“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Friday, September 28, 2007

Nervous Yet?

Still the Early Stages of Financial Reckoning
By David Ignatius Washington Post

"If something is 'unsustainable,' that means it won't be sustained." This bit of financial wisdom is attributed to the late Herbert Stein, a former chairman of the Council of Economic Advisers. And it comes to mind now, as a warning about the underlying problems of the financial markets.

Wall Street has been breathing a sigh of relief since the Federal Reserve cut interest rates last week by a half a percentage point. The Dow Jones average has regained much of the ground it lost in July and August -- including a 336-point jump the day the Fed announced its sharp rate cut, which was the market's collective shout of "whoopie!"

But among seasoned traders, I find a much gloomier mood. They warn that the Fed's actions will have only a limited effect on the imbalances in the financial markets. An analyst for last week asked Satyajit Das, an expert on exotic credit derivatives, whether we were in the third inning of the credit crunch. Das laughed and responded that we're still in the middle of the national anthem.

The best summary I've seen of the current financial picture is the September quarterly report by the Bank for International Settlements in Basel, Switzerland, which acts as a kind of executive committee for central bankers. It warned of the "dark shadow over global financial markets" caused by the collapse of the U.S. market for "subprime" mortgage loans, which was the industry's polite term for mortgages that didn't meet normal credit standards.

The credit market is still locked, months after the subprime problems became clear. Investors can't value their portfolios because they can't sell the underlying assets. Debt that was rated triple-A turns out to be triple-C. In the complex market of credit derivatives, traders tell me it can take weeks to figure out what positions are worth. "That's why the market has frozen up," explains the manager of one leading hedge fund. "We're still in the early stages" of this financial reckoning, he warns.

What's scary is that the financial system has become opaque as assets are bundled and turned into tradable securities. Once upon a time, getting a mortgage was a highly personal transaction: A lender in Des Moines, say, provided money to a local borrower whose income and credit history he knew well. If the borrower got in trouble, the lender could arrange a workout or other repayment terms. The system was transparent, and responsive.

Then the financial engineers took over: The mortgage now is often written by a national lender that has little contact with the borrower; then it is bundled with hundreds of other loans and turned into a tradable security. In theory, the new system spreads credit risk more efficiently, so that each investor can buy the level he wants. But because of deceptive credit ratings (generated by rating agencies eager for fat fees), it turns out investors didn't understand their actual risk positions. And how can they value assets if they can't sell them? That's the meaning of illiquidity.

A deeper problem worrying thoughtful investors is the fragility of the U.S. economy. We have become a nation that borrows abroad to maintain a level of domestic consumption we can't afford. If we were a developing economy, this shaky structure would have collapsed long ago, the way it did with Mexico and Thailand in the 1990s. But as the world's financial superpower, we have had the luxury of borrowing in our own currency. As long as China and other Asian nations are willing to hold our paper, the perpetual-motion machine seems to keep operating. But remember Stein's Law of Unsustainability.

A hot idea in international markets these days is "decoupling" from the U.S. economy. Investors look at the fundamentals and they see a crunch coming. So to the extent possible, they are selling assets that could be infected by future U.S. financial contagion. It's no accident, investors tell me, that the index of emerging-market securities hit an all-time high this week. That's the perverse new definition of a flight to safety -- Indian and Chinese investments.

Wall Street optimists count on the wisdom of the Fed's now battle-tested chairman, Ben Bernanke. With Treasury Secretary Henry Paulson and New York Fed President Tim Geithner, Bernanke has reconvened what under Alan Greenspan was dubbed "The Committee to Save the World." You want to believe that Bernanke & Co. will keep the whole loopy system going. But then you read that there are now half a quadrillion dollars in outstanding derivatives contracts, some of them instruments so complex that most CEOs don't understand them. Try to get your mind around that number -- $500 trillion -- and then tell me you're not a wee bit nervous.


  1. We're already balancing cups and spinning plates while doing backflips on a tightrope. Might as well throw another shrimp on the barbie.

  2. "The sky is falling, the sky is falling. It hit me on the head."

    I have heard and read the gloom and doom news all my life. It can be paralyzing.

  3. F-EM!
    Here's some positive news!

    The economy is poised to maintain a healthy pace of growth.

    By David Gitlitz

    The prophets of economic gloom have been out in force lately, convinced that the financial-market turmoil of recent months spells serious trouble for the broader economy. With their pipeline to the mainstream media, the gloomsters have largely succeeded in establishing as accepted wisdom the notion that the economy is heading for a big slowdown, if not outright recession." Read the rest at NRO

  4. No one is moving to China, nor India.

    but nervous, better believe it.

    Balanced on a razor's edge.
    It's easy to imgaine either falling, or getting cut.

    King of the Hill, wonder if kids still play that game.

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  6. Big John McCain.
    Not totally foolish, scored higher on that candidate test than Ms Clinton, he did.

    ... while most of the world’s known reserves are in the Persian Gulf, oil supplies are no more secure elsewhere on the globe. In Russia and Venezuela, Vladimir Putin and Hugo Chavez have rolled back democracy and utilized oil and gas as foreign policy weapons. Nigerian supplies — our fifth-largest supplier — are endangered by internal strife. Oil’s availability is uncertain and its price at the mercy of countries where our values aren’t typically shared and our interests aren’t their first priority.

    We must not leave the “lifeblood” of America’s economy in the hands of foreign cartels, or bet our future on a commodity located in countries in which authoritarians repress their people, and terrorists find their main support. Terrorists understand the seriousness of our vulnerability. A little over a year ago, a suicide attack at a major Saudi Arabian oil refinery came close to disabling its target. Had the attack succeeded, some price experts speculated that it would have driven the price of oil above $150 dollars a barrel and kept it extremely high for some time.

    The flow of oil has many chokepoints — pipelines, refineries, transit routes, and terminals — most of which are outside our jurisdiction and control. Our enemies understand the effects on America of a significant disruption in supply — a crippled transportation system, gasoline too expensive for many Americans to purchase, and businesses closed. As we sacrifice blood and treasure, some of our gas dollars flow to the fanatics who build the bombs, hatch the plots and carry out attacks on our soldiers and citizens. Iran made over $45 billion from oil sales in 2005, and it is the number one state sponsor of terrorism.

  7. Ten Minutes of Video that EFFECTIVELY Debunks 3 years worth of intense BS
    Each time I watch that thing, I become more impressed by the fact that all those Non-Actors, from such a broad swath of the govt. could not possibly have produced something this authentic feeling if they were not describing Reality.

  8. WHIT: The economy is poised to maintain a healthy pace of growth.

    I don't believe it. America's economy is dependent on consumers borrowing money and spending it. Instead, we're paying for heating oil from cash on hand, and we can't borrow jack because credit is tight in the wake of the sub-prime fiasco. And taxes only go up from here.

  9. In the 1950's, nuclear power was going to bring us free energy.
    Now, open borders provide nearly free labor, Free trade produces nearly free slave produced, polluted products, and soon we will have Free Medicine!
    What's not to like about that?

  10. "Forty-four percent of American adults say that health care services should be made available for free to all Americans.

    Rasmussen Reports telephone survey found that 39% disagree, 17% are not sure; 52% say that reducing health care costs is a higher priority than making sure everybody's insured; 39% take the opposite view.
    Most Democrats, 57%, say that providing insurance for everybody is a top priority.
    Most Republicans, 71% -- and those not affiliated with either party, 52% -- say reducing costs should be the priority."

  11. "Poll:
    94% of American Males say that Keg Beer should be made available for free to all Americans.

  12. "Ten Minutes of Video that EFFECTIVELY Debunks 3 years worth of intense BS"

    That decision of Bremer's is, on the face of it, so extremely bone headed and illogical that I cannot help but to see convoluted conspiracy behind it.

  13. The flow of oil has many chokepoints.

    America understands the effects on its enemies of a significant disruption in supply — a crippled transportation system, gasoline too expensive for many consumers to purchase, and businesses closed.

    The effects of sabotage on pipelines would cripple the economies of Iran, Russia, and China.

    Disputes over oil were at the heart of Russia’s decision to go to war against Chechnya in 1994, because its sole operational pipeline for Caspian oil, which goes directly through troubled Dagestan and Chechnya, was under threat from the Islamic separatist forces. Islamic separatist forces will remain a threat for Russia on its south/southeastern flanks in the decades ahead.

    US Special Forces in the former Soviet Republics?

    The links of the “Pan Asian Global Energy Bridge" is another example. The east-west pipeline is China’s biggest infrastructure project after the Three Gorges Dam and difficult to protect against sabotage.

    The expansion of US influence in Eurasia poses a direct and immediate threat to China, because, among other factors, the expansion of the Chinese economy is directly dependent on access to petroleum. China’s oil needs are expected to nearly double by 2010,
    which will force the country to import 40 percent of its requirements, up from 20 percent in

  14. It all hinges on who walks into the White House on 1/1/09.

    If it's an (R), the media will be reporting that we are in a depression.

    If it's a (D), the media will be reporting on the long boom that began when congress went (D) in 2006.

  15. Peacekeeper:

    Against all advice, a small group of people, including the President, made a decision for which we have paid dearly ever since. The Dream of Democracy, you see, prevailed over reality.

    No way all these individual non-actors could have contributed in the authentic way they do in this video if they were not describing a reality.

    To hear the Col. describe the actual composition of the Army, in comparison with Bremmer's oversimplification in support of his rationalization, is to realize that this was the largest single contributor to the incitement of Sunni/Shia Violence.

    It will be recalled that Shia troops fought valiantly against Iran, seeing it at that time as more of a war of Iraqi Arabs against Iranian Persians, rather than Shia vs Shia.
    The Col makes plain that many officers were Shia, putting the lie to decriptions of a Sunni dominated force.

  16. On Cats and Dogs:

  17. And now we know why Tes loves chasing pussy. :D

  18. The Entitlements People.

    Doubt we'll be in 100+ countries after the great generational entitlement heist breaks.

  19. From Cutler's link:

    The Entitlements People

    Published: September 28, 2007

    If you live in Washington or just visit for a few days, you may run into the entitlement people. Some of them are former senators, cabinet officers or other previously powerful folks. Others are maverick members of Congress or agency heads, who are not in a position to set policy but are prominent enough to get noticed.

    They bombard you with alarming statistics about unsustainable entitlements. The U.S. government has $43 trillion in unfunded liabilities, or $350,000 for every taxpayer. Standard & Poor’s projects that in 2012, the U.S. will lose its AAA bond rating...

  20. I guess that $5,000 bonus would cover the babies of illegals as they are Automat Americans as soon as they cross the birth canal.

  21. Deuce: Standard & Poor’s projects that in 2012, the U.S. will lose its AAA bond rating...

    So where are the investors going to stick their money? Europe, in the shadow of Putin and the Jihad-from-within? Japan, where the population is both shrinking and aging? China, where the communists can nationalize assets at the drop of a hat? The US will retain AAA status no matter how much she declines simply by remaining a better alternative than any foreign craphole.

  22. Ms. T, not if the US dollar keeps devaluing and right now it looks like it'll keep going that way. You print enough of the stuff and it'll become worthless.

  23. Actually, the Fed hasn't been printing all that much money.

    Money supply growth got all the way down to 2% this year. The dollar is shrinking because we're shipping money out the door to pay for oil faster than the oil exporters can invest it back in the U.S. The dollar must shrink to accomodate this situation.

  24. In truth, capitalist economies are far from stationary, and for evidence we need only look to a graph in the latest issue that shows the makeup of the first Forbes 400 in 1982 compared to the latest.

    Back then most American fortunes were in the oil and manufacturing space, while technology was mostly an afterthought. Fast forward to 2007, technology trumps oil, and the largest wealth concentration is within the area of finance and investments. With the Dow Jones Industrial Average having fallen to a modern low of 743 in 1982

    It was above 13,000 yesterday, was it not?
    What's 43 trillion unfunded liability to an economy that boasted over 25% of the world's economic activity in 2006 with a GDP of
    $13,244,550,000,000 vs a liability

    Only 3 years current cash flow.

    With what, a forty year payout on that $43 trillion? It's a Ponzi scheme without end. As long as the population grows modestly and productivity improves.

    A little inflation, a cutback here or there. It's all good

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  26. This is a simple color coded graphic that tells a similar tale.
    Who has the furthest to fall?

    The US is three times the the size of Japan, in economic activity and in numbers of people

    1 United States $13,244,550
    2 Japan $4,367,459
    3 Germany $2,897,032
    4 People's Rep of China $2,630,113

    China, with four times the population & 20% of the economic activity.

    Mexico, #14 in economic activity, with a GDP of $840 Billion, 110 million people, 10 million of which are living in the US.

    Canada, at #8 with $1.269trillion with over 30 million people, same ratio as US.

    Gotta bring up Mexico's numbers to stabilize he migration

  27. I missed this when it happened, the best and the brightest, who's to judge?
    I spent my share of time both behind the wheel and in the bed of 5-Ton dump trucks.
    Rollin' one and crushin' the passengers, damned shame.

    WASHINGTON, Sept. 12 — “Engaging in the banalities of life has become a death-defying act,” the seven soldiers wrote of the war they had seen in Iraq.

    They were referring to the ordeals of Iraqi citizens, trying to go about their lives with death and suffering all around them. But sadly, although they did not know it at the time, they might almost have been referring to themselves.

    Two of the soldiers who wrote of their pessimism about the war in an Op-Ed article that appeared in The New York Times on Aug. 19 were killed in Baghdad on Monday. They were not killed in combat, nor on a daring mission. They died when the five-ton cargo truck in which they were riding overturned.

    The victims, Staff Sgt. Yance T. Gray, 26, and Sgt. Omar Mora, 28, were among the authors of “The War as We Saw It,” in which they expressed doubts about reports of progress.

    “As responsible infantrymen and noncommissioned officers with the 82nd Airborne Division soon heading back home, we are skeptical of recent press coverage portraying the conflict as increasingly manageable and feel it has neglected the mounting civil, political and social unrest we see every day,” the soldiers wrote.

    Sergeant Gray’s mother, Karen Gray, said by telephone on Wednesday from Ismay, Mont., where Yance grew up, “My son was a soldier in his heart from the age of 5,” and she added, “He loved what he was doing.”

    The sergeant’s father, Richard, said of his son, “But he wasn’t any mindless robot.”

    Damn shame, two more good men down.

  28. rufus,

    I'm curious as to your source for the money supply growth. wiki seems to place it at a higher rater then that.

    While I agree that a discussion of money supply is a rather simplistic approach so too is pegging it all on oil.

    The basic idea that the current account deficit coupled with the government deficit underpinned by a low interest rate policy makes it difficult for foreigners to want to hold on to US dollars. The fact that the US dollars is basically the exchange currency has enabled the US to weather the massive deficits so long. I believe the only relevant historical precedent is the debt of the British Empire before its collapse. Usually a countries currency will collapse much sooner (i.e. Argentina) but the US has the mitigating factor as being the exchange currency. If oil were no longer denominated in US dollars it would add to the downward pressure on the US dollar since US dollars would not need be bought to make the transaction.

    In addition to the fact that a large part of the manufacturing base has been moved out of the US it is hard to see how the US can go forward successfully without a major restructuring. Lets hope the restructuring is an orderly affair.

    In response to Whit's remark 'he's heard the doomsaying over and over and over' I agree but, like with bubbles (tech bubble, housing bubble) one sees it and is amazed at how long it takes to burst. Some called those bubbles early and for a long time and were often dismissed as pessimistic naysayers ignoring the 'new paradigm'.

    There is no free lunch.

  29. Another was a member of the "Latin Brigade", a legal immigrant from Ecuador, that died in Iraq for the Stars & Stripes.

    Sergeant Mora’s mother, Olga Capetillo of Texas City, Tex., told The Daily News in Galveston that her son had grown increasingly gloomy about Iraq. “I told him God is going to take care of him and take him home,” she said.

    A native of Ecuador, Sergeant Mora had recently become an American citizen. “He was proud of this country, and he wanted to go over and help,” his stepfather, Robert Capetillo, told The Houston Chronicle. Sergeant Mora leaves a wife, Christa, and a daughter, Jordan, who is 5. Survivors also include a brother and a sister.

    "Comin' to America"

    Either control the access to the US but retain the vitality, or breed more babies here at home.

    We're gonna need a lot more men, men like Sgt Mora.

    Fighting soldiers, from the sky
    Fearless men who jump and die
    Men who mean just what they say
    Brave young men in maroon berets

  30. Ahmadinejad: Bush can speak at a university if he should ever travel to Iran

    The Associated Press
    Friday, September 28, 2007

    TEHRAN, Iran: Iranian President Mahmoud Ahmadinejad has extended an invitation to U.S. President George W. Bush to speak at an Iranian university if the American leader ever traveled to the Islamic Republic, state-run television reported Friday.

    As part of his controversial trip to New York, the hardline Iranian leader spoke Monday at Columbia University, where he faced hostile questioning and a combative introduction by the university's president, who said Ahmadinejad exhibited "all the signs of a petty and cruel dictator."

    "If their president plans to travel to Iran, we will allow him to make a speech" at a university, Ahmadinejad told state TV before leaving New York to travel to South America earlier this week.



    I'd buy that on Pay Per View, wouldn't you?

    "To hear the Col. describe the actual composition of the Army, in comparison with Bremmer's oversimplification in support of his rationalization, is to realize that this was the largest single contributor to the incitement of Sunni/Shia Violence.

    "It will be recalled that Shia troops fought valiantly against Iran, seeing it at that time as more of a war of Iraqi Arabs against Iranian Persians, rather than Shia vs Shia.
    The Col makes plain that many officers were Shia, putting the lie to decriptions of a Sunni dominated force."

    But if the Army was nationalist in nature, how explain the largely Sunni insurgency?

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  32. The ethnicity of the rebuilt Army was what?

    Largely Shia, as I recall.

    I recall Col North, almost two years ago, now, with a Sunni Commander that had reconstituted his old Unit.

    The solution was not to be found in retaining the old Army and it's structure. That'd have been very problematic.

    The reconstruction of the Iraqi Security Forces, that has always been the primary mission if the goal is an Iraq that can assist in the War on Terror.
    That mission has been poorly managed, based upon results.

  33. "The reconstruction of the Iraqi Security Forces..."

    I think people might be inclined to overlook the years between 90 and 03 when evaluating the Iraqi Army in the advent and aftermath of OIF. That time including the Gulf War and the Shiia uprising.

    Hard to capitalize on the strength of a broken object.

  34. The only thing the fed controls is "monetary base." It's been growing at about 2% this year. It's been steadily shrinking since the post-911 "reflation."

    We not only manufacture more than anyone else in the world, we, also, manufacture more than we ever have. We just use fewer people doing it.

    We're using a million barrels/day, Globally, more than we're producing. We're doing this by drawing down inventories. This MUST result in Higher Prices for oil.We "Import" 13 million barrels of oil/day.

    We're shipping out money faster than they can invest it back. As a result, you have the owners of dollars selling them on the world market, buying currencies of countries in which they have investment opportunities. And, Gold, of course.

  35. What Does It Mean To Be A Jelly Bean?
    If the government redefines jelly beans as "jellied sugar lumps", does that mean there is a shortage of jelly beans when the report shows zero?

    Beware of Crooks in White Shirts and Ties

  36. The world's currencies have been undervalued for quite a while, vis a vie "fair market" value.

    If the dollar floats down, the prices of Chinese products, in dollars, will rise. The price of EU products, will increase in the US.
    While US products, Cat tractors, wheat, corn, intellectual properties, will become less expensive overseas.

    The market balancing for the Chinese reluctance to float their coinage.

  37. DR, how do you maintain that Chinese prices will rise vis a vis the US when the Yuan is pegged to the dollar?

  38. rufus, there are a lot of dollars the fed doesn't control the creation of. All that electronic stuff born of leverage ect.

  39. Because, ash, the Chinese will unpeg it, when the 80% of their exports are selling for less & less.

    That was one of the interesting points, the US made up 20% of the Chinese export market.
    By pegging to the dollar, the Chinese lose control of their economic pricing policies to the balance, a no no for a ChiCom, ideologically.

  40. I figured they'd unpeg the Yuan ages ago but, like bubbles, I was wrong. Still my China investments did good...

  41. "The reconstruction of the Iraqi Security Forces, that has always been the primary mission if the goal is an Iraq that can assist in the War on Terror."

    I don't think the War on Terror has much, if anything, to do with it. I don't think the War on Terror ever HAD much to do with it. Rolling an unfinished project into your 9/11 response does not that unfinished project a part of the War on Terror make. Though everyone who participates gets a War on Terror medal.

    And here we are.

  42. The phoniness of it all.

    Rather breathtaking.

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