Game Changer?

Update: Today, October 23, Alan Greenspan testified before Congress about how shocked he was at the explosion of this financial crisis. He also laid blame at the feet of investors, insufficient vetting of borrowers, and faulty credit ratings issued to many sub-prime mortgage backed securities. Anyone who contests my previous article now has to argue against Alan Greenspan as well.

We are in the home stretch now, gringos! For Barack Obama, it looks quite promising. Any benefit he had last week is now magnified by the endorsement of Colin Powell -- all fence stradlers are now noticing severe gaols pushing them to the left. The right is scrambling desperately: claiming he's a socialist, he cavorts with terrorists, and we just don't know enough about his past (whatever the hell that means).

But all these claims have me wondering...where's Bin Laden? This time in 2004, the race was just barely tilting toward John Kerry when (to the delight of Bush loyalists) Bin Laden was on TV telling us that no matter who we elect, we're still on his shit-list. I couldn't help but feel our electorate was the object of mass reverse-psychology: telling us it didn't matter, in a way that made it matter very much.

Fear makes people irrational and this stunt was no exception. Bin Laden understood the dynamic of our political leanings and he exploited the perceived weakness of John Kerry to encourage people to vote for Bush by reminding us that he had gone nowhere. If anything this should have been the clearest sign of failure of Bush's first term, the man we spent so much time, effort, and cash to nab is still at large -- and he feels secure enough to flaunt it. While we can't say definitively what would have happened under a Kerry administration, it seems obvious that Bin Laden was far more comfortable with the devil he knew.

Think about the current perceived weaknesses of each candidate: Obama/National Security and McCain/Economy. To the degree that one weakness is more pronounced as an issue the electorate moves to who they perceive as being strongest in that arena. As long as we're talking about the economy, Obama wins. If we're talking about national security, McCain wins.

To me, it's obvious that McCain has been trying to change the subject for weeks -- nonsense about Bill Ayers, ACORN, and so on...But this all seems to fall into the same black hole gobbling up the Dow. McCain needs an external factor to change the conversation from the economy to security. McCain needs a terrorist attack equal in scope and impact to 9/11 between now and the election. What will be lacking in the public mind, should such an event occur, is the degree to which an Al-Qaida attack would be equal to an Al-Qaida endorsement of Senator McCain.

Let's look at the benefits to Al-Qaida of a McCain administration:
1) Continued Economic Strife (this will be the case no matter who's elected).
2) An Energy Platform built around Oil -- Al-Qaida funding does come from OPEC nations. Greater US consumption of oil means more money for Al-Qaida.
3) John McCain's apparent disliking for the UN, the EU, and real diplomacy will keep the West fractured in the face of this grave threat.
4) If McCain does win (assuming the numbers today are right), it will be by a VERY thin margin -- and because of the divisive nature of his campaign will leave our nation more fractured.

With Obama, we would be trimming our dependence on oil and would be reinvigorating the image of the US around the world (McCain simply cannot achieve this, see #3 above). And if Obama wins (assuming the numbers today are right) he will do so by a fairly substantial margin and a sizeable public mandate.

This is not to say we've seen the last of Al-Qaida. We will almost certainly face an attack within the next year -- this has been their MO for the past 15 years. From the first World Trade bombing in 1993 (one month after Clinton's first inauguration, when republicans argued against his preparedness), the embassy bombings in Kenya and Tanzania (3 months before mid-term elections when republicans accused Clinton of issuing military strikes to divert attention from the Lewinsky scandal), USS Cole (in the months leading up to the 2000 elections, when Clinton did not respond for fear that he would reap the same criticisms as in 1998), and 9/11/2001 (nine months after Bush's first inauguration).

Al-Qaida's strategic move during the next presidential term will be to make a President Obama look ill-prepared and a President McCain to look steadfast and resolute -- those strategies are what will further their objectives to destroy the west.

Role of Fannie and Freddie in Subprime Crisis

It's Sunday morning and I've just finished watching "Sunday Morning" with Charles Osgood. This morning there was an Op-Ed piece by Ben Stein discussing the current financial meltdown resulting from Mortgage Backed Securities (MBS) particularly those weighted in the subprime category. An economist first, and a Republican second, Mr. Stein wove a tapestry of blame that implicated nearly everyone connected to the mortgage industry -- including deregulators (he even conceded that perhaps anti-regulators is more accurate) in Washington D.C. I thought it was fair...for the most part.


Not politically uncharacteristic, Mr. Stein launched the first rhetorical cruise missile at (paraphrasing) liberals who encouraged lending to those borrowers who could not make good. While I do not deny SOME causal relationship between this and the meltdown, I'm not convinced that it is a greater cause or, for that matter, even equivalent to the lack of regulation consistent with this administration (and Bill Clinton's) and the 12 of the last 14 years in which republicans have controlled Congress.


The first charge against liberals goes back to the Carter administration and the passage of the Community Reinvestment Act (CRA) of 1977. Conservatives (such as Larry Kudlow and George Will) like to say this is the "root" of the problem (I think irresponsible lending is the "root", but I digress). Perhaps the most startling aspect of this charge is that this crisis, allegedly caused by the CRA, was 30 years in the making -- not to mention that the U.S. enjoyed the lowest foreclosure rate in its history for nearly 25 of those 30 years of the CRA's existence. Conservatives conveniently and irrationally bestow this credit upon Ronald Regan.


According to Ellen Seidman, Executive Vice President for National Policy and Partnership Development at ShoreBank Corporation and Director of the Financial Services and Education Project at the New America Foundation, the record enforcement of the CRA led to responsible lending resulting in the relatively low foreclosure rate during its exitence but:

CRA enforcement became a lower priority for bank regulators after 2001. My successor at the Office of Thrift Supervision, in fact, led an effort-eventually thwarted-to unilaterally loosen CRA regulations for institutions with more than $1 billion in assets. See 70 Fed. Reg. 10023. Nevertheless, CRA regulations were eased more generally in 2005. See 70 Fed. Reg. 44256. (http://www.newamerica.net/blog/asset-building/2008/no-larry-cra-didn-t-cause-sub-prime-mess-3210).




It's quite obvious that the lack of enforcement of CRA lending provisions (which unarguably occurred during the Bush Administration) is clearly closer to the explosion of the mortgage crisis and therefore warrants far more blame than the CRA itself. It's tantamount to blaming the Social Security crisis on FDR simply because he founded the program -- when a program is in crisis, it's hardly convincing to lay blame at its existence more so than its management.


The follow-up allegation to this initial charge (one spouted by John McCain in the second debate) is that Fannie Mae and Freddie Mac caused this crisis. This very statement shows just how little Sen. McCain understands how the two lenders operate let alone their association with this particular crisis. Allow me to lay out as best I can the Fannie/Freddie role in this industry, then I will mark the areas for which they were at fault.


First, Fannie/Freddie are not primary mortgage lenders -- meaning that no borrower ever goes to Fannie/Freddie and says "I want a mortgage." If one believes, as I do and as conservatives rightly state, that the root of this problem is borrowers taking out loans they cannot afford -- then, it is totally inconsistent to say Fannie/Freddie are a "root" cause since they are NOT a primary lender. It, however, is perfectly consistent to say the lender or, perhaps even more so, the lender's loan processing company (as well as irresponsible borrowers) are root causes.


But just because Fannie/Freddie are not root causes doesn't mean they're entirely innocent either. Fannie/Freddie are what's known as "second-tier mortgage lenders" and it breaks down like this:

1. Borrower applies for a mortgage.
2. Something comes up that prevents the lender from extending credit to that borrower.
3. Yet borrower qualifies for assistance from Fannie/Freddie.
4. Fannie/Freddie subsidize a portion of the financing extended to the borrower for the purpose of shielding that lender from risk (something that has been going on since 1968).
5. Fannie/Freddie then, once all the papers are signed, buy the mortgage debt from the lending institution.
6. The lender, or sometimes a third party, owns the payment management side and charges a fee to Fannie/Freddie for this service (this too has been the case since 1968).

So Fannie/Freddie do not vet any borrowers, yet they do have standards -- standards that admittedly were loosened under the Clinton administration. So if Fannie/Freddie don't vet any borrowers who does the vetting? Either the lender or the loan processing company does, and Fannie/Freddie take them at their word - to which the lenders swear under penalty of perjury. If a lender lies to Fannie/Freddie about the credit worthiness of a borrower, that constitutes fraud.

So Fannie/Freddie then are victims too? Well, yes and no. It's entirely possible that they were duped by lenders and this is under investigation by the FBI. However, the FBI is also investigating them for doing the same thing in turn to other investors buying their MBSs. This is where things get interesting: while Fannie/Freddie were getting clobbered from these bad debts, they decided to sell them off which, in and of itself, isn't necessarily wrong -- asset liquidation is a basic part of any financial strategy. What they may have done and what they're being investigated for is having bundled these bad mortgages together and sold them off to investors all around the world under the false pretense that these securities, like T-Bills, were guaranteed by the Federal Government. (For a better understanding check out Jim Jubak on MSN.)

Now, that's pretty damn serious!! If you don't understand why, it's nothing to be ashamed of, but to help I'll refer to Peter Orszag, Director of the Congressional Budget Office, who stated on October 9 that the saving grace here is that people are still willing to lend to us. This salvation may have been catastrophically absent had the Federal Government not stepped in to comandere Fannie/Freddie. If Fannie/Freddie had been permitted to fail, the U.S. credit rating would have plummeted, and that would have been followed by a whole host of other financial catastrophes far worse than what we've seen thus far.

So Fannie/Freddie are hardly blameless for the exponential growth of this problem but they are quite far from ground zero. And what would that be? Well, nobody seems to be saying it yet but it's a combination between the way Credit Bureaus assess the credit worthiness of borrowers and the way lenders try to justify risky lending with high (and occasionally usurous) interest rates. This fundamental question has been begged: How does one quantifiably justify risk?

The next concentric circle falls to the lenders who bundled these mortgages, gave them bogus credit ratings, and sold them off to investors or second-tier lenders like Fannie/Freddie. Then come the insurance companies who over-issued credit default swaps against these MBSs without the assets to back them up. (Check out this link where Paul Solman of the Newshour explains the credit default swap http://www.pbs.org/newshour/video/module.html?mod=0&pkg=7102008&seg=3). And then, every investor who sold an MBS while fraudulently boosting its credit rating. Finally, lack of regulation (see http://seekingalpha.com/article/98651-don-t-blame-deregulation-for-this-crisis-it-s-all-about-lack-of-regulation?source=wl_sidebar).

For more info about the misdirected blame on Fannie/Freddie see: http://seekingalpha.com/article/98533-fannie-and-freddie-did-not-cause-this-crisis?source=wl_sidebar

The Interests -- Energy Policy

This will be my third and final installment for "The Interests" series. Some readers may ask why am I not going to discuss healthcare, and the reason is because I'm still early on in the learning process. I do not yet feel competent enough to write on how to fix a problem I barely understand and it will probably take nearly eight years before I do feel competent enough -- it took me eight years to feel confident about Economics, Foreign Policy, and Terrorism. And one thing I do know about healthcare is that, believe it or not, it is far more complicated than anyone seems willing to admit. It makes the subprime mortgage crisis look like a game of tic-tac-toe. So I will defer healthcare for a later date -- certainly post-election and post-inauguration. If anyone is kind enough to give me some fundamentals, I'd be grateful.

Energy
Well, I have saved the best for last...because this is the key to American prosperity and hegemony for the next decade and, quite likely, the remainder of this century. As with many complicated issues of public policy, history is the best consultant. I believe it was Mark Twain who said: "History doesn't repeat itself, but it does rhyme." And since we like to consult history in multiples of ten, let's start with the first decade of the 20th century. This is when the US and Great Britain enterred the modern world light years ahead of everybody else.

What allowed this to occur? Interestingly enough, it was the invention of the electric light bulb in 1879. Prior to the electric light bulb, people lit their homes with kerosene lamps. Kerosene was produced through the refinement of crude oil -- a, and in many ways still, mysterious substance discovered in Titusville, PA in 1859 (some say sooner but the Drake Well in Titusville was the first well discovered on purpose). Kerosene remained the primary commodity for the lighting of residential structures as we approached the 20th century. And as early adopters invested in infrastructure (something encouraged by governments), eventually the light bulb overtook kerosene as the primary commodity.

Knowing where the electric innovation was leading, John D. Rockefellar formed the Standard Oil Trust in 1882 and R&D began (though it may have already been in place) for the purpose of transforming crude oil from a means for residential lighting to a means for more efficient transportation. In 1907, the first gasoline station opens up in St. Louis (see Daniel Yergin's The Prize).

What's important to realize here is that these changes did not occur in the vaccuum of a "free" market. Sure, private innovation drove the change but public governance is what brought the idea to reality. Without adequate patent and trade laws, this innovation will likely have died in a market ruled by the oil monopoly's iron fist. The other big player in the way of policy was the Sherman Anti-Trust Act under which Standard Oil was dissolved in 1911. This is an example of government intervention freeing up the market place as opposed to the deregulation which freezes the market by sealing it in the hands of private interests.

Another monumental event occurred in 1911 -- Winston Churchill became First Lord of Admiralty. What did he do? Foreseeing a major continental conflict, Churchill mandated an initiative to convert the Royal Navy from a coal-powered fleet to a diesel-powered fleet. This ensured naval prowess at a time when the British Empire was waning.

In keeping with the spirit of Mr. Twain's insight let us now review the differences and the similarities between the conditions now and those of a century ago:

Similarities
Innovation: We are now in a phase of innovation as we were when Thomas Edison invented the light bulb. It's important to realize that while Thomas Edison receives a great deal of credit for his discovery, he wasn't the only one looking for an electric solution to the demand for artificial lighting. He was part of an army of innovators. Today, we have a similar situation. Scientists all over the globe are looking for solutions to our energy crisis from carbon sequestration technology, to carbon neutral fuel synthetics, to windmills, to solar power -- there is a race for the answer and it is competitive.

State of the Market: Then, as now, there is a peculiar desire among those with an advantage to maintain the status quo. Some may think I'm talking about Big Oil...strangely I'm not. I'm referring to OPEC and Russia. Now, to some degree Big Oil is trying to stall things (i.e. lobbying in opposition to tax credits for companies trying to develop alternative fuels -- though, while this is bad, they are not doing so to keep us addicted to oil but for them to get in on the ground floor of the alternatives which they view as inevitable). If you have a minute, go to MSN.com and read an article by Jim Jubak where he posits the end of Exxon.

How does OPEC and Russia stall this innovation? Well, it's a complicated line of reasoning but it goes like this -- earn the cash, finance the debt, collect the interest, contain the supply. Both OPEC and Russia possess massive reserves of US currency. Rather than hold the cash, they buy up bonds to finance our national debt, they then cash in those bonds to (you guessed it) hold more cash...and the cycle goes on ad infinitum. What does this have to do with stifling the growth of alternative fuels? Nothing directly -- but, together, the two entities control 2/3 of the world's supply of crude. Now, they must do two (seemingly conflicting) things -- 1.) Make it scarce -- by containing the supply, they can undermine buyer power in commodity futures markets and thus control price. 2.) Preach abundance -- by suggesting there's more to be had and that larger profit margins mean greater cost-reduction investment down the line and buyers continue to have faith in the cyclical nature of commodities markets. This is the new supply/demand law -- when demand is high, gradually increase available supplies but never to the point where you undermine your price strategy. It is by tying up capital that these entities skew the cost benefit analysis of investment in alternatives.

Hegemony at Stake: When Churchill converted the Royal Navy to diesel, he understood that he would be at a major disadvantage if he did not. The more we are dependent on oil, at this moment, the more we are at the diplomatic mercy of Russia and OPEC (which includes Iran and Venezuela). If we can succeed in building the proper infrastructure for a transportation fuel other than oil, we can regain our global hegemony.

Differences
Innovation: The difference here is that the stakes are much higher. Russia is moving very quickly to contain our influence in the world, what's more in our own hemisphere with emerging relationships with Venezuela, Bolivia, and Nicaragua (again). Petrodollars also fund madrassahs churning out the next generation of jihadists. Climate change -- enough said. If you don't buy into climate change, consider a resurgent Soviet Union and terrorism -- they are convincing enough on their own.

State of the Market: Globalization today is far more fast-paced than the globalization in the first decade of the 20th century -- the IT revolution bears the blame/credit for that. Also, to a large extent, governments have been sitting out as private industry has built bridges without regard to sovereignty (though government now seems to be getting rushed back into the game to stunt the financial crisis).

If one good thing can come from this government reinsertion, it's that it can actually bring about the coordination necessary to establish an infrastructure that will make the next phase of our energy sector a reality -- the non-fossil fuel revolution. Government was far more involved in our growing energy sector in the early 1900s than now.

Hegemony: Energy innovation has always been a strategic move and has never offered an immediate benefit. It takes time. The future of our hegemony depends on alternatives to oil. That is an unavoidable fact. Further dependence on oil, as stated before, digs us into a diplomatic hole when it comes to dealing with oil supplying nations. This is why a "drill, baby, drill" energy policy is not just wrong, but disastrous. I define a decision as "wrong" when our desitination is straight ahead, and we turn right or left. I define a decision as "disastrous" when our destination is straight ahead, and we do an about face. "Drill, baby, drill" is an about face -- not only is it wrong, but it's obviously wrong.

Some say that if we drill off-shore and in ANWR, we can compete with Russia and OPEC. But with only 3% of the world's supply sitting their, we barely make a dent in our own consumption let alone that of China and India. What's more is that there are plenty of US oil companies that drill for oil all around the world and we are still small potatoes compared to Russia and OPEC -- so the allegation that a 3% increase in supply will make any meaningful difference is absurd.

Are there holes in Barrack Obama's plans, of course -- nobody's perfect. One thing is I'd like to see less of is a focus on food-based fuels like ethanol. It says something when a society is willing to burn necessities to sustain luxuries. It's tough for a politician to speak against ethanol, especially one that's trying to win Iowa. But I'll forgive him on this, if it means the alternative is having a president who thinks we can simply drill our way out of this problem. If there's one thing the W presidency has taught us, it's to be suspicious of simple solutions to complex problems.

Freedom...?

In light of yesterday's column, I've been giving considerable thought to the Cold War. I decided to download the Soviet National Anthem on iTunes but, of course, I don't speak Russian. I located English translations of the text and something piqued my curiosity. The word: "Freedom" is a predominant theme in the text. I began to wonder what the word means in that context as opposed to what it means in ours.

Historically speaking, both cultures have extraordinary differences in how they encountered freedom. I'll begin with the U.S.

As many of us are well aware, we were a colony of the British Empire whose governmental model was a monarchy bound by a constitution. As our revolution approached, a new idea was circulating among western intellectuals pioneering what is referred to as the Enlightenment. Along with the Social Contract and the Vindication of the Rights of Man (and Woman), The Wealth of Nations arose to speak of the next stage of Western Economy -- Capitalism. Until then the model was primarily Mercantilism, which followed what one of my professors once called: "The Golden Rule: Which is, he who has the gold makes the rules." Colonialism was a foreseeable offspring to this model.

Kings sent merchants under their flag to set up shop in foreign lands. Initially, the project was for these merchants to gather as much gold as they could, but this quickly morphed into other valuable commodities. Spices, for instance, were a major factor in King Ferdinand's and Queen Isabella's financing of Christopher Colombus' journey to the East just as ivory was a major factor in the Belgians' interest in the Congo.

Anyway, Adam Smith posited that the nation which would triumph under such a model, would be that nation which allowed their colonists to operate with as much free reign as possible -- something made much easier with the shrinking influence of the Catholic Church. This is not to say that Smith was promoting any inhumanity -- he's strictly speaking of economic freedom. Minimal tax requirements, minimal restriction of the trade that allowed colonists to make their living, and minimal restriction of the freedom to engage in enterprise for private gain -- were all ingredients to building a Nation's Wealth. But the most essential restriction to be kept to a minimum was that on capital. With capital flowing freely, more opportunities for growth would emerge. For Adam Smith, capital meant labor, labor meant production, and production meant wealth -- so long as there was demand for the thing being produced.

When the Magna Carta was drafted and "No Taxation Without Representation" became the law of the land, it was done so for the purpose of sowing economic freedom in the rule of law -- though this occurred before Adam Smith. So when colonists became frustrated with the King's taxation policies (expecting a more capitalist model than mercantilist), they had no voice since they were not represented in Parliament.

The underlying gripe with the colonists was that the Social Contract had been broken through this taxation. After much discussion and deliberation, we declared our independence knowing that such an action was certain to bring war. But we did it for freedom. Patrick Henry framed it in an existential context when he said: "Give me Liberty, or Give me Death!"

We won our independence from Great Britain, and the conversation has been going on internally ever since. Our earliest cultural history tells us that freedom means outside the realm of absolute state control. To preserve this freedom, we constructed our own representative government and gave it oversight and limits on the degree to which it may interfere with the private affairs of its citizenry.

Then, the industrial revolution came. This led to a population shift with the development of urban centers as an alternative to agrarian and small-town merchant communities. The U.S. experience is that this all happened under a representative governmental model defined by a constitution. Although, some have argued that this model became corrupted by large monied interests.

This experience was far from Universal. Not every Western nation had a government in whom the citizens placed legitimacy. I'm thinking of Russia. For Russia, the industrial revolution came about in the world while that nation was still ruled by an absolute monarch. Thus as urban centers developed (though small in the still largely agrarian landscape), the industrial system was seen by the people as a tool of governmental oppression -- specifically at the hands of the Tsar. Rather than viewing industrialization as the means toward a free state (as the U.S. did), it was viewed by the Bolsheviks as a barrier to it.

Though this was not necessarily the case of all Bolsheviks. In the 1920s, following the revolution, there was an interesting event in the world of bilateral trade agreements: The Anglo-Soviet Trade Pact. Essentially this was an oil deal between Great Britain and the Soviet Union, which was met with great controversy among party hardliners such as Joseph Stalin. It, along with other pieces of Lenin's "New Economic Policy," was seen as appeasement to the Bourgeois West and treason of Communist ideology. Though Lenin warned against the dangers of isolationism, coupled with his death in 1924 and the exile and subsequent murder of Leon Trotsky -- Stalin and the hardliners prevailed and pioneered the Command Economy adhering to a Five-Year Plan. This was the birth of what came to be known as Stalinist Communism.

How could the West communicate effectively with the Soviets about policy when each had a different understanding of the concept of "freedom"? Because neither side could agree on this concept, each side was met by the other with immediate suspicion.

Peculiarly enough, I once came across an article in Foreign Affairs that was attempting to re-frame U.S. relations with the Middle East. The article said something I had never heard before -- that the English word "freedom" (as we understand it) does not have a direct translation in Arabic. According to the article, when our word "freedom" is translated into Arabic it is often done with a word that comes closer to our meaning of "justice". It also said that the idea of "free" in Arabic culture is simply associated with not being owned or not being a slave.

I've often wondered to what degree this disagreement of meaning has contributed to our current conflict.

The New Communist States of America

I hope the reader doesn't mind, I'm taking a few days off from "The Interests" -- I'm trying to determine my next issue in line with my priorities. But with the massive overhaul this weekend this is what has been on my mind...

The wheels are off now, Jackson! $700 billion for the sheisters and hornswogglers on Wall Street. Goldman Sachs and Morgan Stanley have just been approved as holding companies...what's that mean? It means they were on deck to have their asses paddled by our economy's daddy -- the Invisible Hand, and went crying to mommy -- the Fed. She assuages daddy's rage with a blow-job and a beer, meanwhile junior doesn't learn a damn thing except someone will always be there to take it on the chin...or the eye, or the neck, or wherever. Junior now has spanking insurance financed by no one but the Bureau of Engraving and Printing.

But, so much for free enterprise -- sorry but it's been squandered away. This is the new global economy -- not entirely state-run, not entirely private, but the indistinguisable and inseparable union of the two. We're following the Russo-Sino-Venezuelo model now! Why not? The Chinese have been more successful at globalization than anyone. A scholar (the name escapes me, now) once said that there was a compromise in Chinese culture after Tiananmen Square and it was this: "Beijing wouldn't let us be free, but they would let us be rich." And thus forth emerged the Chinese yuppie -- just like an American yuppie, but with a work ethic.

What happened here? There are many theories and will continue to be many theories, but the metaphor I find most suitable is that we became a nation of jugglers. Then once the Soviet Union fell, we put on rollerskates too. Then after 9/11, we blindfolded ourselves. We were headlining for the world's largest three-ring circus and it was only a matter of time before we fell off the tightrope with only elephant dung to break our fall.

The good news? Our dollar is going to be so cheap we'd no doubt be a prime labor market for European investment -- if they survive. Imagine somebody actually outsourcing to us. But it's not all good: At best, we'd be the prodigal son of Western Civilization hoping for the slaughter of the fatted calf -- at worst, the calf itself. What's worse is our government will make the deal but there'll be no place for unions or workers' rights -- not if we'd want to compete with China. And if we get too competitive with China, there's no telling what might happen. War? Maybe, or perhaps we'd just go to them to finance our factories using pounds of our children's flesh as collateral.

Hold on to your socks, folks!! We may need them for toilet paper.

The Interests -- Securing the Homeland

Update on Previous Entry. Since writing the previous entry on my economic perspective, three financial firms have been in the news: Lehman Bros. is filing for Chapter 11, Merryl Lynch has been acquired by Bank of America, and AIG has been given an $85 billion loan from the Federal Government -- this was done at what analysts have determined to be an 11% interest rate along with the Federal Government now owning stock in the company. Personally, I don't see how this can be done without legislation generating from the House of Representatives. And since when do we have any government ownership of a private corporation? So, this is how the Red Revolution comes -- not in the streets, but in the boardrooms.

The ultimate irony here was that I became aware of this story listening to NPR while driving home from hearing Tom Friedman speak at Heinz Hall. He was talking about a friend of his who thought government mandates pertaining to energy conservation was the best way to conserve. His response was: "So you want to be China for a day?" Unbeknownst to us, that's exactly what Hank and Benny were up to at the exact moment those words were uttered. I want to have Mr. Friedman's crystal ball for a day.

Homeland Security. How are we best able to secure the homeland? Curiously, this isn't really a new topic. It just used to be called National Defense. What has changed is not the issue, but the antagonist. We do face a new enemy, but I have always found it odd that we insist on fighting this new enemy as if it was an old one. There seems to be an admission that this is a new threat to be combatted in new ways, yet the current administration and John McCain insist that the way to defeating our new enemy and preventing their attacks is by having a strong military. This is wrong on so many levels.

First, let me say that I am not a passivist. Not since Adolf Hitler has the world faced a more severe threat than Islamic Extremism. That is not to say, however, that Usama bin Laden (UBL) poses a threat identical to that of Nazism. While the two appear comparable in severity, they are most incomparable as far as tactics, and even further apart when considering strategy (without argument Islamic Extremism is a far more capable adversary).

Similarities:

1. Both strive/have striven for the complete annihilation of "the other". For Islamic Extremists, "the other" is Western Civilization. For Nazis, "the other" was anyone not of the Aryan race.
2. Both have/had extraordinarily effective propaganda campaigns rooted in vengeance for prior humiliations. For Islamic Extremists, the humiliation stems from Western support for Israel, our propping up of regional dictatorships such as the Shah of Iran, Hosni Mubarak, Saddam Hussein, and the Saudi Royal Family, as well as our military presence in the region. For the Nazis, it was the brutal and excessive punishment visited upon Germany (by Great Britain, France, and the US) in the wake of the First World War.
3. Both have/had direct access to the tools they need(ed) to bring about the realization of their vision. For the Nazis, it was the ability to mass produce conventional armaments. For Islamic Extremists, it is the emergence of the global civilization with world travel and world communication becoming more available than ever before (this characteristic, in turn, has contributed to a more efficient global black market that not only provides weapons but funding as well).

Differences:

1. State-based Organizational Structure vs. Corporate Organizational Structure. Germany built its Axis among countries and formed an overt conventional threat. Islamic Extremists build their structure based on a communication network among individuals and benefit from their anonymity.
2. Isolated Propoganda Campaign vs. Multilateral Propoganda Campaign. The scope of Hitler's rhetoric was isolated among a specific group of people -- those of Aryan descent. Consequently, it was inherently confrontational to anyone not included in that group. While UBL's rhetoric is also aimed at a specific group of people -- Muslims, it also possesses something Hitler's did not -- invitation. In nearly every one of UBL's addresses, he asks Westerners to convert to Islam and makes the case for everyone to rise up against the West.
3. Reckless Fortitude vs. Patient Measuring. Hitler had done many things throughout the course of his chancellorship to telegraph the Second World War. His flaw however, was in his determination to conquer Russia at any cost (even the cost of victory itself, ironically) and his constant waffling over whether to grab the oil in Baku or sack Moscow. Hitler eventually became a victim of his own obsession. I don't know if that can yet be said about UBL. In the current framework, the Islamic Extremists don't need to do much more than just stand by as we kill countless civilians in their pursuit.

When the 9/11 attacks occurred, I was struck by how much media coverage was devoted explicitly to the body counts, destruction, and devastation. It shaped the event in the public's mind simply in the context of an act of war that demanded retribution. While that's true, it's perhaps the smallest truth of what occurred that day. The real story was in asking the following question: What, through this act, was UBL trying to achieve? This question was not only ignored, but ridiculed.

When Mayor Guiliani spoke to the UN on October 1, 2001 he said: "Let those who say that we must understand the reasons for terrorism come with me to the thousands of funerals we are having in New York City..." In essence, let's defeat this enemy while at the same time remaining willfully ignorant of them. Never in the whole course of human history has a war ever been won on the basis of ignorance and lack of understanding. This mentality was precisely what UBL was hoping would prevail because it statistically would render our victory less likely.

The primary strategic goal of these attacks was to provoke a US invasion of Afghanistan (read Michael Scheuer's Imperial Hubris). Something we waited nearly a month to do. The idea from their perspective was to draw us into a conflict similar to the one which defeated the Soviet Union, so that they could sow outrage among the Arab community and future generations of Muslims. As of right now, we have been there for nearly seven years and the enemy is regrouping and waging far more formidable attacks against our troops and the US-backed Karzai administration. We have now only been there just half as long as the Soviets (who, incidentally, not only shared a border, but could afford to be far more ruthless than the US) and yet we insist on muddling through -- the opportunity cost for a horendously executed invasion of Iraq.

So, what is missing from our efforts? Let me start by first identifying what's present: We have a prolonged overt military presence in the Middle East, a surveillance program (allbeit a controversial one), and probably some covert or clandestine activities which are not available for public scrutiny. I want to make clear that, generally, I don't have any problems with the aforementioned approaches. I do find it believable that our military presence in the Middle East probably has pre-occupied Islamic Extremists from pulling off successful attacks in the US, though it does not seemed to have helped Europe. I also believe that some kind of surveillance program is warranted, though not without judicial (or, at least FISA) oversight -- when we ignore the Constitution, we divide ourselves to the point of dangerous vulnerability. And, finally, covert or clandestine action/infiltration is the most efficient way to defeat this enemy -- I hope we do a great deal of this, but I doubt we are doing so effectively considering the blatant lack of funding.

What's missing are our propoganda efforts, our educational efforts, and our diplomatic efforts. I'll take the last two first, but really they are all intimately connected. Read Jennifer Bremer's article from October 16, 2005 in the Washington Post and you'd be amazed to learn just how few of our Foreign Service Officers (FSOs) are proficient enough in Arabic to address large groups of people. As of right now, FSOs being dispatched to the Middle East get only a two-week course in language training -- not much has changed in 3 years. Without sufficient foreign language education, there is no hope for effective diplomacy in the region. How can we forge collaborative relationships when hardly anyone can speak the language?

Of course, there are many English-speaking Arabs -- yet, we don't even forge those relationships. One of the greatest missed opportunities over the past 5 years was in Iraq, and was the major reason why I initially supported the invasion. We had the opportunity to correct something we should have been corrected a generation ago, our support for the most ruthless dictator since Pol Pot (read Peter W. Galbraith's End of Iraq). We could have approached Iraq in such a way that would have made it impossible for anyone to deny its importance and necessity -- we needed penitent diplomacy. If we had approached Iraq with an open book saying: "Yes, we helped this madman because we were too focused on the Ayatollah. We unwittingly helped him slaughter innocent Shias, we unwittingly helped him slaughter innocent Kurds, we unwittingly helped him establish himself as the scourge of all things good and holy and we are heartily sorry for having offended thee." If that had been the talking point in the lead up to Iraq, not that we would have changed bin Laden but we would have rendered him rhetorically impotent.

Finally, where's our propoganda? So many talk about this being a "different kind of war" almost to the point where it becomes a cliche. That's unfortunate, because it's probably the greatest truth that's ever been spoken of it. It is a different kind of war...it's almost characteristic of a vendetta -- something that goes on and on for generations with no end in sight. To ignore the trans-generational aspect of this endeavor, is to ignore the most obvious path to victory and this is where we need to temper our military involvement. How do you convince a 15 year-old kid not to succumb to Islamic Extremism after a family member becomes collateral damage in an Israeli, US, or British air-strike? What happens when that 15 year-old kid has children of his own? What stories will he tell them? Will he tell him about the time a US Marine gave him a candy bar, or when his life was turned upside down by a B-2 bomber?

That, my fellow citizens, is the true threat. Do we need military prowess to fight terrorists? Sure, those lost souls who have already started down that path are beyond reform and unfortunately violence is our only option for dealing with them. However, we need get to those who have not yet strayed -- that's where the audience is. Without attacking the root of terrorism, it will never be defeated.

The Interests -- Economy

I honestly believe that my interests align with the interests of our nation. I therefore consider myself a patriot.

I have a stake in:

Securing the US Economy. As a result of this interest, I have acquainted myself with the issue through the following reading material: The Prize by Daniel Yergin, A Biography of the Dollar by Craig Karmen, Secrets of the Temple by William Greider (unfinished), Wealth of Nations by Adam Smith (unfinished), The Protestant Ethic and the Spirit of Capitalism by Max Weber, The Dialectic of Enlightenment by Max Horkheimer and Theodore Adorno, and Jihad Vs McWorld by Benjamin Barber (this was published prior to 9/11/2001).

This is not to say I agree wholeheartedy with all of these authors' policy recommendations, just that their impression of "the world as it is" has often matched and helped to shape my own impression. For instance, I love capitalism. I honestly think it is the best we have so far, despite my lack of disagreement with the Marxist worldview. Any disagreement with Marxists is purely one of policy. A fully state-controlled resource management system would be, and has proven, positively disastrous. A free market built through unimpeded access, not only to the procurement of goods and services, but also to their production is the only feasible way to manage resources fairly. I hold this pretty firmly, if you disagree with this statement -- you and I will have very little to discuss.

My committment to capitalism is not to say that I am not class conscious. In fact, my committment to capitalism, is the very basis for my class consciousness. The reason most Republicans and other pseudo-laissez faireists, disdain discussions of class is because their idea of capitalism is one that ignores class since class is the very institution capitalism seeks to subvert. This begs the unbeggable following question: Has capitalism, as it exists now, accomplished this goal? If your answer is "Yes", I have very little to say to you as well. If you say "No", then you and I agree on two points thus far.

If you answered "Yes", I will only pose this question: What evidence do you have that class structures across the globe eroded after the fall of the Soviet Union? I am of the opinion that class structures (in the US at least) became reinforced by the current attempt at Global capitalism; and while we see rising middle classes in the nations of China and India, we see a dwindling middle class in our own. More and more of our population is falling into poverty and without a discussion on this topic -- mass civil unrest will be the only foreseeable outcome.

In the meantime, the Nos and I shall discuss what is preventing capitalism from reaching this goal of class elimination. Is it too much regulation or too much freedom? We need to discuss the disparities between classes. I posit that human meddling in the form of regulation plays a large part in income disparity. In other words, contrary to popular opinion, the wealthiest among us love a certain type of regulation -- one that insulates them from market fluctuations. A true capitalist should find this attitude offensive. The Federal bail-out of Bear Sterns and the "takeover" of Fannie Mae and Freddie Mac (I put takeover in quotes because the government took them over the minute they were created) signify a dangerous exacerbation of the already suspiciously lustful relationship between government and private enterprise. They should have been permitted to fail and were given unfair preferential treatment by our government at the expense of, not only the taxpayer, but the investor as well.

That being said: In a free market, an individual is just as capable of unfairly influencing the marketplace as the government. Therefore, it is not government intervention alone that true laissez-faireists must fear -- but private intervention as well. I think this scenario of private interventionism becomes more likely when private businesses start to outgrow nations.

So if both forms of intervention are possible (even likely), which one is preferable? It's tempting to ask that, but that suggests a mutually exclusive relationship. I think, instead, that a better question is: What are our means for defending against unfair intervention? How do we defend against the government's unfair interventions? And how do we defend against unfair intervention by private businesses? Here we arrive at a paradox. Theoretically, the market should defends us from unfair interventions but this is never possible when the market itself becomes manipulated. So, we rely on the government to intervene when these things happen -- hence we have departments such as the SEC.

My position is that the bulk of public regulation ought to be aimed at intervening in instances of market manipulation. When government gets out of hand at any level: local, state, federal, legislative, or executive -- we can always vote the bastards out! Most of us don't get to vote on whether CEOs keep their jobs unless we own substantial shares of a given company's stock. I think it would be fair to say that there is good regulation and bad regulation, bad regulation aims at insulating private entities from market fluctuations and good regulation aims at prevention of private intervention.

To some extent, the government has to play the role of referee in trade. In a global context, this is a perplexing phenomenon. One of the points Thomas Friedman makes in The World is Flat, is that while there is a global economy, there is no global governance. Who regulates the trade amongst governments? This consequence of absent governance is, in my opinion, what has aided the current US middle class collapse. Governance needs to be aimed at allowing capitalism to disrupt the class structure rather than permiting the class structure to disrupt capitalism.

There are many sectors to our version of capitalist economy: Energy, Financial, Technological, and many others. While all sectors are crucial in their own way, there's one that sticks out with some particularly odd characteristics -- I'm thinking of the Financial Sector. It is the only sector of the economy that deals with the very means of growth for that economy -- money. Consequently it is, and rightly so, its most heavily regulated sector.

You see, our economy is based on a fundamental deception -- that money has value. Allbeit a necessary deception, it does have drawbacks. For instance, in order for money to be valued it needs to be in demand -- just like any other product. A person needs money so they go to a bank (the supplier) and get a loan or a line of credit. A bank meets that person's demand based on that person's credit history and that person's willingness to pay whatever interest rate their credit affords. When a person defaults, that bank now has to obtain that cash somehow; often by borrowing from other banks or from the Fed. When banks start to demand more money than they supply to the public, we have a credit crisis -- banks are no longer profiting from the credit they have extended to the public. Simply printing more money is always a last resort. The more cash that's available, the less buying power that cash has -- this leads to inflation. See Greider here, he offers cites some interesting insights into the effects of inflation on class structure.

Inflation, consequently is the enemy for most central banks. Our Federal Reserve System, however wears two hats. Not only do they battle inflation, but they also work to stimulate our economy. Greenspan's idea of lowering interest rates to help the economy after 9/11 was an effort in the latter arena. Some claim that it is conflicting for a central bank to act as both a regulator and a stimulator. The historic analogy many have used to describe the Fed is that they take away the punchbowl just as the party gets started. See Greider. It seems logical why some critics may argue that the Fed, lately, has taken on the task of forcing punch down our throats. I think this is definitely a debate worth watching -- it will have far reaching implications for global commerce.

I'd encourage people to read Jim Jubak any chance they get. He's often talked about how the different approaches of the European Central Bank (ECB) and the Fed, have led to the Euro's overtaking the US Dollar. He has greatly improved my understanding of the Financial Sector.
Essentially, while our Fed dabbles in both inflation protection and stimulation, the ECB concerns itself only with inflation.

So low interest rates accompanied by a grown government debt has contributed quite directly to the devaluation of our Dollar. With more debt, more money needs to be printed to meet that debt, and with the shrinking US tax base resulting from the current economic contraction (some say recession, but I'm not sure if that's "official" yet) it makes no sense to keep taxes where they are. Our government needs to increase taxes to keep the dollar bouyant as it has recently made gains against the Euro thanks to falling oil prices, thanks to rising inventory levels, thanks to people not driving as much, thanks to the high oil prices.

No changes to US taxes means further erosion of the dollar in global financial markets, more oil price spikes, and subsequent price spikes in any commodity sold in dollars. On top of this, further falling home prices could lead to a boomerang effect bringing last winter's economic crisis back for round 2.

Some may say that if we drill for more oil, a price spike won't happen because there will be a supply to meet world demand. That remedy would make sense if the previous price spike occurred as a result of supply crises, but it did not. I'm prepared to argue that the price spike occurred simply because oil became more valuable than the cash people were willing to pay for it. In short, the fiscal deception that money has inherent value -- was becoming more transparent, and people were starting to value oil (and rice, soy, corn, copper, etc.) more than money (much like Russians valued vodka more than roubles when the Soviet system collapsed in the early 1990s). Now that oil has been horded, and nations like China have decided to expose their public to gas price fluctuations by cutting subsidies, the dollar is making gains because it is now being absorbed and recirculated by the financial markets preventing the need for printing money.

How to Secure the US Economy. Because I believe that increasing taxes will have a more positive impact on the economy than keeping them the same, we can't vote for John McCain in 2008. Barack Obama seeks to increase taxes on those making more than $250,000 and cut taxes for those making less, this will pull in more revenue for the treasury since the tax base is shrinking. John McCain's outdated sense that tax cuts for the wealthy lead to employment growth has been rendered historically impotent as we are now facing higher unemployment rates. Obama's plan can provide funding in the event of a recession.

If you disagree, I request your participation.