Over Last 100 Years, Multi-term GOP Presidents = Bank Crisis

OK, correlation does not equal causation; but this is modestly humorous.  Over the last century, any time you had a multi-term GOP president (in other words, long enough to do real damage) you had a pretty substantial collapse in the banking industry (i.e., near fundamental economic collapse).  For the statistics junkies the R does not equal 1...it assuredly can be described as R<>1 but R is notably greater than 1.  Just putting down a list of presidents over the last century and then mapping the major bank panics over the same time period reveals some interesting stuff.

The yellow highlighted line items represent multi-term GOP presidents with banking panics associated with them.  Those in blue/cyan represents multi-term GOP presidents where no such panic occurred.  Eisenhower and Nixon are the two non-panic GOP presidents.  A simple business cycle recession took place near the end of Eisenhower's presidency.  He's also the president to kick-off the largest public works program in world history with the Interstate highway system.  Richard Nixon, of course, was president during the stagflation years of the oil shocks though a lot of his economic woes likely came out of spending for Johnson's Great Society programs.  

The other presidents with panics associated with them are Theodore Roosevelt with the famous bank panic of 1907 where JP Morgan had to step in as the lender of last resort.  His notable power led to demands that a non-private lender of last resort be created.  This was the impetus to create the FED which was established in 1913.  Prior to the creation of the FED the last central bank in the US was abolished by Andrew Jackson in the early part of the 1800s which resulted in most of the 1800s being characterized by constant bank panics and runs.  We then have Coolidge and the Great Depression followed by Reagan and the Savings and Loan crisis.  Finally, we have George Bush and the most recent melt down.  

Again, it's an interesting view; but that's about it.  While the press puts up silly comparisons between Texas secession and 1861, we thought we'd put some silliness up of our own.  

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"Right Wing Extremism" Outrage - Hardly Justified

We've talked a lot about how we're impressed with the clinical case of chronic amnesia the press suffers from.  The symptoms of this malady were on display again during the discussion of the Obama administration's Department of Homeland security report outlining threats from right-wing extremists.  The report pointed to a variety of factors including the economy, the first African-American president being elected, and many veterans suffering from post-traumatic stress disorder having trouble re-integrating into society as potential catalysts for violent activity.  

Many were offended by the reference to veterans as being folks who could be turned to violence in the current political and economic environment.  Fair points of debate.  

However, many rejected the report completely as an example of the Obama administration trying to politicize the Department of Homeland security.  However, many of these critics seem to have forgotten that the Bush administration's Pentagon felt threatened by anti-war protesters earlier this decade.  Such anti-war sentiments were perceived to be destabilizing by the Bush administration.  But forgetting such points is forgivable since that would be reaching back a few years...though we still struggle to understand how people in the press who spend 8 plus hours a day looking at this stuff can't draw back on their own memories much less Google.

A few years ago is forgivable, but not being able to reach back a few days is definitely less so. On April 4th Richard Poplawski killed 3 police men in the suburbs of Pittsburgh, Pennsylvania (where candidate Obama famously said they cling to their guns and religion).  He was arrested soon after the shootings.  

Based on reviewing Poplawski's online activity, it's clear he had white supremest tendencies, feared the current administration, and was generally an avid consumer of right leaning information.  Despite Dennis Roddy's efforts in Slate to suggest Poplawski's interests were wider ranging than right-wing news, its hard to get away from the fact that his online search history revealed a disturbed individual who easily subscribed to the most extreme perspectives offered by the right (there are similar stories on the left, but for the moment we're speaking of the recently released Department of Homeland security report).   In addition, there was fear of being evicted from his residence.  This fact may line up with the economic pressures the report points to.  

It's not clear that Poplawski's interest in things right-wing led to his killing of 3 police officers.  However, he clearly was interested in stock piling weapons and food in anticipation of the end of society as we know it based on current policies per some of his online comments.  A correlation between his seeming online perspectives and real world actions will likely either be affirmed or rejected through his trial.  

But, when such vocal outrage is expressed at a report that was largely authored during the tenure of the Bush administration; the press should at least point to this juxtaposition of facts - a recent killing(s) seemingly motivated by extremist thought and flabbergasted outrage at a report that suggests such violence could occur.  It would seem that a simple copy/paste technology could have helped the media create that context for the news consuming public.  The ridiculous string of events begs for comments: A right wing extremist kills 3 police officers, a report suggesting such a thing could occur comes out, and outrage at the suggestion that this possibility which has already occurred could occur would seemingly be an obvious story.  The absurdity of the logic and chain of evens would demand some comment in the media. 

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Does Texas Governor Rick Perry Hate America More Than Reverend Wright?

During the election there was a lot of concern over the patriotism of Obama associate Reverend Wright. His "infectious hate" for America delivered during his many sermons was considered unpatriotic, unAmerican, and unacceptable. Obama disavowed his relationship with Wright. 

Now, Rick Perry (governor of Texas) has threatened to destroy the union with threats of Texas secession. GOP association with secessionists is well established. Sarah Palin's husband Todd was a member of the Alaskan secession party. In the mid-1990s Texas secessionists holed themselves up and lives were lost.  Perry, facing a primary against K. Hutchinson leading up to the 2010 gubernatorial election, is pulling out all the stops to court the Texas far right. The "true Americans" seem quick to quit the union they profess to love so much. Both Wright and Perry served in the military. Wright seems more like Grant and Perry more like Lee these days...  The true Americans have a strange way of showing their love.  Too quick to quit.  Liberals accepted the rules of the game and decided to "flee to Canada" when things didn't go their way.  Conservatives want to take whole states with them. 

Of course all of this talk is foolish.  Rick Perry is a politician being a politician.  He's firming up his right flank ahead of some tough primaries.  Wright was reflecting the anger of his congregation regarding government policies they did not agree with (Iraq war, etc.).  Both sets of commentary were over the top.  However, Perry is an elected official of a notable state.  He should be more responsible with his words.  If he truly believes what he says, he's no better than Wright.  He's creating an us versus them framework between himself and the US just as Wright was.  There is equivalency that many may not recognize or be comfortable with.  Such absurdities should be pointed out by the press versus pandering to.  Perry's comments should be pointed out for their irresponsibility versus the titillation they provide.  

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World's Largest Democracy Continues It's Experiment

There was a lot of talk about spreading democracy throughout the world for the better part of the last decade.  Efforts met with mixed success, but inspiration can be taken from India's "experiment" with democracy.  The results are in and after more than 50 years of smooth transitions of power, we can say the "experiment" has been largely a success.  India's massive democracy has matured with: 

1.  A significant reduction in political violence
2. The evolution of a vibrant multi-party system with competitive options at the local, state, and national levels
3. The integration of 1.2 billion people into a functioning political order
4. The assimilation of 8 major religions
5. The accomodation of 28 major languages and hundreds of dialects
6. The dampening of hundreds of sectarian divisions
7. The ability to overcome all of the above in the face of a transitioning population with barely 65% literacy rates moving away from subsistence farming scattered across over 1 million small villages 

Just the logistics of the elections are shocking and impressive:

1.  1.2 Billion people
2. 714 million eligible voters (more than twice the entire population of the US) 
3. Low literacy rates of 65% (many vote by selecting pictures)
4. Voting machines distributed to remote jungle locations on the backs of elephants
5. 1.3 million voting machines
6. Nearly 850,000 voting locations
7. Multiple phases to accomodate the massive logistics

Despite the seemingly overwhelming process and the many miles countless voters have to trek to polling stations, Indian's turn out in high rates for elections - nearly 60% versus roughly 50% for the US.  It's a truly inspiring process as one of the world's largest emerging economies goes through this ritual.  It likely deserves a bit more attention that it is getting given the triumph of democracy in the face of so many obstacles.

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Biggest Teabaggers in Socialist "Red" States - Like South Carolina

Some of the biggest teabagger protests took place in socialist red states. Impressive rallies occurred in on-the-dole states like South Carolina. In addition, bailout babies in Texas threatened to secede. It's ironic that Texas bailout babies became so vocal as Texas was the biggest recipient of bailout funds as part of the Resolution Trust Corporation efforts in the late 1980s. For those that need a refresher course, the Savings and Loan crisis that took place after years of deregulation and poor lending (sound familiar) during the 1980s. The government put together a bailout for the Savings and Loan industry to address the biggest bank failures since the Great Depression (sound familiar). Fully 50% of these institutions were in the bailout baby state of Texas. Folks in Texas probably have forgotten about recent requests for federal money to help with wild fires and hurricane clean up.

Interestingly, most of the states where teabagging was the most popular past time are also the states that contribute the least and receive the most in terms of federal support. These on-the-dole socialist welfare states should start by rejecting the handouts that they receive.

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Texas Forgets Its Big Bad Bailout Legacy

This was the banner on the page of the Huffington Post just moments ago.  Texas' governor Rick Perry just did something that radical Reverend Wright may never have thought about...destroy the union.  Yes, he's threatened to secede.

But with all the anger towards bailouts, Texas should just send a thank you note before they head out of the union (let's not get started on the oil depreciation tax credit that allowed Texas to pay less in taxes than almost any other state...sorry California).  In 1989 when the Resolution Trust Corporation (RTC) was set up to deal with the Savings and Loan crisis that culminated after a period in the 1980s (read Reagan years) when deregulation, bad lending, and lax supervision led to a collapse in these banking institutions (sound familiar).  At the time, the government enacted a public-private bailout mechanism to resolve the situation (sound familiar again).  

Fully half of those institutions were in the "great" state of Texas.  You're welcome Texas.  You have a strange way of showing it.  This is a bit of context the press probably should provide.

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Who Would the Teabaggers Hate More Than Obama - Reagan

The press does a poor job of providing context.  This observation is neither unique nor insightful. But, assuming this is the case; we decided to do a quick comparison between actions taken so far by the Obama administration that have caused so much outrage among teabaggers and those of other modern American presidents.  Based on about 15 minutes of research that most of the press seems somewhat incapable of doing, we found some interesting similarities with other presidents.

First of all, it's hard to figure out (as many have noted) what exactly is being protested by the teabaggers.  The range is impressive.  Some folks just hate anything Obama, and others have libertarian perspectives they feel fairly strongly about.  Arguments range from Obama is not really a US citizen to the fact that he's a socialist one minute and a fascist the next.  In general, here's what the purer intellectual points of protest tend to be: 

1. Obama's spending will force the government to raise taxes.  So, it's not a question of current taxes, but the liability that will force taxes to rise in the future (this is probably one of the more intelligent ways of framing the teabag argument). 

2. Bailouts create moral hazards and undermine our capitalist system.   His dismissal of GM's CEO, continuation of Bush era bailouts, and tampering with bank compensation plans suggest he's putting us on the path to economic fascism (fascism being the term used by Ron Paul as recently as yesterday). 

So with regard to the first point, if we look back on growth of "big G" government spending we see some interesting trends.

These figures are, unfortunately, in nominal terms, but even then you see that total US government spending was rising for quite a while and then really took off at a steeper slope around 1982 and continued until it plateaued a bit in the early and mid-nineties.  It then racheted/rocketed back up in the 2000s.  

A look at national debt would suggest a similar trend in terms of government debt burden and time periods.

The graph looks at total federal debt (blue line) and debt as a percentage of GDP (red line).  Obviously World War II represented a significant period of the spending with the government taking on debt (much of it in the form of war bonds) to finance the war (see the red line which represents debt as percentage of GDP).  This high debt load was unwound over the following decades.  In 1981 this downward trend reverses and begins to rocket back upward.  That upward trend is not arrested until 1994 when it flattens and starts a downward trend until 2001 when it starts to climb up again.  During the 1980s the debt blossomed from $700 billion to nearly $3 trillion establishing a credit card bill so high (in comparison to near-term past decades) as to engender America with a "fuck it" attitude.  The teabag argument that high deficit spending leads to inevitable tax hikes has credibility.  George H. W. Bush who was the president immediately after this period was forced to go back on a campaign promise and raise taxes in the wake of this long period of high government spending.  

With regard to the second teabagger point of bailouts, in the late 1980s the Savings and Loans collapsed en masse after a period of deregulation, imprudent lending, and other changes to real estate law.  This collapse led the government to form the Resolution Trust Corporation (RTC) to assume the bad assets of these banking entities in public-private partnerships.  This radical socialization of losses was culminated in 1989 under then president George H. W. Bush, but were structurally organized and conceived prior to his assumption of office.   

In 1981, in support of the bailout of ailing Chrysler corporation, the White House pressed Japan for voluntary trade limitations to give capitalistprotectionist breathing room to the ailing government sponsored auto manufacturer.   

And finally, with regard to the "fascism rising" argument; despite an explicit law against it, the White House funded what many regard as a fascist rebel group in Latin America during the mid 1980s.  Because congress had forbidden the activity and because congress has the power of appropriations, the White House used a complex money laundering scheme involving Israel and the "Hate America First" Iranians to funnel arms to the latter and receive payment from the former.  Funds were then transferred to pet rebel groups in Latin America.  Thus, the White House was able to circumvent the checks and balances of the constitution (or conduct foreign policy with an even hand as the constitution suggests -which ever your perspective might be).  

So, looking back in history and comparing the teabagger gripes to actions taken in the recent past by US presidents, we find an Obama clone in none other than Ronald Reagan.

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Today is finally the day when Rick Santelli channels the rage of American tax payers into "tea party" protests around the country.  Given the utter lack of widespread protests in this country over the last several decades (ok, there were some anti-war protests in San Francisco earlier this decade), it will be interesting to see the result of these events.  

Will this be a broad-based movement that has enough teeth to make politicians pay attention?  Or will this be a tempest in a teapot -- a little bit of noise with no impact?  This blogger is betting on the latter.

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Glimmers of Hope?

This might be something the press want to discuss...

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Is It Just the Time Difference?

It's amazing what these guys know and when they know it.  If you're an avid consumer of global economics and foreign policy news, then you have to keep up with the Asia Times.  The Asia Times is based out of Thailand and is now an online only publication.  They've had some rocky times in the past, but they've embraced the Internet and produce some of the most insightful commentary around.  But beyond the commentary, they seem to know important news between 24 to 48 hours before you even hear a whisper of it in the US press.  For example, the Obama administration's thoughts around conceding preconditions before speaking with Iran were outlined and thoroughly analyzed before they ever showed up any where meaningful in the US press.  In fact, they were already off the main page of the Asian Times before they showed up in any meaningful venue of the Western press.  In addition, the level of context of even the earliest stories goes far deeper than anything typically found in the US even after the topic has been hotly debated (in a superficial way, of course) in the US press.  And, you get an international perspective.  They don't always get it right, but they are worth a visit on the Internet. Asia Times Sphere: Related Content

Ron Paul Says Obama Putting US on Road to Fascism

Moments ago, Ron Paul indicated on CNN that Obama was putting the country on a road toward fascism.  Paul is a popular sitting congressman. Coinciding with Tea Parties, a report by the Department of Homeland Security about threats from the radical right, and resolutions in the Texas legislature declaring state sovereignty; the GOP has essentially decided that if they can't win an election, they'll slowly use language to work out a coup (he he).  Of course, the last time there was a multi-term GOP president that preceded a massive economic crisis (the Great Depression), the GOP also planned a coup.  That was Prescott Bush, George W. Bush's grandfather, who tried to convince a general to take out Roosevelt (move over Reverend Wright, you can't keep up with the real radicals).  

We thought socialism was the opposite of fascism...oh well.  Paul did later clarify he meant "economic fascism"...whatever that means.  He specifically cited Obama's involvement in the management of GM as an example of the US's path toward fascism.  Such "economic fascism"usually involves an oligarchy which one could argue is what we had for the last 8 years with Bush and the energy industry (remember Cheney's secret Energy Task Force meetings).  

We see some double standards here.  For invoking words like fascism, sitting politicians on the left would have been dismantled (though the liberal blogosphere invoked the word often).  No such efforts are put forward by the press at the moment.  But speaking of economic fascism or powerful oligarchies...when oil companies were working with the White House to divide up Iraqi oil fields in an anticipated successful conclusion to the war, that wasn't economic fascism with the government and big business working in cahoots (at leat that's the convenient amnesia being displayed).  

When the government is managing the unwind of GM and the deleveraging of the banking system to avoid systemic risk, that's socialism...or now, sorry...fascism.  Someone, help us with the logic.  You may disagree with the approach and maybe even the intentions, but to suggest that the administration has fascist tendancies requires a bit more proof.  We're looking for illumination here.  Again, can someone help us out?  The press certainly is not...

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Rick Santelli "Very Proud" of Tea Parties

In a heated discussion with Steve Liesman yesterday morning on CNBC, Rick Santelli revealed that he was "very proud" of the Tea Party Movement that he helped to spawn.  In the classic debate, Liesman took the perspective of avoiding systemic risk while Santelli was the continued advocate of avoiding moral hazard.  The balance between moral hazard and systemic risk is at the heart of the debate of the roll of government in trying to salvage the economy.  Moral hazard argues against socializing losses because you remove any incentive for private parties to be cautious and prudent in the long run.  Systemic risk argues that the value of getting involved overwhelms moral hazard because the fallout of private failure will have massive social cost with collateral damage (beyond the private parties directly involved) which will result in an indirect and greater socialization of losses anyway.  From the perspective of informing the viewer, this debate was good to have.

But the missing debate was the role of the media in "creating news" by virtue of spawning a movement.  Santelli's open espousal of the Tea Party Movement (though he said he did not plan to attend any of the estimated 1700 tea parties on April 15th) reveals the complete blurring of reporting and editorial efforts.  When pressed for a moment on the issue by Liesman, Santelli said he was "very proud" of spawning the movement.  

If we compare the current economic crisis with the run up to the Iraq war (and we note that Warren Buffet has called the current crisis an "economic Pearl Harbor"), then surely the media has taken very different approaches in providing a voice to opposing viewpoints to those of the folks in control of the White House.  Both Phil Donahue and Bill Maher essentially fell from grace after making comments in reference to 9/11 that did not jive with the general war footing of the country.  Phil Donahue's anti-war sentiments did not seem to jive with the public mood (and that was likely reflected in his ratings as well).  

In contrast, within one day of Santelli's on-air rant; CNBC was running ads promoting the "Revolution" Santelli's rant was advocating.  And of course, many folks have discussed Fox's open promotion and advocacy of the Tea Party Movement through its commentators and free coverage which has morphed into advertising (though the irony of Fox picking up on a trend created by a division of NBC, the network perceived to be the den of liberal treachery, is not lost upon anyone).    That Fox runs its promotions of the Tea Party coverage with its catch phrase "Fair and Balanced" is at best an inside joke.  The network has done a decent job cleaving its news division from its heavy editorial content which dominates its prime time line up.  But that prime time coverage, in the end, serves to establish the network's conservative credentials.  The Tea Party Movement creates an event that its viewership has keen interest in.  The parties are perfect in that they create events that can be covered.  In other words, news events can be manufactured for which there is known and to some extent controllable demand.  Fox has essentially become a concert promoter.

Beyond the humours comparison with "teabagging" that have dominated the blogosphere, the media's complicity...actually open advocacy...seems to be an analog for a recent article written by Simon Johnson in The Atlantic called the Quiet Coup.  In that article, Johnson argues that a small group of oligarchs has developed an overly cozy relationship with the government.  In his discussion, the oligarchs he is referring to are influential members of the financial services industry.  Similarly, the media has started to develop cozy, deep, and institutionalized relationships with the political parties and/or political movements.  Bias is one thing, open advocacy is another.  Bias suggests a skewed lense through which events are interpreted in most cases unknowingly by the observer/reporter- a sort of Heisenberg principle of journalism.  Advocacy is different.  It's open espousal of a perspective.  That advocacy by large media behemoths has created new set of oligarchs.  Just as Wall Street has failed us, the media may chalked up as the next institution that failed America.  

Special Post Script Note:  We're not suggesting that policies not be aggressively questioned.  We could have, of course, used more of that prior to the Iraq war and during it.  In addition, we certainly are not arguing against substantial coverage of opposing view points.  Specfically, we are arguing against open espousal of a perspective unless those espousals are openly and frankly disclosed.  You can't be an open adovocate of a viewpoint and then apply a disclaimer such as "Fair and Balanced."   Similarly, you can't be the financial news network of record and then promote specific economic policy as part of your brand identity outside your editorial commentary.

Update: Both Melissa Francis and Larry Kudlow are talking up the Tea Party Movement this morning.  Francis has gone so far as making two specific points: 1. she's drinking tea all day and 2. she doesn't want to pay corporate taxes because she doesn't agree with what the government is doing.  She may have forgotten about the concept of representative democracy.

Kudlow especially talked up the bubble.  After the network was chastened by Jon Stewart on the Daily Show, little seems to have changed.  Questioning policy is one thing, open and derisive commentary is quite another.   

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Post Pirate Parley

Jeff Emanuel at Redstate.org provides a fairly partisan view of the Maersk-Alabama incident in the Indian Ocean.  If you check out his editorial, you'll get a heaping spoonful of Obama contempt.  Emanuel argues that the administration is essentially stealing credit for a situation that they completely bungled by allowing it to go on for some time - almost 5 days.

We're waiting to hear David Axe's assessment.  David (over at warisboring.com and WIRED) is an independent freelance journalist who has spent time tracking Somali pirates.  He's also a lot less inclined to let his possible partisan views taint his evaluation of situations.  At the time of this writing, David has not posted anything; but we understand he's travelling in Afghanistan, and we continue to pray for his safety...and for his ability to access the Internet.

Emanuel was in the military and would seemingly have a good grasp of military tactics.  Based on that background he asserts that the administration showed its inexperience and indecisiveness in this latest foreign policy flare-up.  "Inexperience" and "Indecisiveness" are the running memes/narratives on the right these days...that along with referring to Obama as "President Pantywaist."

But looking at the basic facts, wasn't patience possibly a virtue (He who is prudent and lies in wait for an enemy who is not, will be victorious. - Sun Tzu, The Art of War. c.400-320 b.c.)?  When the Indian Navy (pictured above in the AP photo) took out a Thai ship that was being used by the pirates as a mother ship, Thai hostages were killed.  When French commandos stormed a ship over the past few days, a hostage was killed.  In the case of Captain Phillips, he was in an enclosed lifeboat being towed by a US destroyer.  Waiting the pirates out would seem the best way to get an optimal ending.  A rush to action may have been emotionally satisfying, but could have led to a similar tragic outcome.  In addition, the Indian Navies isolated aggressiveness during the last quarter of 2008 did not deter pirate activity.  More coordinated work from a variety of navies is likely necessary.  This assessment is based on the actions that can be correlated with reduced pirate activity around Indonesia.  It would have only been fair to explore that perspective.

It's fair to assert that the administration may have been latching onto something they had little to do with except to give the folks on the ground (both the Navy and the FBI) the space to operate freely with explicit direction to take drastic action when deemed appropriate.  But to be fair, the White House has not held even a meaningful press conference to "take advantage" of the events.   As one Skewz.com commentator mentioned, there was no "Mission Accomplished" banner.  

Deconstructing a situation in a meaningful way would at least involve looking at the advantages and disadvantages of various possible decisions.  The commenting class is focused on persuading versus informing.  That persuasion too often relies primarily on emotional appeals versus intellectual ones.  

AP Picture Post.

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A Timely Repost: Talking to David Axe About The Somali Pirates

We did this podcast a little while back (earlier this year). It's pretty damn timely. We're happy as can be that Captain Richard Phillips of the Maersk Alabama is now a free man!

David Axe, who has a great blog over at warisboring.com, went on another brave endeavor to track Somali pirates in the waters off Somalia and Kenya. You can link to listen to the podcast here:

If you need the direct URL, use:

http://www.skewz.com/podcast/podcast_item?podcastNum=53

The show notes are reposted below:

Skewz Podcast #44: On the Trail of Somali Pirates with David Axe

We had yet another amazing conversation with David Axe whose blog at warisboring.com recounts his experiences in some of the most dangerous places in the world. David's mantra is that he "goes to war so you don't have to." Thank God he's brave enough to do it because the insights David regularly imparts are so much deeper than you hear in the press which often has only a cursory/transitory interest in many of these subjects.

David spoke to us extensively about how Somali pirates have evolved to become a credible threat to high seas commerce off the Horn of Africa. These pirates are especially harmful to the economic interests of Kenya which is one of the more progressive states in the region. Trade with Kenya has been significantly impacted as has trade with many other countries in the region.

David highlighted the fact that the Bush administration unwittingly assisted in the expansion of pirate activity several years ago. The Islamic courts emerged in Somalia with some popular support to provide security and stability in the war torn country. Their appeal was similar to the Taliban's more than a decade ago. Once in power, the Bush administration assumed the Islamic courts had a substantial relationship with Al Qaeda. It was later determined that this was not the case. But before that intelligence could sink in, the Bush administration supported landlocked Ethiopia's take over of Somalia. Ethiopia got access to ports, and Washington removed a perceived problem.

However, the law of unintended consequences ruled he day. The Islamic courts fell, the Ethiopians got locked into an Iraq style occupation which led them to finally retreat, and the one check on the pirates (the courts) disappeared. The Islamic courts were not fans of the pirates and worked to dismantle the pirate network. With that adversary gone, the pirates flourished.

We get a lot of sporadic stories of high seas chases and scenes of high seas naval face offs from the traditional press, but we don't get a lot of context. That's what David provides so well.

You can check out David's blog at: warisboring.com
Your host: Vipul Vyas
Comments can be sent by email to blog@skewz.com
Or you can drop us a voicemail at 646-495-9203 extension 62526. If you don't have time to download the podcast and would like to listen to it over the phone (and if you have an unlimited plan or plenty of minutes to burn) you can dial 712-318-9952 (not a toll-free number) to listen in. And remember...to get all sides of the story, visit SKEWZ.com Follow us on Twitter.com/SKEWZ to get live updates of show releases Theme music by 2012

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Charles Schwab Gets It Right With His Simple Insights

Charles Schwab, the founder and CEO of the Charles Schwab Corporation (NYSE: SCH), provided some simple yet insightful commentary on CNBC earlier this week.  When asked about what the financial services industry needs to do to restore trust among investors and depositors, Schwab put forward the simple yet obvious understanding about  what banking is ultimately all about.  Schwab noted that the money that banks play with is others people's money.  It's that simple.  Wall Street, with that understanding, took the low road of the options available.  Knowing that the money you are playing with is someone else's can either lead you to respect it and treat it better than your own OR abuse it and treat it as if it had little value because it wasn't your own.  

Incidentally, Schwab is one of the biggest individual contributors to the GOP. 

You can see this in the way Citibank's returns behaved relative to Wells Fargo (a more conservatively managed bank).  Citibank's net income shows up in blue and Wells' shows up in red.  With high risk (with other people's money at the craps table) comes high reward in the good years when you look like a genius relative to your competitors.  Conversely, that same high risk typically involves massive downside when things don't go so well.   

It was this "approach to life" that led many banks into perilous waters.  But, unfortunately, the banks should not be perceived as some set of exogenous entities to be despised from afar.  Remember, the money they were playing with was ultimated OUR money (along with a lot of Chinese, Middle Eastern, and European money - and all of these folks are now pretty pissed off).  The old saying (with updated numbers) is that if you owe the bank $500,000, then you're in trouble.  If you owe the bank $500 billion, then the bank's in trouble.  Well, guess what, both situations exist in our current crisis.   

People often forget that banking is a fractional reserve system.  Folks put in deposits and earn an interest rate.  The bank lends that same money out at a higher rate and keeps the difference.  Your neighbors' cars, student loans, credit cards, and home are where your money is tied up.  That's right, it's ultimately YOUR money that went from your checking and savings account into all those credit lines and notes.  Some of those extensions of credit were smart but too many weren't.  The old saying of the bank only lends money to people who don't need it clearly broke down when your coworker started to finance a fancy lunch on his or her credit card.   Banking can be descibed as:

Most people "know" this, but it's easy to forget.  Banks take on deposits, raise capital, etc. and loan that money out.  They keep a portion of that cash on hand for operating purposes.  Most commecial banks are required to keep a certain amount of cash on hand by virtue of regulatory requirements.  But, you can see how it might be tempting to loan that last bit of money out (under the safe) if you think you can make some more money off of it and juice up your profits (net income). The investment banks did just this given they were not regulated like the retail banks.  But, as a result of the repeal of the Glass-Steagal act in 1999 commecial/retail banks and investment banks became universal banks and bank holding companies.  In many cases, they became one and the same.  Therefore, a lot of the risk the investment banking side of the house started to take on was also being assumed by the consumer facing commercial/retail side of the operation of the combined entity.

Now, the banks balance sheet is just a function of the money it has on hand (under the safe again) and the value of the credit lines it has outstanding (in the form of credit card debt and shitty McMansions in Plano, TX).  The banks liabilities include obligations to bond holders and, of course, to depositors.  If what they (the banks) owe their debtors which include us depositors is greater than the value of the credit lines (homes and likelihood of payment of credit card debt) then the bank is screwed.  This concept sums up the mark-to-market debate.  In the wake of the Enron debacle, banks have to value these assets down to the value of the last sale price seen by a similar asset in the market.  In this market, all those prices are very depressed.  If these asset values fall below a certain level, the bank has to go out and raise money in a tough market to meet their reserve requirements (the cash on hand under the safe).  In this market, the cost of raising money  is pretty expensive with investors wanting interest rates in the 11% range...which is also why banks are putting the screws on credit card holders.  They are passing on the pain.  In the mark-to-market debate, banks simply argue that the prices of homes (more precisely, what other investors thing these bundle of loans is worth) does not reflect the true value of the mortgage.  Sure, home prices are depressed, but people are still by and large paying their mortages so the loan is still more valuable than the assessed value of the underlying home.  In other words, mortgage holders will likely pay off their loans even if their houses aren't worth what those loans originally bought.  This may nor may not be a fair assumption, but that's the debate.  

If the mortages turn out to be no good, then the banks are screwed.  But if the banks are screwed, to some extent so are we.  Yes, there is FDIC insurance; but the insurance company can go bust as well.  Only a few weeks back we heard that the FDIC was running extremely low on cash.  The FDIC is funded by charging member banks a fee for insurance.  The FDIC typically has about $50 Billion on hand in normal times.  With nearly 50 bank failures over the past several months, that fund has been depleted.  Now, the congress will likely recapitalize that; but in the end we're just printing money again to pay ourselves back to keep the average depositor (who has $3,000 in a savings account) whole.  If you look at the size of the banks involved, you'll see that if the big money-center banks go down the average depositor exposure to the government is nearly $2 trillion.

You can see this if you look at some of the largest banks and the size of their deposits:

It's a thorny problem.  Bailing out the banks to some extent involves bailing out the average depositor.  Banks are ultimately money middle men.  Their biggest asset is confidence in the institution.  They have been called Trusts in the past for a reason.  Runs on the bank happen when people don't think the "bank is good for it."  But, referring back to the reminder Charles Schwab gave us that we should take extreme care when dealing with other people's money; we should also take notice of the other side of the equation.  Our neighbor's may also not be good for it.  They, afterall, borrowed other people's money.  The cavalier nature with which people enter bankruptcy in this age is in stark contrast to stories of how people spent 14 years paying off old medical bills even though the doctor had forgiven it during the Great Depression  It was a matter of pride and an understanding that owing is not a good feeling and that you should treat other people's money more carefully than your own.  

Hank Paulson and now Tim Geithner have struggled between moral hazard and systemic risk. Systemic is the operative word.  When we collectively are cavalier with other people's money, bad things happen to us all. 

 

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Bill Hemmer isn't aging backwards.  Apparently, he's just aging and suffering from a common ailment of getting long in the tooth - memory loss.  

 

This morning Hemmer was "discussing" the issue of Vice President Joe Biden slamming the Bush administration in recent days.  To create "heat" about the issue in the normal cable news right versus left format he had Juan Williams and Tucker Carlson on.  Juan Williams remarked that looking back to past administration to explain current woes was nothing new.  Williams went on to specifically cite the Bush administration's focus on the Clinton administration's approach to terrorism as a partial explanation for the 9/11 attacks.

 

At that point the degree of complete shock that flashed over Hemmer's face was itself incredulous.  Hemmer went on to say, "I don't ever remember anything like that."  Hemmer was at CNN from 2000 to just recently when he joined Fox News.  Unless he was just a news model and didn't ever digest or consume anything he was peddling, we're wondering how he missed...

 

1. GOP congressional leaders blaming 9/11 on Clinton policies in the run up to the 2004 elections

2.  The issue still being hotly debated as to who was more to blame for 9/11 5 years later

 

But even in the earliest days of the Bush administration, the White House was blaming the preceding Clinton administration for the country's economic woes as the dot-com bust was blossoming.  

 

Blaming the preceding administration for current woes is nothing new.  Why the media doesn't just say that is what is striking.  Hemmer's display of complete shock should only hurt his credibility.  Either he has a serious case of amnesia and is not qualified by virtue of a medial condition to play the role of news anchor that he does OR he's completely biased and throwing the game as a less than impartial ref and should also not be playing the role of news anchor.  Either way, just as Hemmer's jaw seemed to drop at the notion that one administration could blame another; our jaws dropped at either his naivete or his poor acting...we're still trying to sort out which it was.

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CNBC Now Has Expertise in High Seas Piracy

Michelle Caruso-Cabrera is working hard to reaffirm CNBC's no-nothing bluster bona fides.  Within the last hour (11am PST) , Michelle (high seas piracy expert that she is) dressed down a shipping industry representative for paying off Somali pirates in exchange for their crews.  

In her bio she asserts that she is an advocate for free markets and her biggest thrill was interviewing Milton Friedman.  She's advised to stick to those pursuits.   CNBC has established that it has very little unique expertise when it comes to matters financial or economic, and we're sure it has even little to none when it comes to foreign policy.  That, however, doesn't stop these blow hards from commenting with impressive arrogance on topics they are only sporadically familiar with such as high seas piracy.  

Caruso-Cabrera asserted (along with her cohosts) that piracy was a simple problelm of companies paying off ransoms and that if they took a hard stand, this would disappear.  In addition, she asserted (strongly we might add) that the problem should be treated as a terrorist threat.  Both of these assertions are laughable.  First, the high seas pirates get much of their enrichment through acquisition of the ship and cargo.  Second, stronger reaction versus ransom payments will likely lead to more violent actions by the Somali pirates which will start to behave more like their Asian kin who kill all crew members immediately to avoid leaving witnesses.  Third, treating priacy as terrorism only cheapens efforts agaisnt terrorism.  Piracy is a commercial enterprise similar to the mob.  There are no ideological underpinnings.  Fourth, patrolling these seas is nearly impossible given the vastness of the area.  Michelle and her cohosts suggested hiring their favorite firm Blackwater.  Such measures are hardly cost effective when the shipping industry is already beaten down by a down turn in global trade.  Navies, after all, have as a core part of their missing keeping sea lanes open for trade...or have we forgotten that.  Private policing in a context of public policing usually suggests a failure of the public endeavor.  The real answer involves dealing with the problem on the shore and not at sea.  Enhancing stability in Somalia by encouraging the reemergence of the Islamic Courts and the full withdrawal of Ethiopian troops is at least a discussion worth having.

In all this dicussion, no mention was made regarding the genesis of Horn of Africa piracy in Somalia.  No mention was made about how piracy was on the wane during the Islamic Courts rule in Somalia.  No mention was made about how the Bush administration inadvertantly gave a boost to piracy by taking out the Islamic Courts with a US backed invasion of Somalia by Ethiopia.  No mention was made with regard to current coordinated efforts around prosectution between various international navies and the coastal countries involved.  None of these relevant facts are mentioned because they are NOT KNOWN by these hosts.  But again, the shocking element to the discussion is that these CNBC hosts assert their convictions with such certainty in the face of paucity of experience and information.

If they can make confident, yet completely uninformed statements about subjects they have very knowledge of, imagine how assertive they will be about subjects where they may even have modest information.  It's no wonder that CNBC was unable to navigate its viewership away from the iceberg of this current economic crisis.   Ideology clearly shapes reporting at CNBC.  If you want to score points for your team, watch CNBC for a self-affirming high.  If you want real actionable information, we'd suggest you look somewhere else.

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A couple of months back, I spoke at length with David Axe who is a freelance reporter who has a blog at both WIRED and his own at warisboring.com.  David has huge balls and seeks out the world's most dangerous locations and reports back from there.  I believe he might be travelling through Afghanistan right now.

During the latter half of last year he decided to join a Kenyan ship and explore the world of Somali pirates.  I had a lengthy conversation with him which you can check out here. 

David described how the Somali pirates have evolved to become a cedible threat to high seas commercse off the Horn of Africa.  The economy collapsed in Somalia along with social order.  Agricultural and subsistence economies also collapsed as social order disappeared in many parts of the country.  Young men went from agrarian and fishing pursuits to piracy.  Many pirates early on were fighting for territorial fishing rights with each other as compeitition increased and reliance on the sea for food grew.  These skills evolved slowly over the past decade to  include complex operational capabilities involving mother ships and skiffs.  

These pirates have become particularly harmful to the emerging economies of the East African coast such as Kenya which has now been hurt by both the pirates and the overal global financial collapse.  Trade with Kenya has been significantly impacted as has trade with many other countries in the region at precisely the wrong time.   The Kenyans don't have a blue water Navy and don't have the reach to keep the sea lanes open and operating safely.  East Africa relies on a variety of navies that have a vested interest in the region which include the Indian, Chinese, European, and US navies.

In contrast to their more ruthless Indonesian straits pirate cousins, the Somali pirates do not typically kill the crews of the ships they hijack.  Instead, they find that it's more profitable to ransom these folks off, and many countries in the Gulf are willing to pay to avoid trouble.  In addition, there aren't many strong governments that prosecute the pirates which is in stark contrast to Chinese enforcement and dispensation of death penalties for pirates who are caught.  For that reason, the Asian pirates take the operating philosophy of "dead men don't talk."  As enforcement off the Horn of Africa increases, the hostage taking practice may morph into something more violent.

In striking similarity to the Taliban in Afghanistan; most of the pirates involved are young men who get a sort of rock star reputation by being involed in the pirate trade.  They also get access to all the fun things in life such as women and booze which in turn attracts even more underemployed Somali youth to piracy.  An amusing anecdote involves Somali pirates who had just received a multi-million dollar cash rasom returning to shore.  In their rush to celebrate, they began drinking and cruising too fast and capasized...lossing most all of the money and some their lives.  Ah, the folly of youth.

Ironically, the further rise of piracy off the Horn of Africa could have been avoided.  In the cauldron of Somali instability, an Islamic Judicial Council was emerging that was particularly hard on pirates during the early to mid part of this decade.  This early stage government was rising amid the chaos in a very similar fashion to the way the Taliban did in the chaotic context of post-Soviet Afghanistan.  The Bush administration did not want to see this happen.  Looking through fairly myopic lenses, they assumed this group would take the same path as the Taliban though there were many notable differences.  The Islanic Judicial Council was clamping down on pirates effectively as it had declared piracy un-Islamic.  But because they looked too similar to the Taliban, the Bush administration encouraged Ethiopia to invade Somalia and take out the Council.  Ethiopia had a misadventure in Somalia similar to the US experience in Iraq.  Ethiopia was seeking a warm water port after Djibouti had broken away from the country taking away access to the sea.  As Ethiopia started to lose control, lawlessness returned and so did piracy...and it began to rapidly evolved to take the form we see today.

We get a lot of sporadic stories of high seas chases and scense of high seas naval face offs from the traditional press, but we don't get a lot of context.  That's why I'm glad that folks like David are around.

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