Sunday, January 27, 2008

Debt Rattle, January 27 2008

Freddie Mac and Fannie Mae Quick Fix Could Cost Taxpayers

In a terribly misguided attempt to address mortgage market problems, Bush's stimulus plan will include a provision to up Freddie Mac and Fannie Mae's loan limits. The dangerous initiative is liable to leave taxpayers on the hook for billions (possibly trillions) of dollars.

The fiscal stimulus package announced yesterday includes many different provisions. Most of the media emphasis has been on tax rebate checks for individuals and tax cuts for small businesses, but there is another part of the plan that everyone should be paying close attention to:

Government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae will be allowed to buy conforming loans up to $625,500.
The current limit on loans is $417,000. The problem with raising loan limits any higher revolves around the fact that Freddie and Fannie are in a precarious financial position as is. Both companies reported huge losses for the third quarter of last year and are expected to report even bigger losses for the fourth quarter any day now.

Credit Suisse analysts estimate Freddie will write down between $4 billion and $11 billion when reporting earnings. Fannie's losses are predicted to be somewhere between $2.25 billion and $4 billion.

In November Freddie warned that it might not have enough capital to cover mandatory reserves on mortgage commitments. Fannie is in a similar position and announced the need for a capital infusion just last month. Additional losses will most definitely have a negative impact on the companies and their capital positions.

If Freddie and Fannie fail--and let's face it, increasing their power almost guarantees that they will--taxpayers will be forced to pick up the pieces.

Ilargi: A few comments on the article below:
  • Germany’s banking system is different from most other western countries: the major concentration in banking that has taken place elsewhere has largely not happened there. There are tons of smaller banks, and many are -publicly- owned, by the German equivalent of states and counties. This article covers 4 banks only.
  • If it is true that 4 banks have a combined exposure of $117 billion, expect them to write down at least half of that. I see one bank with a $2 billion write-down, and one with $1 billion, so that leaves some $55 billion for the other two, one of which claims to have no exposure at all.
  • Two German banks have already been bailed out by the -national- government.

Germany: Landesbanks' subprime exposure 80 billion euro -report
Four German state banks have a combined exposure of almost 80 billion euros ($117.2 billion) to risky assets and the state bank of Bavaria, BayernLB, could need an over 2 billion euro write-down, FOCUS magazine reported.

Germany's Landesbanks are financial institutions owned by regional government and local community savings banks.
FOCUS, in a preview received on Saturday of an article due for publication on Monday, said the other three banks were WestLB, LBBW and HSH Nordbank.

The banks are considering whether to transfer their U.S. subprime debt-related instruments to a special-purpose vehicle, the weekly magazine reported without citing its sources.[..]

Two German banks, stock exchange listed IKB and the state bank of Saxony, SachsenLB, have already been bailed out after subprime losses.

Ilargi: Well, whaddaya know, I’m not the only one thinking this deal won’t happen. Can I at least be the only one thinking it was never intended to?

Countrywide Earnings Eyed Before Deal
Investor concerns that Bank of America Corp. might try to pull out or pay less for Countrywide Financial Corp. could intensify next week when the troubled mortgage lender reports 2007 year-end financial results. After posting a $1.2 billion loss in the third quarter ended Sept. 30 -- its first quarterly loss in 25 years -- Countrywide declared it would post a profit for 2007's final three months and through this year.

Wall Street has its doubts -- most analysts expect Countrywide to post a fourth-quarter loss -- and will be watching closely Tuesday when the Calabasas-based company reports its results. Investors will be looking for signs that suggest worsening fortunes at the nation's largest mortgage lender -- and a possible about-face by Bank of America.

"Bank of America is going to take a close look at Countrywide's business and see ... whether or not it is able to get value from the purchase," said Sean Egan, managing director of independent ratings firm Egan-Jones Ratings Co. "With the continued weakness in the market, it's not as clear ... that Bank of America is going to be willing to step up," he said.

The housing slump has pummeled mortgage lenders, as home price declines have led to record levels of mortgage defaults, causing multibillion-dollar losses at many financial institutions left saddled with mortgage-backed securities that went bad. During a conference call with analysts this week, Bank of America Chief Executive Ken Lewis reiterated his expectation that the all-stock deal, valued at about $4.1 billion, will close early in the second half of this year.

Still, some investors are engaging in arbitrage -- trading shares in both companies simultaneously based on the spreads in stock prices and speculation the deal will not go through. That trading has put Countrywide shares on a roller coaster.

Banks may need $143 billion in fresh capital
If bond insurers are downgraded a lot, banks will need as much as $143 billion in fresh capital to absorb the impact, Barclays Capital estimated Friday. Citigroup Inc., Merrill Lynch & Co. Bank of America Corp. and Wachovia Corp. are among U.S. banks most exposed to bond insurers, or "monolines" as they're also known, Barclays Capital wrote to investors. In Europe, Credit Agricole , Dexia and Societe Generale are among the most exposed, the firm said.

The consequences of bond-insurer weakness are so severe that regulators and banks in the United States have strong incentives to pump more capital into the sector to avoid downgrades, according to Barclays Capital analyst Paul Fenner-Leitao. "Meetings between regulators and U.S. banks are at an early stage; few concrete details about the structure of a bank-led recapitalisation are known," he said. The last attempted government-sponsored resolution for a financial-market problem -- the M-LEC "super-SIV" -- failed and the current bond-insurer talks could suffer a similar fate, Fenner-Leitao added.

Two bond insurers -- Ambac Financial Group and Security Capital Assurance Ltd. already have had their crucial AAA ratings cut by Fitch Ratings. Without top ratings, bond insurers' business models may be imperiled. Downgrades also cut the value of the guarantees bond insurers have sold. Some banks have hedged complex mortgage-related securities known as collateralized debt obligations, or CDOs, by buying these monoline guarantees. That means more write-downs could come if bond insurers are downgraded.

Fenner-Leitao said that his $143 billion estimate is based on "very aggressive" assumptions about how exposed banks are to bond insurers and how far monoline downgrades will go. The estimate assumes that 75% of insured structured products like CDOs are held by banks. It is also based on bond-insurer ratings being cut to A from AAA and big write-downs following those downgrades, he indicated.

Option ARM Specialist FirstFed: Delinquencies Up 231 Percent in One Quarter
FirstFed Financial Corp., parent to First Federal Bank of California, said Friday that mortgage losses likely led to a 64 percent drop in quarterly earnings at the Santa Monica, Calif.-based holding company. On a preliminary basis, fourth-quarter net income was reported at $8.4 million, or $.61 per share, compared to $33.4 million, or $1.97 per share, in the year-ago period.

Delinquencies and non-accruals — non-accruals refer to severe delinquencies 90+ days in arrears or in foreclosure — have been skyrocketing at FirstFed. The bank reported that single-family non-accruals jumped to $179.7 million in Q4, up a stunning 116 percent from the third quarter alone. Delinquencies less than 90 days among single family loans rose to $236.7 million by the end of Q4 — that’s 231 percent over the $71.5 million recorded just one quarter earlier. The bank had first warned of delinquency problems during the fourth quarter on January 15.

Against such staggering rises in both delinquencies and non-accruals, FirstFed said total allowances for loan losses reached just $128.1 million at year’s end, net of provision expense and charge-off activity; that’s a rise of just 16 percent in loss reserves relative to the $109.8 million on the books at the end of last year. Not surprisingly, FirstFed said that option ARMs hitting a forced recapitalization were “a contributing factor in the higher level of delinquent loans.”

Stimulus plan may lead to higher mortgage rates
A key element of the stimulus package aimed at jump-starting the ailing U.S. housing market may have the unintended consequence of raising mortgage rates, said analysts studying the plan.

A federal proposal to increase the size limit on loans eligible for purchase by mortgage finance giants Fannie Mae and Freddie Mac has unsettled traders in the $4.5 trillion market for bonds backed by the "conforming" mortgages.
Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk.

Borrowers with large, jumbo loans are more likely to refinance since their savings are greater for each incremental drop in rates than for a smaller loan. The loans will taint the bonds since traders don't initially know the make-up of the securities known as "agency" MBS. Higher mortgage rates would make it even harder to unload already high housing inventories and existing homes on the market, delaying any housing recovery and potentially extending the U.S. economic slowdown.

Potential damage to the "to-be-delivered" (TBA) market -- the most actively traded agency mortgage market where investors can buy bonds before they are actually created -- prompted Wall Street dealers to call a special meeting with the Securities Industry and Financial Markets Association at 3:30 p.m. Friday, market sources said. A SIFMA spokeswoman would only say the group is in ongoing discussions with its members.

"The amount of money that investors are willing to pay for agency mortgages (bonds) could be lower if these loans are TBA deliverable and so mortgage spreads could widen," said Ajay Rajadhyaksha, co-head of U.S. fixed income strategy at Barclays Capital in New York, who will listen to the SIFMA meeting by phone. Mortgage rates would rise for the "vast majority" of agency-eligible borrowers, he said.

Reviewer of Subprime Loans Agrees to Aid Inquiry
A company that analyzed the quality of thousands of home loans for investment banks has agreed to provide evidence to New York state prosecutors that the banks had detailed information about the risks posed by ill-fated subprime mortgages. Investigators are looking at whether that information, which could have prevented the collapse of securities backed by those loans, was deliberately withheld from investors.

Clayton Holdings, a company based in Connecticut that vetted home loans for many investment banks, has agreed to provide important documents and the testimony of its officials to the New York attorney general, Andrew M. Cuomo, in exchange for immunity from civil and criminal prosecution in the state.

In these disclosures, underwriters typically said that loans that did not meet even lowered lending standards, called exceptions, accounted for a “significant” or “substantial” portion of the loans contained in the securities, but they offered little hard, statistical information that Clayton promised prosecutors it would provide as evidence. Investment rating firms like Moody’s and Fitch have said that they were deprived of this information before they gave the securities the top rating, triple-A.

“At the heart of the subprime meltdown is the inability to get information,” said Howard Glaser, a mortgage industry consultant who used to work for Mr. Cuomo when he was secretary of housing and urban development.
About a quarter of all subprime mortgages are in default, which has resulted in billions of dollars in losses for buyers of securities backed by these mortgages. Many of these loans were made with low teaser rates that would later increase. Critics of these practices say many of these mortgages should never have been made because borrowers could not repay them.

Investment banks, for their part, have said they provided adequate disclosures, and they even kept some of the securities on their books. They have taken more than $100 billion in write-downs as a result. Mr. Cuomo has already obtained some evidence through subpoenas. But Clayton, which in industry terminology conducts due diligence for the investment banks, could help him identify salient details in its reports.

Without an immunity deal, officials at Clayton could have refused to testify under their right to protect themselves against self-incrimination. There is no evidence that Clayton did anything wrong, but securing immunity provides legal certainty for the company and its officers. The company is in a difficult position, because its cooperation might hurt its clients, the investment banks.

First bank failure in 2008
FDIC Approves the Assumption of all the Deposits of Douglass National Bank, Kansas City, Missouri

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved the assumption of all the deposits of Douglass National Bank, Kansas City, Missouri, by Liberty Bank and Trust Company, New Orleans, Louisiana. Douglass National, with $58.5 million in total assets and $53.8 million in total deposits as of October 22, 2007, was closed today by the Office of the Comptroller of the Currency, and the FDIC was named receiver.

Depositors of Douglass National will automatically become depositors of the assuming bank. The failed bank's three offices will reopen on Monday as branches of Liberty Bank and Trust. Over the weekend, customers can access their money by writing checks, or by using their debit or ATM cards.

In addition to assuming all of the deposits of the failed bank, Liberty Bank and Trust will purchase approximately $55.7 million of Douglass National's assets at book value, less a discount of $6.1 million. The FDIC will retain approximately $2.8 million in assets for later disposition.

Buddy, could you spare us $15 billion?
Another shady realm of finance goes begging for a massive bail-out

This has been a crisis of risk in unexpected places. Think of collateralised-debtobligations (CDOs), structured investment vehicles (SIVs), and now a £4.9 billion ($7.1 billion) loss due to fraud at Société Générale. One particular nastiness has been festering in an obscure industry which, until recently, enjoyed pristine credit ratings: the “monoline” bond insurers. Their plummeting fortunes (see chart) helped to spark the stockmarket sell-off that prompted the Federal Reserve to act this week ahead of its scheduled meeting.

So perturbing was their plight that the prospect of a rescue caused a far bigger stockmarket rally than the Fed's biggest rate cut in a quarter of a century the day before. There may be no better example of how a dull province of finance, when snared by complex risks it barely understands, can become terrifyingly unboring.

Though themselves no giants, monolines have guaranteed a whopping $2.4 trillion of outstanding debt. The two largest, MBIA and Ambac, cut their teeth “wrapping” municipal bonds, in effect, renting their AAA rating to the securities for a fee. For a long time this business, though staid, was nicely profitable.

But, as competition grew, the monolines—with two honourable exceptions, FSA and Assured Guaranty—were seduced by the higher returns of structured finance, especially the stuff involving subprime mortgages (see table).

As mortgage delinquencies rose, so did paper losses. Ambac and MBIA wrote assets down by a combined $8.5 billion in the past quarter.

The monolines' thin capital cushions, adequate when they wrote only safe municipal business, now look worryingly threadbare. Moody's and Standard & Poor's—the very rating agencies the monolines relied so heavily upon when piling into the mortgage business—are threatening downgrades unless they raise more equity. Ambac's failure to do so last week prompted Fitch, another rating agency, to cut its debt by two notches, to AA. This has spooked investors for several reasons. First, heavily downgraded insurers would lose their raison d'être and thus face the prospect of selling up or going into “run-off”: closing to new business and gradually winding down.

Worse, from a systemic point of view, when a monoline is downgraded all of the paper it has insured must be downgraded too. Hence, after its move against Ambac, Fitch went on to cut no fewer than 137,500 bonds (including one issued by Arsenal football club). This is more than academic: holders of downgraded bonds have to mark them down under “fair value” accounting rules. Some, such as pension funds, may hold only the highest-grade securities, raising the prospect of forced sales. And, with fewer top-notch insurers to turn to, bond issuers' costs would rise. The loss of the AAA badge would cost investors and borrowers up to $200 billion, reckons Bloomberg, a financial-information firm.

US slides into dangerous 1930s 'liquidity trap'
The United States is sliding towards a dangerous 1930s-style "liquidity trap" that cannot easily be stopped by drastic cuts in interest rates, Nobel economist Joseph Stiglitz has warned.

"The biggest fear is that long-term bond rates won't come down in line with short-term rates. We'll have the reverse of what we've seen in recent years, and that is what is frightening the markets," he told the Daily Telegraph, while trudging through ice and snow in Davos. "The mechanism of monetary policy is ineffective in these circumstances. I'm not saying it won't work at all: it will help the banking system but the credit squeeze is going to go on because nobody trusts anybody else. The Fed is pushing on a string," he said.[..]

"People have been drawing home equity out of the houses at a rate of $700bn or $800bn a year. It's been a huge boost to consumption, but that game is now up. House prices are going to continue falling, and lower rates won't stop that this point," he said.[..]

... the global downturn may already have acquired an unstoppable momentum, requiring months or even years to purge the excesses from the bubble. Professor Stiglitz blamed the whole US economic establishment for failing to regulate the housing and credit markets adequately, allowing huge imbalances to build up. "The Federal Reserve and the Bush Administration didn't want to hear anything about these problems. The Fed has finally got around to closing the stable door (on subprime lending), but the after the horse has already bolted," he said.

Banks 'face a further $300bn sub-prime hit'
The world's financial institutions will have to write down a further $300bn (£152bn) of US sub-prime losses before the crisis is over, according to a study by consulting firm Oliver Wyman.

"We expect a stormy 2008," Oliver Wyman said in its State of the Financial Services Industry report. "While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting."

Tumbling property prices - especially in the UK and Spain - a weakening dollar, a possible collapse in commodity prices, and a fall in Chinese and Indian stocks will "disrupt" the global economy, the report claimed. Banks are already coming off one of the worst trading periods in memory, with shares across the industry plummeting 40pc in the past six months.

Oliver Wyman has estimated that financial services companies have already taken a $300bn hit on their sub-prime exposure. It estimates that $1,300bn worth of sub-prime mortgages were written in total.

US banks will feel the pinch in particular, Oliver Wyman predicts. "North American financial services firms will have a tough year," it said. "Market uncertainty, combined with further write-downs and expected home-price and loan-volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves."

UK: Pointing fingers at the plutocrats
In an extract from his provocative book Who Runs Britain?, Robert Peston looks at the roots of the current financial crisis and blames a political pact with the super-rich for impoverishing the rest of us

When the going was good, investment bankers, hedge fund managers and partners in private-equity firms all did very nicely from the bonuses and the capital gains and the fees generated by the frenetic manufacturing of deal after deal after deal. Many of them are now paying a price for failing to understand the risks they were taking on. Don't weep for them. They have already extracted fortunes.

It is most of us who are paying for their foolhardiness, as the pricking of a financial bubble they created has a negative impact on all our prosperity. Months, possibly years, may go by before banks are prepared to lend as freely as they had been doing. The price of money is going up for all of us, and the economy is slowing down, because regulators and governments did not dare stop the over-exuberant behaviour of greedy traders, bankers and financiers. In fact, the Government encouraged the excesses of these super-rich individuals and their financial servants because they were thought to be good for London and good for Britain.

There is collusion between most politicians, bankers and investors to avoid asking the big question: has the freedom of investment banks, private-equity firms and hedge funds to buy and sell what they like, when they like, gone too far? That would be to threaten the return to full throttle, whenever it comes, of the most successful machine in the history of the world for expanding the clone army of the super-rich.


Anonymous said...

Yesterday you responded to GZ...

"Are we going too fast for you?"

My answer is no... bring it on!

And thanks. It's going to take a while to get a readership up to commenting speed. There's a learning curve for most of us.

The most disturbing thing about this mess... after you get past the collusion and disgraceful behavior of the best educated lawyers and business execs our society has "chosen" to follow is this: Where is the freaking calvary?

Where is the WSJ? and the NYT? Why the SILENCE?

It's deafening.

Anonymous said...

Reading these posts is surreal. I know nothing of economics except the little I recall from one macroeconomics class thirty years ago, but reading these articles makes me think that two simple ideas doomed our civilization from the beginning: 1) corporate law giving corporations social rights without responsibilities and 2) money as debt. When I was growing up we all believed that a good, democratic society required educated citizens, but now it seems to me our educational systems completely failed at helping us identify and fight destructive economic policy (I’m a teacher). At the moment I can’t imagine any amount of social, scientific, or economic engineering that will be able to salvage the debacle we’re in, but what are the good economic ideas for building the 22nd century after the 21st implodes?

In today’s LA Times, Naomi Klein writes:

“What matters is that, as a political tactic, disaster capitalism works. It was the late free-market economist Milton Friedman, writing in the preface to the 1982 reissue of his manifesto, "Capitalism and Freedom," who articulated the strategy most succinctly. "Only a crisis -- actual or perceived -- produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable."
Why the Right Loves a Disaster

Are there good ideas lying around out there for building ethical, sustainable economic systems? Here’s a crazy question: if there were a time machine that would allow us to go back in history to those places where “bad” economic policy was born, what would be considered “good” sustainable economic policies that might have been used? It’s an impossible question, I suppose, that would generate more heat and hand-waving than light, but I keep thinking that as a society we’ve missed something extremely fundamental about money when teaching our children.

Ilargi said...


I don't think it's so much that we missed things in our education system, it's more perverse than that. The education system has been deliberately set up to imprint into children that what makes them most useful to the economic system.

Independent thinking is not on the list, obviously. Will's comment above yours addresses the role of the media, and amplifies the point I'm making. We have one point of view, and one only.

This principle applies to all levels of education, up to and including universities. As soon as scientists started accepting, and consequently propagating, the idea that the precautionary principle is antithetic to science itself, the game was up and over.

Thus, we now add 10.000 or more untested chemical compounds annually to our environment. If you don't find that a good idea, because they may be harmful sometime down the line, you need to prove that harm. The producers do not have to prove the safety.

This disregard for negative effects of human action has pervaded our society throughout, whether it's in the way we use energy, or the way we pollute our world, or, just as strongly, in our financial system.

The 'now' is all that counts, any other time, read 'the future', is discounted. In any growth-based economy, this is the only thing that makes ultimate sense: everything under the sun has more value when consumed today then left for tomorrow.

Growth is an inflationary principle. You make sure that people don't just sit on their assets by devaluing them by a few percent per year: assets will lose value that way, and that is the incentive to use them and/or make them available to the market. This entices growth, because the former asset owners now have to get out and dig up more assets.

If you think a bit more about how the human mind works, it all makes a lot of sense. We learn in our schools that we are smart, and use that smartness to guide our actions. That is not at all true, though.

We are driven by the same basic instincts that drive all life on earth. Our brain merely enables us to reflect on our actions.

Seen from that side of the issue, things fall into place. We cannot, as a group, as a species, act in different ways. we are the yeast in the winevat and the bacteria in the petri dish. We must use our resources till there are no more. It's in our genes.

Until the education system starts telling us this, we can easily be convinced to continue to lie to ourselves, and say we are guided by an intelligent brain.

In reality, our education, science and our economic system are exactly what you would expect from a bunch of yeast: we can spin stories about it, and tell lies, but we'll still grab all the energy and space and money that we can get. And we'll make more specimens or ourselves as well as long as the going's good.

Anonymous said...

The media issue is a key component to this mess. As long as we will not be critical, meaning, really examine our business practices, we cannot fix this mess.

When I was a bit younger, I marvelled at the Russians reading Pravda: the Glorious 5 Year Plan, the Success of the Commissars, the Integrity of the Party and so on. It was lies. And yet, now, we are treated to worse.

WSJ and NYT have had front row seats to this derivatives quackery for a long time. AND NOT A PEEP. No questions when the banking profits were growing orders of magnitude faster than the economy. Tell us, how is this possible? No questions about $100 million dollar compensation packages. Other than shake the piggy bank, what did these esteemed execs do?

The Mark-it story (How Wall Street Blew Itself Up) is beyond amazing.
And so you have to wonder... With so many banks involved and so much freaking money sloshing around...

Where were the financial reporters?
Nobody smelled a story?
We have to read about it an Internet blog?

Anyway... I appreciate what you and Stoneleigh are doing. I hope you are successful. I hope to read your bylines someday in big newspapers. But to do so we've get rid of all the liars and apparatchiks we're stuck with today.

Anonymous said...

Hi ilargi,
Thank you for taking the time for your thoughtful, reasoned response. It’s sad, but I agree with your portrayal of our educational, scientific, and economic systems as systems that allow us to spin stories and lies as we grab energy, space, and money. It’s as though we justify our instincts with grandiloquent claims of our “humanity” and being “human.”

My experience, though, is that not all claims of “humanity” are lies. I phrase the problem in terms of whether we are a closed system (yeast) or an open system (yeast+). Victor Frankl in his account of living in a German concentration camp (Man’s Search for Meaning) describes how inmates stole each other’s numbers in order to avoid being sent out on dangerous details where they would probably die. Some prisoners, though, refused to trade numbers. Frankl’s comment was that “The best of us never made it out.”

I’ve known people like this—yeast+. They are not survivors, but they are wonderful people. Such people tend to disappear. They’re not good yeast. They don’t call attention to themselves—and often when we meet them we’d prefer not to know them because they just don’t “fit.” The egoic shouting of the internet makes no sense to them.

Unfortunately, to suggest yeast+ exists is absurd because it’s so easy to claim I’m simply justifying my yeasthood—yet once encountered, it’s a private certitude. It’s a secret even to ourselves and I personally believe we’re really only aware of it in the silence that comes in the dead of night. As soon as we speak of it, it’s gone.

Logically, yeast+ is also almost impossible to approach because it’s definition suggests that it’s not human, which is too freaky for most to consider…. For me, humanity makes far too much of itself.

From where I sit, the failure of our social systems is our lack of integrity examining the hypocrisy that is our humanity and our failure to rationally and emotionally face the unknown plus (+). Will the existence of yeast+ change the collapse? No. But it provides meaning in the midst of die-off—and only integrity knows if it’s existence is lie or truth.

godraz said...

In response to ric's inquiry about "Are there good ideas lying around out there for building ethical, sustainable economic systems?" I suggest he take a look at Prof. Antal Fekete's archives begining with his Monetary Economics 101 lecture series.

Like so much else to do with our current dire straits we don't lack for good ideas and prior historical precedent (the sum total of which at the time was succinctly delineated within the US Constitution with respect to what money would be, and the control of which, although not expressed, was rightly assumed would be in the hands of all the free people whose diligent intelligence, labor, and abilities produced the goods & services of wealth creation) but rather resistance to altering course.

Of course it's true that the misbegotten corporate "personhood" and Federal Reserve/banking interests, to go along with their subjugation of government, all in service of their combined corrupt interests are the prime and very potent agents of resistance We The People face regaining control of our purse, and thus control over the economy and government. It certainly doesn't help matters that We The People, out of ignorance, laziness, institutional dumbing down, and greed, have over time surrendered to this theft of control.

As we read here these corrupt powers have all but ensured a disastrous outcome. Out of the wreckage we might prove capable of insisting on revoking these usurpations of power and rebuilding upon that which we lost control of: all our sovereign rights over our governmental affairs as the check upon abuse of power, especially those of the power of our purse. And I believe Antal Fekete's insights are as powerful and true a compass to aligning us to where we can only now hope to one day re-achieve.

Fekete's ideas are lying in wait as an alternative to all the corrupted ones in play that will only strive to otherwise renew and strengthen our enslavement. And if ric, and anyone else reading this, finds Fekete's ideas worthwhile may I suggest he perform what Friedman calls "our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable."

Who knows if I am being unrealistic, but in reply to ric's excellent inquiry I do recommend he read Fekete and make up his own mind as to the worthiness of his ideas. At least ric is asking the right questions! And I suspect he'll learn "something fundamental about money" that we've forgotten.

Ilargi said...

ric, godraz,

You are of course right in your yeast+ notion. But note that I did say:
'We cannot, as a group, as a species, act in different ways."

Individually,we can act differently, and individually, we can have good ideas. Why we act less yeast-like at times, must , however, be contemplated.

It is not that easy, if you accept that principle that even yeast+ is driven by what allowed yeast to survive. And that, necessarily, is survival and procreation. Many people have addressed non-selfish, or hero, behavior, and puzzles remain.

All this also means that one has to seriously question ideas such as those of Fekete; not because of their stand-alone merit, but because of their practicality within the surroundings of a wine vat.

Do they lead the group, the species, which has no reason (*) for long time planning, towards better chances for survival and multiplication?

If so, they may be accepted, but only if they show immediate benefits. Because: (*) the group has no reason for planning: its genes got where they are without that planning.

A species barely 1 million years old is driven by genes that have a 3 billion year history. And a successful one at that: they survived until today!

Planning was never a part of that.

Why would the collective 3 billion year-old pool of genes, present in the 6.5 billion specimens of the species alive today, suddenly switch tactics?

I am pretty sure the same drivers will remain behind the wheel, and use up all available energy till it's gone.

We'll do what we do, until we do it no more.

The biggest problem with our present economic system, and capitalism is just another face of communism (i.e. growth), is that it's ideally suited to our genes.

And that's why our educational system never told you nothing can grow forever.

Anonymous said...

ilargi and godraz,

What beautiful replies. You’ve given me much to think about. You’re discussing the struggle between the plus (+) behind free will and the momentum of our genes. All my life I’ve been compelled by this conflict—drawn to one and repelled by the other. However, while I may be engaged with this issue individually, societies are not. This is why I find Matt’s pessimism at LATOC more convincing than the high school earnestness of TOD. Identifying with society or “humanity” doesn’t make much sense. Yet what do we sincerely identify with? For myself, it’s the reality that non-egoic life exists, though is not survivable—which is its beauty.

Thank you so much for responding so coherently and intelligently. I consider you friends.

godraz said...

While destruction beyond comprehension may come to pass, I would not presume that our genes are to blame for such a result. When it comes to our genes and their determination over behavior, I do not doubt that there are strong (and even iron-clad) correlations of influence, but this does not itself prove our genes as the sole or only causative agent of our downfall.

Species procreation may be an iron-clad genetic signal, yet it is one that some people have resisted!

Despite what we think we know about such genetic determination of behavior, in all likelihood there is just as much that we do not and will not ever fully comprehend about it. So to ascribe with any certainty that because of our genes we are doomed is by my reckoning a fallacy of distraction from coming to grips with how we might think and act accordingly to influence our behavior -- individually and socially -- to avoid such an outcome.

To me this is much more rewarding an intellectual endeavor then to subscribe to any belief that we are doomed because our genes make us greedy. For while it is without doubt that we are prone to such behavior, and many others of similar self-destructive vices, it is also certain that there have been societies of people, in their time and places, who have lived by organized structure that largely kept in check such behavioral failings. (Admittedly, most of the larger ones succumbed to the forces of corrupt vices and dissolution, but many hundred smaller ones did not.)

How and why this occurred, I suppose, must have been due to ecological constraints (of which I consider nearby social group competition such a factor) that formed the cornerstone of their cultural/religious strictures over our harmful behaviors, particularly as they would have otherwise led to societal suicide. For if it was entirely true that our genes drive us mindlessly yet determinedly so to ruination, one could expect that our species would already have been laid to waste in the intervening million years. Yet I think it clearly apparent, despite my lack of scholarly background in either genetic determination, cultural philosophy or religious studies, that this is not true because we have more often than not chosen to abide limits on our behaviors.

The main problem then as I see it is that our species has, thanks to the discovery of energy leverage, first in the form of stored grains and more recently -- yet most profoundly -- in fossil fuels, which has allowed our Western culture to vastly transcend our localized ecological constraints on growth and in the process loosened all restraints on our worst behavioral tendencies. That these behaviors have some genetic basis is largely irrelevant to the matter at hand.

What matters is not our genetic tendencies, but our choices with respect to reigning them in individually and collectively so as to ensure our societal survival within the given ecological constraints and possibilities we find ourselves in. But quite obviously, this is not at all what our culture chooses to recognize as at fault even while faced with all our man made catastrophes. That isn't genetic, but it sure is stupid.

"[T]here is no otherness to the insanity that threatens us now. The insanity is what we call normal, and it is all our own." -- Verlyn Klinkenborg, NYTimes 4.11.07

"It was your skill and your science
That led you astray.
And you thought to yourself,
I am, and there is none but me."
Isaiah 47:10

710 said...

Not being able to act in different ways as a group is almost tautological.

Up until the late 1400s, there was civilization in Europe and Asia, one group, and there were thousands of tribal cultures scattered all over the rest of the world.

Among all the tribal cultures, they each had ways of life that were distinct and different from each other.

I think the issue is that when we do stop acting as one group, civilization + progress + exploitation, at this point that alone would precipitate a chaotic collapse.

I recall reading about the US education system that there were really two tiers, one tier for the BS that us lumpen proles are all supposed to get, and another tier about how things work behind the scenes, for the "elites".

ric, you seem already aware of what's going on, but I will still recommend:
"The Corporation"
"Money as Debt"
"What A Way To Go: Life at the End of Empire", and

All are available online through Google Video, except Way To Go, which may be available elsewhere on the Net, or through filesharing.

The Lizard said...

has no "science" in any of the offered translations, and I have to assume the verse was quoted in that way by godraz as a deliberate provocation, no?

Please don't even dream od using the word "science" in the same paragraph as "economics"!

Anonymous said...

For whatever it’s worth, here’s how I see the problem and its “solution.” The Tragedy of the Commons has become the Tragedy of the World.

As I understand the Tragedy of the Commons, a farmer discovers it’s in his self-interest to take a little more of shared resources. Is the farmer’s self-interested decision solely the result of his yeast-like genetic history? Or are there other factors influencing his decision? In my mind there is another factor (yeast+), but it’s highly problematic to discuss because it’s so easy to distort into self-interest.

Looking at a spectrum of human behaviors, what we are calling yeast-like behavior is what I would call purely egoic-behavior where every decision is made to maximize the amount of energy gained for the individual. At the other end of the spectrum is purely non-egoic behavior (yeast+) where every decision is made to meet the needs of the community. (Most of us make decisions at varying places along this spectrum—sometimes we’re selfless, sometimes not—it’s a struggle.) In a community of solely selfless behavior (yeast+), the sociopath is king because non-egoic people can be easy to manipulate (look at the power of yeast!). In my mind, the point of most of our institutions is to manage (or contain) yeast-like sociopathic behavior.

My question about “are there ideas for building “good” sustainable economic policies” comes from my frustration about how easily sociopaths manipulate “money-as-debt” to the detriment others. (As a teacher, I often see my college as a training ground for sociopaths, because of the number of young people who want to get out into the marketplace and make a killing.) I wonder if there are other monetary systems (such as “money as value” or “money as time,” etc.) that would be harder for sociopaths (yeast) to manipulate to serve self-interest. Because I’m an idealist, its even occurred to me that the root of money is value—and the root of value is love—and the root of love is….+) Then it seems to me that in the world of the purely non-egoic, there is no need for money at all, because in such a world everyone is working to meet the needs of others. In such a world, the limiting factors are knowledge and understanding (ideas!) for managing finite resources.

But, of course, it’s not realistic to ponder such a world! That’s not how people behave! People live to procreate! People are not solely non-egoic! It sounds inhuman! Antlike! Such a world is fantasy—and it even seems a waste of time to contemplate. Instead, we look for ideas that will somehow make egoic thinking serve a greater good. But, for me, this too is an unrealistic enterprise because of how easily yeast overwhelms yeast+.

So is the Tragedy of the World our endgame? From the perspective of egoic yeast, yes. We face die-off. From the perspective of non-egoic yeast+, it’s just another chapter in something larger than ourselves.

I hope all this hasn’t been too off topic—that’s just how the Tragedy of the Commons appears to me at the moment.

Ilargi said...


Don't worry about being off-topic. In view of what happens economically, the Tragedy of the Commons is very much on topic.

My take is, as I said, that the growth model plays right into the Tragedy, since it is so perfectly suited to the 'yeast in us' that is still our main driving force, with billions of years of -successful- evolution to back it up.

Yeast+ is a very recent development, and as such will have to prove its value, or be discarded.

I also think you take the distinction a bit lightly between yeast+ and just yeast. There is not an entirely new species being born, it's just an added layer.

If you look at how people react to threats, for instance, you will see that they revert back to the most primitive instincts, the whole fight or flight mechanism. This is inevitably so, despite all our theories about better worlds with better people.

The 'thinking' layers of our brain were the last to develop. That we all realize. What most people don't yet see, is that those layers are, because of that, also the last to react to "primal circumstances".

And I don't see how we could turn that around.

The ultimate tragedy of "intelligence" and "awareness" is that, if a being tries to survive with them, it has to be able to lie and deceive, first to itself, then to others.

The most poignant and accessible example of this may well be the survivors of Auschwitz. Something in the brain must have the ability to shut off memories and/or paint them in a light that is to some extent rosy, or survival would be impossible.

When this cheating ability developed more pronounced, it turned out to have vast procreational advantages. Chimps lie too, you know, and they know they do, it's not just us.

If you can make a girl believe you are what she wants you to be, instead of what you are, you're having sex. The same applies to second-hand car salesmen.

And we all lie, all the time. We like to think we are yeast+, but we will still pursue what we perceive as inclusive fitness. And it's a trap, very much so: the moment you think you are yeast+, you no longer are.

Anonymous said...

I’m always a little surprised by your willingness to discuss yeast+ as doing so raises so many off-topic problems. For me, yeast+ is something like a new species, though it might be better to think of it as matured yeast. Describing it, though, is difficult.

The way I see the relationship between yeast and yeast+ is a little like the difference between a dumpling and a donut. If a dumpling were to “look within,” it would see it’s dough at the center. It would see itself (absurd, but useful analogy) and make decisions based on itself. If a donut were to “look within,” it would not see dough, but an empty center—it would not see itself. Yeast+ does not make egocentric choices, because when it looks within it sees plus (+). (Whatever this plus (+) might, is pointless to get into here.) But do such purely non-egoic people exist? They do in my experience (just as purely egoic people exist)—however, they see their lives and the world completely differently than egoic people do. So I don’t see yeast+ as an added layer, as much as a maturing—(as an adult male hopefully matures from simply from wanting sex, to being a father caring for a child….) Not everyone reverts back to primitive instincts—it’s not inevitable. Some people are different. But they are also not necessarily survivors.

As you mention, it’s a trap to even bring up the subject because if I think I am yeast+, I am not yeast+. As people, we cannot consider ourselves yeast+ because to look within is to see an unknown plus (+), which is certainly not us. I guess my point is, we are yeast—but also within is sometimes a plus(+) that is not us. It’s hard to talk about, though, and sound rational, so I appreciate you’re letting me try.

Anonymous said...

Seems like Corporate America is not listening to the rosey economic scenario spouted by this adminstration...

Corporate America braced for recession


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