Wednesday, April 30, 2008

Dollar Trivia

What is the US Dollar backed by (i.e., what does the government store for each dollar in circulation)?

1. gold
2. silver
3. a combination of gold and silver
4. nothing

Think about this for a few seconds before scrolling down.

If you chose a, b or c, you fall in the 95+% of the population (my somewhat educated guess) that believes this myth. Ask your friends, or forward them this post - they'll probably guess a, b, or c as well. Congressman Ron Paul has noted that even members of Congressional finance committees believed this myth until he disabused them of their false notion. The dollar is not backed by anything. Well, I suppose in some ways it's backed by the will of the federal government and the Federal Reserve to preserve the dollar's value, but as I'll discuss in another post, it's pretty clear that the powers that be are in favor of a depreciating dollar.

That this myth is so widely subscribed to begs the question of "why". Why is it that most Americans don't know this most basic fact about their currency? It used to be backed by precious metals, but we got off the gold standard a long time ago. But there has been virtually zero education of today's public of the dollar's true nature. And, as it turns out, it's not in the interests of almost anyone who matters for Americans to be made aware of this.

Tuesday, April 29, 2008

Rev. Wright - madman or the voice of many?

So this Rev. Wright thing has become a real shitstorm for Obama. Amazingly enough, every opinion piece I've read has dismissed Wright as a lunatic, without further inspection of what he is saying. In my earlier post, I commented on Wright's 9/11 statements.

Here, let's talk about some of the other stuff, which I'm sure most of white America thinks is sheer madness. How about the suggestion that AIDS was engineered as way of killing blacks? Crazy, right? Well, imagine if your ancestors were dragged over to this country to be slaves and were freed only hundreds of years later. Oh, but it turned out freedom didn't mean much as the South instituted sharecropping. That lasted until well into the 20th century. And it wasn't until the Civil Rights Era that meaningful legislation barring racial discrimination was on the books. And let's not forget about the Tuskegee experiments - imagine if your grandfather was a subject in that study. Does Wright's comment about AIDS seem so crazy now?

What much of non-black America doesn't get is that many blacks place very little trust in the government. And after the black experience in this country, I don't blame them. Perhaps if the rest of us were a little less trusting of government, we could have avoided the Iraq war.

But nevermind that. And nevermind why Wright's seemingly crazy statements resonate with black Americans. The rest of us can't relate to what Wright is talking about, so he must be a fringe lunatic.

Obama gets what Wright is saying - that's why he's been in Wright's church for twenty years. That's why he's been bringing his kids to that church. But Obama also gets that he's not gonna be able to explain it to the rest of America (not that many Americans would accept it if he tried), so he's doing the only thing he can do - run like mad away from that crazy Rev. Wright.

Monday, April 28, 2008

Rev. Wright and America's Chickens

Rev. Jeremiah Wright is in the news again, probably much to the dismay of the Obama campaign. The nation's uproar over Wright's comments strike me as predictably silly (see here for more of Wright's sermon following 9/11).

Oh, the pundits were so upset about Rev. Wright's 9/11-related comments. Wright suggests that American foreign policy precipitated the 9/11 attacks. President Bush said "America was targeted for attack because we're the brightest beacon for freedom and opportunity in the world." Which do you think seems more reasonable?

Those who dismiss Rev. Wright as a crackpot fail to notice the size of his congregation. And choosing to ignore why there is so much anger in black America is exactly the same type of reflexive action many adopted following 9/11, when they ridiculed those who suggested we try to understand why we were attacked. Sorry, sticking our collective heads in the sand is how we arrived at this mess in the first place.

They say Wright is anti-American. He served his country in the military and now serves his Chicago community. Is he less a patriot than President Bush or VP Dick Cheney? Neither of those men served in the military (Bush's National Guard experience has been well documented, and Cheney applied for and received five draft deferments until we was too old for the draft), and the only community they seem to be serving these days are their oil buddies and military contractors. In a firefight with real anti-American forces, who would you rather have in a foxhole with you - Cheney or Wright?

They say Wright is offensive. What's more offensive: Wright's comments to his congregation or the government's exaggerations and fabrications to American citizens to build the case for a war that has exacted a tremendous cost in terms of our national wealth, American lives, and America's standing and influence in the world?

Americans, think for yourselves. Don't outsource your critical thinking to the politicians and the pundits.

The "Elitism" Stigma

So John McCain and, especially, Hillary Clinton are trying to paint Barack Obama as elitist. When did elitism become such a negative? As a country, have we not learned anything in the last 8 years? We voted for Bush over Gore in part because Gore was seen as elitist. Then we voted for Bush over Kerry, again, in part, because Kerry was seen as elitist. And now Hillary is "tarring" Barack with this label and the attack seems to be gaining traction with the public. Amazing.

Why is it so important to people to have a President that they can relate to on a personal level? I'm sure many of the people who disapprove of Bush (which is now ~70% of the country) would rather have him as a drinking buddy than Gore or Kerry. Let's face it, W is a more personable guy. But so what? Shouldn't we be electing presidents of high intellect, who are well educated, and can speak authoritatively to the real issues facing the country? Does it matter that such a person might make you feel like an idiot by comparison? In fact, isn't that a good thing???

Lest you think I'm a rabid Obama supporter who has lost all objectivity, let me assure you that I am not. In fact, I am quite disappointed with all three major candidates. Ron Paul gets my vote.

Flag Pins - Somebody Shoot Me

If I hear one more thing about why Obama isn't wearing a flag pin, I'm gonna lose it.

Just exactly how stupid are my fellow citizens? If Obama wasn't a patriot, wouldn't he wear the pin to help conceal this? Please people, don't allow the right wing pundits and Clintonistas blind you with these asinine arguments. If you want to focus on Obama's weaknesses, look at his voting record, not what he is or isn't wearing on his lapel.

Friday, April 25, 2008

The Democratic Party - Incompetence at its Finest

In the nearly 40 years since Nixon took office in 1969, the Democratic Party has been in the White House for only 12 years, under Carter and Clinton. For the party that is supposed to represent the economic interests of the middle and lower class, which make up the great majority of the country, this is nothing short of a colossal failure.

Even now, after eight years under Bush, who is polling as unfavorably as any President ever has, the Democrats are on the verge of handing the White House to the GOP yet again. As the country has grown weary of the right wing neocon ideology, it is desperate for a more moderate leader, and guess who delivers that candidate? That's right, the GOP. McCain (moderate on most things, excepting the Iraq war) falls where the heart of this country is, center-right. Meanwhile, the Democratic Party serves up:

1. Hillary Clinton, one of the most divisive figures in politics in the last couple of decades, at a time when the federal government has been bitterly partisan for years; and
2. Barack Obama, a junior senator who has done little in his limited time in Congress, and whose voting record falls to the far left.

Is the Democratic Party so weak on talent that this is the best they have to offer? Both candidates have accomplished very little in elected office, and Hillary's claimed accomplishments during the Clinton White House have been shown to be greatly exaggerated:

1. State Children's Health Insurance Program (so deep is her commitment to this program that she missed a vote to extend it last year, though it passed anyway).
2. Bringing peace to Northern Ireland

It is clear to this citizen that neither Democratic candidate has much experience, though lots of experience combined with a flawed policy isn't a particularly attractive option for the country. Hillary has shown that she is strong-willed and can fight her opposition, but her zeal for the fight makes me wonder if she could ever work with the opposition. The blatant lying is worrisome (Bosnia sniper fire, that she didn't know her husband pardoned members of Weather Underground), and her raw ambition leaves me with the feeling that she will say and do anything to achieve what she seems to believe is her destiny - the presidency.

Meanwhile, Obama, under fire for the first time in the campaign, has yet to show the toughness his rival has. And let's face it, as stupid as this question about wearing the flag pin is (by the way, when did wearing a lapel pin come to replace true patriotism?), the GOP will be merciless in their attacks. Look at what they did to their own, McCain, in the 2000 primary. And Hillary has no monopoly on deceit - Obama's claim that he never knew of Reverend Wright's more controversial statements until only a year ago is very clearly a lie (though I suppose he was backed into a corner on that one).

In an election year where the Republicans were set to hand the White House on a silver platter to the Democrats, the Democrats are doing everything they can to turn down the presidency. Prediction: if the war in Iraq doesn't take a sharp turn for the worse between now and November, McCain will defeat the eventual Democratic nominee.

This raises another issue - why do we only have two parties? Why are the most important elected offices in this country completely dominated by a duopoly? Is this not anti-competitive? What can be done about it? To be addressed in a future post.

Wednesday, April 23, 2008

Bear Stearns BAILOUT

In the next couple of weeks, I'll try to catch up on some rants I had prior to starting this blog. After that, I should be real-time ranting!

Treasury Secretary Hank Paulson denied that the Fed bailed out Bear Stearns, and to support his argument, he pointed to the fact that shareholders were only getting $2/sh, down from $30 the prior Friday, or $80 in the prior weeks. Federal Reserve Chairman Ben Bernanke also denied "bailing out" Bear, though he acknowledged that he would characterize it as a bailout of the financial system. Whether the Fed's actions were necessary are debatable, but let's at least call a spade a spade. This was most certainly a bailout of Bear.

Paulson's argument is very misleading. Yes, the shareholders lost most of their investment as the stock plummeted to the $2 original deal price. But shareholders are only one class of financiers of Bear. The creditors are the other class - this is comprised of bondholders, counterparties, etc. Because Bear was so heavily leveraged, the creditor capital dwarfed the equity capital.

Per Bear's financial statements, as of 2/29/2008, Bear had total assets of $399Bn, liabilities of $387Bn and book equity of $12Bn. Bear was leveraged 34x (399/12). Several weeks prior to its collapse, Bear stock was trading in the $80-90 range. A share price of $90 means that the total shares of the firm are worth ~$12Bn, or about the same as the book equity.

In the original deal, Bear shareholders receive $2/sh, or a total of $260mm for all the shares, so the shareholders took a nearly complete loss, from ~$12Bn just weeks earlier to $260mm. But how much were the Bear shares really worth? Consider that the Fed purchased $30Bn of the "hard-to-value" assets as part of the deal. How much would JP Morgan have been willing to pay for the shares if the Fed didn't take those questionable assets? Well, if JPM gave those assets a mere 1% haircut because it wasn't sure what they were worth, that's $300mm less it would pay for Bear. Given that it paid $260mm for the shares, it's pretty clear that JP Morgan thought that the shares were worth $0 in the absence of the Fed's actions. That's the nasty side of being levered 34:1 - even a small drop in asset value means the equity is wiped out.

So rather than getting $0, the shareholders received $260mm in the original deal, funded directly by the taxpayers. Then they complained bitterly and got $10/sh, or $1.3Bn. So instead of receiving $0 (for ALL the shares) as they would have in a true capitalist system, the shareholders received $1.3Bn. Thanks Ben!

How about the creditors? Ah, now this is who the government really bailed out. The creditors went from being owed money by a increasingly risky Bear to the rock-solid JP Morgan. So creditors didn't lose a nickel. In a true capitalist system, would the creditors have lost money? You betcha. In the days leading up to Bear's collapse, Bear credit default swaps (basically, this is insurance against a firm defaulting on its debts) were skyrocketing in value - simply put, this means the market expected Bear would default on its debts. And as the cost of insurance on the debt was increasing in value, the cost of the debt was decreasing - so the creditors had large paper losses. But the Fed's intervention, which made the JPM deal possible, made the creditors whole.

So to summarize, shareholders, representing a mere 3% (12/399) of Bear's capital, suffered a huge loss (though not a complete loss, as capitalism would have dictated), while creditors, representing 97% of Bear's capital (387/399) suffered no loss at all. If that's not a bailout, I don't know what is.

Does this create moral hazard? Of course it does. Creditors are incented to invest in financial firms that are "too big to fail". If the creditors didn't have the Fed put to rely on, the banks would either have employed much less leverage (Bear was no exception in terms of leverage - many of the investment banks are levered 30x), or would be paying much greater financing costs to achieve such enormous leverage. So you, the taxpayer, are effectively subsidizing the investment banks. Makes you feel all warm and fuzzy, doesn't it?

No Child Left Behind = Every Child Left Behind

An op-ed piece in the NY Times, Clueless in America, provides some chilling facts regarding how poorly educated American kids are, on average.

Excerpt describing Bill Gates' view:
Bill Gates, the founder of Microsoft, offered a brutal critique of the nation’s high schools a few years ago, describing them as “obsolete” and saying, “When I compare our high schools with what I see when I’m traveling abroad, I am terrified for our work force of tomorrow.”
Said Mr. Gates: “By obsolete, I don’t just mean that they are broken, flawed or underfunded, though a case could be made for every one of those points. By obsolete, I mean our high schools — even when they’re working as designed — cannot teach all our students what they need to know today.”

Another except:
Roughly a third of all American high school students drop out. Another third graduate but are not prepared for the next stage of life — either productive work or some form of post-secondary education.

Let's talk about No Child Left Behind.
No Child Left Behind is not really about the children, it's about the parents. Parents don't want to accept that their children might be merely average, or heaven forbid, below average. So we lower standards for all children to save the egos of the parents. I say it's not about the kids because the kids know which of their classmates are bright and which are dim.

So now, smart kids are not being challenged and will naturally become bored and find other ways to occupy their time. And by keeping children who should be left behind, and in particular, kids who are serious troublemakers, in the same class with their age-group peers, we invite them to drag down the other students. Recently, nine third-graders were busted for plotting to attack their teacher. As a teacher friend pointed out, it was unlikely that all the kids were really bad kids, but that there were probably one or two that influenced the rest. Turns out Mom was right when she said, "You lie with dogs, you come home with fleas."