2008 September 29 Monday
Congress House Votes Down Bailout

The first attempt at a bailout bill failed 228-205. One complaint about the bailout is that it does not help mortgage holders hang onto their partially-owned houses (or 0 owned if they owe more than market price). But housing is overpriced compared to various historical ratios of housing prices versus income and rents. Housing prices need to fall to market-clearing levels. Trying to prop up people in mortgages they can't afford delays that correction and rewards real estate speculators to boot. The idea that Wall Street is evil but home buyers are innocent doesn't hold up to close scrutiny.

A more compelling argument against the bailout is that it will cause more harm than good. I can't tell. Some think that absent a bailout we'll go into a depression. A recent Wall Street Journal article outline how the Lehmann failure caused a crisis in confidence that made the AIG bailout necessary. If these people are being honest then, hey, economic depression seems plausible.

Then there is the form of the bailout. Buy bonds? Or get preferred stock to be sold later? I like the idea that some CEOs should lose their jobs and that at least stockholders should get wiped out. I think Paulson's plan doesn't inflict enough pain on top management and stockholders. So I prefer a plan that doesn't just buy up bonds from banks. But I most just want to avoid a global economic depression.

I agree with those who argue that Congress set the ball in motion that led to the massive irresponsible lending in the first place. So to blame it all on CEOs and traders is unfair and misleading.

Update: I'm watching CNBC. Some Democratic Congressmen had constituents 100:1 against this bailout bill. Main Street has contempt for Wall Street. I suspect the feeling is mutual. My guess is the elites will find ways to basically go around the democratic process. The Fed will come up with moves to inject money that do not involve appropriated funds. But will the non-democratic methods of intervention be strong enough? Another possibility: put some seemingly innocuous changes into legislation that really open the door for more radical policy changes.

We can't have a financial system that even 110 IQ people can't understand. Complex systems require complex minds to support them. We might have a depression just because the public are mad. Is there some stopping point short of a depression that'll shock people to support bigger policy changes to prevent a financial meltdown?

By Randall Parker 2008 September 29 12:08 PM  Economics Housing
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2008 September 28 Sunday
Which Muslims Will Get Hijacked Ship Cargo?

The hijacking of a Ukranian freighter with a likely Russian arms shipment to the government of Sudan hasn't reached a conclusion yet.

Islamist extremists prepared last night to unload rocket-propelled grenades and anti-aircraft guns from a Ukrainian freighter seized by Somali pirates even as foreign warships surrounded the vessel.

Kenya says the shipment belongs to it. But there's a twist:

Kenya's Government said that it was awaiting the weaponry aboard the ship, but similar shipments in the past have been sent on to southern Sudan.

So either the Islamists in Somalia use the loot to fight their way to power in Somalia or the goods move on to Sudan where Muslim fighters use them against Christians and animists in Darfur. International law calls out for which choice exactly?

Do we a have a dog in this fight? Maybe a member of Obama's Luo tribe serves to make a big commission on it and we should make sure the shipment reaches Kenya? But then again, maybe the profits will go to rival Kalenjin and so we should let the Somalis have it? Or if McCain wins maybe we should let the Kalenjin make the money? Tribal intrigue anyone?

By Randall Parker 2008 September 28 02:45 PM  Chaotic Regions
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Looking At Diversity Recession Argument

Steve Sailer has made the argument that the real estate bubble and subsequent collapse was caused the pressure from the diversity cultists on the political Left to issue more mortgages to lower performing (Non-Asian or NAM) minorities. A correspondent of Steve's has argued that surely blacks and Hispanics had too little money to play an important role in the housing price bubble and Steve asked for reader comments on that argument. Reader "tommy" points to a Dallas Federal Reserve document that shows the huge growth in subprime and other non-prime mortgage lending during the bubble.

Some 80 percent of outstanding U.S. mortgages are prime, while 14 percent are subprime and 6 percent fall into the near-prime category. These numbers, however, mask the explosive growth of nonprime mortgages. Subprime and near-prime loans shot up from 9 percent of newly originated securitized mortgages in 2001 to 40 percent in 2006.1

Lower lending standards made this disaster possible.

These new practices opened the housing market to millions of Americans, pushing the homeownership rate from 63.8 percent in 1994 to a record 69.2 percent in 2004. Although low interest rates bolstered homebuying early in the decade, the expansion of nonprime mortgages clearly played a role in the surge of homeownership.

The mortgage industry threw background checking out the window.

Another form of easing facilitated the rapid rise of mortgages that didn’t require borrowers to fully document their incomes. In 2006, these low- or no-doc loans comprised 81 percent of near-prime, 55 percent of jumbo, 50 percent of subprime and 36 percent of prime securitized mortgages.

I want more mortgage companies to go bankrupt.

So an explosion of low quality lending obviously played a very big role in the bubble. There's still a key piece of the puzzle needed: What was the ethnic make-up of these recipients of subprime and Alt-A mortgages? Were they the NAM (Non-Asian Minority) borrowers that the Democrats pressured the financial institutions to lend to?

Also, did whites find subprime and Alt-A mortgages easier to get because the banks had to lower standards for everyone in order to be able to lower standards for blacks and Hispanics?

Another question: How much of the run-up in housing prices in the bubble was caused by the growth in the rate of home ownership? That rate grew from 64% to just under 70%. The suggests a huge growth in the number of potential buyers competing for the existing housing stock.

What I'd also like to know: On a state level what was the change in rates of home ownership? A small number of states experienced the biggest bubble popping action. Here are the states with the highest foreclosure rates.

  1. Nevada: 1 in 91 homes
  2. California: 1 in 130 homes
  3. Arizona: 1 in 182 homes
  4. Florida: 1 in 194 homes
  5. Michigan: 1 in 332 homes
  6. Georgia: 1 in 422 homes
  7. Ohio: 1 in 444 homes
  8. Colorado: 1 in 452 homes
  9. Illinois: 1 in 483 homes
  10. Indiana: 1 in 522 homes

Michigan and Ohio are hard hit by auto industry declines. But how much of these high foreclosure rates can be accounted for by growth in home ownership during the bubble, especially among NAMs? We need more data. Anyone know some relevant information?

At a local level the foreclosure rates hit even higher levels.

Stockton, Calif., documented one foreclosure filing for every 31 households during the quarter, the highest foreclosure rate among the nation's 100 largest metro areas. A total of 7,116 foreclosure filings on 4,409 properties were reported in the metro area during the quarter, up more than 30 percent from the previous quarter.Detroit's third-quarter foreclosure rate of one foreclosure filing for every 33 households ranked second highest among the nation's 100 largest metro areas. A total of 25,708 foreclosure filings on 16,079 properties were reported in the metro area during the quarter, more than twice the number of filings reported in the previous quarter.The Riverside-San Bernardino, Calif., metropolitan area in Southern California documented the nation's third highest metro foreclosure rate, one foreclosure filing for every 43 households. A total of 31,661 foreclosure filings 20,664 properties were reported in the metro area during the quarter, up more than 30 percent from the previous month.Other cities in the top 10 metro foreclosure rates: Fort Lauderdale, Fla.; Las Vegas; Sacramento, Calif.; Cleveland; Miami; Bakersfield, Calif.; and Oakland, Calif. California cities accounted for seven of the top 25 metro foreclosure rates, while Florida and Ohio each accounted for five of the top 25 spots.

Update: Starting from here you can find a set of useful documents from a 2006 Harvard report on the demographics of housing and lending.

Accounting for nearly two-thirds of household growth in 1995–2005, minorities contributed 49 percent of the 12.5 million rise in homeowners over the decade. But even with these strong numerical gains, increases in homeownership rates of minorities barely exceeded those of whites. As a result, the gap between white and minority rates remains near 25 percentage points (Figure 19). In large measure, the stubbornly wide homeownership gap reflects the rapid growth in young minority households. Because young households have lower homeownership rates than older households, they bring down the overall rate for minorities. Part of the disparity in rates also reflects the fact that minorities continue to lag whites in average income. Indeed, the lower average incomes and ages of minorities together account for about 15 percentage points of the gap in the homeownership rates.

If you look at figure 24 in that report you can see a higher rate of higher risk loans made to low income (NAM) minorities (about 33% of all loans to NAMs versus about 18% for whites - I'm reading these numbers from a graph so not exact) as compared to whites at similar income levels. This supports the argument for a diversity recession.

Update II: Blackstone Group chairman Stephen Schwarzman sees the US Congress as the initiator of this debacle.

It’s a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn’t have been borrowing.

Those loans were packaged into CDOs rated AAA, which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting.

When they started defaulting, out of bad luck or bad judgment, we implemented fair value accounting….You had wildly different marks for this kind of security, which led to massive write-offs by the commercial banking and investment-banking system.

Click thru and read the rest of it. He basically lays out what went wrong. But what caused Congress to make the initial disastrous step? Politically correct intellectually bankrupt leftist multicultural ideology. Oh, and they do not learn from their mistakes. Bush embraces this ideology too.

Update III: Keep sight of a basic fact: Housing prices are too high and must correct. The housing price-to-rent ratio is still well above historical norms. So is the price of a single family home as a percentage of median household income. These things must correct. Attempts to keep people in homes they can not afford will just stretch out the correction period and make the downturn last longer.

By Randall Parker 2008 September 28 09:19 AM  Economics Housing
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2008 September 27 Saturday
Parents Abandoning Children At Nebraska Hospitals

Nebraska legislators (in their unicameral legislature btw) passed a law in July which allows parents to abandon their kids at a hospital without fear of prosecution. The legislators might have had in mind to allow babies to be given up for adoption. But they just said "child" in the law and now parents are abandoning children up the age of 17.

Between 5 p.m. and 9 p.m. on Wednesday, three fathers walked into two hospitals in Omaha and abandoned their children. One left nine siblings, ages 1 to 17.

The men, unless proven to have abused the kids, won't face prosecution under a new Nebraska law that is unique in the nation. The law allows parents to leave a child at a licensed hospital without explaining why.

The guy didn't abandon his 18 year old because she's already an adult. His wife wouldn't be dead if he didn't knock her up 10 times.

Gary Staton went to Creighton University Medical Center to surrender his five sons and four of his daughters, who ranged in age from 1 to 17. He did not bring his oldest daughter, 18.

Staton's wife died in early 2007, shortly after giving birth to their 10th child. The man told police he hasn't worked since July and was struggling to make ends meet.

"I was with her for 17 years, and then she was gone. What was I going to do?" Staton said to Omaha television station KETV. "We raised them together. I didn't think I could do it alone. I fell apart. I couldn't take care of them."

Having 10 kids in the first place was irresponsible.

What can be done about this? Do we just have to pay to take care of all the children of the poor and downtrodden? A Louisiana state legislator would like to offer money to poor people to get sterilized.

Worried that welfare costs are rising as the number of taxpayers declines, state Rep. John LaBruzzo, R-Metairie, said Tuesday he is studying a plan to pay poor women $1,000 to have their Fallopian tubes tied.

"We're on a train headed to the future and there's a bridge out, " LaBruzzo said of what he suspects are dangerous demographic trends. "And nobody wants to talk about it."

Half Sigma says "I don't understand why John LaBruzzo is evil".

My own less ambitious proposal: Offer teenagers and poor women cash for using Norplant. This doesn't permanently remove the option of expanding the lower class. But it at least delays problems and will reduce the size of the lower class.

Reduced reproduction by drug addicts seems like the best place to start. Barbara Harris pays drug addicts to get sterilized or use birth control. She decided to do this after adopting 4 children of the same crack-head mother.

Update: The kids who are getting dropped off at Nebraska hospitals are violent, schizophrenic, and otherwise messed up. Many are cared for by grandparents, aunts, and other non-immediate relatives. A violent 11 year old.

Who: 11-year-old boy

City: Omaha

Reason: violent, destructive

Who used law: grandmother who adopted him

The 11-year-old's destructive streak still scars the grandmother's house.

A violent 15 year old.

Who: 15-year-old boy

City: Lincoln

Reason: disobedience, anger problems, possible gang involvement

Who used law: aunt with custody

He punched holes in walls of his aunt's house.

At home, he was increasingly disobedient. He would yell, throw things, break doors, punch holes in walls.

At school, he would mock teachers, throw things, kick over desks and blame others. School staff called almost daily, several times to say he was being suspended again.

He'd taken to wearing gang-related clothing, flashing gang signs and hanging around with the wrong sort of friends. Over the summer, he had an unexplained amount of money.

Schizophrenia and bipolar.

Who: 13-year-old girl

City: Omaha

Reason: schizophrenia, bipolar disorder, behavior problems

Who used law: great-aunt who had adopted her

A suicidal drug abusing 15 year old and a mentally ill homicidal 11 year old were also dropped off. Sounds like this law is useful. These kids belong in mental institutions, not in neighborhoods and local schools.

It took this legislative mistake to bring to light the failures of the Nebraska social programs to deal with severely messed up kids.

Floyd Gulley fumed as a courtroom filled with strangers discussed what to do with his friend's 11-year-old grandson.

The friend had left the boy Sept. 13 at an Omaha hospital under the state's new safe haven law, saying she was unable to handle the boy's growing violence, threats and tantrums.

During a 15-minute hearing, the judge, lawyers and caseworkers agreed the boy needed several evaluations to determine his psychiatric, neurological and developmental problems and that he needed specialized therapy.

"Where were these people before?" Gulley asked after Wednesday's hearing.

"How many kids are we going to drop off before we do anything?" said Gulley, who has served on a local foster care review board. "This was a wake-up call. We need to wake up and do something about these kids."

By Randall Parker 2008 September 27 03:06 PM  Civilizations Decay
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Obama Embraces Discredited Early Childhood Education

In his first debate with John McCain liberal leftist Barack Obama demonstrated his faith in early childhood education.

The problem with a spending freeze is you're using a hatchet where you need a scalpel. There are some programs that are very important that are under funded. I went to increase early childhood education and the notion that we should freeze that when there may be, for example, this Medicare subsidy doesn't make sense.

But a recent study found little benefit from early childhood education by 8th grade. Also, the benefits of full day versus half day kindergarten fade after a few grades. A 1995 Rand Corporation study found black kids in America gain no lasting benefits from Head Start pre-kindergarten schooling.

Thus, for example, by age 10 African-American children have lost any benefits they gained from Head Start, while 10-year-old white children retain a gain of 5 percentile points. There is no evidence of a similar interaction effect among children who attend preschool.

Our results for African-Americans are thus consistent with those of earlier studies (which tended to be dominated by African-American subjects). When we focus on only young African-American Children, we find clear benefits of Head Start. However, in a sample of African-American children of all ages there is no effect of Head Start. This is because the benefits die out very quickly. In contrast white children experience the same initial gains from Head Start but they retain these benefits for a much longer period.

But for Obama and many other liberal democrats education is the universal cure-all for what ails societies. Obama showed the same delusion in his speech at 2008 Democratic National Convention Aug 27, 2008: Does he really believe this feel-good nonsense?

Michelle and I are here only because we were given a chance at an education. I will not settle for an America where some kids don't have that chance. I'll invest in early childhood education. I'll recruit an army of new teachers, pay them higher salaries and give them more support. In exchange, I'll ask for higher standards and more accountability. We'll keep our promise to every young American--if you commit to serving your community and your country, we will make sure you can afford a college education

Obama is supposed to be smarter than McCain. But what good is intelligence when ideological beliefs require that intelligence not be applied to developing an accurate understanding of reality?

Though in his debate with McCain right after he proposed spending more on early childhood education at least Obama argued to quit wasting money in Iraq.

Let me tell you another place to look for some savings. We are currently spending $10 billion a month in Iraq when they have a $79 billion surplus. It seems to me that if we're going to be strong at home as well as strong abroad, that we have to look at bringing that war to a close.

By Randall Parker 2008 September 27 12:06 PM  Education
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Megan McArdle: Persuadable Voters Crazy

Voters whose minds are not made up do not like the existing Iraq war but are excited by the idea of attacking Iran.

CNN has a running poll of "persuadable" voters which shows up as a sort of red, green and blue ekg on the bottom of the screen--though only, I'm told, for those who are viewing in HD. It's completely mesmerizing. So far I've learned: McCain talking about Iraq is not popular (though mostly that's "persuadable" Democrats dragging down the average). But McCain bashing Iran is like one of those third world dictators who win with 99.4% of the vote.

Conclusion: "persuadable" voters are crazy people who don't like the war we have, but want to start another one just in case that one's more fun.

Do these people only learn the hard way? Or do they think we'll just bomb Iran and they like bombing wars?

Remember, once the United States commits to some country the leaders who made the original decision have a hard time reversing it because admission of failure is something most leaders are either very averse or extremely averse to. Reagan could pull out of Lebanon. But Bush Jr. can't pull out of Iraq and McCain feels just as bound to this mistake as a Senator.

If only Reagan was still President maybe he'd attack Iran to give himself political cover for pulling out of Iraq. Whether Reagan attacked Grenada to give himself political cover to pull out of Lebanon is debated by historians. But if a decision could be made to attack Iranian nuclear facilities in exchange for pulling out of Iraq would that deliver a net benefit?

By Randall Parker 2008 September 27 08:59 AM  Democracy Failure
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China Astronaut Space Report Before Lift-Off

Is this cool or what?

China's state news agency published a despatch from the country's three latest astronauts describing their first night in space before they had even left Earth.

The Xinhua agency, which has sometimes been accused of carrying state propaganda, took down the story and blamed it on a "technical error".

Shades of Capricorn One. But this isn't a movie. This is real life. Maybe Chinese propagandists got the idea from the movie?

By Randall Parker 2008 September 27 12:14 AM  China
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Why Gasoline Shortages Rather Than Higher Prices?

Why don't the gas stations just raise their prices so high that they do not run out of gas?

Gasoline shortages hit towns across the southeastern United States this week, sparking panic buying, long lines and high prices at stations from the small towns of northeast Alabama to Charlotte in the wake of Hurricanes Gustav and Ike.

In Atlanta, half of the gasoline stations were closed, according to AAA, which said the supply disruptions had taken place along two major petroleum product pipelines that have operated well below capacity since the hurricanes knocked offshore oil production and several refineries out of service along the Gulf of Mexico.

Drivers in Charlotte reported lines with as many as 60 cars waiting to fill up late Wednesday night, and a community college in Asheville, N.C., where most of the 25,000 students commute, canceled classes and closed down Wednesday afternoon for the rest of the week. Shortages also hit Nashville, Knoxville and Spartanburg, S.C., AAA said.

Are the oil companies keeping gasoline prices down in company-owned stations in order to avoid a political backlash? Might de facto price controls be causing the shortages?

By Randall Parker 2008 September 27 12:04 AM  Economics Energy
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2008 September 25 Thursday
California Will Fail To Hit 2014 Educational Goal

Even a California with the demographics of 40 years ago couldn't meet the requirements of No Child Left Behind since about half the white population has an IQ less than 100. But with California's Third World demographics it is no shock to find out that California's schools can't achieve the fantasy of high competency for all students.

RIVERSIDE, Calif. – How well students and schools – from kindergarten through high school – succeed in mastering a curriculum that includes English Language Arts (ELA), mathematics, and the social and natural sciences, strongly influences how well the students fare in higher education.

In California, student mastery in ELA and mathematics is measured with the California Standards Tests (CST). To determine how the challenge of mastery is being met, a research team led by UC Riverside's Richard Cardullo examined several years of CST data.

The researchers report in the Sept. 26 issue of Science that mathematical models they used in their analysis predict that nearly all elementary schools in California will fail to meet the Adequate Yearly Progress (AYP) requirements for proficiency by 2014, the year when all students in the nation need to be proficient in ELA and mathematics, per the "No Child Left Behind Act of 2001" (NCLB).

Under NCLB, AYP measures a school's progress toward meeting the goal of having 100 percent of students meet academic standards in at least reading/language arts and mathematics. AYP constitutes a series of calculated academic performance factors for each state, local education agency, school, and numerically significant student subgroup within a school.

100% of students achieving some educational goal. Imagine that fantasy which surely belongs in Lake Woebegone where all children are above average.

California's educational performance is going to deteriorate in coming years. At some point per capita income will start down a slope.

By Randall Parker 2008 September 25 11:00 PM  Education
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2008 September 24 Wednesday
Jack Welch Sees Deep Recession Coming

Former GE CEO extraordinaire Jack Welch sees a really deep recession in the offing.

"I now believe we are in for one hell of a deep downturn," Welch told the World Business Forum in New York on Wednesday, adding that the first quarter of 2009 would likely be "brutal."

Until recently, Welch said, he had believed the U.S. economy could avoid recession, but he has now changed his mind.

"I am now caving," he said. "Get ready for real tough times. They're coming. There is no credit available."

On the bright side the recession might bring housing prices back down to within historical trend and thereby set the stages of recovery. Though a lot of people in Washington DC want to make people pay more for housing. Even free market economist Tyler Cowen suggests destroying houses as a way to keep up housing prices. This is worse than nutty. It is dumb. Why should people pay more for houses just to save some reckless financial institutions?

Some people's losses from underwater mortgages is other people's gains in the form of cheaper housing. Aren't lower prices beneficial? The housing price-to-rent ratio is still well above historical norms. So is the price of a single family home as a percentage of median household income. These things must correct. Tearing down houses or bringing in immigrants to live in repossessed houses lowers living standards and keeps prices up above their market clearing long term levels. Delaying or slowing corrections just delays recoveries.

Update: Warren Buffett thinks Hank Paulson's plan is a good idea and will earn a profit.

``I think the Treasury will pay back the $700 billion and make a considerable amount of money,'' Buffett said, adding that if he had $700 billion on the government's terms to buy distressed assets, he would. ``Unfortunately, I'm tapped out.''

Warren's judgment counts a lot with me. By contrast, a bunch of non-billionaire economists think the Paulson plan is a bad idea. But they don't know how to invest billions of dollars.

By Randall Parker 2008 September 24 10:25 PM  Economics Business Cycle
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Environmentalists Fly More

Shallow left-wing materialistic narcissists are unsurprisingly bad for the environment.

According to the researchers, people who regularly recycle rubbish and save energy at home are also the most likely to take frequent long-haul flights abroad. The carbon emissions from such flights can swamp the green savings made at home, the researchers claim.

Stewart Barr, of Exeter University, who led the research, said: "Green living is largely something of a myth. There is this middle class environmentalism where being green is part of the desired image. But another part of the desired image is to fly off skiing twice a year. And the carbon savings they make by not driving their kids to school will be obliterated by the pollution from their flights."

I used to work with a liberal environmentalist who criticized me when I told him I couldn't be bothered most of the time to separate my trash for recycling. He drove an SUV and liked to fly off to Asia for vacations. So I'm not surprised by this report. Christian Lander has ably nailed these people.

Al Gore travels by private jet and pays huge electric and natural gas bills. Do as I say, not as I do.

By Randall Parker 2008 September 24 10:15 PM  Cultural Wars Western
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2008 September 23 Tuesday
McCain And Obama Unfit For Presidency

Neoconservative commentator Stanley Kurtz says Barack Obama was chosen to head an educational foundation by an unrepentant communist 1960s bomber radical who co-founded the Weathermen. But does Obama know which way the wind blows?

Despite having authored two autobiographies, Barack Obama has never written about his most important executive experience. From 1995 to 1999, he led an education foundation called the Chicago Annenberg Challenge (CAC), and remained on the board until 2001. The group poured more than $100 million into the hands of community organizers and radical education activists.

Obama pretends to hardly know Bill Ayers. But Obama is misrepresenting the relationship. In other words, he's lying.

The CAC was the brainchild of Bill Ayers, a founder of the Weather Underground in the 1960s. Among other feats, Mr. Ayers and his cohorts bombed the Pentagon, and he has never expressed regret for his actions. Barack Obama's first run for the Illinois State Senate was launched at a 1995 gathering at Mr. Ayers's home.

Ayers and Obama used CAC to promote radicalization of school curricula.

One unsettled question is how Mr. Obama, a former community organizer fresh out of law school, could vault to the top of a new foundation? In response to my questions, the Obama campaign issued a statement saying that Mr. Ayers had nothing to do with Obama's "recruitment" to the board. The statement says Deborah Leff and Patricia Albjerg Graham (presidents of other foundations) recruited him. Yet the archives show that, along with Ms. Leff and Ms. Graham, Mr. Ayers was one of a working group of five who assembled the initial board in 1994. Mr. Ayers founded CAC and was its guiding spirit. No one would have been appointed the CAC chairman without his approval.

The CAC's agenda flowed from Mr. Ayers's educational philosophy, which called for infusing students and their parents with a radical political commitment, and which downplayed achievement tests in favor of activism. In the mid-1960s, Mr. Ayers taught at a radical alternative school, and served as a community organizer in Cleveland's ghetto.

In works like "City Kids, City Teachers" and "Teaching the Personal and the Political," Mr. Ayers wrote that teachers should be community organizers dedicated to provoking resistance to American racism and oppression. His preferred alternative? "I'm a radical, Leftist, small 'c' communist," Mr. Ayers said in an interview in Ron Chepesiuk's, "Sixties Radicals," at about the same time Mr. Ayers was forming CAC.

Yet Democrats swoon over Obama. They sure have low standards.

But Obama faces stiff competition in the unfit-to-lead race for the top. Conventional conservative George Will sees McCain as unconservative, with a flawed temper, and serious judgment problems.

The political left always aims to expand the permeation of economic life by politics. Today, the efficient means to that end is government control of capital. So, is not McCain's party now conducting the most leftist administration in American history? The New Deal never acted so precipitously on such a scale. Treasury Secretary Paulson, asked about conservative complaints that his rescue program amounts to socialism, said, essentially: This is not socialism, this is necessary. That non sequitur might be politically necessary, but remember that government control of capital is government control of capitalism. Does McCain have qualms about this, or only quarrels?

On "60 Minutes" Sunday evening, McCain, saying "this may sound a little unusual," said that he would like to replace Cox with Andrew Cuomo, the Democratic attorney general of New York who is the son of former governor Mario Cuomo. McCain explained that Cuomo has "respect" and "prestige" and could "lend some bipartisanship." Conservatives have been warned.

Will argues that both Obama and McCain are not ready to be President of the United States.

It is arguable that, because of his inexperience, Obama is not ready for the presidency. It is arguable that McCain, because of his boiling moralism and bottomless reservoir of certitudes, is not suited to the presidency. Unreadiness can be corrected, although perhaps at great cost, by experience. Can a dismaying temperament be fixed?

These are pathetic choices. A Leftist who hides the extent of his Leftism and an ill-tempered guy who seems to have learned nothing from the Iraq Debacle and whose mind is going to age considerably in the next few years.

Here's my take on it: McCain could become senile while in office. But if we are lucky (and we can't count on luck) then he'll stroke out a few months into office and Sarah Palin will take over. Now, Sarah is not the sharpest card in the deck. One could argue that she'll be in over her head. But if we are lucky she'll respond to the office by not doing very much. She leans rightward. But she's not a man. She doesn't have as much of a need for conquest or radical restructuring. At least that is my take.

What about Obama? Maybe he's grown up as he's gotten more connected and does not attach as much importance to advice from Bill Ayers as he used to. He might instead get lots of advice from the Ivy League. Such advice will cause problems. But has he really abandoned his radical past? I think he would have plenty of knobs of government to turn in support of harmful Leftist ideas.

Which one is worse? Hard to tell. We are only going to experience the disaster of one of them and we'll have to wonder whether the loser might not have been quite as bad as the winner will turn out to be.

By Randall Parker 2008 September 23 10:09 PM  Politics American Presidency
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2008 September 22 Monday
Many To Blame For Financial Disaster

Bankruptcy expert Wilbur Ross says the attempt to stop the financial meltdown is not addressing the problem of people who can't afford their mortgages.

"The reason I think it will take that long is that none of these actions that have just been taken make it any easier for Middle America to meet their mortgage payments -- it doesn't address that whole problem, and that problem is what really caused this to begin with."

But that is not a solvable problem, at least not in any way that Washington DC politicians would try to sell. Why? Because Americans are living beyond their means. There's no way to get from where we are to financial sanity without millions of people losing their homes that they can not afford. The financial crisis can't end until housing prices correct downward and people who can't afford their homes step down to cheaper dwellings.

Ross at least recognizes that it takes two to tango: both borrowers and lenders had to be irresponsible to get us into this crisis.

Ross said that in some ways, the financial crisis could be blamed on the American consumer for wanting to improve their standard of living without having the wages and means to do so.

"In one sense, the American consumer is the victim; but on the other hand, the perpetrator of it," he said.

But the borrowers and lenders are not the only actors on the stage. Or perhaps they are but puppeteers hover above them pulling strings. At the behest of Congressional Democrats (who wanted to lift up poor people - but ended up dragging them down) Fannie Mae and Freddie Mac bought the subprime loans that Countrywide and other failed lenders created. Chinese central bankers bought the Fannie/Freddie bonds because the Congress made Fannie and Freddie appear like no risk bets. The Chinese central bankers were buying the bonds in order to lower the value of China's currency so that Americans would live further beyond their means and buy more Chinese goods.

The lower IQ poor people who took out unaffordable loans are the victims of the political party that sought to help them. Being of lower IQ they had less capacity to judge the deals they were agreeing to. The smart people in Congress, at the top of Fannie Mae and Freddie Mac, and in charge of assorted mortgage banks are more culpable because they are more capable. Though I wonder whether Congressman Barney Frank is capable of understanding how his own actions contributed to this disaster.

A disaster this big requires many willing participants. Unluckily many willing participants were available. Now even those not foolish enough to play will have to pay.

By Randall Parker 2008 September 22 09:17 PM  Economics Human Weakness
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2008 September 21 Sunday
Will New York City Enter Into Decline?

Megan McArdle points out that the financial industry basically funds the New York City government.

The anchor of New York's financial community is the independent investment banks that are all headquartered there. If their corporate center of gravity starts shifting towards Charlotte and London, will other firms begin to question whether it makes sense to pay $50 per square foot just for the privilege of being in Manhattan?

That would crush New York's renaissance like a bug. All of New York's rebound has been paid for by the taxes on the financial industry--a few hundred thousand people in the industry pay the lion's share of the taxes for the entire city. Take them away, and the city will rapidly lurch back towards bankruptcy.

Of course, that's not the sort of thing that happens overnight. But the City and State of New York are remarkably business-unfriendly places; they usually end up ranked at the very bottom of the league tables in terms of the ease of doing business there.

Is there another industry that can replace finance as the big income generator in NYC?

Is there some reason to think that finance can continue to grow in NYC? Why? The financial industry is overly large in the US for the amount of value it adds. It needs to shrink and the part of it that most needs shrinking is in New York City. The investment banks are too big.

Will hedge funds and private capital firms grow so large they can fill the void? I'm skeptical.

By Randall Parker 2008 September 21 09:58 PM  Economics Political
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How About Rolling Heads For Sales Of Securities To Treasury?

Modest proposal: Hank Paulson's proposed fund for buying up toxic securities should have a rule: The CEO of any financial institution that wants to sell to that fund should resign his position. A new CEO should do the actual selling of the securities.

People should pay with their jobs for the financial disaster which they've helped to create.

Also, Congress should make Barney Frank and Chris Dodd resign for protecting Fannie Mae and Freddie Mac for years. Again, I want accountability for mistakes.

By Randall Parker 2008 September 21 07:48 PM  Economics Financial Regulation
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SEC Leverage Rule Change Contributed To Investment Bank Failure

Julie Satow of the New York Sun reports a 2004 US Securities and Exchange Commission rules change contributed to the failure of investment banks.

The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.

The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC's trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.

Keep in mind that this is not the main cause of the financial crisis. Countrywide Financial, Washington Mutual, Fannie Mae, and Freddie Mac (among others) got into trouble due to the mortgage bubble and poor lending practices.

Barry Ritholtz says this rules change helps explain the extreme amounts of leverage in the crashing investment banks.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

In the Winter 2000 edition of the City Journal Howard Husock reported how Bill Clinton's Administration forced banks to loan large sums of money to high risk projects in inner cities. This is part of a multi-decade trend where the Democrats in Congress and the White House forced banks to lower their investment standards in order to supposedly help poor people.

The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.

The CRA's premise sounds unassailable: helping the poor buy and keep homes will stabilize and rebuild city neighborhoods. As enforced today, though, the law portends just the opposite, threatening to undermine the efforts of the upwardly mobile poor by saddling them with neighbors more than usually likely to depress property values by not maintaining their homes adequately or by losing them to foreclosure. The CRA's logic also helps to ensure that inner-city neighborhoods stay poor by discouraging the kinds of investment that might make them better off.

Fannie Mae and Freddie Mac had accounting scandals in 2003 and 2004. Wall Street Journal editor Paul Gigot got wind of an accounting scandal at Fannie and Fannie mobilized many allies on Wall Street to hit back at the WSJ for reporting the scandal. The reporting turned out to be highly accurate.

My battles with Fan and Fred began with no great expectations. In late 2001, I got a tip that Fannie's derivatives accounting might be suspect. I asked Susan Lee to investigate, and the editorial she wrote in February 2002, "Fannie Mae Enron?", sent Fannie's shares down nearly 4% in a day. In retrospect, my only regret is the question mark.

Mr. Raines reacted with immediate fury, denouncing us in a letter to the editor as "glib, disingenuous, contorted, even irresponsible," and that was the subtle part. He turned up on CNBC to say, in essence, that we had made it all up because we didn't want poor people to own houses, while Freddie issued its own denunciation.

The companies also mobilized their Wall Street allies, who benefited both from promoting their shares and from selling their mortgage-backed securities, or MBSs. The latter is a beautiful racket, thanks to the previously implicit and now explicit government guarantee that the companies are too big to fail. The Street can hawk Fan and Fred MBSs as nearly as safe as Treasurys but with a higher yield. They make a bundle in fees.

At the time, Wall Street's Fannie apologists outdid themselves with their counterattack. One of the most slavish was Jonathan Gray, of Sanford C. Bernstein, who wrote to clients that the editorial was "unfounded and unsubstantiated" and "discredits the paper." My favorite point in his Feb. 20, 2002, Bernstein Research Call was this rebuttal to our point that "Taxpayers Are on The Hook: This is incorrect. The agencies' debt is not guaranteed by the U.S. Treasury or any agency of the Federal Government." Oops.

Massachusetts House Democrat Barney Frank has been one of Capitol Hill's biggest defenders of Fannie and Freddie. Frank has consistently tried to make Fannie and Freddie even bigger - putting taxpayers on the hook for even bigger real estate bubbles and bigger losses.

Mr. Frank contends that he favored "very strong reform" of Fannie Mae and Freddie Mac, even before Democrats took over Congress after the 2006 elections. To adapt a famous phrase, this depends on what the meaning of "reform" is. Mr. Frank did support a bill that he and others on Capitol Hill described as reform. But on the threshold reform issue -- limiting the size of the portfolios of mortgage-backed securities (MBS) that the two companies could hold -- Mr. Frank was a stalwart opponent.

In fact, Mr. Frank was publicly arguing for an increase in the size of their combined $1.4 trillion portfolios right up to the day they were bailed out. Even now, after he's been proven wrong about a taxpayer guarantee, he opposes Treasury's planned reduction in the size of the portfolios starting in 2010, according to a quote attributed to him in this newspaper last week. "Good luck on that," he reportedly said. Mr. Frank's spokeswoman hung up the phone when we sought confirmation Tuesday.

Arnold Kling says Fannie and Freddie were under pressure from Congress (primarily Democrats like Barney Frank) to buy more of the subprime mortgages that led to their massive losses. If Fannie and Freddie (Government Sponsored Enterprises or GSEs) had purchased fewer of those mortgages then fewer of those mortgages would have been issued.

However, the GSEs have recently suffered large credit losses on loans that were not of investment quality. These low-down-payment loans were similar to the subprime mortgage loans that fueled the boom and bust cycle in housing. It is not clear why the GSEs chose to purchase these loans, since they are outside of the GSE charters. One story has it that they were afraid of losing market share. Another story I have heard is that the GSEs were under pressure from Congress to do more to provide funds for “affordable housing,” and the GSEs interpreted this as requiring more high-risk lending.

As a result of these high-risk loans, the GSEs ran into difficulty, reporting large losses. This in turn made investors nervous, so that the interest rates that the GSEs had to pay to borrow in order to fund their portfolios went up. Historically, the GSEs had been able to pay unusually low interest rates so that they could afford to hold assets with lower rates of return than other institutions, such as banks, could afford.

I see Congress as the biggest author of this crisis. But Congress critters are pointing at Wall Street. Barney Frank in particular deserves to lose his seat in the election this fall.

Update: The investment banks had huge leverage and therefore an enormous capacity to lose money.

When it collapsed, Lehman had about a 30:1 debt-to-equity ratio, meaning it had borrowed $30 for every dollar in capital it held. Morgan Stanley currently has a debt-to-equity ratio of 30:1, while Goldman Sachs has one of about 22:1.

Bank of America, on the other hand, currently has about an 11:1 leverage ratio, while JPMorgan has about 13:1 and Citigroup about 15:1.

By Randall Parker 2008 September 21 06:14 PM  Economics Financial Regulation
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Obama Worse Than McCain On Human Genetics Research?

Godless Capitalist thinks Barack Obama will suppress genetic research into human biodiversity and human differences. Greg Cochran disagrees. First off, Godless says John McCain will allow more research into genetic differences.

Half Sigma is way off on this one. I don't want to diss him too hard because the h-bd realist blogosphere isn't big enough for internecine warfare, but come on now...Palin is the most libertarian candidate to run since the Reagan administration.
A candidate like Palin is only available because Alaska is a frontier region which has somewhat escaped the tender ministrations of the diversicrats in the lower 48.

Some points:

1) First, the guys who think "worse is better" are morons. Rhodesia and South Africa prove that "worse is worse". The left can take a country all the way to the grave by controlling the media. A rightist backlash is NOT assured.

2) Second, from an h-bd realist perspective we're fighting to hold territory, not to take it. We just need to hold off the left till genomics can come through. We're going to be knocking off sacred cow after sacred cow in the next decade or so. "Race is a social construction" has now been completely dynamited by the genomic maps of Europe, the Hapmap, and all the related papers -- and that only took about 6 years time. Any knowledgeable person can now fillet an unreconstructed Lewontinite by just linking half a dozen recent vintage papers, and there will be literally hundreds by the time the decade is up.

Moreover, it's only a matter of time before the IQ/genomics correlations come down the pike, and that will change everything. But under Obama, there is a very serious risk that work on the genomics/race/IQ nexus will be outlawed or banned. Marcus Feldman and his rapid response teams are only the beginning of this...there are a lot more mutterings going on than have been made public, and left creationists will be ascendant as never before in an Obama administration. There is plenty of precedent: just look at how research into nuclear power, physical anthropology, and genetically modified plants have been brought to a shuddering halt in Europe (and slowed in the US).

It doesn't have to be an overt "ban", of course -- it can just be a series of obstacles to getting any funding for such "racist" studies. It's already well nigh impossible to study genetics, IQ, and race directly given IRB issues...all they'd need to do is apply even stricter scrutiny to the various loopholes that savvy scientists have been exploiting (e.g. Alzheimer's).

By contrast, 8 years of "hold" under a Palin administration will buy us the time we need. And it will be a "Palin administration", in that McCain will see that his popularity depends on his VP. I think amnesty is a *lot* less likely if Sarah has something to say about it.

Anyway -- all the rest regarding the ostensible "prole" nature of solidly middle class Palin is basically bullshit. I mean, for real? Does everyone forget that Obama is an agitator for the underclass, a longtime drug user born to an airheaded teenage mother, the son of an African polygamist and a member of a barbaric church? Obama is beloved by both Yale *and* Jail, and is an apologist for criminal vermin like the Jena Six. Palin is an advocate for the taxpayers. That's the difference between them.

So GC sees a McCain-Palin presidency as less bad than an Obama-Biden presidency. I have to say: I do not know. I can trot out major negatives about each ticket. Presidents once in office can do far more damage than we can foresee in advance. The best we can hope for is an ineffectual president. The downside risks are bigger than the upside potential.

Greg Cochran thinks genetic research into human biodiversity isn't suppressible because the cost of DNA testing has gotten so cheap that the US government suppression won't stop it. I agree on the cheapness. It is going to get orders of magnitude cheaper still.

I've thought about this question for ten years or so, and of course I've had more direct experience with the reaction to this kind of work than - well, anyone.

And I have to conclude that you're an utter loon. First, the idea that there is some difference in the way that the two political parties would react to controversial research results in this area is simply false. Mostly they won't react at all because they're not even interested. Second, the idea that we'll see draconian regulation of genetic data is highly unlikely: researchers will _not_ like it, independent generation of such data is going to be trivially cheap, and the scheme only works if the US conquers the world.
Worse than that - it'd make us fall behind in the great gene race with China. Darpa sure wouldn't like that.

Next, you seem to think that understanding the genetic roots of phenotypic differences between population groups will have dramatic effects - in particular, undermine people's core political beliefs - if allowed to. But in fact it will have minuscule effect. Genotypes are not more convincing than phenotypes, which we see every day. More to the point, you can't shift such strongly held, emotionally held beliefs with anything less than dynamite. And I don't mean _rhetorical_ dynamite.

Read more history.

I happen to think that the evidence from genetics is going to shift enough people's beliefs that many currently taboo subjects will reenter mainstream discourse. For defenders of the status quo genetic evidence represents a threat. The current foolish elite conventional wisdom about human nature (e.g. that all can be raised up to college level of intellectual performance) helps to justify educational policies that inevitably fail. The defenders of those policies do not want to defend their policies against detailed genetic evidence that some people really are dumb. So they do not want to see detailed mechanisms that explain why the dumb are dumb reaching the pages of scientific journals.

While the genetic evidence isn't going to shake the faith of most hard core Lefties it will embolden a lot of people who are currently fearful to speak their beliefs. The balance of forces in political battle will shift against the educational bureaucrats who argue that all can become college material, against the defenders of racial preferences, against redistributionists who argue that economic inequality is primarily the result of unfairness by capitalists.

Now, educational bureaucrats will continue to fight for more money. They'll just use different arguments. For example, they'll argue that training the less intellectually able with useful job skills requires a lot ratio of teachers to students and lots of intensive teaching. Redistributionists will argue that while intellect and hard work are responsible for part of inequality some inequality will be due to unfairness. Politicians will still campaign with Robin Hood arguments for the masses. But the Left will not win quite as many political struggles. Obama wants to win struggles for the Left. So he's not keen to see the Left weakened by the results of scientific research.

Cheap DNA testing by itself doesn't get us the identification of genetic variations that influence intelligence and personality. We need large scale comparisons of people for many different cognitive measures and lifetime behaviors correlated with DNA testing results. This requires collection of large amounts of social science data. The work probably won't get funded much in the US - unless some rich people pony up the money. But I'm hopeful that countries with less racially diverse populations will fund the research and we'll learn which genetic variations cause which differences in cognitive function.

Suppose Godless's worry about Obama is correct. The research will still get done more slowly elsewhere. But we have to keep in mind other considerations when selecting a President. One of my worries for a McCain Administration is that he could become demented while in office. He might not be willing to admit it to himself. His decision making could become even more erratic than his temperament and shallowness already makes it.

By Randall Parker 2008 September 21 01:52 PM  Politics Human Nature
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2008 September 20 Saturday
Prevent Banks From Being Too Big To Fail?

Steve Sailer proposes size limits on financial institutions so that they don't become too big to fail.

There is a lot of talk about how we need more governmental regulation of today's enormously complex financial markets, but the obvious problem with that is that barely anybody understands how today's enormously complex financial markets work, and those that do generally have better things to do than get paid at civil servants' salary levels.

So, what we need are a few new but simple regulations. But those are hard to come up with. Let me toss one idea out there: We shouldn't permit financial institutions to get too big to fail.

But I do not think size by itself is the problem. First off, Hank Paulson decided that Lehman Brothers could fail but AIG couldn't. Why? AIG was an insurer for lots of securities that lots of banks and other financial institutions held. If AIG failed then all that insurance would have become worthless and all those securities would have been downgraded. Then the banks would have sold those securities and took huge losses. The point here: AIG was too intertwined with other financial institutions.

So I would argue that bigger financial institutions should get saddled with more restrictions in order to limit their ability to take other institutions with them when they crash. Limit counterparty risk.

AIG's losses came in security instruments that started out with AAA ratings. Are ratings agencies the biggest causes of the financial crisis?

It now appears that a large proportion of AIG’s $41bn in writedowns stem from its exposure to so-called supersenior instruments, or the most senior chunks of pools of debt backed by mortgage and corporate bonds.

Until last summer, these instruments were considered so utterly safe and dull that they carried a triple A rating and rarely moved in price. That was because these instruments sat so high in the capital structure that they only suffer losses if a tsunami of defaults occur – and in the halcyon days before the credit crunch most investors, and rating agencies, found it impossible to imagine such a shock. However, this once-unthinkable scenario is now starting to materialise in relation to some bundles of mortgage-linked debt, causing the price of supersenior debt to fall 30 and 60 per cent, according to different measures. That has created vast mark-to-market losses at the entities holding this stuff, such as Merrill Lynch and UBS. It has also hit AIG, both in terms of securities it holds and those it has insured.

Update: A better idea: Prevent banks from buying securities that are AAA rated only as a result of being insured. Security insurance sets up the conditions of a massive failure. If the insurance agency fails then massive numbers of securities get downgraded and dumped all at once.

By Randall Parker 2008 September 20 11:00 PM  Economics Financial
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Muslim Politics In America And Materialistic Shallow Progressives

Razib rifts off of a recent report that evolutionist and avowed atheist Richard Dawkins' web site has been banned in Turkey (which wants to become part of the European Union btw). After commenting that Anglo-American and Scandinavian attitudes toward free speech are alien to most of the world Razib points out that in spite of a higher IQ skew of Muslim immigrants to America they take political positions close to those of Evangelical Christians.

In the USA the Muslims are relatively civilized because of immigration which skew toward those with industry and education, which naturally means inculcation in many disciplines which presuppose a Western outlook. Nevertheless, I have pointed out that by the data the average American Muslim has views in line with the average Evangelical more than the typical religious person. On a pan-religious distribution of traits in many ways moderate Muslims and conservative Christians are isomorphic. There are Muslims who might be the equivalent to liberal Christians, but their numbers proportionally small even in a relatively assimilated and integrated community such as American Muslims.

Razib points out that American secularists (and by these I think he's referring to the left-liberal subset of secularists) focus their criticisms on Evangelical Christians while simultaneously saying nothing about the threat posed by letting Muslims immigrate to America.

I only bring this up because many American secularists are in the habit of mocking and attacking the "American Taliban" and the primitive knuckle-dragging predispositions of Bible-believing white Evangelicals. On the other hand, to a great extent they treat Muslims like they treat black Christians; with benign neglect. This makes sense to some extent, Muslim politics today resembles that of black Americans; roughly, relatively fiscally liberal and socially & religiously conservative, and strongly Democratic. Muslim and black Americans are not perceived to be a threat to abortion rights, for example, despite their avowed opposition to the practice, because they support a political party which generally supports the maintenance of Roe vs. Wade. In contrast, large numbers of white religious conservatives are mobilized around this issue. The social conservatism of Muslims and black Americans is directed inwardly, against deviants and misfits within their own communities, and so to a large extent invisible to the anti-religious progressives who are allied with these communities politically.

But context matters. Turkey is not the United States, it is a 99% Muslim country where religious conservatives flex their muscle in a manner very reminiscent of American religious conservatives, except to a far greater magnitude of medievalism. For example, the stalled attempt to criminalize adultery. Across the Muslim world heterodox men and women exist under an oppressive traditionalism which would put small town Mississippi to shame. Of course despite any universal avowal of human rights there is only so much that one can practicably do. Here in the United States gay rights activists usefully turn their attention to religious conservatives as their primary opponents despite the much greater repression of open homosexuality in most of the world, especially the Muslim world. It is to some extent a matter of bang-for-your-buck, and also an issue of concerns near which are realized in our day to day life vs. abstractions of justice and fairness on the grand scope.

I do not see American left-liberalism as stable. The left-liberals act in ways counter to their long term interests because some of the elements of their faith blind them to their interests. As a result they support public policies that do great harm. Unfortunately from my perspective to the extent that my interests overlap with theirs my interests get sacrificed along with theirs. I will live in a less free and less prosperous society because they were too content to criticize Evangelical Christians and people in Fly-Over Country to develop in depth understanding. Their biggest mistake is going to turn out to be their support for immigration of groups which will, in the long run, act in ways that undermine the goals of middle and upper class liberals.

This all reminds me: Stuff White People Like blogger Christian Lander (read his post on white people moving into Harlem for an example) has a book out entitled Stuff White People Like: A Definitive Guide to the Unique Taste of Millions. Writing for The Atlantic Benjamin Schwarz takes a look at the white progressive status-seekers and Lander's critique of this population segment.

Lander’s White People approve of the kind of diversity that affords them the aesthetic and consumer benefits of what they like to think of as urban life—that is, the kind that allows them to

get sushi and tacos on the same street. But they will also send their kids to private school with other rich white kids so that they can avoid the “low test scores” that come with educational diversity.

Here and elsewhere, accompanying the book’s mockery of the essentially innocuous solipsism of White People is what Lander, a man of the left, described to me as his exasperation with progressives’ “cultural righteousness” and “intolerance and groupthink”—a set of attitudes that enhances and is enhanced by a profoundly smug and incurious outlook. To be sure, these faults aren’t peculiar to the progressive and the hip, but Lander repeatedly and cleverly shows how some of White People’s favorite activities (watching political documentaries, “raising awareness,” foreign travel), which they complacently embrace as broadening, are in fact lazy and tend to be intellectually and politically stultifying: White People “like feeling smart without doing work—two hours in a theater is easier than ten hours with a book.”

More damning is the conclusion produced by a careful reading of this often fine-grained semi-sociological analysis: a good deal of the progressives’ attitudes, preferences, and sense of identity are ingrained in an unlovely disdain for those outside their charmed circle. In Lander’s analysis, much of their self-satisfaction derives from consumption (the slack-sounding “stuff” in the title is deceptively apt)—and much of that consumption is motivated by a desire to differentiate themselves from the benighted. Sushi, for instance, is “everything [White People] want: foreign culture, expensive, healthy, and hated by the ‘uneducated.’” And whatever its goals, the ACLU is beloved by White People, Lander satirically but not wholly unjustifiably asserts, because it protects them “from having to look at things they don’t like. At the top of this list is anything that has to do with Christianity”—an aversion, Lander discerns, rooted not in religious enmity but in taste (Christianity is “a little trashy”), formed largely by class and education. To those of this mind-set, the problem with a great many Americans is that they don’t “care about the right things.”

What is especially exasperating to me about the "White People" which Lander describes is the lasting damage of their shallow condescending outlooks. When translated into public policy their desires lead to long-lasting harm to the commonwealth.

By Randall Parker 2008 September 20 01:52 PM  Cultural Wars Western
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2008 September 19 Friday
Iraq Violence Dropped Due To Ethnic Cleansing?

UCLA researchers point to satellite night light measurements as evidence that ethnic cleansing rather than the US troop surge cut violence in Baghdad.

By tracking the amount of light emitted by Baghdad neighborhoods at night, a team of UCLA geographers has uncovered fresh evidence that last year's U.S. troop surge in Iraq may not have been as effective at improving security as some U.S. officials have maintained.

Night light in neighborhoods populated primarily by embattled Sunni residents declined dramatically just before the February 2007 surge and never returned, suggesting that ethnic cleansing by rival Shiites may have been largely responsible for the decrease in violence for which the U.S. military has claimed credit, the team reports in a new study based on publicly available satellite imagery.

"Essentially, our interpretation is that violence has declined in Baghdad because of intercommunal violence that reached a climax as the surge was beginning," said lead author John Agnew, a UCLA professor of geography and authority on ethnic conflict. "By the launch of the surge, many of the targets of conflict had either been killed or fled the country, and they turned off the lights when they left."

A few years ago I was arguing that the best way to end the inter-ethnic violence was to speed up the ethnic cleansing by helping the Shias, Sunnis, and Kurds move away from each other. That would have reduced the number injured and killed. But such realism is too far from the lame mainstream of politically correct America.

The Sunni areas of Baghdad were getting darker at night even before the surge. They've stayed darker.

The night-light signature in four other large Iraqi cities — Kirkuk, Mosul, Tikrit and Karbala — held steady or increased between the spring of 2006 and the winter of 2007, the UCLA team found. None of these cities were targets of the surge.

Baghdad's decreases were centered in the southwestern Sunni strongholds of East and West Rashid, where the light signature dropped 57 percent and 80 percent, respectively, during the same period.

By contrast, the night-light signature in the notoriously impoverished, Shiite-dominated Sadr City remained constant, as it did in the American-dominated Green Zone. Light actually increased in Shiite-dominated New Baghdad, the researchers found.

Until just before the surge, the night-light signature of Baghdad had been steadily increasing overall, they report in "Baghdad Nights: Evaluating the U.S. Military 'Surge' Using Night Light Signatures."

"If the surge had truly 'worked,' we would expect to see a steady increase in night-light output over time, as electrical infrastructure continued to be repaired and restored, with little discrimination across neighborhoods," said co-author Thomas Gillespie, an associate professor of geography at UCLA. "Instead, we found that the night-light signature diminished in only in certain neighborhoods, and the pattern appears to be associated with ethno-sectarian violence and neighborhood ethnic cleansing."

We are wasting our time, money, and blood in Iraq.

"The surge really seems to have been a case of closing the stable door after the horse has bolted," Agnew said.

..."The U.S. military was sealing off neighborhoods that were no longer really active ribbons of violence, largely because the Shiites were victorious in killing large numbers of Sunnis or driving them out of the city all together," Agnew said. "The large portion of the refugees from Iraq who went during this period to Jordan and Syria are from these neighborhoods."

It makes sense that ethnic cleansing would have eventually led to a decline in violence. The surge might have helped too. But another factor that helped was the split of the Sunni tribes away from foreign fighters. My guess is that American cash had a lot to do with it. Part of that cash came in the form of security jobs for Sunni fighters. But I bet substantial amounts of cash came in briefcases and suitcases for tribal leaders.

By Randall Parker 2008 September 19 11:05 PM  Mideast Iraq Ethnic Cleansing
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2008 September 18 Thursday
California Housing Prices Keep Becoming More Affordable

Happy days. Housing prices are down in California. This means the financial institutions holding all those mortgages and derivatives have bigger losses in store. Their loss is your gain if you want to buy a house.

The figures released Thursday by MDA DataQuick showed 37,988 new and preowned homes were sold statewide last month, up 13.6 percent from August 2007 but down 3.8 percent from July.

The firm said 46.9 percent of all homes sold last month were foreclosed properties.

That helped send the statewide median home price plunging 35.3 percent to $301,000 during the year ended in August.

Now if you have a mere $447k you can afford to live in the Bay Area.

Other data released by MDA DataQuick showed a 31.8 percent plunge in the median home price in the San Francisco Bay Area last month to $447,000, from $655,000 in August 2007.

Who says this collapse is bad? I see better lower prices. Lower prices are good. Don't forget that - no matter what the bankers say.

San Diego is an even better deal - only $350k per house. Nice weather too.

Weighted down by ever more low-priced foreclosure sales, San Diego County's median home price fell to $350,000 last month, the lowest level in 5½ years, MDA DataQuick Information Systems reported yesterday.

The 3.8 percent drop from July marked the 13th time in 14 months prices have fallen locally, with the median off 26.3 percent from a year earlier.

Around LA the rate of new foreclosures is running faster than the rate of foreclosure sales. So the percentage of houses sold that are foreclosures looks set to exceed 50%.

In August, about 8,800 of the 19,366 homes sold in Los Angeles, Orange, Riverside, San Bernardino, Ventura and San Diego counties were in foreclosure, according to San Diego-based MDA DataQuick.

But as those homes were selling, even more were being repossessed, building up an inventory of foreclosed properties that will take months to move.

Banks and other financial institutions took back about 12,900 homes last month in the region, O'Toole said, thousands more than they managed to sell.

More supplies are building up and so better deals are coming. Obama should be celebrating how these price drops are making housing more affordable for poor and working class people. McCain should celebrate how the free market is making housing cheaper. Okay, so the market has been distorted by the Chinese central bank with lots of help from the SEC, Fannie Mae, Freddie Mac, and other instruments of US federal government policy. Still, this is a market at work and it is making housing cheaper. Hurray!

In Ventura County, just north of LA County, housing prices have fallen to a mere $400k. Hey, if this keeps up Ventura housing might become affordable.

The median price, the point where half the homes sold for more and half for less, is still being tugged down by distressed sales. In August, the median fell to $400,000, a 30.4 percent decline from $575,000 a year ago, according to DataQuick.

The last time the median was below the $400,000 level was in June 2003, when it was $396,000. The county's median peaked at $634,000 in July 2006, according to the San Diego-based real estate information service.

You can see why all the mortgage-granting banks are tanking. More mortgages are going underwater and people are walking from mortgages for amounts larger than their houses are worth. Meanwhile, rumour has it that the Bush Administration is going to resurrect the Resolution Trust Corporation concept to hold all the bad debts.

The Bush administration is urgently preparing a massive intervention to revive the U.S. financial system, including a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers.

The financial crisis continues to unfold very quickly. An electronic equivalent of a bank run appears to be starting with certificates of deposit.

Regulators and the banking industry are increasingly concerned about customer withdrawals from money-market funds. Crane Data, which tracks the industry, said total deposits in money-market funds fell Wednesday by at least $79 billion, or about 2.6 percent. Financial executives have told government officials in recent conversations that the rising pace of withdrawals is the equivalent of a bank run and that if it continues, it will drain a massive and critical source of funding.

NYU gloomster economist Nouriel Roubini lists the various ways the US government is trying to stop the panic and concludes things are going to get worse.

There is the beginning of a silent bank run as depositors are nervous about their assets. The panic is mounting in the financial markets, and the credit default swap market is frozen because of the Lehman collapse and the state of affairs at AIG, WaMu and other financial institutions. Many hedge funds are now teetering as their losses mount. Investors in fixed income--including preferred stocks--have experienced massive losses and the financial turmoil is becoming global as stock markets all over the world plunge. Worst of all, policymakers are running out of bullets. Think Spaghetti Westerns and a parched desperado in a dry gulch.

The Lehman collapse is leading to the risk of a generalized run on the shadow banking system. The policy reaction is to try to build a new set of levees after the financial perfect storm of the century destroyed the first set.

The TED Spread was at 3.13% on Sept 18. 2008. That means the banks are afraid to loan to each other overnight and indicates parts of the capital markets are freezing up.

So RTC The Sequel is coming. Calculated Risk says RTC Part 2 will be different. Sounds like the US government will buy massive amounts of financial assets. Just that buying will drive up their value - at least until the underlying assets fail due to foreclosures and the like.

However this new entity would be very different from the RTC in a number of ways. The RTC was created to dispose of assets accumulated from failed Savings & Loans.

The new entity, according to the WSJ, would purchase illiquid assets "at a steep discount from solvent financial institutions and then eventually sell them back into the market".

With the RTC, the government already had direct responsibility for the assets since they acquired them from insured S&Ls that had failed. The role of the RTC was to liquidate certain of these assets.

In the current situation, the government has no financial responsibility for the assets, except for a few exceptions like the assets of Fannie and Freddie, and the NY Fed's assets acquired in the JPMorgan / Bear Stearns deal. The new entity will both buy assets "at a steep discount" and eventually sell the assets. So unlike the RTC, this new entity puts the taxpayers at risk.

By Randall Parker 2008 September 18 10:28 PM  Economics Housing
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Treasury 3 Month Rate Almost 0%

The US 3 month Treasury Bill rate has fallen to almost 0%.

Investors pushed down the rate to 0.0203 percent on concern that credit market losses will widen after the bankruptcy of Lehman Brothers Holdings Inc. and the federal takeover of American International Group Inc. In a sign of banks' reluctance to lend, the rates charged for short-term loans relative to U.S. bill rates rose to the highest on record.

That rate has never been so low since before World War II. Yes, you have to go back to the late Great Depression years for a T-bill rate that low.

The Treasury-EuroDollar (TED) Spread, a measure of flight from risk, has soared.

The Wall Street Journal reported in Wednesday’s newspaper that overnight LIBOR, a key interbank lending rate, had surged to more than 6%. That rate declined to 5.03125% overnight. However, the key three-month lending rate rose to 3.0625% from 2.87625%. Despite news of the Federal Reserve’s bailout of American International Group, worries about liquidity spiked on news that U.K. bank HBOS may be facing short-term funding problems.

The TED spread hasn't been this big since 1987 or perhaps earlier.

Goldman Sachs might be able to stay independent. But the other still independent US investment bank, Morgan Stanley, is looking for a merger partner.

Seeking to avoid the kind of fate that led Lehman and Bear Stearns to collapse, John J. Mack, Morgan Stanley’s chief executive, made an unsuccessful effort on Tuesday evening to persuade Citigroup’s chief executive, Vikram S. Pandit, to enter into a combination, according to people briefed on the talks.

“We need a merger partner or we’re not going to make it,” Mr. Mack told Mr. Pandit, according to two people briefed on the talks.

Washington Mutual has put itself up for sale and Citibank might buy it instead.

Will a few mergers stop the financial panic? Or will it spread?

By Randall Parker 2008 September 18 12:06 AM  Economics Financial
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2008 September 17 Wednesday
Financial Reform Debate Intensifies

Peter J. Wallison, formerly general counsel of the Treasury Department in the Reagan administration, argues that US Treasury Secretary Hank Paulson took over Freddie Mac and Fannie Mac in a way that guarantees further Congressional mischief.

Mr. Paulson has correctly noted that Fannie and Freddie operate on flawed business models -- as government-sponsored enterprises they have conflicting missions, and force the taxpayers to subsidize the risk-taking of for-profit managements. But he argued that, after they have been re-established as operating companies, Congress can decide their future.

This is stunningly naive. Recent statements by Barney Frank (D., Mass.), the chairman of the House Financial Services Committee, and Chuck Schumer (D., N.Y.), a powerful member of the Senate Banking Committee, make clear that Congress will never let them be privatized, broken up, slimmed down, nationalized or any of the other options hopeful reformers are putting forth today. Fannie and Freddie in their current form are just what Congress wants: an inexhaustible source of campaign contributions and funds for favored groups.

But was there a way for Paulson to reduce the future mischief potential of Fannie and Freddie? Wallison says yes.

What should have been done? A receiver, not a conservator, should have been put in charge of Fannie and Freddie. A receiver could have wiped out the common and preferred shares, repudiated unfavorable contracts, created a good bank/bad bank structure for isolating the bad assets, and otherwise taken steps to reduce the losses to taxpayers.

A web site called OpenSecrets.org which tracks campaign donations has a chart that shows Senator Barack Obama was the second largest recipient of campaign donations from Fannie Mae and Freddie Mac from 1989-2008. Senator Christopher Dodd, chairman of the Senate Banking Committee, was the biggest recipient of Fannie/Freddie money. Though in 2008 alone the New York Times finds McCain got more from Fannie and Freddie than Obama did. Neither Dodd nor Obama want to abolish or privatize Fannie and Freddie. Not sure where McCain stands on this question.

Fannie and Freddie have been a way for former high officials in government to hop into the public-private hybrid sector and make a lot of money.

Fannie and Freddie have also been places for big Washington Democrats to go to work in the semi-private sector and pocket millions. The Clinton administration's White House Budget Director Franklin Raines ran Fannie and collected $50 million. Jamie Gorelick — Clinton Justice Department official — worked for Fannie and took home $26 million. Big Democrat Jim Johnson, recently on Obama's VP search committee, has hauled in millions from his Fannie Mae CEO job.

Tyler Cowen says we had incorrect regulation of the financial industry.

In short, there was plenty of regulation — yet much of it made the problem worse. These laws and institutions should have reined in bank risk while encouraging financial transparency, but did not. This deficiency — not a conscientious laissez-faire policy — is where the Bush administration went wrong.

It would be unfair, however, to blame the Republicans alone for these regulatory failures. The Democrats have a long history of uncritically favoring expansion of homeownership, which contributed to the excesses at Fannie Mae and Freddie Mac, the humbled mortgage giants.

Even with the crisis well advanced Democrats in Congress wanted Fannie and Freddie to dig their holes even deeper.

The privatization of Fannie Mae dates back to the Johnson administration, which wanted to get the agency’s debt off its books. But now, of course, the government is on the hook for the agency’s debt. As late as this spring, Congressional Democrats were pushing for weaker capital requirements for the mortgage agencies.

This reminds me of the savings and loan crisis that reached a climax while Ronald Reagan was President. The genesis of the crisis was in the 1970s when inflation drove up interest rates that the S&Ls had to pay and made them insolvent. Well, rather than shut down all those S&Ls Congress, and chiefly though not solely Democrats in Congress, decided to raise the limits on what the savings and loans could do in hopes that by raising their insured deposit limits and letting them into new lines of business that they'd be able to earn their way out of insolvency. Instead these financial institutions dug holes even deeper leading to the Keating Five scandal where John McCain found his character questioned and he became a tireless crusader against private donations to election campaigns.

I think that banks shouldn't be able to buy bond insurance policies. Bank health shouldn't be wrapped up with insurance industry health.

By Randall Parker 2008 September 17 11:50 PM  Economics Financial
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2008 September 16 Tuesday
US Federal Reserve Rescues Insurer AIG

$1.1 trillion insurer American International Group (AIG) avoids collapse by a Fed takeover. Since AIG isn't a bank the Federal Deposition Insurance Corporation couldn't step in. So the Fed did the deed.

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.  

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy. 

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries.  These assets include the stock of substantially all of the regulated subsidiaries.  The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

If the counterparty risk of an AIG collapse is as massive as some people say it is then the most surprising thing about the AIG crash is just how little the stock market went down as this crisis intensified. My interpretation: the big players on Wall Street knew that Ben Bernanke and Hank Paulson would find a way to prevent the house of credit default swap (CDS) cards from falling down. The threat was so massive that the disaster wouldn't be allowed to happen.

But how could the Fed intervene without legal authority from Congress to take over an insurance company? Before this deal was announced some commentators were opining that the Fed does not have the legal authority to lend tens of billions of dollars to an insurance company and become a big stock holder in it. Well, the law is what government entities decide is the law. Megan McArdle opines (correctly in my view) no major player is going to try to stop the Fed because noone wants responsibility for the problem.

It's probable that they don't actually have the legal right to do anything like this. Their authority is this: who's going to stop them? No one wants to take on responsibility for this mess themselves.

Megan has many thoughtful observations about which regulatory changes might reduce the risk of another massive financial failure.

Given AIG's role as a very large scale insurer of debt securities its collapse could have caused a massive disastrous chain reaction. I know some of you do not believe this. But seems likely to me.

What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but A.I.G.’s its role as an enormous provider of financial insurance, which effectively requires it cover losses suffered by other institutions in the instance of defaults of securities that they have purchased. That means A.I.G. is potentially on the hook for securities that were once considered safe.

If A.I.G. had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of billions of dollars in debt securities, which in turn would have reduced their own capital and the value of their own debt.

“It would have been a chain reaction,” said Uwe Reinhardt, a professor of economics at Princeton University. “The spillover effects could have been incredible.”

What financial regulatory changes are needed to make the financial world less like a house of cards?

The Fed claims it won't lose money on the deal. Supposedly AIG is faced with a liquidity crisis, not an insolvency crisis.

According to the Fed’s statement on the deal, it has a two-year term, and will pay an interest rate of three-month Libor plus 850 basis points. Taxpayers are protected, the bank said, by the fact that the loan is collateralized by all of the assets of AIG and its subsidiaries. As of its most recent SEC filing, AIG was reporting assets of $ 1 trillion.

David Leonhardt of the New York Times wonders whether bailouts make things worse in the long run.

Barry Ritholtz — who runs an equity research firm in New York and writes The Big Picture, one of the best-read economics blogs — is going to publish a book soon making the case that the bailout actually helped cause the decline. The book is called, “Bailout Nation.” In it, Mr. Ritholtz sketches out an intriguing alternative history of Chrysler and Detroit.

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Well, I do not want to see most of the banks collapse like a bunch of dominoes just so some investors will learn some lessons. Sure, the Great Depression taught a whole generation to be wary about investments and debt. But do you want to live through that kind of educational experience? I don't.

As far as Detroit in the early 80s is concerned: the US Congress has kept the automakers in a slow death bear hug with the UAW. That's not the fault of the people who run the car companies. Also, a continuing focus on fuel efficiency would not have worked as gasoline prices fell and the car buyers decided they wanted big cars once again.

By Randall Parker 2008 September 16 10:19 PM  Economics Financial
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2008 September 14 Sunday
Liquidity Crisis Unfolds Over Weekend

In case you have missed the scope of what is unfolding here's a list of the major Wall Street and Federal Reserve events of this weekend. The big banks are afraid of a liquidity crisis and stronger banks are banding together.

Second, to establish a collateralized borrowing facility, which ten banks (Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, and UBS) have committed to fund for $7 billion each ($70 billion in total). The facility will be available to these participating institutions for liquidity up to a maximum of one third of the facility for any one bank. It is anticipated that the size of the facility may increase as other banks are permitted to join the facility.

Nouriel Roubini said on CNBC that the investment banks can not survive as independent units. So Morgan Stanley will need to tie up with a conventional bank if it is to survive. The effects of the Glass-Steagall Act (which separated investment banks from retail banks) have been almost totally reversed.

Lehman Brothers might be headed into chapter 11 bankruptcy. At the time of this writing they are trying to sell themselves to one last potential suitor.

As potential suitors walked away from a deal to rescue Lehman Brothers Holdings Inc on Sunday, it became increasingly likely that the only place the troubled investment bank has to turn is a bankruptcy court.

The biggest insurer in the United States, AIG, is fighting for its survival.

American International Group, the nation's largest insurer, plans to unveil a restructuring plan as soon as Monday morning that will include selling off part of its business to raise cash and boost investors' confidence, according to a published report.

Other big investment banks are afraid they too will find it impossible to raise capital at affordable rates. Merrill Lynch decided to cut a deal before they went up against the wall. Bank of America is to buy Merrill Lynch for $29 per share.

Bank of America has struck a $44 billion deal to buy Merrill Lynch, according to two people familiar with the negotiations, a merger that will unite the nation's largest consumer bank with one of its most celebrated investment banking firms.

Many months after Warren Buffett said we were going to have a long deep recession due to financial reasons former Fed chief Alan Greenspan is now saying we are going thru a once-in-a-century financial crisis. Er, wouldn't that make it worse than the Great Depression?

The United States is mired in a "once-in-a century" financial crisis which is now more than likely to spark a recession, former Federal Reserve chief Alan Greenspan said Sunday.

The talismanic ex-central banker said that the crisis was the worst he had seen in his career, still had a long way to go and would continue to effect home prices in the United States.

"First of all, let's recognize that this is a once-in-a-half-century, probably once-in-a-century type of event," Greenspan said on ABC's "This Week."

The Federal Reserve has just announced a broadening in the types of collateral it will accept from major banks. This is a move to allow the Fed to give more banks more very large sums of money.

The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.

The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.

These changes represent a significant broadening in the collateral accepted under both programs and should enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally.

The recession is going to deepen, housing prices will continue to fall, and default rates will rise on more types of credit aside from mortgages. Major financial institutions have fallen just from the mortgage crisis. So what happens to the rest of them as the bad credits start piling up in other areas?

Update: The cost of insuring against company defaults soared even for seemingly stronger firms such as Morgan Stanley and Goldman Sachs. This illustrates how deeply the market distrusts all the investment banks at this point.

Among some market participants, the wait on Sunday was excruciating. There was trading in credit default swaps — contracts that allow traders to buy or sell protection against a company defaulting on its debts, and there were few willing to sell such protection.

Instead, traders said, the cost of buying protection against defaults soared, even for financial firms that are considered to be in good shape, like such as Morgan Stanley and Goldman Sachs.

If the markets do not trust the investment banks then the other market participants will be reluctant to take the opposite side of trades with them or to let large amounts of money flow through the investment banks.

Will stock prices go through a huge decline on Monday or some other day soon?

Some even recalled the stock market crash in 1987, the biggest fall ever seen by the current generation of Wall Streeters. “This is an earth-shattering event, this is like a tectonic plate shifting event,” said Thomas Priore, chief executive of Institutional Credit Partners, a hedge fund active in credit markets. “This is welcome back to Black Monday.”

Update: What caused this debacle? Something this big requires multiple causes that all come together. First off, the East Asians bid up the dollar and drove down interest rates so that we could live beyond our means without causing consumer price inflation. This fed into the real estate bubble. Second, Democrats in Congress (with support from George W. Bush and Bill Clinton before him) pressured financial institutions to lend lots of money in sub-prime mortgages to poor blacks and Hispanics (see more here). This helped lower the quality of mortgage debt. Third, the price of oil skyrocketed and drained disposable income. This comes courtesy of Peak Oil. The problem is going to get worse.

By Randall Parker 2008 September 14 07:44 PM  Economics Financial
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2008 September 10 Wednesday
Tyler Cowen Sees Treasury Had No Choice Over Mortgage Agencies

The US government had to bail out Freddie Mac and Fannie Mae because the only other alternative was another Great Depression.

But let's say that the Treasury did not support the debt of the mortgage agencies. The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless. The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly. The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value. Most of the U.S. banking system would be insolvent. Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot. The rate of unemployment would climb into double digits and stay there. Many Americans would not have access to their savings. The future supply of foreign investment would be noticeably lower. The Federal government would lose its AAA rating and we would pay much more in borrowing costs. The deficit would skyrocket.

Oh come on Tyler, don't hold back. Tell us what you really think.

David, I don't think of those as extreme predictions! Maybe the dollar would fall only by 20 percent. If nothing else, just imagine what happens when the banks holding all that agency paper are formally belly-up, all at the same time, not to mention the effects from agency equity, which we will be seeing as it stands. Or think about how highly leveraged and thinly capitalized so many parts of American finance are. Look at what kind of assets money market funds are holding and what would happen if there was a general run on such funds. Under these scenarios the U.S. financial system shuts down for a while and that doesn't require any radical assumptions. It's another Great Depression. Abroad, the Chinese and others would be *very* surprised to take losses on agency debt. Blame it on a collective nudge-nudge, wink-wink if you want, but that is their market expectation, very much encouraged by the U.S. government, and they would view anything else as equivalent to expropriation.

Tyler's argument is that while Freddie and Fannie as semi-private government corporations are really bad ideas it is too late to basically disown those corps and let them collapse. Too much US government financial credibility was invested in their lack of risk. If we let their creditors lose their money a lot more other US government obligations would come to be seen as lacking credible backing.

Tyler says US banks have too much in Freddie and Fannie debt issues and would collapse if their debt became worth little.

1. The current operation of the money market requires ongoing faith in a variety of assets and commitments.  Just try tracing through the consequences of a general "run" on money market funds, which "promise" a redemption ratio of $1 a share but on the other hand really don't make such a promise.  How quickly would Merrill Lynch cry Uncle, how quickly would the Fed's balance sheet be exhausted, and how many commitments would they have made in the meantime and how many people would have to sell stocks to find cash and make margin calls?  Or think about what would happen if FASB ruled that Frannie debt securities did not qualify as "ready cash" for accounting purposes.  (As a general tendency I find that economists vastly underrate the importance of accounting as an economic force.  I might add that many market advocates are unaware of how quickly liquidity can vanish in these markets; just look at auction-rate securities.)  And those aren't even the biggest potential problems arising from a default.

Tyler thinks the US government made promises that left it with no other choices than to bail out Freddie and Fannie.

How many phone calls do you think Hank Paulson has received from the Chinese central bank since August 2007?

"Are you *sure* that paper is safe enough for us to keep on buying?"

We'll never know exactly what kind of verbal dance Paulson concocted in response, but just look at the resulting flow of purchases and the relatively slight mark-up over Treasuries over that period of time. The Chinese (among others) thought we were standing behind the securities, at least in any world-state short of federal government quasi-bankruptcy. (In fact Paulson is in a total bind once that phone call comes in. He doesn't have much incentive to just say "tough luck" and precipitate a crisis when otherwise no crisis is on the horizon.)

Note that the financial crisis is so large at this point that bad decisions by the US Treasury Secretary could precipitate a global financial meltdown and Great Depression. The stakes in this game are very high.

On the bright side, if the Chinese stopped buying our debt we would stop running a trade deficit with them as the dollar plunged in value. But that'd be a hollow victory for us as the US economy would enormously contract if the world lost faith in our debt.

By Randall Parker 2008 September 10 11:15 PM  Economics Financial
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Some See Sarah Palin As Talented Political Performer

Former California Assembly speaker and Democrat Willie Brown sees Sarah Palin as a talented political performer.

I actually went back and watched Palin's speech a second time. I didn't go to sleep until 1:30 a.m. I had to make sure I got the lines right. Her timing was exquisite. She didn't linger with applause, but instead launched into line after line of attack, slipping the knives in with every smile and joke. And she delivered it like she was just BS-ing on the street with the meter maid. She didn't have to prove she was "of the people." She really is the people.

As for Palin herself, she is going to be very, very effective on the campaign trail, especially if McCain's people can figure out how to gently keep her from getting into confrontations with the press. If she can answer questions like she handled herself at the convention, Palin will turn out to be the most interesting person in all of politics, and the press will treat her like they treated Obama when he was first discovered. And remember, the Palin bandwagon needs to roll for only two months.

At Lying Eyes ziel thinks Palin is smarter than Half Sigma gives her credit for being.

Meanwhile, blogger HalfSigma has questioned Palin's intelligence, guessing she's in the 110 range. It's an interesting post with lots of comments including from yours truly. He bases it on her taking six years to get through college and the generally working-class life choices made by her and her family. I'd guess she's a little smarter than that, but she seems to have such a natural affinity for leadership I find it unlikely she would not have landed herself in a far more lucrative position if she were especially smart. So this is an interesting question, as it may ultimately restrict her ability to rise too far.

James Fulford, in the VDARE blog, found an interview with her where she expresses admiration for Ron Paul, so she at least has promise to be something other than the package the McCain campaign will box her into. Again she speaks effortlessly without notes about some mildly technical issues, so I'm guessing she's a bit more intelligent than Half Sigma claims.

In an exchange with Ross Douthat Tyler Cowen comments that he sees Sarah Palin as politically formidable.

T.C: There is also the notion that the Kennedy School of Government does not and never will rule America and that America can revoke an electoral victory for the Democrats "at will." Sarah Palin is a populist of the right, and that scares a lot of people. I differ from her myself on many fundamental views, but I will confess that I am enjoying seeing her upend so many presuppositions of her critics.

I tell you, I watched a big chunk of that debate she had when she ran for governor of Alaska a few years ago. She crushed her opponent. If she can survive the next few days, she will prove a very formidable opponent for the Democrats. They are torn between realizing that and not wanting to admit it, by painting her as a lightweight. She isn't.

Everyone is harping on the experience issue. The biggest question is how good a decision-maker you are and how "meta-rational" you are, namely having the ability to recognize your own imperfections. I don't know how she does on those counts, but those are the more honest questions, not whether she can name or understand all the different factions in Afghanistan. No one can.

Tyler does not see her as a libertarian.

Over at Gene Expression Razib decided (correctly) that Audacious Epigone doesn't get the size of readership he merits. This led into a discussion thread on the political suppression of human biodiversity research which is really worth reading in full, particularly Godless Capitalist's comments. But Mencius also makes a number of points worth considering when looking at McCain and Palin as candidates.

And the second thing you're missing is the symbolic nature of the Presidency, especially in Republican hands. Ever see an article in the Times complaining about "political interference" with "nonpartisan public policy?" If you've seen one, you've seen a thousand. And they are the exception that proves the rule. The 20th-century American civil-service system was designed, in the Progressive Era, to respond with perfect fidelity to Harvard, and completely ignore all elected officials. Americans could elect Sarah Palin for four straight terms, and there still isn't a damn thing she could to do to get NSF to hand out grants to creationists.

Ie: don't be manipulated by the fear of an imaginary boogeyman. It is a mistake to think of electing Republicans as turning America into Palin-stan. When you vote for Democrats, you are saying that the people who have real power should stay there. When you vote for Republicans, you are agitating and disrupting the system, if to a much lesser degree than most think.

There are two genuine, positive effects of voting Republican. One, it serves as a symbolic protest against the rule of Harvard. (Or, to be more specific, of Drew Gilpin Faust.) Progressives are very good at calibrating their demands to what the public will accept - I believe it's one of Alinsky's rules. By saying, "we want Palin," you implicitly say, "we have an issue with Maoist freshman indoctrination struggle sessions" - and many other such things. This does not stop such programs, not at all, but it strikes a little bit of fear into the enemy's heart. By saying "we love Obama," you say, "full speed ahead." This is basically gc's argument.

Second, the American right is a destructive tool. It cannot error-correct the great consensus, with its one tiny little flaw. And it is full of errors itself. But suppose that consensus cannot correct itself, either? Then we know of one tool that can be used to help destroy it.

Since the right has no significant elite and no intellectual institutions, its beliefs are not a good guide to the beliefs of a world in which the progressive edifice has been toppled and shattered - a change that would make the fall of Communism look like a petty detail. After that great, cataclysmic collapse, which I'm sure would discard some good along with the bad, a new intellectual elite would have to construct itself. And you, personally, would be on the inside track for membership. With your present views, you are certainly not eligible for membership of the current ruling elite.

The whole thread is worth reading. Godless Capitalist's argument that thread is the most troubling one I've heard about the downsides of an Obama presidency. GC fears Obama will clamp down on genetics research into human biodiversity just as DNA sequencing costs have gotten so cheap that questions about genetic causes of human nature have become answerable. The Left does not want those answers. They do not want scientific evidence that supports thought crimes.

Whether you think Obama or McCain will be worse depends in part on your values. But it also depends on your assessment regarding what sorts of damage they each might cause. I'm aware of the threat that McCain poses in foreign adventures. But I think our biggest problems are domestic and we should focus our concerns chiefly on what either of them will do with domestic policies. Obama is a typical Leftie who wants to do Robin Hood taxation. He's to the Left of Bill Clinton on welfare and tax policy. But I'm more worried about what he'll do with racial preferences and restrictions on research into taboo subjects.

Peak Oil, the US trade deficit, the retirement of the Baby Boomers, and the lingering effects of the unfolding financial crisis will make the economy into a disaster zone regardless of who gets elected. So the next President won't be popular.

By Randall Parker 2008 September 10 10:59 PM  Politics American Presidency
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2008 September 09 Tuesday
US Budget Deficit Soars

Feel like living beyond your means? America is the place to be.

The budget deficit will jump by $246 billion to $407 billion this year, the Congressional Budget Office estimates in a report released Tuesday.

"Over the long run, growing budget deficits and the resulting increases in federal debt would lead to slower economic growth," the agency said.

The $438 billion projected for 2009 is still small potatoes in GDP percentage terms.

The fiscal 2009 deficit is projected to rise to 3% of GDP. Still, the budget deficit as a percentage of GDP has been higher before, in the 1970s and 1980s, reaching 6% in 1983.

Back in the early 1980s Federal Reserve chief Paul Volcker was pushing the US into repeated recessions in order to wring out inflation. Also, Reagan's tax cuts and defense build-up were expensive and of course entitlements were growing rapidly. So the US budget deficit was much larger then. Well, the Democrats want to show that they can outdo Reagan. Expect a much bigger budget deficit if the Democrats get their way with fiscal stimuli and good old pork barreling.

The still-emerging Democratic plan would pile more than $50 billion worth of new spending on roads, heating subsidies, aid to state governments and a further extension of unemployment benefits onto a deficit for next year that is already likely to near $500 billion. Loan guarantees for the troubled auto industry are also on the table.

"I would be surprised to see a package that would be less than, you know, $50 billion to $75 billion," said Sen. Charles Schumer, D-N.Y.

Come on Chuck, think big. $100 billion. $200 billion. Heck, why not $300 billion?

I am more worried about the trade deficit. Dr. Peter Morici, former Chief Economist at the U.S. International Trade Commission, points out we are going in hock to the world faster than the US government is going in hock. (same article here)

Today, the Commerce Department reported the June deficit on trade in goods and services was $56.7 billion, down from the $59.2 billion deficit in May. U.S. imports of consumer goods did ease, as a result of the recession in retail sales, but the cost of oil imports and the trade deficit with China continued to rise.

U.S. exports have been growing, but the trade deficit remains large because of high prices for imported crude oil and refined products, subsidized imports from China, and the continuing woes of the Detroit automakers. At about 4.8 percent of GDP, those pose a significant drag on the economy and combine to destroy thousands of high-paying U.S. jobs.

...

Trade deficits must be financed by foreigners investing in the U.S. economy or Americans borrowing money abroad. Direct investments in the United States provide only about a tenth of the needed funds, and Americans borrow about $50 billion each month. The total debt is about $6.5 trillion, and at five percent interest, the debt service comes to about $2000 per U.S. worker each year.

With assorted central banks trying to pump up the dollar and China boosting dollar reserve requirements of commercial banks in order to boost the dollar I do not see the international "market" allowing trade to be conducted on terms that I would recognize as free. But anyone who wants to correct this situation with tariffs is labeled anti-free trade by legions of economists. Makes sense to them but not to me.

By Randall Parker 2008 September 09 11:24 PM  Economics Government Costs
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2008 September 08 Monday
Federal Reserve Shafts Savers To Save Banks

Savers are paying a big price to bail out bank stockholders.

Indeed, a year ago, a six-month certificate of deposit earned, on average, 3.53%, according to Bankrate.com (RATE). Today, that's down to 2.03%. A one-year CD that earned 3.75% at this point in 2007 was offered for as little as 1.92% in April, before inching up to its present 2.38%. It's hardly a secret that banks are only able to pay out such pittances thanks to depositors' knee-jerk desire for security: "Hey, I might be earning crumbs on my cash, but at least I'm not losing money."

Sure you are. Wholesale inflation has soared 9.8% in the past 12 months, the highest clip since 1981. The more widely cited consumer price index jumped to 5.6%. In other words, while your saved buck was adding 2 cents or so on one end (and even less after taxes), three times as much was getting singed off the other end of that dollar bill.

Isn't there some other way to save the financial system from collapse that involves more pain for those who made the mistakes that caused this state of affairs and less pain for those who were prudent and who lived within their means?

Update: The Congressional creatures Fannie Mae and Freddie Mac, semi-part of government, misrepresented their financial positions.

Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.

What, companies that were like public-private partnerships, working according to Congressional demands to benefit society, could be so corrupt? But wait, it has happened before, recently even.

Accusations of improper accounting are not new for either company. Earlier this decade, both companies paid large fines and ousted their top executives after accounting scandals.

Fool me once shame on you. Fool me twice shame on me. But I'm sure the Congressional allies of Fannie and Freddie feel no shame and want to make Fannie and Freddie once again ladle out risky loans to favored groups.

Congress pushed for the flood of credit to poor people that made the failure of Freddie and Fannie inevitable. So if you are getting low interest on bank deposits Congress is to blame.

Over the previous years, as the housing bubble inflated, Fannie and Freddie stepped up their purchases of the risky but profitable subprime and alt-A loans that were at the root of the mortgage crisis. Though Congress had just pushed Freddie and Fannie to accelerate purchases of loans to give the housing market a boost, Mr. Paulson was now urging lawmakers to establish stronger oversight and push the companies to raise more capital.

The intent of Congress was to help poor black and Hispanic people buy homes. (see more here). The result was disaster for those poor people and for savers and many other home buyers.

By Randall Parker 2008 September 08 05:02 PM  Economics Inequality
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Democrats Drive Reagan Democrats To Republicans

The Inductivist says the Democrats are doing what they can to elect John McCain and Sarah Palin.

Conspiracy theory: I see that, according to the USA Today/Gallup poll, McCain is now up by 10 points. I suspect that there is a genius Republican plot going on. It's so good, Rove must be behind it. The GOP must have planted people in the media and the blogosphere and ordered them to obsess about how Palin is Alaskan trailer trash. It is brilliant: nothing is going to convince Reagan Democrats to vote Republican better than telling them that someone they identify with is low-class. It's "clinging to guns" all over again. I am truly impressed.

I thought Barack Obama was a shoo-in because of the recession and the Iraq war. But I underestimated the power of liberal elite disdain for whites who didn't go to top colleges and who are not whiterpeople (and go take the test and tell us how white you are).

The white liberals can't help themselves. They have to look down on working class whites. They need to feel superior to other whites and rural and working class whites are who they feel they are better than. So they alienate these white voters and send them into the arms of the Republican Party. Never mind that conservatives are about as smart as liberals. The liberals are determined to feel smarter. Never mind they claim that intelligence is a social construct or a product of the environment. They either don't really believe that or can hold contradictory beliefs.

By Randall Parker 2008 September 08 11:19 AM  Politics Identity
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Will Drugs And Declining Oil Cause Mexico To Implode?

Sean Maher thinks drug corruption and declining oil production could cause a collapse of Mexico.

There are two pressing issues that are putting intolerable stresses on the Mexican economy and society; the first is the huge escalation in drug related violence and corruption, as US support for the Colombian war on drugs has displaced Cartel activity into Mexico, now the primary base for cocaine shipments in the region. The revenues involved are estimated by the DEA to have reached over $40bn a year (or about 25% of all official exports), financing very effective private armies, and rampant high level corruption.

Attempts to crack down on the drugs will cut exports at a time when oil exports are already in steep decline.

The second crisis relates to collapsing oil production and hence state revenue; the biggest Mexican oil field, Canterell, has seen production tumble 37% in a year and down 50% from its 2004 peak, equivalent to 1.2m barrels a day. For US energy security this is a full blown emergency; this field was a 'Supergiant', as big as the four largest discovered in US Gulf waters combined and Mexico is currently the third largest oil exporter to the US, after Saudi and Canada.

Amazingly, Mexican production fell 10% and oil exports dropped over 16% in the first 7 months of 2008. The faster decline in exports reflects soaring domestic demand.

The oil industry in Mexico provides lots of jobs and a third of Mexico's tax revenue comes from oil. Not only will Mexico stop exporting and suffer a huge decline in tax revenue, but it will need to import oil that it can not afford to import. Currently the Mexican government collects only 11% of GDP in the form of non-oil tax revenue.

Petroleum geologist Jeffrey "westexas" Brown argues that the net oil exporting countries will export far less oil in the years ahead as declining production and soaring domestic demand cuts the amount of oil available for export. In a sort of "Always look on the bright side of life" take on this trend Brown says this development will free us from needing to placate or protect or cater to oil exporting countries.

I have good news for the GOP.

We will probably be free of Mexican oil imports by 2012. We will probably be free of Norwegian and Russian oil imports by 2025. We will probably be free of Venezuelan oil imports by 2028. We will probably be free of Saudi oil imports by 2031.

Why?

Those are the dates that I expect to see the respective countries approaching zero net oil exports, although Venezuela is a bit of a wild card. In any case the GOP is telling us that we can maintain Business As Usual, as we replace oil imports with increased US oil production and other forms of energy. The Democrats really aren't any better on energy, but I think that they are at least trying to sell us less of an energy fantasy than the GOP is regarding domestic oil production.

Think of the coming collapse of world oil exports as an energy independence program that really will work. We will not import all that oil which will no longer get exported by other countries. Calls by politicians for energy independence will finally be heeded as we find it impossible to buy much oil abroad.

My guess is that total world net oil exports in 2031 will be at 25% or less of the 2005 rate.

Jeffrey Brown expects all the major oil exporters to export far less in the coming years.

I wrote my first essay on Net Oil Exports with a guest post on TOD, in January, 2006, where I introduced the Export Land Model (ELM). I focused on the current top three net oil exporters, Saudi Arabia, Russia and Norway. They accounted for about 40% of total world net oil exports in 2005.

Here are the EIA net export numbers for the top three for 2005 and 2007:

2005: 18.7 mbpd
2007: 17.2

Of course, Saudi Arabia is currently showing a year over year increase in production, but I estimate that their 2008 net exports will be at 8.4 mbpd, or less, versus their 2005 rate of 9.1 mbpd. Norway is in terminal decline, and then there is Russia.

In our (Khebab/Brown) top five net oil exporters paper, our middle case shows Russia and Norway approaching zero around 2025, when Saudi Arabia would be exporting about 3 mbpd—which would of course be the combined net exports for the top three.

Note that net exports declines tend to approximate linear declines, i.e., an approximately fixed volumetric decline per year. If we average the initial top three two year decline, it’s 750,000 bpd per year. If we extrapolate this out to 2025, the top three would be exporting about 3.7 mbpd. Note that this is about what Khebab’s middle case shows.

Russian oil exports are declining, IMO, because they have to, if they are going to meet internal demand. While Russia has a lot of potential reserves in frontier areas, my guess is that they are to Russia as Alaska is to the US, i.e., Alaska helped, but it was no panacea.

We need a really tall barrier wall along the entire US border with Mexico to protect us from the chaos and economic hard times coming for Mexico. The world oil production decline will give us enough problems without having to take in millions of poor and low-skilled Mexicans.

By Randall Parker 2008 September 08 10:48 AM  Mexico
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Hank Paulson Sees No Recovery Until Real Estate Price Bottom

If the US Treasury Secretary is correct in this claim then economic recovery is years away.

"Our economy and our markets will not recover until the bulk of this housing correction is behind us."
Treasury Secretary Hank Paulson, Sept 7, 2008

Calculated Risk then proceeds to list reasons why the economy won't recover any time soon: housing prices are still well above historical trendline, the housing price-to-rent ratio is similarly well above historical trendline, the housing price-to-income ratio is also above historical its historical ratio, and the supply of unsold housing is high. Federal Reserve and Treasury Department money shoved into financial institutions can not push up housing prices hard enough to prevent the price correction. So more mortgage holders will abandon their mortgages and more home sales will be for less than what is owed.

Mish Shedlock does not expect the Fannie Mae and Freddie Mac bail-outs to cause a recovery. Given that more mortgages are going to go under water (more owed than the declining market prices of the houses) a Fannie/Freddie bail-out by itself can't raise demand for housing enough to fix the liquidity crunch. Americans have been living beyond their means by using mortgage equity withdrawal (MEW) to finance consumption. Well, MEW is gone and housing prices are going to decline even further. So MEW as a source of consumer spending isn't coming back any time soon either.

The United States has been on a credit spending binge financed by East Asian central banks. That binge couldn't last and it was inevitable that living standards would have to decline in the US for years so that we could consume less, import less, and export more. This binge was made worse by the support that Democrats in particular provided for irresponsible Freddie Mac and Fannie Mae lending and for affirmatie action lending that cause the sub-prime debacle. The irony is that by making it so easy for poor people to buy homes the irresponsible lending practices pushed up the prices that poor people had to pay for housing. If the scaling up of credit availability had been done more slowly it still would have been irresponsible. But it would not have driven up prices as high since supply would have had more time to expand.

By Randall Parker 2008 September 08 08:45 AM  Economics Business Cycle
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2008 September 07 Sunday
Obama And McCain Fail To Address 2 Major US Problems

Robert Samuelson says our terrible US Presidential candidates aren't seriously addressing two of our biggest problems. (Hat tip to Michael Blowhard)

Though echoed by policy wonks, pundits and politicians -- last week, Bill Clinton -- the conventional wisdom is wrong or, at least, misleading. Here's a more accurate assessment. For most Americans, living standards are increasing, albeit slowly, over any meaningful period. But rising health spending is eroding take-home pay, and immigrants are boosting both poverty and the lack of health insurance. Unless we control health spending and immigration, the economic report card will continue to disappoint. Unfortunately, neither Obama nor McCain seriously addresses these problems.

McCain and Obama support illegal immigrant amnesty that would make these problems worse. They aren't just not addressing these problems. They are supporters of the growth of these problems. Both candidates for President of the United States are wrong on a huge and growing problem and yet substantial portions of the US population support one or the other of them. How tragic. McCain's presidential bid almost failed because he is wrong on immigration. But we did not get lucky.

Immigration's effects on poverty and health insurance coverage are greater. Since 1990, Hispanics numerically account for all the increase in the number of officially poor. Similarly, immigrants represented 55 percent of the increase of the uninsured from 1994 to 2006, says the Employee Benefit Research Institute. Many unskilled workers can't get well-paid jobs with insurance.

Immigration not only grows the size of America's lower class. It also increases the burden on the higher productivity net taxpayers (those who pay more in taxes than they receive in benefits) in a few ways. First off, the net taxpayers need to pay more in taxes to pay for health care, education, police, prisons, and other costs generated by the poor. Plus, the net taxpayers pay more in medical insurance to pay for medical costs of the uninsured that governments do not reimburse. This medical cost shifting onto the insured is a substantial portion of medical costs of the insured. Plus, poor people create crime and other problems that are burdens to net taxpayers. All these costs are rising due to immigration. The shift of money toward taking care of the poor pulls productive people away from wealth-creating activities such as research and development toward just providing services. This slows economic growth.

From 2000 to 2007, only 53 percent of the increase in average compensation came from wages and salaries, says economist Gary Burtless of the Brookings Institution. The rest went to health insurance (21 percent), pension contributions (19 percent) and payroll taxes (6 percent).

These numbers are even worst than they look. Not only are employers shifting more compensation toward paying rising health insurance costs but they are also shifting more medical costs directly onto employees. So that 53% of compensation increase that actually becomes taxable income not only gets a piece taken out of it by taxes but also more of it needs to go to pay for higher medical costs. Higher deductibles bite.

But it gets worse. The use of mortgage equity withdrawal (MEW) to boost disposable income is rapidly declining with declining home prices. So people are feeling the effect of less money to spend from borrowing.

From 2004 to 2006, Americans took almost $700 billion per annum of net equity out of their homes through borrowing and spent as much as 50% of it on consumables. The most highly regarded study on mortgage equity withdrawals (MEW) is “Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences,” by Prof. James Kennedy and none other than Alan Greenspan (Federal Reserve Board FEDS working paper No. 2005-41); Kennedy has been updating his numbers on an ongoing basis, as set forth in the graph below.

...

In addition to the wealth effect resulting from the housing bubble, Kennedy has concluded that MEW, at its peak, constituted as much as 8% of all disposable personal income and a correspondingly higher percentage of non-housing spending.

MEW declined 60% from 1Q 2007 to 1Q 2008. It peaked at 8% of disposable income and as of 1Q 2008 was at 2% of disposable income. It probably has dropped further in the mean time and will drop further still. The housing price decline is far from over because the housing price-to-rent ratio is still well above historical norms. So is the price of a single family home as a percentage of median household income.

The bursting real estate bubble, immigration, and the rising cost of medical care are some of the bad trends in the United States. Add in the coming retirement of the Baby Boomers, the need to end the trade imbalance, and dwindling oil and natural gas reserves and I'm expecting slower rates of per capita economic growth in the coming years. We might even experience declining living standards.

By Randall Parker 2008 September 07 09:40 PM  Immigration Economics
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2008 September 06 Saturday
Rich People Work Harder Than Poor People

Dalton Conley, chairman of NYU’s sociology department, says the most affluent work the longest hours.

But what’s different from Weber’s era is that it is now the rich who are the most stressed out and the most likely to be working the most. Perhaps for the first time since we’ve kept track of such things, higher-income folks work more hours than lower-wage earners do. Since 1980, the number of men in the bottom fifth of the income ladder who work long hours (over 49 hours per week) has dropped by half, according to a study by the economists Peter Kuhn and Fernando Lozano. But among the top fifth of earners, long weeks have increased by 80 percent.

This is a stunning moment in economic history: At one time we worked hard so that someday we (or our children) wouldn’t have to. Today, the more we earn, the more we work, since the opportunity cost of not working is all the greater (and since the higher we go, the more relatively deprived we feel).

I personally would rather work more hours to get paid more money. But I've had jobs where my employer was happy to take the greater amount of work product I produced by working more hours without paying me any more for doing it. So how many of the people working longer hours are self-employed or have earnings very directly tied to performance? For example, salesmen working on commission have strong incentives to work longer hours.

To put it another way: Do higher income people work in more incentivized environments? Even if higher income people work in more incentivized environments that does not mean that is the initiating cause of why they work longer hours. It would be that they have a stronger preference for jobs and occupations where they can make more by working more. So lower income people of similar levels of talent put into similar jobs might not choose to work as hard at the same tasks and with the same incentives.

So then what caused the shift in work hours for higher and lower income workers? One possibility: changes in tax law. Starting in the Carter Administration capital gains taxes were cut and later under Ronald Reagan income taxes were cut on higher income people. This probably unleashed a lot of suppressed desire to work among those who have the potential for very high productivity.

But tax law changes probably don't explain the decline in hours worked by lower income workers. The men in the bottom fifth have experienced a number of changes. First off, a huge influx of cheap unskilled immigrant labor has lowered the returns on working and has reduced the dignity of manual labor. Second, the decline in marriage reduces the number of men in marriages with children with the pressures to bring home the income needed to feed and house the family. The huge decline in black male labor market participation explains part of the decline in hours worked by the poorest. That decline in labor market participation has been accompanied by an order of magnitude increase in black male incarceration.

By Randall Parker 2008 September 06 05:57 PM  Economics Inequality
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Sarah Palin Unusual Without Male Relative As Leader

Sarah Palin is unusual for a female political leader because most women in top roles have male close relatives who are powerful.

Sarah Palin, the Republican nominee for vice president, is different from many female leaders around the world in at least one respect – her political career does not follow that of a male relative, according to an expert on women in global politics.

Many female leaders around the world had a family connection to a politically powerful male, said Pamela Paxton, associate professor of sociology and political science at Ohio State University.

“In many countries with traditional cultures, women are easily seen as ‘stand-ins’ for their father or husband,” said Paxton, who is co-author of the book "Women, Politics, and Power: A Global Perspective" (Pine Forge Press, 2007) with Melanie Hughes, a former Ohio State doctoral student now at the University of Pittsburgh. Often, women leaders achieve power when their male relative dies, is martyred, or otherwise is forced to leave office.

“People have generally accepted these female leaders because it was assumed they had the same views and supported the same policies as their father or husband,” Hughes said.

While the United States is “somewhat traditional” in its culture compared to other countries, Paxton said she was surprised that the first female who was a strong contender for president in the United States followed the worldwide model by having a husband who was in politics first.

“Hillary Clinton followed a typical model by following her husband, Bill Clinton. I had expected that the United States would be less traditional, and have a first woman contender who arrived in politics independently.”

Quite a few women in politics road to power as wives and daughters of powerful men. Lois Capps, Democratic Congresswoman for Santa Barbara, took office when her husband died in office. Sonny Bono's wife Mary basically inherited his Congressional seat as well. Indira Gandhi was the daughter of Indian independence movement leader Jawaharlal Nehru. Former Prime Minister of Pakistan Benazir Bhutto was the daughter of another Prime Minister Zulfikar Ali Bhutto. Megawati Sukarnoputri became leader of Indoneisa and she is the daughter of Sukarno, Indonesia's first president after Indonesia achieved colonial independence.

Certainly Palin isn't unique as a woman in higher office whose husband or father was not already in politics. But she's not typical either.

Half Sigma wonders whether Sarah Palin's IQ might be as low as 110 to 115. He's heavily speculating and he lays out the elements of his assessment. I say we need more data. We really need to know the answer to that question given John McCain's age and the abuse he suffered as a POW which surely accelerated his body's aging and his brain's aging as well. McCain could suffer a stroke in office even if he doesn't die in office. Half Sigma argues candidates should release their test scores and school grades so we can find out how dumb or smart they are.

The substantial brain aging that occurs in the last 15 years of life make me worry about the fitness of John McCain for high office at this point in his life. Brain aging starts to become noticeable via changes in gene expression at age 40. So at age 72 John McCain's got 32 years of brain aging already lowering his intellectual capabilities. The slope of his decline is now steeper than it was in his 40s and 50s. Not a good stage to put him into the White House.

If McCain wins and then dies or strokes out while in office can Sarah Palin handle the job? Keep one thought in mind: Presidents mostly can succeed by not causing damage. Will a President Palin be sufficiently restrained in policy making to not cause damage? The idea is at least plausible.

By Randall Parker 2008 September 06 02:19 PM  Politics Identity
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Ron Guhname On Starr County Texas Demographics

The Inductivist finds a county in Texas that shows us a slice of America's demographic future.

Starr County, Texas: America's future: I’m in the process of putting together a U.S. county-level data set, and I ran across the most Hispanic county I’ve ever seen. Starr county, on the U.S-Mexico border in southern Texas, is 97.4% Hispanic. Looking at the county website, Starr looks like a nice enough place.

But there’s two little problems. The Census says that 90.7% speak Spanish at home. Sounds something like Mexico to me. And only 6.9% of Starr’s residents have a bachelor’s degree. I don’t know the number, but I wouldn’t be surprised to see if Mexico’s graduation rate is in the same ballpark.

To understand what this portends for the future see my posts: Texas Has Lowest High School Graduation Rates, Immigrants Do Not Improve Academically In Later Generations, Grim Demographics Of Texas And California, Perfect Storm In Demographics To Shrink American Middle Class, and Whites Become Minority In America In 2042.

What we are leaving behind: Smarter States More Livable Places.

We need to learn how to live in the Third World. Any thoughts?

Update: Half Sigma says smart people are more libertarian. So the dumbing down of America will further marginalize the libertarians. We will become less free as a result.

In a previous blog post, I analyzed data from the General Social Survey, and discovered that smarter people are more libertarian on all issues, both economic and social.

It’s the less intelligent people who are more easily swayed by the notion that if there’s a problem, than something needs to be done about it. The idea that nothing needs to be done about a problem is a more abstract idea which requires higher intelligence.

By Randall Parker 2008 September 06 11:17 AM  Immigration Societal Decay
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2008 September 04 Thursday
Roissy On Sarah Palin

Washington DC pick-up artist and human nature realist Roissy takes a look at why the reactions to Sarah Palin are so extreme.

Sarah Palin has been in the news lately so I’ve decided to give it the Roissy treatment — one long kiss on the neck and an ass cheek squeeze.

She’s a palinpsest — people see reflected in her their particular American narrative. Why has she commanded so much attention? Because in her life, her mannerisms, her morals, and her views she is the embodiment of everything evil or everything good. Her existence alone reignites the culture wars.

For this reason she'd be the best part of a McCain presidency. If she can keep liberal whites livid then she'll earn her pay and then some.

Effeminate males stand in contrast to Sarah Palin.

In general, liberal white men are more effete than conservative white men. This has been my observation. I can tell with 80% accuracy whether a male caller to a radio talk show is liberal or conservative just based on the tone of his voice. Liberal — mellifluous, sing-songy, whiny, high-pitched. Conservative — baritone, even, throaty, resonant. Sarah Palin drives the point home even further. Her ability to field dress a moose in waist-deep snow strikes at the sissified soul of the simpering suckass conformist and makes him lash out like a stuck piglet.

Beta males are not Palin's biggest opponents. Urban women who're losing their shot at reproduction do not like the reminder that she provides.

But Sarah Palin’s worst enemy is not the mincing liberal betaboy, oh no. It’s the childless, career-tracked, urban slut machine, government-as-daddy-and-husband-substitute, spinsterette. Palin shits grizzly-sized dung all over that lifestyle with her outdoorsiness, large brood, and prole tastes. The thing about her they really can’t swallow are her FIVE kids. There’s no better way to remind a hip clubgoing single chick in the city who loves to travel and sip pinot noir of her impending infertility and genetic obsolescence than with the image of a woman who’s chosen not to ignore her biological imperative in favor of playing the field indefinitely.

I think Roissy might be rifting off of a recent Steve Sailer post where Steve says the hostile reaction to Sarah on the Left is all about white conservatives outbreeding white liberals.

Now, the Breeding Wars have moved into the political arena. Barack Obama launched his Presidential run at the 2004 Democratic convention by devoting the first 380 words of his speech to describing in great detail the two stocks from which he was crossbred. His message is that by uniting in his DNA the two races, he will end the racial conflict that has long plagued this land. (Noah should take a look at Henry VII’s speech ending Shakespeare's “Richard III” for the classic expression of the logic of dynastic merger, in this case between the Lancasters and the Yorks.) Obama left out the part about his mom being 17 when she got pregnant and his father already being married with a kid and another on the way.

Palin has horned in on all that subliminal symbolism with her own. She’s had five kids while shooting caribou (a picture of her and a daughter standing over a huge beast she shot is the LA Times most emailed article of the day even though it's not an article, just a picture) and throwing the crooks out, and now she has a 17-year-old daughter who is pregnant and will marry a handsome hockey player.

The Blue Whites are alarmed and outraged to be reminded that the Red Whites can afford to outbreed them and are outbreeding them. Modern people tell themselves they don't care about stuff like that, but they do, oh, they do.

Since conservative whites are making more babies than liberal whites the genetic factors that contribute to political orientation are going to shift the white vote rightward. Only immigration is preventing a full shift rightward in the nation as a whole.

Roissy's previously argued that the crowds will turn against alpha males if they mistreat women who come across as more feminine and maternal.

People will only turn against an alpha male when he attacks a weak woman.

Roissy thinks Sarah's strong maternal image makes her immune from serious criticism. So does Sarah the mom have more immunity from criticism than Barack the black?

This is Sarah Palin’s anti-missile defense shield. She isn’t weak, but she will be perceived as worthier of protection than her alpha male opponents. Her attractiveness, earthiness, motherhood, and gender means she will be almost impenetrable (heh) to frontal attacks, while affording her the latitude to fire at will.

Roissy points to Megan McArdle's evident discomfort with instinctual reactions to Sarah Palin.

As a person I like her. Politically, I dislike what she represents: populism, culture warmongering, and especially, the notion that if a woman is to hold power, she has to make herself non-threatening by emphasizing her domesticity and fertility. I don’t blame her for doing these things, since they seem to work. But I don’t like living in a society where this works.

So then Megan dislikes the results of evolution by natural selection. Roissy has realistic advice for Megan:

Megan, I’ve got news for you. There is no society where this doesn’t work. Check your libertarian fantasies at the door because the frontline of human nature - and innate sex differences - is everywhere.

My problem with libertarianism is that its believers build their political philosophy around an unrealistic model of human nature. When libertarian principles are applied to all policy questions the result is damaging because humans do not react to libertarian policies in ways that further the cause of liberty. For example, open borders where all are allowed to immigrate will make the original citizens of a prosperous society less free. By seeking the impossible libertarians contribute to a loss of freedom, not a gain.

Megan's unhappiness with war mongering and popular reactions to a fertile woman ought to serve as reminder to her that when forming political views she needs to look at biological humans as they really are rather than ideological humans as she wishes them to be. The genetic factors at work which cause her fellow Americans to react to her evident dissatisfaction are not going away. No amount of rational argument is going to convert people into libertarians when they have strong instincts calling them to think and act otherwise.

By Randall Parker 2008 September 04 08:07 PM  Human Nature Mating
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2008 September 03 Wednesday
Minneapolis Bridge Repair Happening Fast

The Minneapolis Minnesota bridge which collapsed on August 1, 2007 will get repaired rapidly because of high motivation to get it fixed.

Florida Rep. John Mica, the highest-ranking Republican on the U.S. House of Representatives Transportation and Infrastructure Committee, toured the bridge reconstruction on Wednesday and hailed it as a model for federal projects.

"It normally takes at least seven to eight years to undertake an infrastructure project of this magnitude, but the new I-35 bridge was contracted to be designed and completed in 437 days," he said.

Mica said following that pattern in other projects could dramatically lower costs. "This will be our goal in the next highway bill, which is scheduled for renewal in 2009," he said.

I wonder what percentage of the money spent on bridge repair and replacement goes to staffers who do studies and conduct hearings on what ought to get fixed and how it ought to get fixed. Some people say America can't keep up its infrastructure any more. I'm not worried about our ability to afford it as much as I'm worried that the populace will just lower its standards and let things become more decayed than they ought to be. Bureaucracies can spend years planning with big staffs because people do not expect fast repairs.

By Randall Parker 2008 September 03 10:32 PM  Economics Transportation
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2008 September 01 Monday
Layoffs Reduce Social Capital

Here's a cost of both globalization and immigration.

"What we find is that even just one disruption in employment makes workers significantly less likely to participate in a whole range of social activities — from joining book clubs to participating in the PTA and supporting charities," said Jennie E. Brand, a UCLA sociologist and the study's lead author. "After being laid off or downsized, workers are less likely to give back to their community."

The first study to look at the long-term impact of job displacement on social participation, the research found that workers who had experienced just one involuntary disruption in their employment status were 35% less likely to be involved in their communities than their counterparts who had never experienced a job loss due to layoff, downsizing or restructuring, or a business closing or relocating. Moreover, the exodus from community involvement continued not just through the spate of involuntary unemployment, but for the rest of the workers' lives.

"Social engagement often involves an element of social trust and a sense that things are reciprocal — that you give some support if you get some support, and you benefit from society if society benefits from you," said Brand, an assistant professor of sociology at UCLA. "When workers are displaced, the tendency is to feel as though the social contract has been violated, and we found that they are less likely to reciprocate."

Along with University of Michigan sociologist Sarah A. Burgard, Brand looked at 4,373 participants in the Wisconsin Longitudinal Study, which has tracked a group of 1957 Wisconsin high school graduates for more than 45 years, gathering detailed information on their IQs, education, careers, psychological well-being, family and social lives. Born between 1939 and 1940, the group belongs to what Robert D. Putnam, the author of the 2001 sensation, "Bowling Alone: The Collapse and Revival of American Community," has described as "a cohort of joiners" or an American age group particularly inclined to participate in community and social groups.

Of the six forms of involvement studied by Brand and Burgard, youth and community groups experienced the strongest exodus followed by church and church groups, charitable organizations and leisurely activities, including country club attendance.

For workers who were displaced during their peak earning years — between 35 and 53 years of age — the effects were the strongest. The researchers found that non-displaced workers were 1.2 to 1.5 times more likely to participate across all forms of social and community activities than workers who had been displaced. This was the case for both ages examined by the researchers — 53 as well as at 64 years of age.

Humans didn't evolve for the market economy. I"m not surprised to see them react to it in this way. People who have been laid off feel like the tribe has been disloyal to them. They therefore focus on number one.

Ethnic diversity also reduces social capital.

By Randall Parker 2008 September 01 10:24 PM  Politics Social Capital
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