The Curse of Political Parity

The period roughly stretching from the early 1950s, though the late 1970s, might be described as a political and legislative golden age in the United States. While there were plenty of rough spots, such as the two Cuban crises, Berlin and Vietnam, much good was done by government. The US successfully anchored NATO, countering a serious Soviet threat, nuclear missiles were removed from Cuba, the space exploration program was begun, and reached the moon. Medicare, and the civil rights, and voting rights acts, were passed and signed into law.

What made these many positive milestones possible? A permanent legislative minority. Republicans formed a “loyal opposition”, one that knew it could not achieve majority status in the near term. It's true that the two parties weren't nearly as far apart ideologically as they are now, but the long term minority status of a single party, in a two party system, led to a significant amount of true bipartisan cooperation. With no near term hope of winning a majority of seats in either house, there was no need for continuous legislative conflict in order to try to gain advantage in the next election.

This situation is long passed. Either party has a reasonable chance of gaining majority status in either house. The result is constant warfare on the part of the minority party, in each house, in an attempt to win a majority of seats in the next election. We see constant, highly charged, partisan guerrilla warfare, with the hope that the majority party will fail to accomplish anything, and can be held up to the electorate as such.

There is no likely cure for this condition. In fact, several factors make it probable that the situation will get worse.

1. The ideological divide between the two parties, and within the politically active electorate, has widened, and is moire likely to widen, rather than narrow. This ideological divide is itself being used to energize politically active supporters; this alone suggests that it will widen.

2. The federal government's involvement in funding and regulating daily activities has increased by several orders of magnitude since the early 1960s. This has created a “bigger pie” of issues over which the parties can fight.

3. The federal government, and many state governments, are rapidly approaching insolvency. Given the magnitude of government's role in the economy at all levels, both parties are heavily occupied with attempting to show how we can solve the fiscal train wrecks without real pain. There is no way. Politicians on both sides of the aisle are so frightened of the consequences of cutting any significant federal program, that Congress wouldn't even agree to form a bipartisan commission to study debt reduction. Such a commission is one of the last great refuges of political cowards, so our senators and congressmen must be really scared.

Where do we go from here? We don't go to any useful place. We keep hurtling toward the fiscal abyss, with the money throttle on high, and no serious possibility of a tax increase. Now, all together now, everyone raise their hand who thinks that Congress would use the proceeds from a tax increase to reduce the deficit, rather than increase spending. Hmmm... thought so.

Do We Understand Where We've Been in the Last Three Years?

Do we? Our investment banks are still dealing in derivatives, using a 30:1 leverage ratio. You didn't really think that that they could rack up such profits without using other peoples' money, did you? Since Senator Chris Dodd announced his retirement, he has been willing to consider some type of reforms, but given how bland and ineffective the reforms are likely to be, one might imagine that he could have the decency to speak on behalf of the public concerning how little reform we are likely to get, even under the best of circumstances. The Democrats, a clear majority in Congress, seem to be in single minded pursuit of the financial consumer protection agency. This will thoroughly mask the fact that there will be little reform of those elements that nearly brought down our economy. It's not treason, but it is disgusting.

A Note on the Picture

The photo of me appearing on the blog was taken about six years ago. I've not aged well since then.

Rational Market

Justin Fox has written a book called “The Myth of the Rational Market.” As one might imagine, it's carefully aimed at the recent financial ex/implosion. Fox thoroughly describes the theory and history of the rational market, that is, the theory that “markets” will tend toward behavior that will prevent them from collapsing. Fox shows the holes in this theory, but his assumptions and conclusions are only partially correct.

Markets are not homogeneous entities. They operate on multiple levels, with different levels exercising differing degrees of control over market behavior. Those in control of financial markets acted rationally. As financial markets expanded, they required more and more product. Derivatives, specifically those whose value were based on second and third order extensions to sub prime mortgages, filled the need for product. The beauty of these second and third order derivatives was that they required no additional entities of value in order to be created; they were based purely on faith in the value of the mortgages themselves, and on the underlying derivatives that were based on the underling mortgages. Still with me? Those creating these derivatives were well aware of their worthless nature. The goal was to sell the products quickly, getting them off the books, and in the process, generating a sales commission on every transaction. This made the originator of the product wealthy, while removing any responsibility for the product's future value from the originator. The originators had no need for future market health, as they no longer required a stake in the market. The new owners were just typical semi-passive residents of the back end of a speculative bubble. The entire rationale for the market's existence was simply to generate sales commissions, not to serve as a place where derivatives were traded. That trading was just a vehicle. In another time, the same traders might have dealt in precious metals (though they are problematic from a speculative point of view, since they do have some intrinsic value), tulip bulbs, or fictional railroad shares. It doesn't matter what the product is; whatever the product is, it simply has to exist at some existential level.

Ironically, investors in mortgage backed securities had ample opportunity to learn of their lack of worth. While brokers hyped these products, Gretchen Morgenson and Joe Nocera, of the New York Times, were accurately describing them as junk, at least two years before the crash. In another remarkable twist of irony, the banks and brokerage houses ended up caught with billions of dollars worth of these worthless securities (now so appropriately named toxic assets), while many of their own traders walked away with fortunes enough to retire to the French Riviera.

So, here we had the freest of free markets, wholly unregulated, thanks to the lobbying efforts of the investment houses and banks themselves. The investment houses could work with these derivative products in any way they saw fit, short of out and out fraud. The result? A web so tangled, with assets so arcane, that the CEOs of these investment houses couldn't understand them. They do conduct risk management at those brokerages and investment banks, don't they? Well no matter, the criminals who perpetrated this crime-less crime were made whole, their fortunes intact. Those who were sold this crap saw their fortunes, however slim, evaporate. The free market was very free indeed, punishing idiots, while rewarding those who understood the territory. The irony continues. Congressional windbags have had much to say about how bad things were, but they can't agree on regulation to prevent another blow up. The financial lobby still wants an unregulated derivatives market. Now that's the best Congress money can buy, and it's a market that has preserved itself. Caveat emptor? O tempora, o mores!

Committing National Suicide

According to the Times of London, the Swiss government is planning to crack down on what appears to be an epidemic of suicide tourism. I'm not familiar with the situation, but I suppose people from less enlightened countries, in need of ending their lives, can visit that alpine paradise to get the deed done.

We in the United States, however, needn't worry about raising the air fare from our shrunken pocketbooks. We are in the midst of committing national suicide. I know, know, people have been predicting the end of American civilization as we know it since the New Deal, or perhaps since the Wilson administration. This time the doomsayers maybe on to something, though.

We have adopted a perverse variant of Keynesian economic theory, whereby we run large budget deficits in the good years, and gigantic ones in the bad years. At the same time, economists, or at least those who would be heard, have divorced their theories from any concept of a balance sheet, taking shelter in their particular ideologies. This condition guarantees that the American economy will sooner or later come to a full stop, and to the day when we can no longer find buyers for our debt. Our only alternative to social, economic, and political chaos will be to print money willy nilly, touching off inflation on a scale that will dwarf that of the 1970s. At that point the American emperor, whose "full faith and credit" have been the gold standard, will be shown to have no clothes, and will become the "sick man", just as once the Ottoman Empire did, as it faded away.

They Say Our Debt is Ballooning

According to Economist Joseph P. Stiglitz, our national debt is ballooning. Didn't that already happen? Was I otherwise engaged while we ran a bunch of budget surpluses, and paid the debt down to sub-balloon level? I've had attention span issues before. There are enough statistic generators out there, so I'll not review the deficit numbers. I just have one question for our bosses (formerly our elected leaders): At what level will the deficit start to seriously worry you? I don't need to ask whether winning the next election is more precious than the future of the country; you've proven that to be so. Once again... I'm out of here.

A Remembrance of Old Champagne

I'm not much of a wine drinker, but once upon a time I was. As a brand new ensign, I wasn't likely to drink much in the way of really fine wine, but there are occasions when the rule meets its exception. I was flying over seas the next day to meet my first ship. I frequently passed a very fine wine shop near the Boston Public Gardens and while I'd occasionally visited to chat with the salesman, on this day I was a customer. The bottles were arranged on their sides, in hoppers, and above each hopper lay a single display bottle, so that customers could check out the merchandise. I entered, passing the more than ample Bordeaux section without a second look. The champagne section was in the rear, and given the nature of the product, it was the smallest. I didn't have to look far. Right on the corner was a unique bottle. Most champagne bottles were green, but this one had a purplish cast, and an odd shape – Veuve Clicquot - 1961. I'd had a few half bottles of champagne, though never a vintage bottle, and never Veuve Clicquot. It was August, 1975. Fourteen years can be a long time for a cork to hold pressure, so, in a fit of pure insanity, I bought not one, but two bottles. The only wine book I'd ever read said that old champagne could be a delight, or a disappointment.

Each bottle came wrapped in tissue paper; the salesman carefully bagged them, with plenty of padding, and I walked home to chill them. When the time cane, I carefully held the cork, while twisting the bottle. It cane away without a sound, leaving an eighth inch plug in the neck. A cork screw made quick work of the plug. The faintest phht told me that all might not be lost. The champagne gave off just a few bubbles in the long, slim fluted glasses. The surprise was in the drinking. I don't think that it's possible to clearly describe the taste and aroma of old champagne. The closest I could come would be to suggest a light perfume of liquid flowers. All good people should be lucky enough to taste this once in their lifetime.