2008 December 30 Tuesday
Fouad Ajami On Obama Shift Toward Afghanistan

Secular Shia Lebanese immigrant academic Fouad Ajami, former unofficial adviser to George H. W. Bush, writes disapprovingly of the Obama Administration's plans to bail on Iraq while fighting the supposed good war in Afghanistan.

The new cause shall be a return to the struggle for Afghanistan. This is the liberal narrative: the bad, unilateral "war of choice" in Iraq, the good, multilateral "war of necessity" in Afghanistan. The doves on Iraq can thus be hawks on the Afghan-Pakistan frontier. The strategic gurus who preached that Iraq is a hopeless, artificial state put together by Gertrude Bell and Winston Churchill and T.E. Lawrence can try for victory and nation building in the unforgiving tribal lands of Afghanistan and Pakistan. If there is an artificial state in our world of nations, Afghanistan must be its closest approximation. If there is a false national boundary -- mocked by ethnicity and historical allegiance -- it is the Durand Line, drawn up by British power in the 1890s, between Afghanistan and Pakistan, through the lands of the Pashtuns. Afghanistan could yet thwart President Bush's successors, frustrate them in the way Iraq frustrated him.

Iraq still is an artificial state with the Kurds already ruling their area with de facto independence. Will the Arabs be able to entice or force them to stay in Iraq? Or will they reach some sort of agreement where the Kurds pretend to stay in Iraq while continuing to govern their area without Iraqi Arab involvement?

Ajami is right that Afghanistan has an even larger dose of tribalism than Iraq. Compare Afghanistan's fertility rate of 6.58 with Iraq's fertility rate of 3.9. The assorted Afghani tribal groups can afford to lose a lot of their young males at war. Plus, they do not have to listen to pacifist women since men dominate.

Note that Ajami doesn't call for splitting up Afghanistan. Would it make sense to shift the Pashtun part of Afghanistan into Pakistan? Or pull the Pashtun parts of Pakistan and Afghanistan together into a 3rd new nation? My guess is that the Pakistani central government would not take kindly to giving territory. But at the same time the Pakistanis might not want more Pashtuns added to the balance of Pakistani politics either.

By one measure the US in Afghanistan is more like the US in Vietnam than the US in Iraq. Pakistan serves as a sanctuary for Taliban fighters to a much greater extent than any neighbor of Iraqi provided sanctuary for militias in Iraq. The war in Vietnam had many differences as well. But achieving a state in Afghanistan that can be labeled "victory" seems hard to me.

I question the intellectual capacity of either of America's two political parties to think rationally about the Middle East. I wish we could wash our hands of it because I do not expect US policy in the region to be anything approaching wise.

What fraction of the US troops withdrawn from Iraq will get shifted to Afghanistan? Will Obama limit the scale of US involvement in Afghanistan in order to free up more money for domestic welfare programs?

By Randall Parker 2008 December 30 10:48 AM  MidEast Afghanistan
Entry Permalink | Comments(6)
2008 December 29 Monday
Russian Media Can Not Acknowledge Financial Crisis

Does ignoring the financial crisis make it less severe? In other words, is there any economic benefit from the censorship?

MOSCOW (Reuters) - When a Russian sociologist wrote a newspaper column last month suggesting the global financial crisis could cause social unrest, the state media watchdog advised the paper not to spread extremist sentiments.

"This is censorship," said Yevgeny Gontmakher, the author of the column and the head of the Academy of Science's Social Policy Center. "The situation in the country is changing; you can no longer utter the word 'crisis'."

The control exercised by the authoritarian press-controlling regime in Russia would have been more justifiable if the Russians had managed to clamp down on the excesses of their own boom. They could have kept more money abroad to limit the size of the boom and make more money available after the popping of the bubble. Also, they could have shifted the ruble's value downward to boost the development of a manufacturing economy in spite of the oil boom. But they didn't. Not so impressive.

Police in European Union member Latvia jailed an academic for two days for saying in an online debate people should not trust the banks, and launched a case against a singer who made similar comments at a concert.

The European Union has a long way to go before it has press freedoms as strong as in America.

By Randall Parker 2008 December 29 03:30 PM  Russia
Entry Permalink | Comments(3)
NYTimes Describes WaMu Boiler Room Lending Culture

Reminds me of descriptions of penny stock brokerage firms selling misrepresented stocks in boiler room atmosphere. But this was a huge FDIC-insured bank.

On another occasion, Ms. Zaback asked a loan officer for verification of an applicant’s assets. The officer sent a letter from a bank showing a balance of about $150,000 in the borrower’s account, she recalled. But when Ms. Zaback called the bank to confirm, she was told the balance was only $5,000.

The loan officer yelled at her, Ms. Zaback recalled. “She said, ‘We don’t call the bank to verify.’ ” Ms. Zaback said she told Mr. Parsons that she no longer wanted to work with that loan officer, but he replied: “Too bad.”

Shortly thereafter, Mr. Parsons disappeared from the office. Ms. Zaback later learned of his arrest for burglary and drug possession.

The sheer workload at WaMu ensured that loan reviews were limited. Ms. Zaback’s office had 108 people, and several hundred new files a day. She was required to process at least 10 files daily.

“I’d typically spend a maximum of 35 minutes per file,” she said. “It was just disheartening. Just spit it out and get it done. That’s what they wanted us to do. Garbage in, and garbage out.”

Massive numbers of taxpayer-insured dollars got shoveled out the door. Many of the loans were packaged up and sold off. Washington Mutual just didn't package up enough of them to avoid holding the bag when the music stopped.

As housing prices went above the levels that buyers could afford WaMu responded by lowering standards and selling mortgages that the buyers wouldn't be able to afford once they reset.

WaMu’s boiler room culture flourished in Southern California, where housing prices rose so rapidly during the bubble that creative financing was needed to attract buyers.

To that end, WaMu embraced so-called option ARMs, adjustable rate mortgages that enticed borrowers with a selection of low initial rates and allowed them to decide how much to pay each month. But people who opted for minimum payments were underpaying the interest due and adding to their principal, eventually causing loan payments to balloon.

Customers were often left with the impression that low payments would continue long term, according to former WaMu sales agents.

For WaMu, variable-rate loans — option ARMs, in particular — were especially attractive because they carried higher fees than other loans, and allowed WaMu to book profits on interest payments that borrowers deferred. Because WaMu was selling many of its loans to investors, it did not worry about defaults: by the time loans went bad, they were often in other hands.

WaMu’s adjustable-rate mortgages expanded from about one-fourth of new home loans in 2003 to 70 percent by 2006. In 2005 and 2006 — when WaMu pushed option ARMs most aggressively — Mr. Killinger received pay of $19 million and $24 million respectively.

The FDIC ought to sue to recover some of that executive compensation. The financial executives of America should come to know some fear.

By Randall Parker 2008 December 29 02:29 PM  Economics Lending
Entry Permalink | Comments(4)
2008 December 27 Saturday
Some Students Graduate Deep In High Interest Rate Debt

Private sources of educational financing charge crushing high interest rates.

Natalie Hickey left her small hometown in Ohio six years ago and aimed her beat-up Dodge Intrepid for the West Coast. Four years later, she realized a long-held dream and graduated with a bachelor's degree in photography from Brooks Institute in Santa Barbara.

Higher education does not always pay off. For some the odds of pay-off are slim. I doubt that Brooks graduates get a good return on their investment.

She also picked up $140,000 in student debt, some of it at interest rates as high as 18%. Her monthly payments are roughly $1,700, more than her rent and car payment combined.

I wonder how much this contributes to the birth dearth among smarter and more educated people. Miss Hickey isn't exactly a great catch for marriage and child-rearing. A guy would have to make big money to afford to let her make babies while still servicing her school debt.

Even worse in her case an LA Times photographer tells that demand for photographers and reporters is tanking due to the internet taking ad revenue away from newspapers. The editorial staff (which I think includes all reporters and photographers) has shrunk from 1500 to 600. The Tribune company that owns the LA Times just filed for bankruptcy. So the Brooks students graduating with piles of debt are entering a buyers' market for photographers.

If you are thinking about some career before you get yourself in debt up to your neck find out what the jobs in that occupation typically pay and how hard the jobs are to get. Kids need to be told that higher education doesn't automatically pave the road to your future with gold.

By Randall Parker 2008 December 27 10:21 AM  Education
Entry Permalink | Comments(12)
Decline Of United States Will Offer Advantages

Chris Ayers, an Englishman stationed in Los Angeles for the Times of London, sees many advantages to loss of top position in rankings of nations.

Do Tehranis and Muscovites blame Britain for the culture of mindless self-gratification that brought down the global economy? Of course not. They blame America -- even though Britain is arguably the more guilty party, what with its foreign-debt-to-GDP ratio standing at an unconscionable (and, really, quite embarrassing) 490%, as opposed to the United States' puritanical 89% (according to the 2007 "purchasing power parity" GDP and external debt figures supplied by the CIA World Factbook).

The fact is that when you're No. 1, you always get blamed for everything. When you're No. 3, or No. 5 -- or No. 135 -- you can put your hands in your pockets and whistle tunelessly with a "Who, me?" look on your face, and no one ever asks any questions.

Take Slovakia. Five years ago, Slovakia invaded Iraq. Admittedly, it did this with the help of a few other countries. But still, does Slovakia ever get the blame for all the trouble that has gone down over there since then?

Nope.

I think the biggest relief will come when I do not have to worry so much about a future President of the United States making global mistakes. If only George W. Bush had gotten elected in, say, 2080 he couldn't have done much internationally with his position. But no. He had to have a powerful military at his disposal.

Ayers sees a booming business for any surviving US newspapers to sell condescending tripe to American readers eager to look down on peoples more powerful than them.

The beleaguered American newspaper industry, for example, might very well be able to profit immensely by simply dispatching its most snide and ironically detached correspondents to the new capitals of world power, from which they will be able to report with maximum condescension about the hilarious earnestness of the locals.

Well, if you are into condescension the future will seem culturally more enriching. Me, I think I'll shift to reading news written by the local writers of these future centers of power.

By Randall Parker 2008 December 27 10:08 AM  Civilizations Decay
Entry Permalink | Comments(0)
Ben Bernanke Sees China As Cause Of Lack Of US Savings

Enforced savings by the Chinese government causes a lack of savings in the US. It also causes financial distortions that lead to bubbles.

WASHINGTON — In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.

The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.

I've been complaining about this for years. Can the head of the US Federal Reserve get people to take this problem seriously?

Here's how it works: Americans buy something from Chinese exporters. The exporters get dollars and are required by the Chinese government to deposit them in a Chinese bank at a fixed exchange rate. Then the Chinese bank (which is really part of the Chinese government) takes those dollars and buys US Treasury bonds. One effect of doing this is to keep the US dollar strong against the Chinese currency. This cuts US sales to China by making US goods more expensive in China while simultaneously making Chinese goods cheaper in the US.

How does this cause a financial bubble in the US? Easy enough. The Fed sees that US companies aren't generating enough economic activity in the US (what with lots of factories shifted over to China and engineering as well). It expands the money supply to try to generate more economic activity here. Normally an over-expansionary money supply should cause inflation in the US. But the Chinese are keeping goods prices low with cheap imports.

The Chinese purchases of US Treasuries inject money into the US financial system and lower interest rates while also making imported goods cheap at the same time. Since consumer goods inflation is prevented by the cheap Chinese goods the monetary expansion causes inflation in the prices of real estate and financial assets instead. The inflation has to pop up somewhere.

The lower interest rates cause potential investments to look more attractive than a non-distorted money supply would cause them to look. The result was an excessive investment in the financial industry and in real estate. This caused excessive spending in industries that supply construction materials and in luxury goods as well. Eventually the bubble burst. We all see the results.

Other factors contributed to the real estate binge. Foolish deregulation of government-insured banks and really dumb policies aimed at boosting home ownership of non-Asian minorities (NAMs) both played roles in causing the unfolding financial disaster. But this one big monetary distortion caused by mostly East Asian countries played an important role in creating the mess we are in.

By Randall Parker 2008 December 27 08:56 AM  Economics Trade
Entry Permalink | Comments(10)
2008 December 26 Friday
Big Interest Gap Between Big And Small Sized Mortgages

Mortgage rates are about 2% higher in areas with expensive housing.

The average 30-year fixed jumbo loan rate was 7.32 percent on Dec. 22, compared with 5.38 percent for a conforming loan, according to BanxQuote of White Plains, New York.

Wide Spread

The difference between the two averaged 2.13 percentage points in December, 10 times the spread from 2000 to 2006 and above last month’s 1.95 percentage points that was the highest on record. If current rates reflected the historical difference of 0.2 percentage points, jumbo borrowers with an $800,000 mortgage would save $913 a month.

This provides a measure of how much Freddie Mac and Fannie Mae lower the cost of mortgages. Freddie and Fannie will only buy mortgages worth $417,000 or less (actually, there are exceptions that range as high as $729,750 depending on local housing costs). That higher cost for mortgages on more expensive houses is causing them to fall more in price than houses that qualify for cheaper mortgages. Note, however, that the more expensive market of California saw much more housing price inflation than most of the US. So these housing price declines are bringing houses down to a less distorted level.

The elite expert response continues to be that we should reflate the housing bubble.

“The real elephant in the room is falling house prices,” Glenn Hubbard, former chairman of the Council of Economic Advisers under President George W. Bush who is now dean of the Columbia University Graduate Business School, said in an interview Dec. 22. “We can fix this by lowering mortgage interest rates.”

Any dumb idea worth doing once is worth doing twice? Why is that? Let me bore you with repetition: The housing price-to-rent ratio and price-to-income ratio have to return to historical trends.

By Randall Parker 2008 December 26 02:04 PM  Economics Housing
Entry Permalink | Comments(0)
Option ARM Mortgages To Cause Next Wave Of Foreclosures

Some people took exception to a recent post about how alt-A and option ARM mortgages will be the next financial disaster. The argument in the comments of that post is that interest rates are so low that resetting of interest rates won't make the monthly payments higher but rather lower. But a lot of option ARM mortgage holders were not even paying enough per month to cover interest in the first place.

Known as an option ARM — and named “Pick-A-Pay” by World Savings — it is now seen by an array of housing analysts and regulators as the Typhoid Mary of the mortgage industry.

Pick-A-Pay allowed homeowners to make monthly mortgage payments that were so small they did not cover their interest charges. That meant the total principal owed would actually grow over time, not shrink as is normally the case.

Now held by an estimated two million homeowners, the option adjustable rate mortgage will be at the forefront of a further wave of homeowner distress that could greatly delay or even derail an economic recovery, mortgage industry analysts say.

Option ARM is yet another financial weapon of mass destruction.

“This product is the most destructive financial weapon ever deployed against the American middle class,” said William J. Purdy III, a housing lawyer in California who is representing elderly World Savings customers struggling to repay their loans. “People who have this loan are now trapped, and they can’t get another loan.”

People become less willing to make their suddenly higher payments as the price of their house drops and they find themselves financially under water - owing more than their house is worth. In some cases they never would have been able to make the higher monthly payments once the mortgage readjusted to cover interest costs. Some were probably counting on flipping and moving on to another home at that point. But in the game of housing musical chairs when the game stops it is those who are sitting in chairs who lose. These mortgage holders and their banks and the American taxpayers all became losers.

Once upon a time in a distant era regulators didn't think federally insured financial institutions should offer such risky loans.

When Reagan era deregulation arrived, the Sandlers and two other competitors were able to market option ARMs for the first time in 1981. Before that, lawmakers balked at the loan because of its potential peril to borrowers.

World Savings initially attracted borrowers whose incomes fluctuated, like professionals with big year-end bonuses. In the recent housing boom, when World Savings started calling the loan Pick-A-Pay, they began marketing it to a much broader audience, including people with financial troubles, like deeply indebted blue-collar workers.

The risky loans didn't just pull in people who had no business buying houses. These loans so boosted demand for housing that they had the macroeconomic effect of driving up the prices of houses. The rising prices pulled in more fools and so when the bubble inevitably popped it caused the deep long recession and big costs for the net taxpayers.

By Randall Parker 2008 December 26 12:09 PM  Economics Housing
Entry Permalink | Comments(0)
2008 December 21 Sunday
South Africa Becomes Net Food Importer

The democratically elected government of South Africa is forcing white farm owners to sell to the government which turns large white-run farms into many small black-run farms. One result is that food production is dropping.

The South African government vowed to carefully investigate land claims and provide fair compensation to white farmers. Many of the country's 40,000 white farmers willingly sold their property.

Even so, the effect on the country's agricultural economy has not been overwhelmingly positive. Whereas the global trend is toward larger, more commercially successful farms, South Africa is breaking many of its large farms into smaller, less economically efficient pieces to meet the claims of new black farmers.

Partly as a result, South Africa in the last year has gone from a net exporter of food to a net importer. And, in another worrying trend, some of the whites who sold their farms have been recruited by other African countries, where their skills are much in demand. Now once-impoverished countries such as Mozambique are becoming more self-sufficient -- and taking a share of South Africa's export market.

Since the trend of pushing whites off the farms will continue South Africa's food production will decline and the parallels to Zimbabwe will increase. Since the more talented younger whites mostly have left or will leave the real crunch is going to come as the older skilled whites get too old to work and die off.

Zimbabwe shows where South Africa could end up.

Zimbabwe's farms are ruined, its economy has evaporated, and its people have begun to starve and die of cholera. What better time to call a feast? According to reports in Zimbabwe's domestic press on Thursday, President Robert Mugabe and delegates to the annual conference of his ruling Zanu-PF Party will chomp their way through 124 cattle, 81 goats and 18 pigs over the course of their deliberations in the central town of Bindura.

South Africa starts from a higher position and therefore has further to fall.

By Randall Parker 2008 December 21 10:53 PM  Civilizations Decay
Entry Permalink | Comments(11)
Locusts Swarm To Starve Predators

This report has lessons for people who want to escape Robin Hood government and parasites.

By applying an old theory that has been used to explain water flow through soil and the spread of forest fires, researchers may have an answer to a perplexing ecological and evolutionary problem: why locusts switch from an innocuous, solitary lifestyle to form massive swarms that can devastate crops and strip fields bare. Their report, published online on December 18th in Current Biology, a Cell Press publication, concludes that once the insects' ranks grow to a certain threshold size, banding together prevents predators from moving from one patch of insects to the next and easily picking the bugs off one by one.

"A predator can only move continually across a landscape, consuming locusts as it goes, if there is a landscape-spanning pathway of connected, high-yielding patches containing locusts in abundance," said Andy Reynolds of Rothamsted Research. "If the locusts were to remain dispersed when their numbers become sufficiently high, then such predator-sustaining pathways would always exist. By grouping together, locusts can reduce the number of connections between patches, and there is a significant probability that the predator will locate too few locusts to sustain itself."

If the most productive are too thinly spread then the majority and a corrupt elite can feed on them. Highly productive people need to be able to form their own governments and basically exclude predators and parasites. Concentrate together where predators can't feed and control the borders. Too late for the United States.

By Randall Parker 2008 December 21 02:34 PM  Economics Predation
Entry Permalink | Comments(8)
Roissy On Infractions Against The Male Libido

Roissy says:

Relations between the sexes and divorce rates would markedly improve if men started putting their women in the doghouse more often for infractions against the male libido.

Are there cultures where men demand better performance from women in terms of keeping up their looks?

In the comments Michael Blowhard reacts to this line:

Why *do* so many American guys picture marriage as a matter of living up to the woman’s demands? Dudez: Dont’ be so lame. Qualify your woman. (I think I’m using that term correctly …) No reason not to be nice to your woman and enjoy making her feel good. But for god’s sake, make her aware that she has a duty to live up to your standards — and to contribute to your pleasures — too.

Good advice. Make it clear early on in a relationship that if she porks out the relationship will be finished.

Though the guys who pork out as well aren't going to be in a position to negotiate. Also, once kids are in the scene the costs of a break-up includes the impact on the kids. So she thinks if you are conscientious she's got you by the balls. I hear Mick Jagger:

Too bad she's got you by the balls
You can't get free at all
She's got your name
She's got your number
You're screamin'
Like thunder
And you can't get away from it all

By Randall Parker 2008 December 21 01:56 PM  Human Nature
Entry Permalink | Comments(3)
2008 December 20 Saturday
Ford Brazil Plant Shows What UAW Blocks

Watch this video. Such a highly efficient plant would be impossible to set up in the US - at least by Chrysler, Ford, or GM. Of course, Toyota, Honda, and other companies in the anti-union Old South could do it. Have they already?

Megan McArdle paints a great picture of why customer satisfaction dropped down in the list of things that Big Three managers worried about.

During those years of oligopoly, the Big Three's first loyalty (after their loyalty to management) was loyalty to the union.  The worst thing that could happen to a Big Three manager was a strike.  Making a car that is reliable is only partly a matter of engineering; it's mostly a matter of extremely tight control over the assembly process.  That tight control is necessarily less pleasing to the workers than looser rules.  The unions could severely hurt a company with a strike.  Whereas the customers?  The customers could only go to another company where the same union was negotiating the same loose work rules.

(Yes, yes, I know that Toyota does it differently, with group responsibility.  But Toyota's system was developed in the absence of a strong union; the adversarial model that the UAW had developed along, however historically necessary, made the Toyota example completely unworkable in a Detroit plant.)

After the unions, for the Big Three, the government was the next most worrisome constituent, followed by the dealers, then the suppliers.  The customers were somewhere down there with the mayor of Youngstown, Ohio, in emotional importance to Detroit managers.  It's not that the managers in Detroit had anything against their customers, and I've no doubt that they had lots of meetings in which moving testimonials to the gosh-darned swellness of Chevy or Buick or Mercury buyers.  But the buyers had little power to punish them, and their other constituencies could make their lives miserable.

My fear is that anything less than bankruptcy won't break through the pull that other interests have on how the car companies function.

By Randall Parker 2008 December 20 04:09 PM  Economics Labor
Entry Permalink | Comments(5)
Detroit Jails Appealing For Some Homeless

With Depression level 21% unemployment and homelessness, prisons look appealing to some down and out.

DETROIT – One measure of how tough times are in the Motor City: Some of the offenders in jail don't want to be released; some who do get out promptly re-offend to head back where there's heat, health care and three meals a day.

"For the first time, I'm seeing guys make a conscious decision they'll be better off in prison than in the community, homeless and hungry," said Joseph Williams of New Creations Community Outreach, which assists ex-offenders. "In prison they've got three hots and a cot, so they commit a crime to go back in and come out when times are better."

Detroit Michigan: avoid it.

About 83 percent of the current population is African-American; of cities with more than 100,000 people, only Gary, Ind., had a higher percentage in the latest census.

Detroit's crime, poverty, unemployment and school dropout rates are among the worst of any major U.S. city. The bus system is widely panned; car and home insurance rates are high. Chain grocery stores are absent, forcing many Detroiters to rely on high-priced corner stores.

With a population of 916k, a city budget deficit of $300 million, and a school budget deficit of $400 million the deficit works out to about $764 per person. That compares to California's deficit of about $600 per person. But since California has a much higher per capita GDP the deficit in Detroit is far worse when measured in terms of ability of residents to pay it.

Update: Detroit houses are some of the cheapest in the nation.

$18,513: Average sale price of a Detroit home so far in 2008, down from $40,011 in 2007, according to Detroit Board of Realtors.

How can Detroit function? Will it go bankrupt?

By Randall Parker 2008 December 20 03:02 PM  Economics Poverty
Entry Permalink | Comments(11)
2008 December 19 Friday
US Car Financing Deal Requires UAW Cuts

The Bush Administration has reached a deal with GM and Chrysler to lend them enough money to keep them in business for 102 days to give them time to negotiate a large restructuring with their creditors, suppliers, and union workers. The deal requires GM and Chrysler to negotiate lower labor costs with the UAW.

The conditions of the Bush plan require that GM and Chrysler satisfy a number of restructuring goals spelled out in the legislation that failed to pass in the Senate earlier in December. The companies will have to reach a new wage and benefit agreement with the United Auto Workers and retirees that puts the automakers on parity with foreign companies manufacturing vehicles in the U.S., such as Toyota (TM) and Honda (HMC). Investors holding GM and Chrysler debt will also have to take a huge "cram-down" or discount on their bonds, reducing debt by two-thirds.

The Big Three can't compete long term unless all their costs are competitive with their competitors. So this need is obvious.

These loans from the US government are needed to give GM and Chrysler time to negotiate the sorts of deals which normally happen during bankruptcy. What they are going thru is bankruptcy in all but in name.

But some are skeptical that the deal will force sufficient cost cutting on labor.

Industry critics say this plan won't force the automakers to do what is really necessary to become competitive with the nonunion auto plants operating in the United States by overseas automakers. They wanted tougher rules that would have forced the companies into bankruptcy unless the union agreed to painful wage and benefit cuts.

"Over and over again we've seen these guys use creative math to give the illusion of competitiveness," said Peter Morici, a business professor at the University of Maryland.

Reaching agreements with a large number of debtors and with the UAW in 102 days will be very difficult. During bankruptcies these sorts of measures normally take a year or two. This deal basically requires GM and Chrysler to do something similar to bankruptcy without officially filing for bankruptcy.

More daunting may be targets set by the White House, which require the companies to work toward reducing debt by two-thirds, cut in half the cash owed to an employee health care plan and make UAW wages competitive with those paid by Honda, Nissan and Toyota at their U.S. operations by the end of 2009.

The president's designee, by March 31, can waive those targets but must explain why.

The Obama Administration does not have to honor the terms of this agreement. It can let the UAW off the hook and force the Big Three to keep paying uncompetitive prices for manual labor. Some politicians do not want to see labor cost cuts that are needed to make the Big Three cost competitive. Barney Frank inhabits a fantasy world where the Big Three can achieve competitive costs while paying more for unskilled labor.

Still, House Financial Services Committee Chairman Barney Frank is calling the stipulation "an unfair assault on working men and women" that could force them to accept "a disproportionately large reduction in what is currently legally owed to them."

The provision, Frank said, "could give foreign auto companies in effect the ability to dictate wages for all America auto workers."

He already is pushing for president-elect Barack Obama to change that portion of the emergency loan package, something Treasury said the incoming administration will have the power to do.

If the Obama Administration decides to let the UAW off the hook then the Big Three will get even more deeply in debt and the crisis will hit again but with the GM and Chrysler in just as much debt but the next time around with the US government.

The Big Three also need a restoration of credit and demand for cars.

"The automakers will hemorrhage red ink until auto lending and leasing revives. Without credit, vehicle sales will at best remain at their current 10 million unit annual sales pace," said Mark Zandi, the chief economist at forecaster Moody's Economy.com.

"The Big Three share of these sales is less than 5 million units. Their break-even sales rate is closer to 7 million units."

By Randall Parker 2008 December 19 09:27 PM  Economics Transportation
Entry Permalink | Comments(1)
2008 December 18 Thursday
Alt-A And Option ARM Mortgage Resets Coming

While lots of sub-prime mortgages have failed after their mortgages reset to higher interest rates far above what their holders could ever afford most of the Alt-A and option ARM resets are still coming up and will bring a second big wave of mortgage defaults.

Just look at a projection from the investment bank of Credit Suisse: there are the billions of dollars in sub-prime mortgages that reset last year and this year. But what hasn't hit yet are Alt-A and option ARM resets, when homeowners will pay higher interest rates in the next three years. We're at the beginning of a second wave.

"How big is the potential damage from the Alt As compared to what we just saw in the sub-primes?" Pelley asks.

"Well, the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have option ARMs on top of that. That's probably another $500 billion to $600 billion on top of that," Tilson says.

Asked how many of these option ARMs he imagines are going to fail, Tilson says, "Well north of 50 percent. My gut would be 70 percent of these option ARMs will default."

Politicians in Washington DC are trying to find a way to put Humpty Dumpty back together again. Basically, they want to reflate the bubble. But lots of people who were granted mortgages never should have gotten mortgages in the first place. Trying to renegotiate their mortgages is pointless and just delays the inevitable. The housing price-to-rent ratio and price-to-income ratio have to return to historical trends.

Credit card holders losing their jobs are going to cause a big increase in credit card losses by banks.

Innovest said that credit-card charge-offs could hit $18.6 billion in the first quarter of next year, and $96 billion by the end of the year, forcing banks to search for other ways to generate revenue from customers.

Unpaid Balances

Delinquencies tend to follow unemployment, which were 554,000 first-time claims in the week ended Dec. 13, near a 26- year high reached the week before. Net worth for U.S. households and nonprofit groups fell $2.81 trillion from July to September, the most since tracking began in 1952. That means consumers are more strapped for cash, contributing to a slowdown in spending, which accounts for two-thirds of the economy.

By Randall Parker 2008 December 18 11:36 PM  Economics Housing
Entry Permalink | Comments(6)
2008 December 16 Tuesday
Can Big Navies Beat Little Pirates?

So far various Navies have shown themselves ineffectual against Somali pirates.

But the wily buccaneers of Somalia’s seas do not seem especially deterred — instead, they seem to be getting only wilier. More than a dozen warships from Italy, Greece, Turkey, India, Denmark, Saudi Arabia, France, Russia, Britain, Malaysia and the United States have joined the hunt.

And yet, in the past two months alone, the pirates have attacked more than 30 vessels, eluding the naval patrols, going farther out to sea and seeking bigger, more lucrative game, including an American cruise ship and a 1,000-foot Saudi oil tanker.

The pirates are stalking bigger game. They are getting away with stuff like Johnny Depp. They need film crews assigned to them. This could make great reality TV.

Finally, nations are at least pretending to take serious this threat to the international trading system. Can't have mere pirates flaunting their disregard for authority now can we? No. The big governments are talking tough.

UNITED NATIONS, Dec. 16 -- The U.N. Security Council voted unanimously Tuesday to authorize nations to conduct military raids, on land and by air, against pirates plying the waters off the Somalia coast even as two more ships were reportedly hijacked at sea.

The vote represented a major escalation by the world's big powers in the fight against the pirates, who have disrupted commerce along one of the world's most active sea routes and acquired tens of millions of dollars in ransom. It came as China -- which has had several ships commandeered in recent months -- said it is seriously considering joining U.S., European and Russian warships policing the region.

Are the pirates making enough money to buy the tech they need to fight back? Or are they too unsophisticated to get guided missiles to use against ships?

By Randall Parker 2008 December 16 11:45 PM  Civilizations Order Maintenance
Entry Permalink | Comments(16)
2008 December 14 Sunday
2007 Delphi UAW Agreement Shows What UAW Fears

Why is UAW President Gettelfinger claiming that Republican Senators are in league with foreign car companies to break the UAW? A June 2007 agreement between the United Auto Workers union and Delphi during Delphi's bankruptcy gives an insight into what the UAW is afraid of and why the UAW wants the US Congress to loan money to Chrysler and General Motors. Delphi UAW worker salaries went down by almost a third because bankruptcy gave Delphi leverage to renegotiate with the UAW.

The historic restructuring of the American auto industry cleared another major hurdle Friday with the announcement of a deal covering wage cuts and factory closures between bankrupt Delphi Corp. and the United Auto Workers.

The tentative agreement includes a payout of $105,000 over three years that will be offered to about 4,000 of Delphi's 17,000 UAW workers. In return, the workers' pay will be cut from about $27 an hour to a maximum of $18.50 an hour by Oct. 1.

There's a lot more at stake between the Big Three and the UAW aside from hourly wage rates. Retirement benefits and payment for not working during slow periods are both areas where the UAW doesn't want to give up anything.

If GM and Chrysler do not enter bankruptcy and if the US Congress does not force the UAW to make concessions then high UAW wages and benefits will continue until the Big Three burn thru the US Treasury loans that they and the UAW want them to get.

The Big Three need to get their costs down with a big shaving on their bonds (basically mark down the face values and perhaps exchange some of the debt for equity) and also with big labor union concessions on wages, benefits, and hourly rates. The UAW turned down the Republican Senate offer precisely in order to avoid making any concessions. If the Obama Administration lets them get away with this then the effect will be to delay the bankruptcies, not avoid them.

By Randall Parker 2008 December 14 06:54 PM  Economics Labor
Entry Permalink | Comments(3)
2008 December 13 Saturday
Associated Press Can't Recognize Absurd UAW Claim

Associated Press reporters Tom Krisher and Kimberly S. Johnson get used as tools of the United Auto Workers to uncritically relay a UAW claim that is obviously incorrect.

DETROIT (AP) -- Festering animosity between the United Auto Workers and Southern senators who torpedoed the auto industry bailout bill erupted into full-fledged name calling Friday as union officials accused the lawmakers of trying to break the union on behalf of foreign automakers.

What did Bob Corker and other Republican Senators propose that would help foreign automakers? Nothing. In fact, Corker and colleagues wanted to lower UAW salaries in order to make US automakers more competitive against foreign makers. The key Republican demand to make UAW wages competitive would hurt foreign makers by lowering the costs of US makers. US automakers are stuck in a death hug with the UAW. Corker wants to give them some relief from this death hug.

The irony here is that the Senators from states that have non-union foreign transplant factories are promoting a policy that would help the Michigan competitors of these southern factories. But the AP writers can't seem to notice that what the Republican Senators are saying is true.

The vitriol had been near the surface for weeks as senators from states that house the transplant automakers' factories criticized the Detroit Three for management miscues and bloated UAW labor costs that lawmakers said make them uncompetitive.

The AP writers do not think to question the reasonableness of the UAW President's absurd claim.

"They thought perhaps they could have a twofer here maybe: Pierce the heart of organized labor while representing the foreign brands," UAW President Ron Gettelfinger said at a Friday morning news conference in Detroit.

Corker wants a deal that results in low enough costs for the American makers that they can survive and thrive. That is a wise and prudent position to take. The companies need to get all their costs (and that includes union labor) down to a level that allows them to compete with foreign car makers.

"Our members wanted to know that the UAW was willing to be competitive," Corker said.

"I basically pleaded with them to give me some language by some date certain that they were competitive with these other companies," Corker said. "That's where it broke down."

You can listen to Corker's press conference after the deal fell thru where he explains what happened from his vantage point. What amazes me about the whole thing: The US automakers are effectively at death's door and yet the UAW refuses to make big concessions. The UAW wants the US taxpayer to start funding union wages and very high benefits for an indefinite period of time. The UAW wants its manual laborers to continue to get benefits that no other manual laborers in the United States get. They want to do this at taxpayer expense and they expect everyone else to solve their problems.

By Randall Parker 2008 December 13 07:59 PM  Economics Transportation
Entry Permalink | Comments(15)
2008 December 12 Friday
Jim Rogers Sees Most American Banks As Insolvent

Legendary investor Jim Rogers, who co-founded the Quantum Fund with George Soros, says most American banks are bankrupt.

"Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt," he said.

"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent.

"What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics."

Given that the mortgage default rate is going to surge along with rising unemployment it seems to me most of the losses of the banks still lie in the future. So Rogers sounds plausible. Rogers is a dollar bear.

"I plan to get out of all of my U.S. dollars at some time throughout this rally," he said. "The dollar is a terribly flawed currency, and perhaps a doomed currency."

We are doomed! Well, not all of us. Some people will prosper even during decay.

The promise of mortgage modifications seems exaggerated.

"With half of modified loans defaulting, many modifications are only kicking the can further down the road and not solving the root problem," said Greg McBride, senior analyst with Bankrate.com, an online consumer finance Web site. "The fact is that with a lot of properties, you won't be able to move to an affordable modification because the borrower took out a lot of equity at the top of the market or the initial loan was taken at an extremely low teaser rate," he said.

Rising credit card defaults promise to hammer the big banks that hold most outstanding credit card loans.

The three largest U.S. card issuers are J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. Those three banks had nearly 60 percent of the $724.44 billion in outstanding loans at the 10 biggest card issuers in the U.S. as of June 30, according to the Nilson Report, a Carpinteria, Calif., newsletter that follows the industry.

These banks are going to get hammered by rising mortgage defaults and rising credit card defaults. We are in the mother of all deleveragings.

Not only are at least half of modified loans failing even after modification. But Stanford University prof Robert Hall says 70% of subprime foreclosures aren't eligible for mortgage modification programs.

“Something like 70 percent of subprime foreclosures are beyond the reach of modification programs because the owners are investors, because the owner is in default for the second time on the property, or because the owner has disappeared,” Hall said.

People who never should have gotten credit in the first place do not magically become good borrowers. These redefault rates will get even worse as unemployment rises.

Consider the first quarter of 2008. After three months, 36 percent of borrowers with mortgages modified in this quarter had re-defaulted (with payments more than 30 days past due). At six months, this re-default rate had risen to 53 percent. And after eight months, it had reached 58 percent. The data is almost identical for mortgages modified in the second quarter of 2008. For those arguing that 60 days past due is a better predictor of ultimate default and foreclosure, the numbers are hardly better, with re-defaults in excess of 35 percent after six months.

Then there's the auto industry. Some see another acute credit crisis if the car companies go bankrupt.

The threat is so serious that "Credit Crisis Part II" looms if the government doesn't come to the aid of GM and Ford, said J.P. Morgan analyst Eric Selle, author of a research report that pro-bailout Democrats like Levin are citing.

While the threat of a GM bankruptcy gets lots of attention the equally real threat of a GMAC bankruptcy promises to slash the size of GM's dealer network.

“There’s so many dealers on the edge, if GMAC goes out of business 30 to 40 percent of dealers won’t be able to get financing from anywhere else,” Martin NeSmith, a liaison to the lender as a member of GM’s National Dealer Council, said in an interview yesterday. “They’ll go out of business.”

Some people (Jim Rogers included) warn that we may be headed into a lost decade ala Japan in the 1990s where the economy stagnated for a decade. I think this risk is real and made worse by attempts to prop up housing prices with low mortgage interest rates. At the end of a bubble trying to patch the holes in the bubble in order to reinflate it is equivalent to what the Japanese government did when it tried to keep unhealthy companies solvent. Prevent a needed correction and the causes of the downturn will persist and therefore economic growth will be stunted.

By Randall Parker 2008 December 12 11:49 PM  Economics Lending
Entry Permalink | Comments(3)
2008 December 11 Thursday
Disaster Relief Funds Cause Corruption

Think Barack Obama's big infrastructure spend is going to make America a better place? Maybe. But that huge influx of money for building stuff bears some resemblance to disaster relief spending for rebuilding. Disaster relief funds cause corruption conviction rates to skyrocket.

Where natural disasters strike, political corruption is soon to follow, say the authors of a study in the Journal of Law and Economics. But it's not the wind and rain that turns good folks bad; it's the money that floods in afterwards from the Federal Emergency Management Agency.

I think the $100 here is supposed to be $100 million. So the billions of dollars that flow in after a big hurricane hit causes the rate of corruption to go up by multiples.

"We find each $100 [million] of FEMA-provided disaster relief increases the average state's corruption by nearly 102 percent," write Peter Leeson (George Mason) and Russell Sobel (West Virginia U.). "Our findings suggest that notoriously corrupt regions of the United States, such as the Gulf Coast, are in part notoriously corrupt because natural disasters frequently strike them. They attract more disaster relief, which makes them more corrupt."

Leeson and Sobel base their conclusions on a statistical model that measured the relationship between FEMA allocations and corruption in each U.S. state. The researchers quantified corruption as the number of per capita convictions of public officials for crimes such as embezzlement, accepting bribes or kickbacks, extortion and unlawful dealings with private vendors or contractors.

Hurricane-prone states like Florida, Mississippi and Louisiana, which receive large amounts of FEMA money, tend to have more corruption convictions per capita. States like Nebraska and Colorado, which receive almost no FEMA dollars, have least corruption.

Leeson and Sobel also found notable spikes in corruption convictions in the year following influxes of FEMA money in a given area. For example, in 1997 Minnesota received around $300 million from FEMA after the Red River Flood. In 1998, corruption convictions in Minnesota spiked to 14 per 100,000 citizens from less than two per 100,000 the year before.

Will we see a boost in corruption due to more infrastructure spending?

By Randall Parker 2008 December 11 10:51 PM  Economics Corruption
Entry Permalink | Comments(2)
2008 December 10 Wednesday
California Budget Deficit Grows Even Bigger

It keeps getting worse.

Gov. Arnold Schwarzenegger said California's budget deficit has widened by another $3.6 billion in just the past few weeks amid a worsening economy, and that the total shortfall of an estimated $14.8 billion will keep climbing until the state legislature acts.

The state is only 2 and a half months away from running out of money.

By the end of February, the governor said, the state will be out of cash and forced to pay its bills with IOUs. The state's projected budget gap through mid-2010 now stands at more than $30 billion.

Recent balanced budgets were only balanced in name, not in substance.

Over the past few years, state budgets have been "balanced" with borrowing, raiding voter-designated funds, delaying payments, creative bookkeeping and a lot of wishful thinking about future revenues.

Few states are in as bad a shape as California. Only Arizona and New York have budget gaps bigger in percentage terms:

Arizona is expecting a budget gap in 2010 that will exceed 24 percent of its general fund budget. Other states expecting huge budget holes include: New York (20 percent), California (18 percent), Wisconsin (17.2 percent), Minnesota (14.7) and Kansas (14.5 percent), according to the NCSL report.

But those percentages were calculated before the most recent growth in California's deficit. By my calculation California has just about pulled even with Arizona. Also, California has played lots of games with trying to make budgets balance in recent years that put it in worse financial condition than states that haven't been delaying payments and engaging in creative bookkeeping.

By Randall Parker 2008 December 10 11:55 PM  Economics Government Costs
Entry Permalink | Comments(11)
2008 December 08 Monday
Personal Account Of Argentina 2001 Financial Collapse

When the proverbial wheels came off the Argentine economy in 2001 the poverty was so severe and the disruption so abrupt that crime soared, people begged, and people went hungry. I found one person's account of what life became like and what one ought to do to prepare if one thinks such a disruption is possible in one's own society. An interesting read.

Forget about shooting those that mean you harm from 300 yards away with your MBR. Leave that notion to armchair commandos and 12 year old kids that pretend to be grown ups on the internet.

Some facts:

1) Those that want to harm you/steal from you don’t come with a pirate flag waving over their heads.

2) Neither do they start shooting at you 200 yards away.

3) They wont come riding loud bikes or dressed with their orange, convict just escaped from prison jump suits, so that you can identify them the better. Nor do they all wear chains around their necks and leather jackets. If I had a dollar for each time a person that got robbed told me, “They looked like NORMAL people, dressed better than we are”, honestly, I would have enough money for a nice gun. There are exceptions, but don’t expect them to dress like in the movies.

4) A man with a wife and two or three kids can’t set up a watch. I don’t care if you are SEAL, SWAT or John Freaking Rambo, no 6th sense is going to tell you that there is a guy pointing a gun at your back when you are trying to fix the water pump that just broke, or carrying a big heavy bag of dried beans you bought that morning. The best alarm system anyone can have in a farm are dogs. But dogs can get killed and poisoned. A friend of mine had all four dogs poisoned on his farm one night, they all died.

After all these years I learned that even though the person that lives out in the country is safer when it comes to small time robberies, that same person is more exposed to extremely violent home robberies. Criminals know that they are isolated and their feeling of invulnerability is boosted. When they assault a country home or farm, they will usually stay there for hours or days torturing the owners. I heard it all: women and children getting raped, people tied to the beds and tortured with electricity, beatings, burned with acetylene torches.

He thinks you shouldn't be too isolated. You need a group around to do mutual self defense. But at the same time he thinks urban areas become too dangerous during a period of severe economic downturn. One problem is that one doesn't just need a safe place to live. One also needs a way to work and to engage in commerce.

Read the full lengthy article for lots of details of what this guy saw. I was struck by the fact that while one can stockpile lots of stuff one can't stockpile internet access or phone access. The ability to communicate is crucial for commerce, especially if you can telecommute. A large country wouldn't be equally impacted everywhere by communications failures. He said Argentina had many electric power outages but most were not long.

There is a survivalist angle to this article. But it also provides insights into human nature. Given tough enough conditions suddenly people who you'd never expect to become criminals engage in criminal behavior. Also, the level of corruptibility of police and government officials plays a huge role in determining just how far a country will fall as a result of economic disruption. Note that not all police departments or local and state governments are equally corruptible. Some areas in the United States would probably stay pretty uncorrupt even in a severe crisis.

By Randall Parker 2008 December 08 11:30 PM  Chaotic Regions
Entry Permalink | Comments(6)
GM Needs To Escape From United Auto Workers

76 year old GM vice chairman Bob Lutz says what GM needs to do to survive is obvious but not possible.

But with Mr. Wagoner under attack and with the bailout legislation uncertain, the automaker decided to give Mr. Lutz a chance to forcefully defend the company.

“You get these people who say, ‘I know what I’d do if I were C.E.O. of G.M., like close up all the union plants and set up plants down South with non-union labor,’ ” he said. “Well, any idiot can figure that one out. But how conceivably can you get that done?”

Escape from the UAW. The need is obvious. But there's no way the Democrats in the US Congress are going to bail out GM so it can escape from the organization that made the bail-out necessary in the first place.

Roger B. Smith wanted to escape from the UAW with robots. But he was too soon in attempting to go down that path. A lot of the robots didn't work well. Robots advanced enough to replace all human labor on assembly lines still lie somewhere in the future. 10 years? 20 years? The day is coming. But GM has to survive till that day. Not clear that it can.

By Randall Parker 2008 December 08 11:15 PM  Economics Transportation
Entry Permalink | Comments(8)
California State Financial Disaster Approaches

The weather is still highly excellent. But state government infrastructure spending in California is headed for a complete stop due to the budget crisis.

SACRAMENTO — California will have to stop financing nearly all infrastructure projects within two weeks if lawmakers don't immediately solve the state's $11.2 billion budget shortfall, state Treasurer Bill Lockyer warned Monday as legislators met in a rare joint session.

About $5 billion in loans for highway projects, school construction and other public works would be cut off, just as Gov. Arnold Schwarzenegger and others are urging greater investment in such initiatives to help shore up the faltering economy, if the Legislature fails to act.

Cut off. Finito Baby! This ain't no party. This ain't no disco. This ain't no surprise either. Just last week Steve Sailer was predicting that state and local budget crises are going to cause a big cut-back in infrastructure spending even as Barack Obama tries to ramp it up.

California needs over $30 billion to balance its budget for Fiscal Year 2009 and it could get a lot worse than that. California and its counties and municipalities should not be worrying about starting expensive new construction projects. They should be worrying about meeting payroll in 2009 and 2010 for firemen, policemen, schoolteachers, and the like. I wouldn't be surprised if a year from now we see giant piles of Chinese steel sitting on the docks of Long Beach collecting dust while new California construction hiring is postponed indefinitely and Obama's infrastructure money is diverted to keeping current civil servants employed. Teachers and prison guards and the like will be renamed "human infrastructure."

The California budget deficit is going to grow even bigger.

California's budget deficit could reach nearly $28 billion over the next two years unless drastic steps - including raising new taxes - are taken to stem the fiscal bleeding, the nonpartisan legislative analyst's office said Tuesday.

...

Without bold fixes, the state will have budget gaps of about $22 billion a year through 2014, the analyst said: The budget deficit is so deep that simply cutting spending won't work without devastating funding to key programs such as education and health care.

Actually, the $28 billion figure is over just 19 months according to many news accounts. That's $1.47 billion per month of unsustainable red ink. But that's nothing compared to the $22 billion per year figure which works out to $1.83 billion per month. With 38 million people that works out to about $50 per month per person. But since most of them are poor or children or both we have to expect that the middle and upper class net tax payers (those who pay more in taxes than they receive in benefits) will foot most of the cost. So if you are well paid in California better find a way to spend a couple hundred dollars less per month. Gotta feed the nanny state and the illegal aliens.

Financial disaster coming to palm tree lined boulevards. Actually a ride thru LA is more notable for the enormous quantity of graffiti and other signs of urban decay.

Dec. 8 (Bloomberg) -- California will suffer a “financial disaster” if lawmakers remain deadlocked over how to address a widening budget deficit and a looming cash shortage, Director of Finance Mike Genest said.

The state is on course to start defaulting on debt.

State controller John Chiang said the state could face running out of money by March, be unable to borrow, and be forced to issue the equivalent of IOUs for only the second time since the Great Depression.

Think this is bad? In coming decades the state's demographic deterioration is going to make it much worse. The younger population isn't going to achieve as much educationally or in their careers. Sure, there'll still be a lot of really bright people in Silicon Valley. But they'll have to carry along too many others not so bright and not so high achieving.

There is one big weapon we could use to shrink the California deficit: deportation. But you aren't going to see it mentioned. Libertarians would rather that taxes go up than illegal aliens be deported. They'll claim they prefer smaller government. But we know that immigration from the 3rd World means a bigger lower class and more Robin Hood taxes to support the nanny welfare state. So libertarians favor higher taxes and larger government.

Update: Dan Walters says the California budget shortfall is even bigger than the state government is reporting.

And then there are retiree health costs. New accounting standards require governments to report costs of providing health care to retirees. A year ago, a blue-ribbon commission appointed by Schwarzenegger said state and local governments have a $118 billion unfunded health liability, with the state accounting for $48 billion of the staggering total.

Accumulating unfunded liabilities, accumulating public debt, accumulating private debt, going into hock with the world due to sustained large trade deficits, a deteriorating demographic situation, and assorted other building problems are starting to reach critical mass. The 2010s are going to have features of a long crisis.

By Randall Parker 2008 December 08 10:11 PM  Economics Government Costs
Entry Permalink | Comments(3)
2008 December 07 Sunday
Underemployment Reaches Record High

Daniel Gross at Slate explains how different measures of labor underutilization show bigger declines in employment than the headline unemployment rate.

The data on people not in the work force show the number of people not looking for work because they're discouraged about finding jobs has risen from 276,000 in September 2007 to 467,000 in September 2008—up 70 percent. The percentage of people unemployed for more than 15 weeks stood at 2.3 percent in September 2008, up from 1.6 percent in September 2007, a rise of nearly 45 percent. But the most troublesome is the U6. The U6 is sort of the summa of job angst, a shorthand tally for the aggregate of job-related frustration. (Moneybox covered some of this terrain back in 2004.) To compile the U6, the BLS takes the number of unemployed, plus all marginally attached workers, plus all of those employed part-time for economic reasons, and then calculates that total as a percentage of the sum of the entire civilian labor force plus marginally attached workers.

The U6 in September rose to 11 percent, its highest level since the data series started in 1994 and significantly higher than it was in the last recession, in 2001.

That U6 number is already higher than in 2001 even though economists predict the unemployment rate will go much higher.

U6 has since soared even higher to 12.5%.

That rate (called “U-6”) in November? A whopping 12.5%.

This expected rise in unemployment will push mortgage defaults up much higher. How many more banks will fail as a result?

Moody's Economy.com now sees the unemployment rate peaking at 8.7% in the first quarter of 2010, rising from the 6.5% peak it forecast in September.

How much of an impact does unemployment have? Barclays Capital estimates that a 1% increase in the unemployment rate, like that between May and October, could push up losses on securities made up of pools of mortgages by as much as 35%.

The US unemployment rate hit 10.8% in 1982 and some economists are saying recession will be the deepest since WWII. So that opens up the possibility of double digit unemployment.

Ireland's unemployment might reach 12% in 2010.

The Irish economy is labouring under the collapse in residential construction and a severe decline in consumer spending and as a result unemployment is expected to reach 10 per cent in 2008 and may peak at 12 per cent in 2010, according to the report.

How bad does it have to get to call it a depression?

Richard Sylla, an economic historian at New York University, says that his rule of thumb for a depression would be double-digit unemployment rates lasting for more than a few months. The only times that occurred in the U.S. were during the Great Depression and the 1890s. The deep recession that ended in 1982 briefly saw unemployment rise above 10%.

Berkeley economic historian Brad DeLong’s definition of a depression is in a similar vein: Unemployment hits 12%, or it stays above 10% for three years.

Another measure of depression involves the size of the economic contraction. I do not expect to see depression levels of economic contraction. But the financial markets keep throwing up surprises. So hard to say for sure.

Update: In percentage terms the November 2008 job losses were only half the December 1974 job losses.

While in terms of raw numbers the November job losses are the largest since 1974, it is important to realize that the economy and labor market are much larger than they were in 1974. In percentage terms, the number of establishment jobs declined by 0.4 percent. In comparison, the December 1974 job losses of 602,000 were twice that number—a 0.8 percent decline from the previous month. The size of the decline in percentages is the same as the peak job losses in the 1981-82 recession but twice that as compared to peak job losses in the 1990-91 and 2001 recessions.

So the 1973-1975 recession still looks bigger than the current recession. We would need to see a huge increase in job losses to get up into 1974 territory.

The November jobs report is one of the worst jobs reports in 30 years. Job losses totaling over a half a million is a very worrisome number. However, it is important to realize that the numbers are not as bad as the 1973-75 recession. The employment picture is already worse than the last two recessions, but right now the 1981-82 recession appears to be an apt comparison due to the increased relative scale of our economy.

One thing different today that gives policy makers a lot more latitude: much lower inflation rate. The Fed can do massive bond buying and take other measures to expand the money supply to counteract the contraction.

By Randall Parker 2008 December 07 10:24 PM  Economics Labor
Entry Permalink | Comments(3)
Zimbabwe Soldiers Not Getting Paid

Robert Mugabe's government is failing to pay its soldiers. What this means: A small covert operation dispensing US dollars or Euros could bring down the Zimbabwean government by bribing soldiers to rebel.

HARARE (IRIN) - Uniformed Zimbabwean soldiers raided one of the capital's money-changing haunts after becoming frustrated with queuing to withdraw cash at a Harare bank, according to an IRIN correspondent who witnessed the event.

The soldiers descended on foreign currency dealers in "Roadport" in central Harare on 27 November, where they assaulted money dealers and robbed them, an indication of the low morale among Zimbabwe's rank and file soldiers.

Effectively the national currency is now useless.

Zimbabwe's official inflation annual rate is estimated at 231 million percent, but independent economists cite the inflation rate in the billions of percent; hyperinflation is causing widespread cash shortages.

Banks have set a maximum daily limit of Z$500,000 (US$0.25), creating long queues at banks each day, with no guarantee there will be any money to withdraw.

A small shove could knock over this government. Granted, overthrowing the government won't bring on a golden age. But while Africa is going to remain impoverished and backward it does not have to be as totally dysfunctional as Zimbabwe.

By Randall Parker 2008 December 07 01:30 PM  Chaotic Regions
Entry Permalink | Comments(5)
Obama Expected To Reduce Illegal Alien Round-Ups

An already pathetically small rate of illegal immigrant arrests will be cut by Barack Obama.

As the Obama administration takes shape, many experts are betting it will significantly curtail one of the most visible and controversial facets of the Bush administration's immigration crackdown: the high-profile workplace raids in which federal agents arrest dozens, even hundreds, of undocumented workers.

The number of people arrested in such raids has risen tenfold in the past five years, to 6,287 in 2008.

The economy is bleeding jobs like a slashed open pig. Hundreds of thousands lose their jobs every month and this will continue until some time in 2010. You might think that under such dire circumstances reserving what jobs there are for Americans might be a priority. But no.

With tens of millions of illegal aliens the US government could manage to find just 6,287 of them to round up in 2008. By contrast, Dwight D. "I like Ike" Eisenhower rounded up illegals by the tens of thousands and over a million fled to avoid getting caught. We could do this today if only we had the political will.

By the end of July, over 50,000 immigrants were caught in the two states. Around 488,000 illegal immigrants are claimed to have left voluntarily for fear of being apprehended. By September, 80,000 had been taken into custody in Texas, and the INS estimates that 500,000 to 700,000 had left Texas on their own.

We used to be able to build things in the 1950s. We could build roads without years of planning. We could build cars and lots of gadgets. We could also get things done in government. Got illegal aliens? Just go out there and round them up. We live in the era where we can't do things any more.

By Randall Parker 2008 December 07 11:25 AM  Immigration Law Enforcement
Entry Permalink | Comments(5)
Imposter Almost Causes India-Pakistan War

This really happened.

Asif Ali Zardari, the Pakistani President, took a telephone call from a man pretending to be Pranab Mukherjee, India's Foreign Minister, on Friday, November 28, apparently without following the usual verification procedures, they said.

The hoax caller threatened to take military action against Pakistan in response to the then ongoing Mumbai attacks, which India has since blamed on the Pakistan-based militant group Lashkar-e-Taiba (LeT), they said.

Mr Zardari responded by placing Pakistan's air force on high alert and telephoning Condoleezza Rice, the US Secretary of State, to ask her to intervene.

This is funny. Admit it. Sure the stakes are high and tens or hundreds of millions could have died. But the fact that a phone caller can trick the President of Pakistan into putting the Pakistani air force on high alert is a hoot.

By Randall Parker 2008 December 07 10:48 AM  Military War, Rumours Of War
Entry Permalink | Comments(3)
Palin And Huckabee 2012 Republican Front Runners

Here is an idea: take your losers and run them again against an incumbent President.

Barack Obama is more than six weeks away from assuming the presidency, and the next Iowa caucuses are more than three years away, but a national poll out Friday suggests that former Arkansas Gov. Mike Huckabee and Alaska Gov. Sarah Palin top the list of potential 2012 Republican presidential hopefuls.

Huckabee leads in the CNN/Opinion Research Corp. poll released Friday. The survey is an early measure of possible support for the next GOP presidential nomination.

If the economy is doing well in 2012 then whoever runs as a Republican will lose. If the economy is doing poorly due to the continued effects of the burst debt bubble combined with Peak Oil then it would be a shame if the Republicans wasted their opportunity by running Palin or Huckabee.

I am expecting poor economic performance through the 2010s. So I expect incumbents to lose more often.

By Randall Parker 2008 December 07 10:43 AM  Politics Republican Party
Entry Permalink | Comments(1)
Heard About Riots In Greek Cities?

Did you know that the Greeks are big on public violence?

Thousands of protesters have attacked banks and shops in Athens and the northern city of Thessaloniki, angered by the police's killing of a teenager.

Demonstrators threw firebombs, rocks and other objects at the buildings and at police, who responded with tear gas.

Earlier, Interior Minister Prokopis Pavlopoulos appealed for restraint.

If I didn't regularly visit large numbers of news sites I would have missed the story. We've got Iraq, Pakistan, Afghanistan, and Bombay (aka Mumbai) to worry about. Rioting over police killings can only happen in America is there's some racial angle where evil whites kill saintly blacks. How can the Greeks get so upset about Greek police killing a Greek kid? Does the absence of inter-racial resentment mean that people in the same race have to channel their natural resentments at each other?

Why would the violence spread all the way to Crete? Do youths in Crete look for a reason to riot?

The unrest, the worst in the country in several years, later spread to Thessaloniki and the southern island of Crete.

The BBC says violence during demonstrations is common in Greece. Anyone know why this is so and how long this has been so?

Violence often breaks out during demonstrations in Greece, but people are rarely injured. Last week, a small group of people clashed with police at a protest against the government's education policy.

Imagine physically clashing over education policy. "All we are saying is give teach a chance".

Update: Okay, this makes more sense. This is class conflict.

Despite appeals for calm from the conservative government, leftist demonstrators and anarchists held running battles with security forces on Sunday.

...

In recent years, anger among Greek youths has been fanned by the growing gap between rich and poor. Violence at student rallies and fire bomb attacks by anarchist groups are common.

Anarchists are leftists who are mad at government because they are not in charge. Anarchism is especially appealing to youths because they have so little power and such low status. People have instinctive desire for power and status. Hence the violence.

Update II: The kid that was killed was throwing stones at a police car.

Nearly 5,000 people rallied outside the National Museum near where the teenage victim, Andreas Grigoropoulos, died late Saturday.

Grigoropoulos was killed by shots fired from a police gun during clashes between police and youths in Athens' Exarchia district. He was among a group of youths who threw stones at a police car.

Stones can kill a person.

By Randall Parker 2008 December 07 10:16 AM  Culture Compared
Entry Permalink | Comments(9)
2008 December 06 Saturday
Financial Consolidation Causes Bigger Financial Disasters?

What caused the world economic crisis? Kurt Cobb points to an argument that fewer and bigger financial companies make for fewer and bigger financial mistakes.

For former Wall Street hedge fund manager and self-styled student of uncertainty Nassim Nicholas Taleb an important cause of the current financial meltdown is best described by ecological science. The system has become overoptimized. The consolidation of finance into the hands of fewer and fewer large players--banks, insurance companies, investment banks, and giant hedge funds--has made it less vulnerable to frequent crises, but more likely to produce a severe crisis when there is a breakdown in the system.

What used to be country-specific or regional crises, now become worldwide crises. In the past we've had the Mexican crisis, the Asian crisis, the Argentinian meltdown and most recently the utterly devastating hyperinflation in Zimbabwe. But none of these became global crises.

"It's vastly more optimal to have one large bank than 10 small banks. It's more efficient," Taleb told The News Hour with Jim Lehrer recently. "[But,] when one bank, [a] large bank makes a mistake, OK, it's 10 times worse than a small bank making a mistake." The moral of the story: A world with a lot of small banks is far more resilient than one with a few large banks. That's the kind of result one would expect in biological communities, and it turns out to be true, not surprisingly, in human communities as well.

Not sure I buy this argument. The Savings and Loan crisis of the late 1970s and 1980s featured a large number of S&Ls all making the same mistake.

But globalization does bring more economies into sync with each other and has caused the financial mistakes that led to our current financial crisis to occur on a global scale rather than just a national scale.

By Randall Parker 2008 December 06 05:05 PM  Economics Disasters
Entry Permalink | Comments(3)
2008 December 04 Thursday
Market Projects 21% Junk Bond Default Rate

Speculative grade bonds might default at a higher rate than in 1933. Of course the market could be wrong. After all, it was wrong to buy so many of these bonds in the first place.

Dec. 3 (Bloomberg) -- Yields on speculative-grade bonds imply a U.S. default rate of 21 percent, higher than the record set during the Great Depression in 1933, according to John Lonski, chief economist at Moody’s Investors Service.

The extra yield investors demand to own U.S. high-yield bonds was 19.19 percentage points on Dec. 1, according to Moody’s. Assuming a 20 percent recovery rate, the spread implies a default rate of 20.9 percent, Lonski said yesterday in a market commentary. That compares with a rate of 11 percent in January 2001, 12.1 percent in June 1991 and 15.4 percent in 1933.

There's the default rate on junk bonds. But there's also the percentage of all bonds that junk bonds represent. Anyone have an idea where we stand on that score?

Deutsche Bank says the interest rate spreads predict a 50% default rate for junk bonds.

According to Deutsche Bank, current spreads imply a 50 per cent default rate for high-yield credits and an "inconceivable" default rate for investment-grade companies: government intervention to prevent defaults on such a scale, they believe, would be inevitable.

The high interest rates charged to higher quality companies are most interesting. Do these higher rates accurately forecast future default rates?

FedEx CEO Fred Smith sees the worst Christmas in at least 35 years.

It is by far the worst I've seen in the 35 years I've been in business. It's just gone right off the cliff. For retailers, I don't think there's going to be any Christmas to speak of. Some of our high-end retailers reported sales down 25%.

That big sales drop means lots of manufacturers and retailers will go bankrupt in 2009. How many? BorgWarner CEO Timothy Manganello is planning for a long recession.

We're preparing for nothing good until mid-2010. If things get uglier, it's possible it won't improve by then.

Junk bond yields are at record levels.

Junk-bond yields are at unprecedented high levels. As rattled investors dump everything but U.S. Treasury bonds, the average yield on below-investment-grade debt is over 20% for the first time ever.

So far massive US government intervention in financial markets hasn't stopped the contraction. Will the US government just keep upping the ante? By that point will inflation break out in a big way?

Some people are still deluded that we can put the Humpty Dumpty back together again. Harvard economist Edward Glaeser says that lending subsidies can't restore housing prices back to their distorted highs.

THE GREAT housing cycle of the aughts - the 73 percent increase in housing prices between 2001 and 2006 and the 22 percent decline since then - was built on three illusions. Too many homebuyers thought housing prices would go up forever. Too many investors thought they could lend without risk to subprime borrowers. Too many policy makers thought the magic of subsidized credit could permanently achieve a vote-winning trifecta of bigger homes, rising prices, and more homeownership.

The cruel reality of the market has shattered the first two illusions, but somehow the misconception persists that more lending subsidies can take us back to the housing markets of 2006.

By Randall Parker 2008 December 04 11:01 PM  Economics Housing
Entry Permalink | Comments(6)
2008 December 02 Tuesday
Republican Immigration Restrictionists Had Fewer Electoral Losses

Audacious Epigone shows that once again House Republicans who are members of the restrictionist Immigration Reform Caucus (IRC) experienced fewer electroal losses than Republicans who were not part of the IRC.

The ten seats given up thus constitute a 9.5% loss rate among Republican IRC members. They are:

Renzi, AZ
Musgrave, CO
Keller, FL
Feeney, FL
Sali, ID
Walberg, MI
Hayes, NC
Kuhl, NY
Drake, VA
Goode, VA

How did their non-restrictionist counterparts fare? Of the 97 non-IRC Republicans, 15 gave up their seats this election cycle. That comes to a loss rate of 15.5%. The losers are:

Everett, AL
Shays, CT
Weller, IL
Gilchrist, MD
Knollenberg, MI
Saxton, NJ
Wilson, NM
Pearce, NM
Porter, NV
Fossella, NY
Walsh, NY
Chabot, OH
Regula, OH
English, PA
Davis, VA

This repeats the pattern of 2006 where 5.9% of restrictionists lost while 16.7% of non-restrictionists lost. As Audacious points out, the result is that the Republican Party is becoming more restrictionist in Congress.

By Randall Parker 2008 December 02 10:37 PM  Immigration Politics
Entry Permalink | Comments(3)
Advertise here. Contact randall dot parker at ymail dot com
 
Web parapundit.com
Site Traffic Info