush and co are morally bankrupt and untrustworthy, and Paulson's demand for zero oversight was too much. However, the Treasury needs maximum flexibility to respond to the crisis. The oversight provisions that have recently been inserted will help. And there is no reason so far to assume that Paulson is acting in bad faith. The crisis is not manufactured, it is real. I've heard people point to the fact that somehow, Goldman Sachs (he was formerly CEO) has survived where a lot of banks have failed, and therefore his good intentions are questionable - that's nonsense, Goldman survived because its management team was sharp.

I continue to see the proposed rescue plan as a reasonable course of action, and I urge its passage.