naked capitalism

We’ve had a series of posts (see here, here, and here) on the judge’s decision in a case called Kemp c. Countrywide, which provided what appeared to be the first official confirmation of what we’ve long suspected and described on this blog: that as of a certain point in time post 2002, mortgage originators and sponsors simply quit conveying mortgage notes (the borrower IOUs) through a chain of intermediary owners to securitization trusts, as stipulted in the pooling and servicing agreements, the contracts that governed these deals. We say “appeared to be” because Bank of America’s attorney promptly issued a denial, effectively saying that the employee whose testimony the judge cited in his decision, one Linda DeMartini, a team leader in the bank’s mortgage- litigation management division. didn’t know what she was talking about. As we discussed, this seems pretty peculiar, since she was put on the stand precisely because she was deemed to be knowledgeable about Countrywide’s practices.

Today, an article appears in Bloomberg, and it appears to be a rehash of this now week-old story, so I was puzzled to see it run now. But buried in the article is the probable reason for this piece, namely, that the Bloomberg reporters saw that BankThink had purchased and posted the trial transcripts, and quoted more of DeMartini’s testimony. And it isn’t pretty. From Bloomberg:

The judge asked DeMartini whether the notes ever move to follow the transfer of ownership, according to the transcript of the August 2009 hearing.

“I can’t say that they’re never moved because, I mean, with this many millions of loans as we have I wouldn’t presume to say that, but it is not customary for them to move,” DeMartini said.

This is in keeping with the judge’s recap, and also underscores the notion that it was Countrywide’s practice to not convey the notes. We have been told separately that a senior industry executive also said that no one in the industry transferred the notes. If true, this has very serious implications. As we’ve indicated, it means that residential mortgage backed securties are not secured by real estate, or as Adam Levitin put it, they are “non mortgage backed securities. Bloomberg provides further comments along those lines:

“It may mean investors who think they bought mortgage- backed securities bought securities that aren’t backed by anything,” said Kurt Eggert, a professor at Chapman University School of Law in Orange, California.

With the ramifications so serious, expect industry denials to continue apace until the evidence becomes overwhelming.

→ Washington’s Blog

I have repeatedly documented the detrimental impacts of dispersants on humans, wildlife and seafood safety. See this, this, this, this, this, this and this.

As I noted in September, scientists from Oregon State University found elevated levels of polycyclic aromatic hydrocarbons (PAHs) in the Gulf, and blamed dispersants.

Now, the website of the prestigious Journal Nature is also reporting on the increase of PAH contamination due to the use of dispersants in the Gulf:

Peter Hodson, an aquatic toxicologist from Queen’s University in Kingston, Ontario, presented his case on 9 November at a meeting of the Society of Environmental Toxicology and Chemistry in Portland, Oregon…

The problem, explains Hodson, is that the dispersed cloud of microscopic oil droplets allows the PAHs to contaminate a volume of water 100–1,000 times greater than if the oil were confined to a floating surface slick. This hugely increases the exposure of wildlife to the dispersed oil. …

Worse, the toxic constituents of oil hang around longer than other components, another speaker told the meeting. “This idea that there’s an oil biodegradation rate doesn’t hold,” says Ronald Atlas, a microbiologist at the University of Louisville, Kentucky, who has studied the aftermath of the 1989 Exxon Valdez spill in Alaska. Alkanes, the simple hydrocarbons that comprise the bulk of oil, are degraded more readily than the PAHs, he points out.

As the Press Register notes:

“These chemicals, these are PAHs that are carcinogenic. … These items are not in any way appropriate for anyone to eat,” said Ed Cake, an environmental consultant from Ocean Springs. “There’s no low-dose level that’s acceptable to eat.”…

[William Sawyer], the [veteran] Florida toxicologist, said the government tests do not look for total petroleum hydrocarbons in the seafood. He said his tests of Gulf shrimp have shown unsafe levels of the compounds, which can cause liver or kidney damage in a matter of weeks.

And watch this short video.

Raw Story reports:

Dr. William Sawyer… said… “We found not only petroleum in the digestive tracts [of shrimp], but also in the edible portions of fish.

“We’ve collected shrimp, oysters and finned fish on their way to marketplace — we tested a good number of seafood samples and in 100 percent we found petroleum.”

The FDA says up to 100-PPM of oil and dispersant residue is safe to consume in finned fish, and 500-PPM is allowed for shellfish.

Dr. Sawyer, who has long been a vocal critic of these rules, called the government’s tests “little more than a farce.”

Maine Public Radio points out:

“We’re more concerned about the dispersant and the dispersant mixed with oil–the dispersed oil, if you will–than we are about the crude oil itself.”

Tests conducted in recent months by [University of Southern Maine Center for Toxicology and Environmental Health director John] Wise’s lab, using human cell lines, show that dispersants cause cell death and DNA damage, which has been linked to cancer and reproductive problems.

WFTV Orlando reports:

Brand new laboratory test results just in Monday morning are showing troubling problems with gulf seafood… the results are raising a lot of red flags.

WFTV put gulf shrimp to the test by ordering raw shrimp over the Internet and shipping it to a private lab. …

Scientists found elevated levels of Anthracene, a toxic hydrocarbon and a by-product of petroleum. The Anthracene levels were double what the FDA finds to be acceptable.

The scientist who tested the shrimp said she would not eat it based on the results…

I’ve also previously reported that dispersants were used long after BP and the government said they had stopped using them in July. Now, Cherri Foytlin and Denise Rednour claim to have pictures of 176 empty containers of ‘discontinued’ COREXIT 9527A found… With a ship date of August 10th. And the president of a county seafood workers’ association claims that dispersant is still being applied.

In related news:

• Louisiana allegedly has more oiled shoreline now than in July

• A Gulf resident’s November blood test shows ethylbenzene levels higher than cleanup workers tested in August

• An NSF-funded workgroup notes: “Storms are likely to resurrect the oil that is currently hidden from sight” — “Much oil persists” nearshore

• A Florida State University professor says the oil is still there: “most of that Deepwater Horizon oil — as much as 70 percent to 79 percent of it —sank to the ocean floor, where it remains, sucking up oxygen and inhibiting life.

• A University of Florida scientist says “clear evidence that much of the oil is still below the surface in subsurface plumes”

• At an international conference of experts, almost no one had great confidence in the safety of Gulf seafood

• Alabama shrimpers find catch “coated in oil” at area open for fishing — Boat to be decontaminated

• Instead of cracking down on BP, the Obama administration has granted “categorical exclusions” to federally funded stimulus projects by BP (and other companies), effectively exempting those projects from environmental oversight

Hat tip: Florida Oil Spill Law

Acupuncture changes brain’s perception and processing of pain PhysOrg

Hoard of 271 Picasso works found in garage Financial Times

Food Banks Bracing For End Of Extended Unemployment Benefits Huffington Post

WikiLeaks shows out-of-control US secrecy David Rothkopf, Financial Times

WikiLeaks: Ayatollah Khameni has terminal cancer Telegraph

Wikileaks: It Could Take Down a Bank Or Two 4ClosureFraud

Afghan UN Ambassador’s $4.2 million Manhattan apartment Kabul Press versus Afghan government’s neglect of notorious mountain pass kills hundreds Kabul Press (hat tip reader May S)

The Political Economy of CFPB Funding Adam Levitin, Credit Slips

Economists’ Grail: A Post-Crash Model Wall Street Journal. This is quite a good piece, given WSJ constraints.

Obama Turns On The Base — Freezes Federal Pay Michael Scherer, Time

Did New Rules Worsen Pay Situation? Wall Street Journal

The Merkel crash FT Alphaville

Spain braces itself for a crisis made in Germany José-Ignacio Torreblanca Financial Times. Richard Smith notes, “Spain sound peed off.”

If Ireland Doesn’t Take The Bailout . . . Gonzalo Lira. As I indicated, the Irish wanted a bailout of the banks ONLY, the IMF and EU cohort apparently nixed that pronto. If the vote goes the wrong way, this will prove to have been a fatal error.

Can the eurozone afford its banks? Robert Peston

Endgame Eurointelligence

This suggestion on the Irish mess from an irreverent Commonwealth reader:

The UK conquest of Ireland began in 1169.

It’s time to finish the job.

All they have to do is offer the following:

Ireland converts all its public debt to sterling.

The UK Treasury takes over the responsibility for all of Ireland’s existing public debt.

(Ireland gets a clean start with no Irish govt. debt and not interest payments)

Ireland taxes and spends in sterling only and has a balanced budget requirement.

Ireland can borrow only for capital expenditures.

The UK Treasury guarantees all existing insured euro bank deposits in Irish banks.

Only sterling deposits are insured for new deposits.

Ireland runs a mirror tax code to the UK and keeps all of its tax revenues.

The UK agrees to fund Ireland’s with a pro rata/per capita share of any UK deficit spending.

St. Patrick’s Day is declared a UK national holiday and everyone over 21 gets a beer voucher.

Antidote du jour. OK, this is not as soft and fuzzy as usual, but it struck me as fitting:

As much as I’ve seen a lot of financial services industry misconduct at close range, sometimes even a cynic like me is not prepared for how bad things can be. And mortgage abuse is turning out to be one of those areas.

I’ve been in contact for over the last six months with attorneys involved in foreclosure defense. Unlike the foreclosure mills, which seem to coin money, the attorneys on this front are either laboring pro bono or making considerably less than they could in other lines of work. They also can back up their views with depositions and trial transcripts.

One thing they stress is that a significant number of their clients facing foreclosure has made every single mortgage payment. . Read that again.

Now how can that be? How can that square with the banks’ assertion that in every instance, their foreclosures were warranted, that the borrower was hopelessly behind?

It’s actually very simple. It’s called servicing errors and fraud. And whether by mistake or design, when a borrower gets caught in the servicer hall of mirrors of compounding fees and charges, there is no way to appeal and pretty much no way out.

Let’s look at how this begins. A payment is credited as being late. It might actually legitimately be late, the borrower might have neglected to send it in on time. Or the bank might have been slow to process it. That might be simple queuing meets bad controls, or it might be deliberate. Servicers have been found to delay posting checks to incur late fees. Unless the borrower incurs the cost of sending mail via a service that provides proof of time of delivery, the bank can always claim the payment arrived late.

Let’s say the late fee is $75. It will be charged against the next month’s payment. But the borrower doesn’t know that he owes more that month. He gets a mortgage coupon and sends his regular payment in.

Now the servicer starts playing the sort of tricks practiced elsewhere in retail banking. Under the terms of the loan and Federal law, monthy payments are to be applied to principal and interest first, fees second. But the bank applies it to fees first. This makes his second month come up short. He gets charged a fee for insufficiency, and perhaps a late fee too.

Once the borrower has had two late fees, the servicer is often required by the pooling and servicing agreement to get a broker price opinion (BPO). This is a typically $250 exercise in form in which a broker drives by, takes a couple of pictures of the house, and offers a guesstimate of what it might be worth.

Many servicers double dip and also charge the BPO to the borrower as well. So the fees and arrerage charges and interest charges are compounding at a faster rate now.

It takes a remarkably short amount of time for pyramiding fees to add up to a few thousand dollars, unbeknownst to the borrower, until he gets a call from the servicer, or worse, a foreclosure notice.

This is where it gets even better. Even when the borrower hires an attorney, it is remarkably difficult to get the servicer to disgorge its records showing the borrower payment history and its fees and charges. I’ve also been told by attorneys that the reports are difficult to decipher and reconcile with the borrower’s records of payments that have cleared his account. So unless the attorney is tenacious, or has been down this path before, he may not realize that the borrower isn’t nuts when he says he was late only once, maybe twice at most, and doesn’t understand how they bank is now foreclosing.

In the first part of the Senate Banking Committee hearings on mortgage modifications and foreclosure, Diane Thompson of the Consumer Law Center and Professor Adam Levitin forcefully disputed the banks’ claim that all foreclosures were warranted. Each pointed to servicer driven foreclosures as well as consumers being instructed by their serivcer to become delinquent so as to qualify for a mod program, being led to believe they would qualify (and even encouraged to use the money saved to pay down other debt), then either foreclosed upon while the mod was under consideration, or denied the mod and foreclosed upon. And to add insult to injury, homeowners who are denied “permanent” mods are not only charged the difference between their reduced payments and their regular amount due, but they are charged late fees, which per our example above, compound in nasty ways.

Thompson, who defends borrowers herself, estimates that servicer-driven foreclosures represented about 50% of the cases she handled. The attorneys I have been dealing with put the estimate even higher, for the simple reason that servicer errors also led to refis that failed.

Remember how this pattern would have worked pre-bust. Borrower finds out from servicer that he is, for reasons he cannot fathom and cannot get the servicer to explain, $4000 behind on his mortgage. He can’t swing that now, and if he only pays part of the overdue amount down, it will quickly compound back up to a big bad number. So sooner or later, his only way out is a refi.

I had always assumed cash-out refis (where the borrower took out a mortgage on a refi that was bigger than his previous mortgages) were to pay down credit card debt, invest in home upgrades, or fund consumption. But at least a portion of those refis were to pay off the mortgage to prevent a foreclosure due to an inabilty to make up for a major arrearage. And some of those were servicer induced.

This pattern of servicer abuse is far from new. I hope readers will watch the second installment of the Senate Banking Committe hearings on the mortgage mess (the Senators were quite entertaining in their first go on this topic), this Wednesday at 9:30 AM. One of the witnesses, Kurt Eggert, law professor at the Chapman University School of Law, must feel like a Cassandra. He was writing about subpime origination fraud in 2002, and in a 2007 article, “Limiting Abuse and Opportunism by Mortgage Servicers,” goes through a sad and familiar litany of servicer misconduct: attempting to foreclose when borrowers were current (!), not giving borrowers time to get current, charging late fees when payments were made on time, improper force-placed insurance, and chicanery with escrow funds. As Eggert pointed out:

Late fees on timely payments are common when consumers are making payments through a ankruptcy plan. Moreover, some servicers have added false fees and charges not authorized by law or contract to their monthly payment demands, relying on borrower ignorance of the exact amout owed…Some servicers may add a fee by conducting unnecessary property inspections, having an agent drive by even when the borrower is not in default, or conducting multiple inspections during a single period of default to charge the resulting multiple fees….

Moreover, servicers can frustrate any attempts to sort out which fees are genuine. On McCormack v. Federal Home Loan Mortgage Corp., when the borrower challenged Chase Manhattan Corporation’s insistence on collecting disallowed attorneys’ fees and mortgage payments that had been cured in a bankrutpcy, the servicer subjected the borrower to what the court called “a barrage of totally meaningless and in fact misleading printouts” that was “”truly egregious and outrageous conduct”. The servicer repeatedly promised to correct its errors, but did not do so.

Servicer bad conduct is a long-standing problem, but in a rising housing market, no one much cared if the banks were effectively stripping borrower equity to pad their profits. And perhaps even worse, many people are still inclined to trust banks when they trot out their party line. Recall the bunk their representatives offered with touching shows of concern in the pre-Thanksgiving Senate and House hearing on the mortgage mess: their policies are pro-consumer, they don’t make money on foreclosures (!), any problems are “mistakes” and they of course correct them as soon as they become aware of them. The over-decade long record of persistent servicer abuses shows this spin to be pure fabrication. The sooner the media and the public learn to assume banks are liars until they offer solid evidence to the contrary, the better off we will all be.

Readers may recall that I’ve been a long-standing critic of Gerson Lehrman, a “research” firm that signs up so-called experts to provide information to clients, typically hedge funds.

The problem with the Gerson model is the experts are often full time employees, and hence are effectively re-selling information they learned on their employer’s nickel. I’ve not seen Gerson’s consulting agreements, but I would strongly suspect that they are designed to shift liability for compliance with corporate policy to the consultant. And unless Gerson independently contacts the HR or legal department, there is no assurance that the employee is operating within official policy. One former head of research for a major bank expressed serious doubts about Gerson’s business model; he was pretty certain many Gerson consultants either had not obtained approval or had not done so properly (ie, a casual chat with the boss, “Do you mind if I spend a few hours a month on my own time working with some investors?”)

The SEC and the New York attorney general did probe Gerson in 2006 but it did not lead to charges being filed. But now the SEC is taking a broader view of what constitutes inside information, and Gerson may fall afoul of this reading.

Roger Ehrenberg provided a his idea of where the line between inside information and legitimate research might be drawn. But even his distinction is not as clean as it might seem:

As it relates to the research process, I think fairness should be judged by whether a motivated investor could learn the information through resourcefulness and hard work. If an investor was focused on better understanding the prospects for a particular product, could they read published research, explore primary sources and perform surveys? Sure. Would it be difficult? Absolutely. But it could be done if the individual was sufficiently motivated. Alternatively, they could obtain this information by paying money for it via an expert network. Is it “fair” that someone has the resources to pay for access to experts where another might not? I think so. Those who have built careers around investing and are willing and able to spend money to streamline their investment process are ok with me – provided that the information to which they have access could be obtained by a highly motivated person. What isn’t fair, however, is when experts provide information that couldn’t be obtained through any amount of hard work, e.g., if an official at the FDA was on an expert network panel and had non-public information about the likelihood of a drug making it through clinical trials, sharing this information with a subscriber would unquestionably be unfair. Another example would be a company executive handicapping the prospects of an M&A deal. In these circumstances the recipient of the information would have the ability to trade on it, capturing the benefit between the current stock price and the target stock price reflecting the information they have received. Does this promote efficient markets? Yes. Does it support fair markets? Clearly not.

The problem with the “any amout of hard work” is it assumes time is not a constraint. But in the real world of markets, timing is crucial. If, say, the head of the purchasing department at a major IT retail chain of a sudden falloff in orders for a particular product or vendor , it might be possible to replicate that information via other avenues, but probably not quickly enough to gain a trading advantage.

And Gerson, at least historically, has focused on “channel checking”: they cultivate up people at companies who are buyers of certain goods to see what kind of orders they are placing. It’s not hard to see why employers would object to this information being shared. First, the employee has no right to trade on his employer’s data. Second, information on order levels could also give an early warning of the company’s overall revenue trends. Third, disclosure might damage its relationships with suppliers.

From the Wall Street Journal:

Federal Bureau of Investigation agents questioned a consultant for Gerson Lehrman Group in August as part of the probe, according to people familiar with the matter. The consultant, an employee of Marvell Technology Group Ltd., provided information about the technology industry to a Gerson client, Diamondback Capital Management LLC, a hedge fund the FBI raided last week, the people said.

Gerson controls two-thirds of the market for expert networks, which set up meetings and calls with current and former managers from hundreds of companies for hedge-fund and other traders seeking an investing edge…The FBI questioning of the Gerson consultant shows the government’s examination of the expert-network business is broader than Primary Global. Criminal and civil authorities are investigating whether these consultants passed inside information to clients, who pay the expert companies large fees for their services….

The Gerson consultant, Menucher Menuchehry, is a 41-year-old employee of Marvell working in the business-development and strategy area of the company, according to public records. It isn’t known whether authorities suspect Mr. Menuchehry passed inside information to any fund.

Yves here. Ahem. Gerson engaged someone who worked in “business strategy and development” and this is supposed to be kosher? For those not savvy about corporate life, that area is deeply involved in (in many cases, formally responsible for) M&A and other major corporate initiatives, like large-scale capital investments and new product planning. It is the single biggest hub of valuable trading information in a company. Engaging someone like that as an “expert” for investors is asking for trouble. A supposedly savvy firm like Gerson can’t pretend it didn’t know what was going to happen. It’s like pretending those beautiful women rented out by escort services are hired only to be arm candy.

If Menuchehry really is the only corporate development type in Gerson’s network, it might have a defense, that he somehow slipped though the cracks. But if he has company, then Gerson’s business model is probably every bit as dirty as my contacts have long insisted it is.

The US stock markets are harboring the fond notion that the sovereign-bank debt pile-up in Europe has no real implications across the pond, no doubt out of professional participants’ hope to retain solid gains thorugh year-end bonus setting. The debt markets are saying otherwise. Credit market risk aversion typically precedes a stock market correction, but bond markets can also send false positives.

What is noteworth is how pronounced the shift in sentiment was. From Bloomberg:

Issuance has slumped 31 percent since Nov. 15, compared with the same period a year earlier, after surging 34 percent in the first half of the month, according to data compiled by Bloomberg. Plunging returns on debt of borrowers from France’s Credit Agricole SA to Bentonville, Arkansas-based Wal-Mart Stores Inc. are dragging bonds to a 1.08 percent loss in November, Bank of America Merrill Lynch index data show.

And note that the jitteriness isn’t just for high yield paper, but across the board:

“There’s been a lot more volatility in the high-yield and investment-grade markets here in the U.S. because of what happened in Greece in the spring and Ireland now,” said Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP, which manages $6.8 billion in Los Angeles….

By Marshall Auerback, a hedge fund manager and portfolio strategist who writes for New Deal 2.0.

Despite a blame-a-thon on Ireleand, Germans banks are really at the core of the eurozone catastrophe.

Much ink has been spilled in the press over the Irish problem and the laxity of the country’s southern Mediterranean counterparts in contrast to the highly “disciplined” Germans. But perhaps we have to revisit that caricature. Not only has the Irish crisis blown apart the myth of the virtues of fiscal austerity during rapidly declining economic activity, but it has also illustrated that Germany’s bankers were every bit as culpable as their Irish counterparts in helping to stoke the credit bubble.

One of the traditional rationales for the creation of the euro was that a single currency and strict Maastricht criteria would keep the profligate Mediterraneans and their Celtic equivalents in line. Instead, critics, particularly in Germany, increasingly see the European Monetary Union as a means for freeloading nations to offload their liabilities onto fitter neighbors.

Not surprisingly, this has engendered much discussion that perhaps it would serve Germany’s interests to leave the euro, rather than booting one of the Mediterranean “scroungers” out. But as Simon Johnson has pointed out, this comforting narrative of German prudence matched up against Irish profligacy doesn’t really stack up:

German banks in particular lost their composure with regard to lending to Ireland — although British, American, French and Belgian banks were not so far behind. Hypo Real Estate — now taken over by the German government — has what is likely to be the highest exposure to Irish debt.

But look at loans outstanding relative to the size of their domestic economies (using the BIS data on what they call an “ultimate risk basis”).

German banks are owed $139 billion, which is 4.2 percent of German G.D.P. [my emphasis]

Where were the German regulators? As my colleague Bill Black has noted:

They seem to have believed that ‘What happens in Vegas (Dublin) stays in Vegas (Dublin).’ Instead, their German banks came back from their riotous holidays in the PIIGS with BTDs (bank transmitted diseases). The German banks’ regulators continue to let them hide the embarrassing losses they picked up on holiday, but that cover up will collapse if any of the PIIGS default. The PIIGS will default if the EU does not bail them out, so there will be a bail out even though the German taxpayers hate to fund bailouts.

German banks’ relatively high exposure to Ireland does pose the question as to whether there is some wild, Weimar-style hyperinflationista lurking deep in the heart of every German, only able to express itself fully when away from the prying eyes of fellow citizens.

All of the rescue plans that have been introduced in Ireland or Greece thus far rest on the assumption that, with more time, the eurozone’s problem children could get their fiscal houses in order — and Europe could somehow grow its way out of trouble. But the fiscal austerity being offered as the “medicine” is turning out to be worse than the disease. It has exacerbated the downturn and unleashed a horrible debt deflation dynamic in all of the areas where it was reluctantly implemented.

But here’s the thing: these fiscal straitjackets obscure the history of how we came to today’s horrible impasse and, more specifically, the German banks’ role in helping to fuel the credit binge. Also lost is the reason why this has metastasized into a far greater crisis: as part of the eurozone, Ireland does not have the fiscal freedom to come up with a sufficiently robust government response. The UK had a comparable real estate bubble in the late 1980s, which culminated with the Soros attack on the pound in 1992 and the ejection of sterling from Exchange Rate Mechanism (the precursor to the EMU). This was a blessing in disguise. Withdrawal from the ERM saved the UK because it allowed the country sufficient latitude to reflate. Yes, the country had a major recession (in many ways a consequence of the surrender of fiscal freedom as a result of joining the ERM in the first place), but there was never a systemic risk that posed a threat to the country’s overall solvency as is the case in Ireland today. And this is exacerbating the problem in Ireland because it persists in chasing its tail repeatedly with futile fiscal austerity measures.

The truth of the matter is this: the eurozone seems rotten to the core, literally. Germany represents that core. The Germans might occupy the penthouse suite, but it is the suite of a roach motel. And we know what happens to those who enter such “establishments.”

Yes, longer term the problems currently afflicting the eurozone could be sorted via the creation of a supranational fiscal authority — a “United States of Europe”. But with each crisis (Ireland today; Portugal and Spain tomorrow; Italy and then France next?), the political forces are coalescing in a radically different direction. The Germans are becoming increasingly resentful as they perceive their country as the bailout mechanism of last resort (even though the Irish experience suggests that their bankers are also guilty of many of the same excesses as the “Celtic Tiger”). The PIIGS themselves are seeing that the benefits of euro membership have been vastly overstated and in fact now act as a cancerous influence through the Germanic embrace of austerity. (Paradoxically, it has been the “profligate” behavior of those so-called lazy Mediterraneans that has enabled Germany to retain its export-driven model, as well as allowing it to run lower budget deficits than most other countries.)

The eurozone could ultimately end up like Yugoslavia writ large. Prior to the break up of that country, the relatively rich republics, Slovenia and Croatia, resented policies that transferred wealth to the poorer republics like Serbia, Macedonia, Montenegro, or the autonomous region of Kosovo. Once Tito’s organizing genius disappeared, the links stitching the country together became frayed and eventually snapped as old grievances manifested themselves in newer forms. The same could happen to the Europe Union if it underwent a supranational fiscal union — the beginnings of which are already in evidence. I think the Germans are beginning to recognize that, which is why there is discussion about leaving the euro.

But let’s first be clear: German Chancellor Angela Merkel has persistently argued that it is essential that private investors, notably the bond holders, begin to suffer losses so that they will have the proper incentives to provide effective “private market discipline” going forward. She has further argued that it is fair that they suffer losses, given the premium yields they received and their lack of due diligence. That’s an honorable policy. But it’s like the old Irish joke of the driver who gets lost, asks for directions, and is told, “Well, I wouldn’t be starting from here.” By the same token, Ireland clearly illustrates that German banks, as well as their Mediterranean counterparts, would be big losers under the Merkel proposal. Ironically, German financial institutions could find themselves subject to the same kinds of bailouts that Chancellor Merkel and many of her counterparts in Berlin are urging on the Irish and Greeks.

As always, leave it to the Irish to come up with the most poetic response to the crisis. True, W.B. Yeats did not live to see this disaster, but his passionate “September 1913” does evoke the tragedy of today’s Ireland and the futility of the current policy responses for their people (and beyond):

Was it for this the wild geese spread
The grey wing upon every tide;
For this that all that blood was shed,
For this Edward Fitzgerald died,
And Robert Emmet and Wolfe Tone,
All that delirium of the brave?
Romantic Ireland’s dead and gone,
It’s with O’Leary in the grave.

Graves that might soon include not only the O’Learys, but also the Garcias, Texeiras, Moreaus, and Schmidts if a more rational course of action throughout the euro zone is not adopted soon.

On the one hand, I’m being proven somewhat wrong in my dismissive views of the impact of Dodd-Frank. Credit default swaps, a product I’ve viewed as essential to rein in (it’s a fee machine for Wall Street that has produced clear harm and has almost no socially productive uses) have fallen markedly in volume prior to expected rule changes this summer. On the other hand, Wall Street is hammering out details (code for watering the legislation down by wrangling for favorable interpretation) and volumes are expected to partially rebound once this period of uncertainty has passed.

From Bloomberg:

Trading in credit-default swaps, Wall Street’s fastest-growing business before the credit crisis, has tumbled 40 to 60 percent from three years ago as banks prepare for new regulation of derivatives.

The declines estimated by executives at four of the biggest dealers of swaps means lower profits at firms that used to get as much as two-thirds of credit-market trading revenue from the derivatives. Moody’s Investors Service says pending rules may translate into job cuts of as much as 50 percent in groups that trade the contracts.

Investors are avoiding strategies that contributed to $1.82 trillion in writedowns and losses amid the worst financial crisis since the Great Depression. The net amount of credit swaps outstanding globally has fallen 20 percent from October 2008…

The five biggest dealers — JPMorgan, Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and Bank of America Corp. – - bought a net $430 billion of credit protection as of Sept. 30, down 38 percent from $689.9 billion in March 2009, filings with the Federal Reserve Bank of New York show.

Barclays Plc analyst Roger Freeman in New York estimates that before and during the credit crisis, Goldman Sachs generated two-thirds of its credit-trading revenue from derivatives. The contracts now likely contribute about a third, with the rest coming from bonds, he said. …..

While Freeman expects a rebound once regulators meet their July deadline to write market rules, the changes will likely squeeze profit margins and prompt bank executives to cut more trading jobs….

The changes may drive down pre-tax profit margins for credit swaps to 22 to 23 percent from about 35 percent, said Sanford C. Bernstein & Co. analyst Brad Hintz, ranked by Institutional Investor as the top analyst covering brokerage firms.

One issue that will make a diffference on how much ultimate impact the dealers will feel is how much of CDS they will be able to get classified as “non-standard” and hence not required to clear centrally. That would allow for more opacity and more profit potential to dealers. So while this development so far looks favorable, this is not over till it’s over.

Apologies for delayed links and lack of my own posts. Not only was the admin part of the site inaccessibile during my normal posting hours (which was pretty peculiar), but because I’m working on an antique Mac (will not bore you with story involving new machine and data recovery), a browser freeze meant I lost drafts of posts I was working on, including this one, which had to be reconstituted in large measure. In other words, I seem to be the Typhoid Mary of technology right now.

Aging Ills Reversed in Mice Wall Street Journal

Met Office says 2010 ‘among hottest on record’ BBC

Laura Hillenbrand releases new book while fighting chronic fatigue syndrome Washington Post

Irish bailout ‘stuns’ experts Guardian (hat tip Richard Smith)

Greece Is Almost Certainly “On Track” – But Towards Which Destination Is It Headed? Edward Hugh

The Eurozone Endgame: Four Scenarios Simon Johnson

Did Washington sabotage WikiLeaks? Website crashes after it suffers ‘denial of service attack’ Daily Mail (hat tip reader May S)

Thomas Friedman, the High Priest of Austerity Dean Baker

Deficit commission plan would kill 4 million jobs, analysis finds Raw Story

The Administration’s “Communication Problem” Mark Thoma

The road to endless war Paul Rogers OpenDemocracy

Trade for some from political stalemate John Dizard, Financial Times

Talk at Bennington College William Polk (hat tip reader May S). Very much worth reading, despite unrevealing title. For instance:

The Cold War changed the world for both America and Russia. We like to think that we “won” the Cold War, but the history of events since it ended shows that we both really lost it.

A Proposal for Money Market Fund Reform Economics of Contempt

The Fed and Foreclosures New York Times. While it’s nice of the Grey Lady to oppose this proposed move, the “most effective tool” designation is a bit of a stretch at this juncture. Didn’t someone figure out that three years ago is the beginning of December 2007 and the subprime market shut down in June 2007?

Boom in Debt Buying Fuels Another Boom—in Lawsuits Wall Street Journal. Contrast with this coverge.

Shortcuts on the foreclosure paper trail Sarasota Herald-Tribune (hat tip April Charney)

WSJ: The Tail Wags the Foreclosure Dog Adam Levitin, Credit Slips

Antidote du jour:

By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

The YouTube video “Quantitative Easing Explained” has surpassed 2.9 million views. The video is both entertaining and unremittingly critical of the Fed. In defense of the Fed, numerous economists, bloggers and mainstream media pundits have pointed out errors in the video. In doing so, the critics have missed the forest for the trees. While there are errors and oversimplifications in the video, it has resonated with the public because: a) it tapped into widely held perceptions about the Fed and b) the video deftly treated troublesome aspects of Fed policy with comedic license.

In fact, the defensiveness of the critics of the video has only served to convince many skeptics of QE2 that its proponents are unwilling to or incapable of seeing the troublesome dimensions attached the bailout packages and the decision to go forward with QE2. The critics of the video and the Fed itself also appear unaware of how much the stature of the Fed has suffered as a result of the financial crisis, the recession, and the bailouts. It behooves the Fed and its defenders to move past narrow definitional/legalistic responses and address the underlying concerns of many citizens and market participants.
Two examples of criticisms of the video that miss the forest for the trees are the responses to:

1. The assertion in the video that engaging in QE2 equates to printing money, and

2. The suggestion in the video that the Fed should buy Treasuries directly from the Treasury.

The Fed does not print money. It never has. Furthermore, the reserves that had been created as a result of QE are not included in the monetary aggregates. On the other hand, the Fed has by expanding its balance sheet contributed to inflation in the past and reserves are part of both the monetary base and “high-powered money”.

However, the import of the video does not turn on whether or not QE2 will create money or reserves. QE2 is presented as part of a long litany of Fed policy mistakes. Some of the mistakes are mentioned explicitly in the video, i.e., the Fed’s contribution to the housing bubble and its failure to appreciate the magnitude of the subprime crisis. Viewers will also have in mind the Fed’s failure to carry out its bank regulatory and supervisory responsibilities. Equating QE2 with printing money and policies of “banana republics and failed economic systems” is a short-hand humorous way of invoking the laundry list of costly failures in the minds of the viewers. Arguing a definitional point, reserves are not money, and ignoring policy failures misses the point.

While the critics correctly point out that the Fed is prohibited by law from buying new issues directly from the Treasury, they again missed the point. Main Street is deeply troubled by the Fed’s decision to play roles heretofore filled by the fiscal authorities and the bankruptcy courts. The video is a general protest against the role the Fed has played in transferring wealth from savers and taxpayers to Goldman Sachs and other Wall Street firms. The Fed is seen as picking winners and losers: Wall Street is seen as the winner and savers and the taxpayers are seen as the losers.

The video’s criticism of the Fed’s links to Goldman is also a protest against TARP, the Fed’s role in the de facto nationalization of AIG, the fall in interest income accruing to households, the revolving-door network whereby the regulators and the regulated play musical chairs with more than enough chairs, and so on. The American people care deeply about fairness, but the Fed is perceived to care more about the health of Wall Street than fairness. Instead of addressing the underlying issue of fairness and the efficiency of the bailouts, the Fed defenders focus on a narrow legal prohibition.

The video is popular and effective because it is not a detailed-footnoted-rigorous academic exercise. It humorously plays on what a substantial fraction of the audience already perceive to be true. It takes swipes at what many viewers see as an institution that is charged with promoting economic welfare yet they see it both detrimentally affecting their lives as well being arrogant and well insulated from accountability.
The Fed dismissed its critics while the housing bubble grew. It did so to its own detriment as well as to the detriment of the real economy and the financial sector. Those who defend of the Fed against the criticisms in this video may win every definitional battle, but they will lose the war for the hearts, minds and confidence of the American people. If the Fed and its supporters want to win the war, they must address the larger concerns:

1. Admit past mistakes (not because confession is good for the soul, but because the Fed can then assert it has learned from past mistakes and less likely to made mistakes in the future);

2. Explain fully the necessity of the financial interventions (For example, the majority of American believe that the AIG’s problems were limited to AIGFP and that AIG posed no systemic risk.);

3. Explain fully the reasoning behind the path chosen (TARP and interest rate subsidies) versus nationalization of failing financial institutions;

4. Explain the continued adherence to the economic and policy frameworks that failed to produce sustainable full employment and price stability and are seen by many as having contributed to financial instability and economic unsustainabilities which resulted in the financial crisis and the recession.

Maybe then the American people will respond better when the Fed says “trust me” in response to questions about a timely unwind of QE.

Yves here. While Quinn has a deliberately (some might say overly) provocative style and I quibble with some of his supporting arguments, his overarching observation, that America is wedded to an economic model past its sell by date, and that model has damaging social
and political consequences, is one I believe will resonate with many readers.

From Jim Quinn, who writes at The Burning Platform

Every single empire, in its official discourse, has said that it is not like all the others, that its circumstances are special, that it has a mission to enlighten, civilize, bring order and democracy, and that it has a mission to enlighten, civilize, bring order and democracy, and that it uses force only as a last resort. – Edward Said

The increasingly fragile American Empire has been built on a foundation of lies. Lies we tell ourselves and Big lies spread by our government. The shit is so deep you can stir it with a stick. As we enter another holiday season the mainstream corporate mass media will relegate you to the status of consumer. This is a disgusting term that dehumanizes all Americans. You are nothing but a blot to corporations and advertisers selling you electronic doohickeys that they convince you that you must have. Propaganda about consumer spending being essential to an economic recovery is spewed from 52 inch HDTVs across the land, 24 hours per day, by CNBC, Fox, CBS and the other corporate owned media that generate billions in profits from selling advertising to corporations schilling material goods to thoughtless American consumers. Aldous Huxley had it figured out decades ago:

Thanks to compulsory education and the rotary press, the propagandist has been able, for many years past, to convey his messages to virtually every adult in every civilized country.

Americans were given the mental capacity to critically think. Sadly, a vast swath of Americans has chosen ignorance over knowledge. Make no mistake about it, ignorance is a choice. It doesn’t matter whether you are poor or rich. Books are available to everyone in this country. Sob stories about the disadvantaged poor having no access to education are nothing but liberal spin to keep the masses controlled. There are 122,500 libraries in this country. If you want to read a book, you can read a book. The internet puts knowledge at the fingertips of every citizen. Becoming educated requires hard work, sacrifice, curiosity, and a desire to learn. Aldous Huxley describes the American choice to be ignorant:

Most ignorance is vincible ignorance. We don’t know because we don’t want to know.

It is a choice to play Call of Duty on your PS3 rather than reading Shakespeare. It is a choice to stand on a street corner looking for trouble rather than reading Hemingway. It is a choice to spend Black Friday in malls fighting other robotic consumers for iSomethings, the latest innovative, advanced TVs, flashy Rolexes, and ostentatious Coach bags rather than spending the day reading Guns of August by Barbara Tuchman, a brilliant Pulitzer Prize winning history of the outset of World War I, which would provide insight into what could happen on the Korean Peninsula. It is a choice to watch 6 hours per day of Dancing With the Stars, American Idol, Brainless Housewives of Everywhere, or CSI of Anywhere rather than reading Orwell or Huxley and discovering that their dystopian warnings have come true.

Conspicuous Consumption Conquistadors

Americans have chosen to lie to themselves. They have persuaded themselves that buying stuff with plastic cards while paying 19% interest for eternity, driving BMWs while locked into never ending indecipherable lease schemes, and living in permanently underwater McMansions bought with 0% down on an interest only liar loan, is the new American Dream. They think watching the boob tube will make them smart. They soak in the mass media hype, misinformation and lies like lemmings walking off a cliff. Depending on their political predisposition, they watch Fox or MSNBC and unthinkingly believe the propaganda that pours from the mouths of the multi-millionaire talking heads who read Teleprompters with words written by corporate media hacks. They tell themselves that buying stuff on credit, giving them the appearance of success as measured by the media elite, is actually success. This is a bastardized, manipulated, delusional version of accomplishment. Americans have chosen to believe the lies because the truth is too hard to accept.

Becoming educated, thinking critically, working hard, saving money to buy what you need (as opposed to what you want), developing human relationships, and questioning the motivations of government, corporate and religious leaders is hard. It is easy to coast through school and never read a book for the rest of your life. It is easy to not think about the future, your retirement, or the future of unborn generations. It is easy to coast through life at a job (until you lose it) that is unchallenging, with no desire or motivation for advancement. It is easy to make your everyday troubles disappear by whipping out your piece of plastic and acquiring everything you desire today. If your brother-in-law buys a 7,000 sq ft, 7 bedroom, 4 bath, 3 car garage, monolith to decadence for his family of 3, thirty miles from civilization, with no money down and a no doc Option ARM providing the funds, why shouldn’t you get in on the fun. It’s easy. Why sit around the kitchen table and talk with your kids, when you can easily cruise the internet downloading free porn or recording every trivial detail of your shallow life on Facebook so others can waste their time reading about your life. It is easiest to believe your elected leaders, glorified mega-corporation CEOs, and millionaire pastors preaching the word of God for a “small” contribution to their mega-churches.

Americans love authority figures who act as if they have all the answers. It matters not that these egotistical monuments to folly and hubris (Bush, Obama, Paulson, Geithner, Greenspan, Bernanke) have committed the worst atrocities in the history of our Republic, leaving economic carnage and the slaughter of thousands in their wake. The most dangerous man on this earth is an Ivy League educated, arrogant ideologue who believes they are smarter than everyone else. When these men achieve power, they are capable of producing catastrophic consequences. Once they seize the reigns of authority these amoral psychopaths have no problem lying to the American public in order to achieve their objectives. They know that Americans love to be lied to, so the bigger the lie, the more likely it is to be believed.

The current lie proliferating across the land of the free financing and home of the debtor is that austerity has broken out across the land. The mainstream media and the government, aided by various “think tanks” and Federal Reserve propagandists insist that Americans have buckled down, reduced spending, increased savings, and have embraced austerity.

They now proclaim that it is time to spend again. It is the patriotic thing to do, just like defeating terrorists by buying an SUV with 0% down from GM was the patriotic thing to do after 9/11. Defeating terrorists by going further into debt was the brilliant idea of those Ivy League geniuses Bush & Greenspan. Let’s critically examine the facts to determine how austere Americans have become:

* Consumer credit outstanding is $2.41 trillion, the same level reached in early 2007, and up from $1.5 trillion in 2000. This is a 60% increase in ten years. Personal income has risen from $8.4 trillion to $12.6 trillion over this same time frame, a 50% increase. Americans have substituted debt for income in order to keep up with the Joneses. The mass delusion lives.
* The MSM declares that the reduction in overall consumer debt from its peak of $2.56 trillion in 2008 to $2.41 trillion today proves that consumers have been cutting back and paying off debt. This is another media lie. Non-revolving debt, which includes car loans, education loans, mobile home loans and boat loans sits at $1.6 trillion, an all-time high matched in 2008. Credit card debt has “plunged” from $957 billion to $814 billion, not because consumers paid down their balances. The mega Wall Street banks have written off $20 billion per quarter since early 2009, accounting for ALL of the reduction in credit card debt. Clueless consumers continue to charge at the same rate as the peak in 2008.

* Average credit card debt per household with credit card debt: $15,788
* There are 609.8 million bank credit cards held by U.S. consumers.
* The U.S. credit card default rate is 13.01%
* In 2006, the United States Census Bureau determined that there were nearly 1.5 billion credit cards in use in the U.S. A stack of all those credit cards would reach more than 70 miles into space – and be almost as tall as 13 Mount Everests.
* Penalty fees from credit cards added up to about $20.5 billion in 2009.
* The national average default rate as January 2010 stood at 27.88% and the mean default rate is 28.99%.
* Total bankruptcy filings in 2009 reached 1.4 million, up from 1.09 million in 2008. Bankruptcies in 2010 are on pace to exceed 1.6 million.
* 26% of Americans, or more than 58 million adults, admit to not paying all of their bills on time. Among African-Americans, this number is at 51%.

Does This Look Like Austerity? Really?

This data clearly proves that austerity has not broken out across the land of delusion. The billions in consumer loan write-offs by the Wall Street banks that run this country have masked the fact that Americans have not cut back on their spending habits at all. GMAC (taxpayer owned) and Ford Credit continue to dish out car loans to anyone with a pulse and a 600 credit score. The Federal Reserve and the FASB have encouraged, if not insisted, that banks fraudulently value the commercial real estate loans on their books. The Federal Reserve has bought $1.5 trillion of toxic mortgage loans from the criminal Wall Street banks at 100 cents on the dollar. The government’s corporate fascist public relations firms then spread the big lie that the economy is recovering and consumers should join the party and spend, spend, spend.

If Americans were capable or willing to do some critical thinking, they would realize that those in power have created the illusion of a recovery by handing $700 billion of your money to the banks that created the financial meltdown, spending $800 billion on worthless pork barrel projects borrowed from future generations, dropping interest rates to 0% so that the mega-Wall Street banks can earn billions risk free while your grandmother who depended on interest income from her CDs edges closer to eating cat food to get by, and lastly Ben Bernanke’s blatant attempt to enrich Wall Street by buying US Treasury bonds in an effort to make the stock market go up, while the middle and lower classes are crushed under the weight of soaring fuel and food price increases that exceed 30% on an annual basis. The illusion of recovery is not a recovery. With a true unemployment rate of 22%, a true inflation rate of 8% and a real GDP of -1.5% (Shadowstats), we are in the midst of the Greater Depression. You are being lied to, but most of you prefer it.

The Little Lies We Tell Ourselves

Our ignorance is not so vast as our failure to use what we know. – M King Hubbert

When Jimmy Carter gave his malaise speech in 1979, Americans were in no mood to listen. Carter’s solutions were too painful, required sacrifice, and sought to benefit future generations. The leading edge of the Baby Boom generation had reached their 30s by 1979, and the most spoiled, pampered, egocentric generation in history could care less about future generations, long term thinking, or sacrifice for the greater good. They were the ME GENERATION. The 1970s had proven to be tumultuous episode in US history. M King Hubbert’s calculation in 1956 that U.S. oil production would peak in the early 1970s proved to be 100% correct.

The Arab oil embargo resulted in gas shortages and economic chaos in the U.S. Hubbert used the same method to determine that worldwide oil production would peak in the early 2000s. If long term planning had been initiated in the early 1980s, combining exploration of untapped reserves, greater utilization of natural gas, development of nuclear plants, more stringent fuel efficiency standards, increased taxes on gasoline, and more thoughtful development of housing communities, we would not now face a looming oil crisis within the next few years. Instead of dealing with reality, adapting our behavior and preparing for a more localized society, we put our blinders on, chose ignorance over reason and pushed the pedal to the medal by moving farther away from our jobs, building bigger energy intensive mansions, and insisting on driving tank-like SUVs, Hummers, and good ole boy pickups. Kevin Phillips in American Theocracy explained that hyper-consumerism, fear, and inability to use logic have left our suburban oasis lives in danger of implosion when the reality of peak cheap oil strikes:

Besides the innate thirst of SUVs, some of the last quarter century’s surge in U.S. oil consumption has come from Americans driving more – some twelve thousand miles per motorist per year, up almost one – third from 1980 – because they as a whole live farther from work. In consumption terms, exurbia is the physical result of the latest population redistribution enabled by car culture and the electorate that upholds it.

Family values are central – if by this we mean having families and accepting lengthy commutes to install them in reasonably safe and well churched places. In the 1970’s such households might have been fleeing school busing or central city crime; in the post – September 11 era, many sought distance from “godless” school systems or the random violence and terrorist attacks expected to occur in metropolitan areas.

We willingly believe the lies espoused by the badly informed pundits on CNBC and Fox that if we just drill in Alaska and off our coasts, we’ll be fine. The ignorant peak cheap oil deniers insist there are billions of barrels of oil to be harvested from the Bakken Shale, even though there is absolutely no method of accessing this supply without expending more energy than we can access. Environmentalists lie about the dangers of nuclear power, while shamelessly promoting the ridiculous notion that solar, wind and ethanol can make a visible impact on our future energy needs. Ideologues on the right and left conveniently ignore the facts and the truth is lost in a blizzard of their lies. Here is an explanation so clear, even a CNBC “drill baby drill” dimwit could understand:

When oil production first began in the mid-nineteenth century, the largest oil fields recovered fifty barrels of oil for every barrel used in the extraction, transportation and refining. This ratio is often referred to as the Energy Return on Energy Investment (EROEI). Currently, between one and five barrels of oil are recovered for each barrel-equivalent of energy used in the recovery process. As the EROEI drops to one, or equivalently the Net Energy Gain falls to zero, the oil production is no longer a net energy source. This happens long before the resource is physically exhausted.

After the briefest of lulls when oil reached $145 per barrel, Americans have resumed buying SUVs, pickup trucks, and gas guzzling muscle cars. They have chosen to ignore the imminence of peak cheap oil because driving a leased BMW makes your neighbors think you are a success, while driving a hybrid would make your neighbors think you are a liberal tree hugger. It boggles my mind that so many Americans are so shallow and shortsighted. According to Automotive News, at the start of 2008 leasing comprised 31.2% of luxury vehicle sales and 18.7% of non-luxury sales. This proves that hundreds of thousands of wannabes are driving leased BMWs and Mercedes to fill some void in their superficial lives.

I bought a Honda Insight Hybrid six months ago. It gets 44 mpg and will save me $1,500 per year in gasoline costs. I put 20% down and financed the remainder at 0.9% for three years. My payment is $450 per month. I will own it outright in 2 ½ years. I could have leased a 2010 BMW 328i with moonroof, bluetooth, power seats with driver seat memory, lumbar support, leather interior, iPod adapter, 17″ alloy wheels, heated seats, wood trim, 3.0 Liter 6 Cylinder engine with 230 horsepower for 3 years at $389 per month. At the end of 3 years I’d own nothing. In 2 ½ years I’ll be able to put $450 per month away for my kids’ college education and I’ll be saving more on fuel as gasoline approaches $5 per gallon. The self important egotistical BMW leaser pretending to be successful will need to hand over their sweet ride and move on to the next lease, never saving a dime for the future. I’m sure they’ll make a killing in the market or their McMansion will surely double in price, providing a fantastic retirement.

After the briefest of lulls when oil reached $145 per barrel, Americans have resumed buying SUVs, pickup trucks, and gas guzzling muscle cars. They have chosen to ignore the imminence of peak cheap oil because driving a leased BMW makes your neighbors think you are a success, while driving a hybrid would make your neighbors think you are a liberal tree hugger. It boggles my mind that so many Americans are so shallow and shortsighted. According to Automotive News, at the start of 2008 leasing comprised 31.2% of luxury vehicle sales and 18.7% of non-luxury sales. This proves that hundreds of thousands of wannabes are driving leased BMWs and Mercedes to fill some void in their superficial lives.

The delusion that cheap oil is a God given right of all Americans can be seen in the YTD data on vehicle sales. Pickups and SUVs account for 48.5% of all sales, while small fuel efficient cars account for only 16.5% of all sales. Americans will continue to lie to themselves until it is too late, again.

Americans are so committed to their automobiles, hyper-consumerism, oversized McMansions, and suburban sprawl existence that they will never willingly prepare in advance for a future by scaling back, downsizing, or thinking. Our culture is built upon consumption, debt, cheap oil and illusion. Kevin Phillips in American Theocracy concludes that there are so many Americans tied to our unsustainable economic model that they will choose to lie to themselves and be lied to by their leaders rather than think and adapt:

A large number of voters work in or depend on the energy and automobile industries, and still more are invested in them, not just financially but emotionally and culturally. These secondary cadres included racing fans, hobbyists, collectors, and dedicated readers of automotive magazines, as well as the tens of millions of automobile commuters from suburbs and distant exurbs, plus the high number of drivers whose strong self-identification with vehicle types and models serve as thinly disguised political statements. In the United States more than elsewhere, a preference for conspicuous consumption over energy efficiency and conservation is a signal of a much deeper, central divide.

M King Hubbert was a geophysicist and a practical man. He observed data, made realistic assumptions, and came to logical conclusions. He didn’t deal in unrealistic hope and unwarranted optimism. He knew that our culture had become so dependent upon lies and an unsustainable growth model based on depleting oil and debt based “prosperity”. He knew decades ago that we were incapable of dealing with the truth:

Our principal constraints are cultural. During the last two centuries we have known nothing but exponential growth and in parallel we have evolved what amounts to an exponential-growth culture, a culture so heavily dependent upon the continuance of exponential growth for its stability that it is incapable of reckoning with problems of non-growth.

Our country is at a crucial juncture. It is time for thinkers. It is time for realists. It is time to deal with facts. It is time to drive the ideologues off the stage. Are you tired of lying to yourselves? Are you tired of being lied to by the corporate fascists that run this country? It is time to wake up. Right wing and left wing ideologues will continue to spew lies and misinformation as they are power hungry and care not for the long-term survival of our nation or the unborn generations that depend upon the decisions we make today. It is time to see how we really are.

Most of one’s life is one prolonged effort to prevent oneself from thinking. People intoxicate themselves with work so they won’t see how they really are. – Aldous Huxley

From the look of it, the Irish bailout is taking another chunk of another one of FT Alphaville stalwart Neil Hume’s weekends. From Peston

European finance ministers are struggling to reach agreement on the interest rate to be paid by Ireland for the €85bn of rescue finance it is set to receive from the EU and IMF – although they appear to have reached a settled position there should not be losses imposed on providers of senior debt to Irish banks.

The rate Ireland pays for its bailout is to be announced very soon, apparently after some wrangling between the UK government, which wanted 5%, fearing 7%+ was unaffordable, and can see a total bank exposure UK to Ireland of around EUR200Bn, plus trade, and the German government, which, according to their finance minister Wolfgang Schäuble

feels that any rescue loans should not look like cheap money, but should be charged at an interest rate that contains an element of punishment for the reckless borrowing spree of Ireland’s banks, which took the Irish economy to the brink of bankruptcy.

Read this bit again:

…an element of punishment for the reckless borrowing spree of Ireland’s banks…

Umm, who gets punished, exactly? And who gets off?? And whose banks??? Is Schäuble perhaps confused about the nationality of the well-known not-particularly-Irish bank, DEPFA, which changed domicile from Munich to Dublin in 2002, evading the regulatory scrutiny of both Ireland and Germany, adopted a risky, short-term funding model, and then, when the CP markets it depended on stopped dead, in August 2007, worked its contacts, and sold itself, a mere month later, to the definitely 100% echt-deutsche Teutonosuckerbank, aka Hypo Bank? Which ended up in a EUR100Bn black hole by mid 2008:

…Hypo was engulfed by the crisis, with its Depfa operations in Dublin at the centre of the chaos as it failed to find short-term funding as the financial crisis spiralled out of control.

Or is Schäuble confused about the other not-Irish bank Sachsen LB, which nearly collapsed

…after its Dublin-based special purpose vehicles — which fell between the stools of two regulatory regimes — was found to be stuffed with speculative investments in US subprime mortgages.

The EUR35Bn lost by German banks lending to Iceland has slipped Schäuble’s mind, too; or fried it.

Of course, we Brits most definitely have a dog in this fight; a EUR200Bn+ dog. But irrespective of that interest, the German government might want to take it easy with the moral opprobrium and the punitive line. It looks hypocritical and insulting; and imprudent, as well, to anyone who remembers the financial results of the Treaty of Versailles.

Of course, if the Irish state is bust anyway, none of that matters quite so much.

Update: overview and quick take from FT Alphaville

One scientist’s hobby: recreating the ice age Associated Press (hat tip reader John M)

Where the weird things are: Meet the pangolin, the mammal that thinks it’s a reptile Independent (hat tip reader Buzz Potamkin). It actually looks cute.

Tuna group defies quota cut calls BBC. If we don’t stop eating bluefin, there will be no more bluefin.

Netherlands the ‘tallest nation’ Al Jazeera

Full-body scanners are waste of money, Israeli expert says Vancouver Sun (hat tip reader May S)

One-of-a-Kind Designs and Gifts Created Under Watchful Eyes New York Times. So this is how the US can compete in handicrafts?

Is There Anything to the Case Against Maxine Waters, Really? FireDogLake

Fairness and the cost of life for the poor in Britain OurKingdom (hat tip reader May S)

Ireland is Bankrupt…a letter from an Irish citizen Angry Bear

Civilian soldiers’ suicide rate alarming USA Today (hat tip reader May S)

Speaking Freely – Chalmers Johnson on American Hegemony Vimeo (hat tip reader May S)

Black Friday Sales Rise 0.3% as Shoppers Await Better Deals Bloomberg. So consumers are demanding deflation?

Number of the Week: 492 Days From Default to Foreclosure Wall Street Journal

Register of Deeds asks AG to investigate mortgage group Salem Gazette (hat tip reader Barbara W).

Antidote du jour:

Taxes on top earners are the lowest they’ve been in nearly three generations, yet their complaints about the prospect of an increase to a level that is still awfully low by recent historical standards is remarkable. In my youth, if someone complained much about their taxes, it was taken as a sign that they either had no class or were under some financial stress.

Some of this caviling no doubt reflects the degree to which the plutocrats are firmly in control of the political process. They can openly lobby for blantanly self-serving policies, and adopt a non-negotiable posture. But something else is afoot too, and these bitter protests seem to be another side effect of social stratification.

As we’ve pointed out, highly unequal societies are unhealthy for their members, even members of the highest strata. Not only do they score worse on all sorts of indicators of social well-being, from crime rates to teenage births to average lifespan, but they exert a toll even on the rich. Not only do the rich have less fun, but a number of studies have found that income inequality lowers the life expectancy even of the rich. As Micheal Prowse explained in the Financial Times:

Those who would deny a link between health and inequality must first grapple with the following paradox. There is a strong relationship between income and health within countries. In any nation you will find that people on high incomes tend to live longer and have fewer chronic illnesses than people on low incomes.

Yet, if you look for differences between countries, the relationship between income and health largely disintegrates. Rich Americans, for instance, are healthier on average than poor Americans, as measured by life expectancy. But, although the US is a much richer country than, say, Greece, Americans on average have a lower life expectancy than Greeks. More income, it seems, gives you a health advantage with respect to your fellow citizens, but not with respect to people living in other countries….

Once a floor standard of living is attained, people tend to be healthier when three conditions hold: they are valued and respected by others; they feel ‘in control’ in their work and home lives; and they enjoy a dense network of social contacts. Economically unequal societies tend to do poorly in all three respects: they tend to be characterised by big status differences, by big differences in people’s sense of control and by low levels of civic participation….

Unequal societies, in other words, will remain unhealthy societies – and also unhappy societies – no matter how wealthy they become. Their advocates – those who see no reason whatever to curb ever-widening income differentials – have a lot of explaining to do.

It’s easy to see how the “big status differences” alone has an impact. The wider income differentials are, the less people mix across income lines, and the more opportunties there are for stratification within income groups. Thus a decline in income can easily put one in the position of suddenly not being able to participate fully or at all in one’s former social cohort (what do you give up, the country club membership? the kids’ private schools? the charities on which you give enough to be on special committees?). And lose enough of these activities that have a steep cost of entry but are part of your social life, and you lose a lot of your supposed friends. Making new friends over the age of 35 is not easy.

So a perceived threat to one’s income is much more serious business to the well-off than it might seem to those on the other side of the looking glass. Loss of social position is a fraught business indeed.

Robert Frank points out the fallacy in this reaction: if all the rich pay more taxes, the relative differential should remain the same. Of course, this is a bit simplistic, since some people will be better positioned to minimize their exposure to an increase than others. But his general premise holds. And he has proof of a sort, in that he actually made headway with a buddy who was incensed over the prospect of seeing his taxes go up by making a relative status argument. From the New York Times:

A financially prosperous friend of mine is a case in point. He watches a lot of angry talking heads on cable news, and he recently buttonholed me to ask whether I had any idea that our taxes were about to rise?…. His face grew redder as he listed each outrage.

I said I knew all about the scheduled expiration of the Bush tax cuts but hadn’t heard much about the other proposals. When he expressed shock that I hadn’t, I tried to explain why I didn’t think it made sense to fret….

But the most salient issue in taxpayers’ minds is how the changes would affect their own standard of living. Truly wealthy families wouldn’t have to alter their spending at all…

Many families with income of $250,000 and more do spend everything they earn, and, of course, would have to cut back. As psychologists have long known, individuals typically find belt-tightening painful. But recent psychological research suggests that if all in that group spent less in unison, their perceptions of their standard of living would remain essentially unchanged….

With less after-tax income, top earners also wouldn’t be able to spend as much on cars or their children’s weddings and coming-of-age parties. But why did they feel compelled to spend so much in the first place? In most cases, they simply wanted a car that felt spirited, or a celebration that seemed special. But concepts like “spirited” and “special” are inescapably relative: when others in your circle spend a lot, you must spend accordingly or else live with the disappointment that results from unmet expectations.

If the top tax rate were to rise, as scheduled, from 35 percent to 39.5 percent — its level during the Clinton era — many top earners would spend a little less on cars and parties, so the standards that define their expectations would adjust. But once the dust settled, their cars would feel no less spirited, and their celebrations no less special, than before…

I explained all of this to my friend — telling him that because the tax increases he listed would apply not only to him and me, but also to others like us, they wouldn’t much affect our ability to acquire the things we want. That seemed to calm him down a bit.

Even in the Eisenhower era, when the top marginal tax rate was 90%, I have no doubt the rich were still able to find ways to hold themselves apart from everyone else, even if it isn’t as far as they can now.

A hedge fund manager and I had a flurry of e-mails over the weekend, prompted by various “The recession is over” declarations, particularly one lauding Timothy Geithner’s skills as a forecaster. I think our shared view is that to call this recession over is tantamount to calling an operation successful when the patient is tethered to an oxygen tank and needs 24 hour nursing care. In other words, the designation may be technically correct, but also shows how low the threshold of “success” is considered to be.

One of his comments:

It’s weird, but even here in the heart of our wealthy suburb, and people APPEAR to be as affluent as ever, but scratch beneath the surface, and many are experiencing money strains. It’s like we just continue extend and pretend and then people use the recurrence of bad habits as a sign that Geithner was right. It’s nauseating. And somehow 10% unemployment doesn’t matter any more!!???

I also know of cases exactly like the situation he alludes to. One, a successful entrepreneur, with a seven figure net worth not all that long ago, prudenty diversified and bought some small local ventures as well as a second home. One of his ventures was hit with unforeseeable bad luck; one of his homes turned out to have mold; and his business is such that he has to invest a lot with the expectation (or one might say hope) of getting a big payoff. On paper, he did nothing wrong, he’s not a big spender (his expenses were moderate relative to his income and net worth, and his leverage level would have been deemed cautious in 2007) but adverse developments plus a change in the economy now has him with a negative net worth. He can reorient his business to a steadier cash flow mode, but that makes it less likely that he will be able to dig his way out of the hole he is now in.

For the most part, this sorta-recovery has left the lower income strata still struggling, but even the better-offs may not be doing well, just less badly. What do you see? Do you sense strain behind this talk of improvement, or do you see it as solid?