armchair pundit

The House recently passed a major financial reform bill, and the Senate will vote on it as soon as there’s enough Republican support to push it through. By most accounts, the Republicans are mostly on board, which is probably why we’re not hearing a whole lot about it from the media. There’s not enough conflict and hysteria to make it television fodder.

18 months ago we were told we were teetering at a precipice. We felt anxiety, which subsided into anger as we learned more about how the firms we paid to rescue had precipitated the crisis. Now we’re no longer feeling the acute fear, and the anger at Wall Street has fizzled somewhat, so I’ve been a bit worried that the final reform bill won’t have any teeth.

This inspired me to do some digging. I’m not a financial whiz, but having devoured many accounts of the crisis, I feel like I have a pretty good handle on what needs to change.

Too Big To Fail is a maddening phrase we heard a lot, and we’ll never know what would have happened if the federal government had rejected the premise outright – meaning we’ll never know what would have happened if the government didn’t bail out the banks. There are lots of smart people on both sides of the debate around the bailouts, but ultimately hindsight is blind.

Given this fact, too big to fail is one of the key things that Congress has vowed to fix in the financial reform bill. Specifically, they want to be empowered to break up companies before they become too big to fail. I for one have little confidence in the government’s ability to define big in a way that would lead to action down the road. The truth is, the government will never be able to know exactly when or how they should intervene, so I don’t think this will really be a meaningful part of the final reform bill.

Another piece of needed financial reform has to do with incentives. Up and down the whole chain of cause and effect, from home buyers in the suburbs to folks on Wall Street assembling mortgage-backed securities – people had good incentives to make really bad decisions. But this is something the companies themselves need to fix.

That makes one thing the government can’t fix, and one thing they shouldn’t fix, so what should we expect from a reform bill? I think there are three obvious things:

1. Create independent ratings agencies – Agencies like Moody’s and S & P are paid by the firms whose bonds they are responsible for rating. This is the only reason a CDO made up of hundreds of garbage loans put together by Goldman Sachs was able to get a triple-A rating, and it’s obviously insane. Either the government should put together its own truly independent ratings entity, or it should require the existing agencies to operate independently. Either way this is easier said than done, but it’s pure common sense.

2. Eliminate huge private transactions – Wall Street firms routinely make multi-billion-dollar deals with each other that are not reported on anyone’s balance sheet or visible on any index. If the larger financial market is exposed to the risk inherent in these transactions – which it obviously is – then the larger market needs to know about them. The financial industry will fight this tooth and nail, and we’ll certainly hear lots of manufactured reasons why it’s a bad idea. Look for the “trickle-down” attack – you know, the one that says that any restraint imposed on big business is bad for the economy because that’s where the jobs come from.

3. Regulate “hedging” – This is a tough one, because it’s subjective. A few firms made a lot of money from the deals that led to the financial crisis by aggressively touting certain investments to customers while simultaneously making big bets that those same investments would fail. Executives from Goldman Sachs were questioned about this by Congress, and a series of deals engineered by a firm called Magnetar makes a perfect case study. Companies call this “hedging” and claim it’s just a prudent part of doing business – you make a bet, and you “hedge” it with a side bet, as insurance.

There are two problems with this argument. First, the side bets they refer to as hedging were mostly secret, back-channel deals, whereas the affected investments they promoted were very much the opposite. In other words, they aggressively sold certain investments that they secretly bet would fail, and the more of these bad investments they sold, the more money they stood to make from their failure. Secondly, many indications suggest the so-called hedges were often bigger than the bets (which means they’re the real bets and not hedges at all). This is hard to prove, given the secrecy around these “hedges,” which is its own problem.

Again, this is something the financial industry will fight tooth and nail, but we should all demand transparency. We have the right to know about both the hedges and the bets, so we – meaning not only ourselves, but our banks, mutual funds, etc. – can make informed investment decisions

One proposal put forward in the financial reform bill is to establish a new government entity called the Consumer Financial Protection Agency to alert us to red flags in potential investments (like giant side bets), and this is what the Republicans are opposed to, because they see it as unnecessary government bureaucracy. This is a valid point, but I’m not sure what else they’re offering. Alternatives suggested by Democrats in an effort to gain Republican support include beefing up  the consumer protection power within one or more existing agencies.

In any case, consumer protection should give us more freedom, serving to illuminate risks in complicated financial products without prohibiting those products. It’s transparency we need, and that’s what we should look for in the financial reform bill.

[UPDATE] The good news is that items 1 and 2 are in the bill that passed the House. Item 3 is fuzzier, although there are a number of provisions in the bill that might have some impact on the way that firms will be allowed to make bets vs. side bets. Maybe worthy of another post.

It’s been a while since I posted here, and I’m introducing a new category: Elimination Dance.

Instructions: An elimination dance begins with a crowded dance floor.  At a signal, the band stops playing and the announcer reads an elimination, say, “Any lover who has gone into a flower shop on Valentine’s Day and asked for clitoris when he meant clematis.” Any dancer answering this description must sit down, and his partner is also disqualified. The process continues (e.g. “Any person who has burst into tears at the Liquor Control Board”) until a single couple remains.

(from the description of Michael Ondaatje’s book by the same title)

This new category, in other words, is for all the things I wish would go away. My first is small-government fanatics. For some reason I’ve allowed myself to rant in the comments of a couple friends’ blogs this week in response to passionate small-government fanaticism and comments I somewhat unfairly deemed as such.

The rest of this post is a lightly-edited re-post of a comment I left on my friend Jay’s blog…

Small-government fanatics seem to believe we are a prosperous and successful country in spite of our government – rather than because of it, whereas I believe the truth is very much both.

We are beneficiaries of two centuries of government protection and support – much of which we basically seem to take for granted at this point, and much of which few people would really want to go back and undo. Of course there have been missteps too, but the small-government libertarian crowd usually fails to acknowledge the ways in which we have benefited.

One core principle of small-government fanatics is free markets, or as my friend Jay unambiguously put it: “The free market is one of the greatest gifts to mankind in all of our history.”

I think, however, that total market freedom almost inevitably leads to “tragedy of the commons” scenarios. People and businesses will pursue their own desires even to the detriment of everyone’s needs. They pursue immediate individual gains that risk (and often cause) generalized future catastrophe.

If government does not serve to protect the commons from the individual, then what – or who – will?

Before the FDA required drug companies to prove their products were not dangerous prior to putting them on the market, there were numerous incidents of contamination – sometimes maiming or killing thousands (thalidomide, diethylene glycol). What’s the free-market alternative to this? The free-market response might be to put a company out of business because one of their products killed a few thousand people, but um… the company KILLED people. That was the free-market drug industry before the FDA.

What about a more straightforward tragedy of the commons? I have a hard time envisioning a free-market solution to protecting fisheries from individual companies competing against each other to pull in the biggest catches. The companies know when they are pushing fisheries toward collapse, but they also know that if they hold back, then others will just step in and out-fish them. What’s the free-market answer?

This is similar in nature to what happened in our financial markets. Smart people knew they were taking insane risks that were not sustainable, in order to reap huge short-term gains. But they also knew that if they didn’t do it, plenty of other people would out-gain them in the short term, and they would be fired.

For whatever reason, it’s easier for me to stomach this problem with the financial markets (as part of the cost of doing business – even if it hurts a lot of innocent bystanders), than with things like forests and fisheries. Damage done to forests and fisheries is longer-lasting.

I have a hard time believing our country’s major parks and wilderness areas would ever have been created without our government deciding to do so (imagine how many more dams could have been built along the Colorado River and how many more trees harvested in Appalachia if companies were free to do so). I’m personally happier to have the parks and wildernesses.

Scientists have been sounding alarms about atmospheric carbon and climate change for five decades, warning us about a point-of-no-return. We probably needed to start doing things differently 10 years ago to avoid the point-of-no-return, but what free market incentive existed to do so? None, and that’s why we’re in the predicament we’re in.

If you believe there are no situations when the collective good is more important than individual gains, then my argument is lost on you. I don’t believe this. And it’s hard to imagine who would aim us toward the collective good if the government was not trying to do so.

It’s fair to argue that the government does not operate effectively or efficiently enough, but I think the answer is to improve it, not to eviscerate it.

I think it’s good and necessary to debate each threshold of government intervention (currently, healthcare), but I think we need to acknowledge how much existing government protection and support we take for granted and would not want to give up.

I have a somewhat irrational affection for Costco. The selection is good, the prices are low. They have a generous return policy (my friend just returned a printer he bought there four years ago and exchanged it for a new one). The folks who work at the one in San Francisco always seem to be enjoying themselves.

But many of my green-minded friends see Costco as a perfect embodiment of modern-day consumer culture and all that is wrong with America.

When you think about it though, one giant jug of laundry detergent requires significantly less plastic than the same amount of detergent sold in six smaller bottles. And buying a mega-bundle of toilet paper means fewer trips to the store than buying six rolls at a time. Plus, they sell recycled paper products and phosphate-free detergent.

I’m just sayin’

My job has sent me to Amsterdam for the week, and when I went to the Continental Airlines website to check in for my flight the other day, I was presented with the option to buy carbon offset credits – powered by an organization called Sustainable Travel International.

The whole idea of carbon offsetting is met with some harsh criticism. Skeptics argue that it’s just a way to help people feel better about themselves without having to change their consuming, polluting lifestyles…

But there’s no reason why purchasing carbon offsets can’t be just one part of a person’s overall change in lifestyle, instead of an alternative to change. And the truth is the money spent on carbon offsets does make its way into projects like wind farms and reforestation initiatives.

It might be better to avoid air travel altogether, but of course it’s unrealistic. I’m happy that the airline industry is promoting not only awareness of the issue in general, but a quantification of my own individual contribution. And I’m happy that they point me to one way of mitigating at least some of the damage.

It won’t save the world, but it’s better than nothing.

…and not just because my recent investment in oil futures depends on the price continuing to rise.

The sudden upsurge in the price of gas has been the top news story for the past few weeks, and there doesn’t seem to be any relief in sight. Oil is a finite resource, and as China, India and other developing nations have… well… developed, the worldwide demand for oil has shot up. As Americans turn to the government – and the three people campaigning to be the next president – for a solution, it seems amazing that no one saw this coming.

Of course the US leads the rest of the planet by a long shot when it comes to oil consumption, thanks to a combination of massive suburban sprawl, the popularity of gas-guzzling SUVs and a system of government subsidies that keeps our gasoline cheap compared to the rest of the world.

Progressives have lobbied the government for years to raise the mandatory average fuel-efficiency requirements of American cars, and the government’s response over the last eight of those years – especially from that bunch of oilmen in the executive branch – has been predictably dismissive.

The normal Republican philosophy regarding such things is to let the market take care of it. Keep the government out of it, they say. In an ideal world, I totally agree. The government is bloated and slow and bad at getting things done. In reality though, the problem with the Republican hands-off philosophy is that Republicans are totally disingenuous about it.

If the real price of gasoline was actually reflected at the pump, then people would stop using gasoline simply because they couldn’t afford it. People would stop buying gas-guzzling behemoths in favor of smaller cars. People who work in cities would stop moving into houses way out the suburbs, and people who already live in the suburbs would start carpooling or taking public transportation (if it’s even an option). That’s the market at work. We know the market would do its thing because it’s exactly what happened in the past when gas prices shot up for any length of time.

And it’s happening again. Even the modest rise we’ve seen over the past year or so – and it has been modest for Americans, no matter what it feels like – has sent a surge of riders to mass transit, according to this recent article in the New York Times. The difference this time is that given what’s happening with China, India and much of the rest of the developing world, oil prices aren’t likely to level off again… ever.

The bottom line here is that the Republican philosophy works. We just need the courage – yes, courage – to let the market actually do its thing.

Of course there’s another part of me – the part that loves to travel – that’s afraid to see what all this will do to air fares.

The fantasy known as Dubai, home of the world’s only 7-star hotel, is planning to burn another billion or so on what will be the world’s largest and tallest spanning arch bridge, The 6th Crossing:

(rendering by FXFOWLE)

Obscene displays of money are nothing new to Dubai, and why not? They might as well spend everything they can as fast as they can, because in 100 years I’m guessing Dubai will look something like…

(photo by daarkfire)

President Bush is touring the Middle East right now, and he has made sure to bluster about Iran’s fictional nuclear ambitions at every stop, but oil has been the main topic on his agenda. Yesterday he met with Saudi leader, King Abdullah and tried to persuade him to up his country’s production, in order to stabilize prices.

Bush argued that high oil prices will cause the US to import less oil, and therefore less money will flow from American wallets into royal Saudi Arabian wallets. The problem with this argument (other than the notion of protecting the exchange of our cash for Saudi palaces and ponies) is that the increasing demand for oil in China, India and the rest of the developing world will more than offset any decrease in US imports.

Saudi Arabia shrugs.

In the 1970s, before the Ayatollah overthrew the Shah, Iran was one of our main sources of imported oil. The Iranian Revolution of 1979 triggered an energy crisis when in November of that year, President Carter cut off oil imports from Iran. This marked the beginning of the end for Carter, who famously proposed to the American people that the solution to the crisis was to conserve. “Wear sweaters,” he told us.

The thing is, we’re addicted to oil, and to conserve is… well… un-American. The Reagan administration saw the light, and Saudi Arabia became our new best friend in the Middle East.

Fast-forward to 2008. Iran is still chock full of oil, so it should come as no surprise that our current president has steadfastly ignored the U.S. Intelligence Estimate finding that Iran stopped pursuing its nuclear ambitions in 2003. Iran has oil. We want it. We need it. Therefore we need Iran to be a threat, just like we needed Iraq to be a threat, because President Bush needs to guarantee access to oil.

Consider the following:

• Current US consumption of oil is 20.7 million barrels per day.
• The US strategic reserves contain 689 million barrels.
• Factor in our domestic production, and without imports we have about 60 days of oil to burn before it’s all gone.

Bush’s commitment to keeping oil lines open is not sinister in itself. The reality is, our economy would cease to function without foreign oil, and that would hurt every single one of us, probably more than we can imagine. If Bush had simply told the truth – we need a steady supply of oil from Iraq in order for our economy to function, therefore we need a more stable and sympathetic regime there – he would not have gotten the necessary support from Congress or the American people. So he used terrorism as a pretense.

Now Bush is trying to do it again, with Iran.

The war in Iraq is about oil. Few people would dispute that. Some would say it was waged simply to take the oil, while others argue that it is being waged in order to create a stable regional ally who will reliably sell us oil. It’s probably the latter, but it doesn’t really matter. The war is about oil.

To ensure access to Iraq’s oil, we are paying $275 million per day. How much would it cost to expand the war to Iran?

So, to summarize, we consume an enormous amount of oil. We have dangerously little oil of our own, so we need everything we can get from the Middle East. To maintain this dynamic of dependence, we are willing to invest $275 million per day and hundreds of thousands of American lives (because it’s not just the lives lost that we are investing, but the hard work of all the soldiers) in a war.

This is the true cost of oil, which is not represented at the pump. The $3-plus that you pay per gallon does not include the costs of tax subsidies to the oil industry, the subsidies for the extraction, production, and use of petroleum, the military costs of protecting access to oil supplies – not to mention health care costs for treating respiratory illnesses ranging from asthma to emphysema, or finally, the costs of climate change. If we factored all this into the price of gasoline, it would cost about $15 per gallon, according to a study (pdf) by the International Center for Technology Assessment.

Are we getting a good return on this investment? Does it have a future? What else could we do with $275 million per day and the hard work of hundreds of thousands of people we’re spending just on the Iraq war?

$275 million per day works out to about $100 billion per year which, according to one study, could pay for…

• Reforesting the earth (6 billion)
• Stabilizing water tables around the world (10 billion)
• Restoring all the world’s fisheries (13 billion)
• Protecting topsoil on the world’s croplands (24 billion)
• Providing universal basic health care to everyone on the planet (33 billion)
• Providing universal primary education to every child on the planet (12 billion)
• And finally, for good measure, closing the condom gap (2 billion)

Before you get into a tizzy, the figures above reflect additional money that would need to be spent on the various initiatives, rather than the total figures. These are all things, like the military, that only cost us money. They don’t generate any, which is why I didn’t compare the military spending on the Iraq war to money we could invest in, say, developing alternative energy sources. We’d actually make money if we did that.

It’s good to know we have our priorities straight.

Some kind of silly excuse for a Golden Globe Awards ceremony took place last night, with no speeches, performances or jokes – just winners announced by unknown non-celebrities who had the look of Star Search contestants in the “spokesmodel” category.

The impact of the writers’ strike on the event and activities surrounding it reportedly cost the Los Angeles economy anywhere from 75 to 100 million dollars. If the Oscars suffer the same fate – which looks likely – the blow will be much bigger.

The producers who are the target of the strike represent only a slice of that pie, but even if you consider the whole thing, $100 million is small potatoes compared to the amount the producers would give up by submitting to the writers’ demands, so a couple of missed awards shows probably won’t cause them to blink an eye.

The other problem for the writers is that the strike hasn’t had the expected crippling effect on the quality or quantity of television available to viewers like me. Sure I miss a couple of shows, but I was watching too many anyway. Now, with the writers’ strike going on, I can still watch my favorite reality shows (lately, Kitchen Nightmares, The Dog Whisperer, Survivorman, No Reservations and Top Chef), and I can watch other shows in reruns that I didn’t make room for before. With my favorite scripted shows on hold for a while, I’m enjoying my chance to give my second choices – shows like Friday Night Lights, The Office and Lost – their due.

The only show I was really painfully missing was The Daily Show with Jon Stewart, but that’s back on now. Woohoo!

The bottom line is, I’m not sure how much pain the strike is delivering to the wallets of the producers, which is why no one expects it to end anytime soon. There’s simply too much good TV left on the air for the strike to make much of a financial impact.

Even if this was not true, or even if the writers hold out long enough to dent the supply of good television, they still might not hit the producers where it hurts, because, as a product, television follows a demand curve much like that of a controlled substance. With television, as with cocaine or cigarettes, a reduction in supply has little effect on demand. Watching television is the default leisure activity for Americans. We do it out of habit. We’ll keep doing it whether or not there’s anything worth watching.

The thing is, the writers are in the right. They deserve a piece of the web revenues, and the producers are greedy bastards for not allowing that. Maybe the force of public opinion will ultimately be enough to sway the producers. Maybe the strike will hurt their moral sensibilities, and that will be enough.

Or maybe there are enough good people in Hollywood to eventually force a bottom-up victory. Maybe the string of isolated side deals already happening between shows and their respective writers will reach a critical mass and lead to an industry-wide agreement.

It has happened before.

I spent several hours on Friday unsuccessfully trying to install Parallels and then Windows XP on my Macbook Pro. I was able to get it up and running over the weekend through some inelegant workarounds, and today I found myself fully in the Office Space world that is Windows.

10 minutes before the departure of the last #5 bus from the downtown depot, I shut down my computer. Well, I asked it to shut down. Windows chose this inopportune moment to notify me that it needed to install 81(!) updates. It warned me not to shut down, or face dire consequences.

15 minutes later, updates installed, I was allowed to leave.

But I had to find an alternate route home.