Neville Chamberlain Would be Proud of Barack Obama

Update 3/19/2011 - Today Obama launched Operation Odyssey Dawn with international support and a U.N. Resolution -- this is excellent news and time will tell if the operation can be successful in shielding Libyan citizens and leading to the ouster of Moammar Gadhafi and his clan.

Those who know their WWII history know that Neville Chamberlain's name is synonymous with the notions of cowardice and appeasement by a national leader. It saddens me to be thinking of Neville Chamberlain when I ponder the Obama Administration's inexplicable lack of a coherent, forceful response to Moammar Gadhafi's slaughter of unarmed protesters, but that has happened.

It is moments like these when the mettle of national leaders is truly tested, when the strength of their belief in core values like freedom and democracy are put to the test. When revolt in North Africa spread to Libya, it became clear that the Obama Administration was completely unprepared.

A pair of very coherent opinion pieces by Slate contributor Christopher Hitchens (here and here) led me to formulate my opinions. Rather than reiterate them here, I am going to cut-and-paste my comments below:

"If Ronald Reagan were still President he would have, at the very least, blocked enough of Gaddafi's offensive capabilities to enable the Libyan Rebels to secure their gains in the eastern half of the country, and would have provided them support so that they might organize and eventually capture the western half of Libya.

Any red-blooded, freedom-loving American understands that it is our moral obligation to undermine tyrants and to support democratic revolutions whenever possible.

All of this moral hand-wringing is shameful and we should be embarrassed by our failure to show leadership. We have squandered a beautiful opportunity to free a country from a tyranny and terror."

"The Libyans want the same thing their North African brothers want: freedom and democracy. Why doubt that? In any event, freedom from Moammar Gaddafi is enough to ask for."


[The following is in response to a poster who suggested that we have no right to get involved in Libya]

"The fact of the matter is that we (the U.S. Government) DO get involved in the internal affairs of sovereign nations routinely on the basis that it is perceived to be in our national interest to do so.

The dilemma that the Obama Administration is facing is that they are not convinced that the crisis in Libya passes muster when judged by that rubric.

My argument is that it DOES pass muster, and therefore justifies limited engagement.

The point that the Obama Administration is missing is that Islamist extremism finds fertile ground in countries with a desperate population. Libyans, after 40 years of tyranny under Gaddafi, are a desperate population. They are now seeking to overthrow Gaddafi and form a new government with greater individual freedoms, and are actively looking to the West for guidance and support. The Western response has been, effectively, to leave these brave men and women hanging out to dry, which is likely to have the effect of radicalizing them against the West faster than anything else I can imagine. And, don't think that the rest of the Arab Street isn't rooting for the Libyan Rebels and growing increasingly bitter over the U.S. inaction.

From their perspective, they see the U.S. as a nation that is more than happy to occupy a Muslim country if it believes there is extremism afoot, but can't lift a finger when a Muslim people tries to liberate itself from tyranny and subjugation because they aren't considered a threat to us.

If the Muslim world ever imagined that we are in Iraq or Afghanistan to help the Iraqis or the Afghans, I think their delusion is over. And it is U.S. interests abroad that are going to suffer as a result.

So, DO WE STILL WANT TO DO NOTHING??"

[The following is a response to a poster who wrung his hands over our failure to come up with a coherent response to the Libyan crisis]

"Glenn, great comment. I, too, feel ashamed and embarrassed at our Administration's apparent moral turpitude. Our oil dollars are enslaving Arabs by supporting the tyrants who are keeping the spigots open and their people in chains.

A few of those slaves momentarily broke free of their chains and we did NOTHING TO HELP THEM.

Shame on us, shame on Europe and shame on those who coddle tyrants.

CIVIL WAR MY A$$ - THE LIBYAN PEOPLE ARE FIGHTING TO BE FREE FROM DICTATORIAL OPPRESSION."

Meredith Whitney and Nuclear Winter for Us All

Image Courtesy of CNBC

Yikes! Meredith Whitney's report on CNBC is a draconian spin on current events if I ever heard one! Head for the hills!! (Of Utah as Meredith has done...)

In my opinion the only thing to fear at this point is fear itself.

I smell an agenda in between the lines of Meredith's report. She is now a private investment consultant. She doesn't hold positions in stocks, but she advises her clients and profits to some extent by how successful they are, and so she indirectly holds the positions they hold, but doesn't have to report that.

What is she advising them to do? Who is she working for now? These are interesting questions, because her words carry a lot of weight on Wall St. Is she talking down the financials so her clients can take more favorable positions? Is she under contract with the banking industry and lobbying against financial regulation? Either scenario is plausible. A third scenario is that we are headed for a double-dip recession, which will make this period equal to or worse than the Great Depression.

I refuse to believe the third hypothesis. I see Americans staying busy at all costs, even if it means heading back to learn a new skill. I feel that we, as Americans, are universally sympathetic and empathetic to our common plight and are not headed down the self-destructive road of infighting and recrimination.

I believe that we will use recent events, such as the collapse of Lehman Brothers and the Gulf Oil Disaster, to innovate and invigorate our economy in new and exciting directions. I believe that our central bank will ward off deflation by inflating the M1 money supply and will protect the bottom line of the money center banks by keeping the Fed Funds rate as close to zero as possible.

I believe that the European response to the credit crisis (fiscal restraint and budget cuts) spells a nuclear winter for Europe and a disaster for the European banks. And, weakness in Europe spells a slow-down for China, and continued demand for U.S. Treasuries as China fights to keep the renimbi weak.

At the end of the week, all this is good news for the United States and U.S. financial institutions.

I disagree with Meredith about the impact of U.S. Senate banking regulation. The regulations are populist in nature, but they are common-sense and operate at the margins in any event. If a particular state limits interest rates below the market and its residents can't get credit, then the limits will rise or people will move. This is not bad, but good. To charge less for debit card transactions is also common sense. To regulate merchant fees against an oligopolistic servicing market is also common sense.

The road out of this crisis is for Americans to keep their spirits up, keep busy, and keep building things. If we continue to design, innovate and produce we will be just fine.

Just ridding ourselves of our dependence on fossil fuels is the work of a generation, and that work is really just getting under way in earnest. Let's use rallying points like these to launch ourselves into a saner future.

Ethical Conflict?

The U.S. Senate Banking Committee's cross-examination today of Lloyd Blankfein was remarkable in many regards.

The most significant regard, in my opinion, is the apparent naivete or populist anger expressed by the senators, especially Chairman Levin and echoed less forcefully by Senator McCain. The naivete lies in the fundamental misunderstanding of what a business like Goldman Sachs is all about.

First and foremost, Goldman trades for their own account and their own profitability, not the profitability of their clients, is and has always been their main priority and concern.

Secondarily to this objective, Goldman creates and markets a wide variety of investment vehicles, acts as a middleman in corporate mergers and acquisitions, acts as market makers in new issues of stock, and operates a financial advisory division to manage other people's wealth, amongst other functions.

The central tenet of Levin's complaint hinges on his outrage that one division of Goldman would actively sell a security that another division might be placing bets against. I find this to be populist and naive. Not all investments that Goldman sells will go up (Goldman often simultaneously sells securities that represent opposite bets on the same position) and it is the buyer's responsibility to know what they are investing in, and why.

Just like millions of Americans bought homes near the peak in real estate values in this country (over 48% of current home loans are now "underwater"), thinking that home values would continue to rise as they had done in dramatic fashion over the preceding period, many investors actively sought exposure to the U.S. real estate market by way of the mortgage-backed securities that Goldman marketed.

The question here is whether it is morally tenable for Goldman to continue to make a market for securities that they believe are overpriced against the wishes of their clients who still maintain an appetite for these securities. I do not believe that this is an untenable position to be in. While Goldman is smart, they are be no means omniscient or omnipotent. The securities that they continue to market because of market demand, and simultaneously bet against in their own house account, could very well go up and leave Goldman's customers with a profit and Goldman with a loss.

Therefore, while Goldman's behavior on the face of it appears slimy and they appear to have their client's blood on their hands since they made money while others (including some of their clients) lost, the fact is that Goldman Sachs is in business for Goldman shareholders first and foremost, and Goldman cannot maintain an effective trading strategy if they are continuously obligated to disclose the myriad positions they hold in their house account.

This gets back to the free market premise that our government supported when people were making money but has forgotten now that people have been hurt which is LET THE BUYER BEWARE!

Lloyd Blankfein Scam Artist?

And, yeah, even Gollum seems surprised.

Well... that seems to be the gist of the SEC allegations against Goldman Sachs and Mr. Blankfein, who led GS during the period in question.

However, I doubt the SEC case is that simple and don't think the SEC can convict.

The problem that the SEC is facing is that GS was not alone in packaging Alt-A with conventional mortgages into mortgage backed securities. Either the entire industry was in collusion, or it occurred to no one that a few bad apples might ruin the bushel.

And that is going to be their primary defense. "Yes, we packaged less qualified mortgages with more conventional mortgages, but at the time the vast majority of mortgages were non-conventional in some way or another, and we were acting in a competitive marketplace where we were compelled to offer a generalized product."

So, yes they knew but, as long as equity values continued to rise, bundling alt-a with conventional loans was a low-risk proposal.

I tend to believe that the SEC is on a fishing expedition with two objectives:

1) Extract a settlement from Goldman Sachs
2) Further distance the Obama Administration from the actors who are held most centrally responsible for the current economic crisis.

And, as far as these two objective are concerned, the SEC may achieve their goals.

I just don't think they have a case.

Why George Soros Hates Lloyd Blankfein

While the Congress and the White House debate the best way to wean the U.S. financial industry from the government teat, George Soros is actively promoting the wholesale castration of the banking industry. Not that many bankers aren't deserving of such treatment. It's just ironic that George Soros would be urging such regulation of the financial markets. In a recent interview with the Financial Times, George Soros went so far as to urge a government cap on executive compensation at financial institutions receiving government aid, so that the risk-takers who are earning the greatest bonuses will be inclined to jump ship and go to work for the hedge funds, such as Soros Fund Management, where George Soros believes their abilities are better suited.

Clearly, I can understand Soros' jealously and frustration. In previous posts I have expressed deep dismay at actions by the Treasury and the Fed, as well as Congress' absurd TARP legislation. Financial institutions who have access to the Fed Window can borrow almost unlimited sums for free, and use them to purchase government bonds at 3%, which is literally giving banks a license to print profits. Hedge funds, like Soros Fund Management, have to raise money the old-fashioned way, by seeking out investors, and must pay over-market returns in a volatile and risky environment. The resentment in the hedge fund world must be tangible.

However, is increased regulation of the banking industry, including unprecedented moves such as regulating executive compensation, the correct response? Absolutely not. Any institution that provides a service that is so central to the function of the Republic that they have been designated as "too big to fail" should be nationalized and the service should be provided by a government agency. If the government is not willing to nationalize the biggest banks, then they should remove support and permit them to sink or swim on their own.

Existing regulations, such as minimum capital requirements and leverage limits on FDIC insured deposits, should be enforced and the legal authority of the FDIC to seize troubled institutions should be bolstered, but the government should not socialize the banking industry through excessive regulation. Doing so would guarantee that credit remains available only to those who least need it, and that innovation and risk-taking are squelched.

As much as we hate watching Lloyd Blankfein and his ilk suck the government dry, it is the government itself that got into this position, and it is the goverment itself that must get out, but not at the expense of free market capitalism and the American Way.

NATURAL SELECTION

The recent discovery of a remarkably well-preserved, mummified baby mammoth reminded me of the gargantuan banks, insurance companies, and auto companies that are slowly dragging the balance sheet of the U.S. Government toward the bottom of the sea.

I am reminded how the mammoths, once the largest land mammals to walk the earth, are no more. There is debate as to what brought about the end of the reign of the woolly mammoth, but one fact is clear: whatever stresses befell this massive animal, the species could not flee or adapt quickly enough and perished in its entirety.

What parallels exist between the extinction of the mammoth and the taxpayer support of Citigroup? For one, Citigroup is a bank that is doomed to failure by its over-burdened corporate structure that permits far too many inefficiencies to creep in at all levels. Secondly, the massive size of Citi, and the sheer weight of its balance sheet, makes it impossible for the company to rapidly adjust to the finanical tsunami by, for example, merging with another bank, or spinning off business units, and thereby effectively getting to higher ground.

Not only is it preferable to let outsized banks like Citigroup collapse under their own weight, it is absolutely necessary in order to preserve the ecological balance for all other banks and financial institutions. While Citi is kept on life support, it continues, like a zombie mammoth, to trample the shoots of smaller, more agile banks that are looking to advance their own business models. The taxpayer funding of these privately-held banks is also setting a precedent of government intervention into private enterprise that will encourage the same kind of consolidation and risk-taking that led to this crisis.

In order to restore balance in the system, the public must begin immediately to extricate itself from the process of nationalization of the financial sector and refuse to re-engage, no matter how scary it gets. At the same time, we must formally establish a hands-off policy with regard to the success or failure of any individual private business enterprise, backed by the force of law if necessary. At the end of the day, the core constitutional obligation of the federal government is to protect us from famine, war and natural disaster. Restoring the central government to its core function, and allowing the free market to heal itself, will preserve the innovation and diversity that is the hallmark of U.S. enterprise.

AMERICAN OLIGARCHS

In the Comment section of today's Financial Times, Martin Wolf wrote about analogies drawn by former IMF Chief Economist Simon Johnson between Russia and the United States. The parallels stem from the outsized political authority wielded by, and public attention paid to, the largest U.S. financial institutions, which he compares to the Russian Oligarchs.

These institutions, deemed "too big to fail", are literally sapping the public dry on the belief that what is good for Wall Street is good for Main Street. And, like the oligarchs in Russia, while these companies and their shareholders represent a tiny percentage of the population of businesses in need of rescue, they are benefiting from almost all the stimulus money.

How could this distinctly undemocratic policy arise in a social democracy such as the United States? In short, because of the corrupting effects of money on the political system. In 2002, the financial sector booked 41% of all corporate profits in America, more than double the long-term average, and a lot of this money flowed to the political parties. By 2008, many politicians had been elected, and many bureaucrats appointed, in no small part as a result of contributions from members of the financial sector.

So, when it started to become apparent that the outsized financial profits had been made on the backs of ridiculously outsized bets that were quickly coming home to roost, the heads of the major banks were able to rally President Bush and his Treasury Secretary, former Goldman CEO Hank Paulson, to sell a terrifying scenario to Congress and the Fed of a financial domino effect in which the major banks and the global credit markets collapse, leading to runs on banks, a deflationary spiral, and general chaos.

Whether this scenario was accurate or not is anybody's guess (I personally do not believe in the "too big to fail" thesis and would not have voted to approve TARP), but trillions of dollars in public money have been spent and it is not clear that bank balance sheets and credit markets are showing any lasting signs of improvement.

The good news is that the ability of the financial sector to wield the same public policy authority is set to wane: relative wages in the financial sector fell from a 1933 peak of over 1.6 (the ratio of financial wages to non-farm private wages) to near parity in 1980. As of last year, the ratio was over 1.7, so if history is a guide we can expect non-financial wages (and political authority) to grow relative to financial wages for many decades to come.

The bad news, of course, is that the U.S. dollar and to the spending ability of the U.S. taxpayer have been dealt a lasting and awful blow.