When you Find yourself in a Hole, Keep Digging until you Pop your Head through the Floor of the People's Bank of Beijing

Full disclosure: Dwight, this was too good to leave on your comments page.

In discussing the Iraq war with Dwight from Logic and Politics, I agreed with his assertion that if we're not wanted in Iraq, we should leave them to their mess. Frankly, I said, it never made any sense, other than the cronyistic nature of the no-bid contracts that were going to Blackwater, Halliburton and the like; it was Bush and Cheney's own little Keynesian economics project, which kept the economy from collapsing until . . . well, until it collapsed in spite all the government investment in the private sector.

I don't suppose it had anything to do with the fact that many of the corporations that have profited from the war in Iraq have been outsourcing a sizable portion of their production overseas--a strategy which takes government dollars from our economy and filters it through corporate coffers into reduced payrolls in developing nations, so payroll turnover is spent there, instead of here. Frankly, the the only way they could keep it going here was to convince the Wal-Mart employee that s/he could afford (and deserved) a split-level, five bedroom/three bath house with a Hummer, an Escalade and a pair of snowmobiles/motorcycles in their three car garage.

This is a market correction: in what universe is a cramped, two bedroom, one bath in East LA worth $600,000? A simple rule of macroeconomics is that where supply curves meet demand curves is called "equilibrium." When a market is out of eqilibrium, as it was during every boom we've experienced from George Washington forward, an "invisible hand" (AKA "market forces") has a way of pushing things back into equilibrium. It's not magic, it's just common sense: who's going to spend $600,000, plus interest, for the privelege of fixing their own pipes and paying dues to a home owner's organization, when it costs less to rent, with none of the headaches? So yes, those who appear to be downplaying the economic crises, are correct, this is unequivocally a market correction. The problem with the kind of market correction that we're going through is, how do you stimulate lending when the prime rate is already hovering around zero and most of the potential borrowers are leveraged to the point that they couldn't borrow their best friend's lawnmower? The Keynesian solution, employed during the Great Depression, if used to escape the current economic crisis, will require a level of spending that will make budget deficits under Presidents Reagan, Bush and Bush look like what they never even tried to deliver on: fiscal conservatism.

And capital? What capital? It's all borrowed money--every dime. Remember the good old days when savings accounts would yield 4.1% per annum? It was 3-7 per cent less than inflation, but at least capital was something other than a promissory note. People had savings accounts because they could earn money on them and banks had capital because they didn't expect savings account holders to give their money away.

The solution isn't hard to grasp, but it'll be painful for years to come, because inflation--as bad as it's been--will skyrocket. In order to attract savers, the fed will have to raise the prime rate so that interest rates will pay a reasonable return on savings. All of this will take time and it will cost more just to live than ever before. But when you're in a hole, you have to, at some point, stop digging, even when you're halfway to China and you forgot to bring your trusty ladder. The one thing we have going for us is how many of us wound up in the hole together. It is that "hole unity" shared by all Chrysler employees that made it possible for the company to survive: according to the Los Angles Times, the Union is buying controlling interest of the automaker--not something GM employees could ever dream of doing, even if 21,000 of them weren't losing their jobs.

There appear to be some advantages in being small enough to fail, after all.

Update: so much for an employee-owned Chrysler. According to the Guardian (UK), some hedge fund speculators, such as Oppenheimer Funds, Perella Weinberger Partners and Stairway Capital, whose greed helped to sink the global economy, were holding out for a taxpayer bailout, claiming that taxpayers and unions "were getting preferential treatment." Among banks willing to write off up to 2/3 of the automaker's debts were JP Morgan, Citigroup and, my favorite punching bag of the financial bailout, Goldman Sachs. While Chrysler may survive bankruptcy, their can be no doubt that the hold-outs once again gambled with other people's money and lost--again: by forcing Chrysler into bankruptcy, the holdouts may well be forced to take a smaller settlement than the one they turned down.

The Handshake the Shook Fox News

It was an E.D. Hill moment ("A fist bump? A pound? A terrorist fist jab? The gesture everyone seems to interpret differently. We'll show you some interesting body communication and find out what it really says."): yet another knee-jerk reaction by conservative media.

On the cover of Sunday's Los Angeles Times, President Obama was photographed shaking the hand of (gulp) Hugo CHAVEZ!! While this didn't exactly give me the warm and fuzzies for the embattled Democratic President, I didn't see the harm in it either. Yes, there's been a lot of criticism of the United States from Chavez in recent years, much of which I dismissed, considering the source. Of course, Fox News weighed in, making sure to tell their loyal followers what to think:

When President Obama met Venezuelan President Hugo Chavez in Trinidad on Friday, he shook hands with a man who only four years ago called the United States the most "murderous empire that has existed in the history of the world." . . . "What he's going to say is that what he has been doing in Venezuela now has the seal of approval of the United States," said Otto Reich, who was ambassador to Venezuela under President Reagan. "He sees it as a green light to continue dismantling democracy in Venezuela."

Those few readers following this blog will note that I have written a piece or two myself that weren't exactly singing the praises of Obama. In fact, I believe I have implied that he (like all Democrats and Republicans) was a bought-off-sonofabitch. Not a socialist or a commy, but a pro-business President, willing to socialize the costs of propping up large American corporations (too big to fail) while privatizing the gains. It's just as wrong now that Barack Obama is doing it as it was when Ronald Reagan did it during his first term. No, dittoheads, I didn't stutter: your bloated, drug-addled leader's fantasy lover, whom he verbally felates daily with such abandon, raised ZERO eyebrows throughout the eighties when subsidized multinational corporations, enabling the corporate raids that would dismantle the industries that had been key to decades of American prosperity. The kleptocracy has been continued through Bush, Clinton and Bush, on up to the present day, in which Timmy Geithner continues funneling Goldman Sachs' now much anticipated profit margin through AIG, as well as direct bailout subsidies to Goldman Sachs itself.

In other words, President Obama is no worse--even from a tax and spend perspective--than any other President we've had since 1981. But the conservative media, needing to prove its omnipotence, having failed to turn out the vast numbers of protesters on tax day, seized on the President's handshake with Venezuelan leader Hugo Chavez. As hastily planned as the teabagging venture was, I saw it as a brilliant move by Fox News and other conservative media. While I wouldn't have personally had anything to do with it, being as the "astroturf" (fake grass-roots) movement was sponsored and driven by the media, I thought that the mockery from leftists like Paul Krugman and Rachel Maddow failed to recognize the value of such protests, in terms, not only of galvanizing Americans who see themselves as conservatives, but that it might be attractive to independents, like myself, looking for a place to channel their rage over the bailouts.

But Fox News, having seized on a great opportunity to exploit populist rage, once again showed its tone-deafness. This was apparent when Fox & Friends brought Newt Gingrich on for a little of his sophistry:

"Frankly, this does look a lot like Jimmy Carter. Carter tried weakness, and the world got tougher and tougher, because the predators, the aggressors, the anti-Americans, the dictators – when they sense weakness, they all start pushing ahead. . . . I think it sends a terrible signal to all of Latin America, and a terrible signal about how the new administration regards dictators."

Ah, the favorite Republican straw man, Jimmy Carter. I credit the former Speaker of the House with a good deal more intelligence than he exhibits on behalf of the Fox News viewer. To put it another way, Gingrich's analysis is deliberately obtuse and he knows it. Perhaps historians have different standards for showing cause and effect than other social scientists, particularly when your version of history relies so heavily on the stereotype of Democrats being "weak." To claim the Iran hostage crisis was the result of a weak Presidency, fails every litmus test of cause and effect. It ignores the fact, for example, that the Iranian Revolution was the result of many usurpations by the Shaw against his people, on behalf of the United States; the Iranian Revolution can no more be blamed on Carter than the Chinese Revolution can be blamed on Truman, or the Cuban Revolution can be blamed on Eisenhower, or that the Hatian ousting of the Duvalierists was Reagan's fault. Furthermore, while it scores some KISS (keep it simple, stupid) points, it opens the GOP up to the question of why George W. Bush made such a point of going to war to catch Osama bin Laden, who remains at large to this day. And as for our relationship with dictators: does the former Speaker of the House mean military dictators, like Augusto Pinochet and Pervez Musharraf, or just dictators who act in only our interests, while lining their pockets at the same time, like Ferdinand Marcos1, the Shaw of Iran, "Poppa Doc" Duvalier & Son and Fulgencio Batista (don't even get me started on Nicaragua)?

They freaked out over a First Lady with biceps, for crying out loud. The problem with Fox's histrionics is relevance: they're so busy nit-picking about the little things and parroting the echoes of the late Ronald Reagan as per Rush Limbaugh, that they miss the bigger picture. Fox News became relevant by riding a wave of popular dissent, not for dissent's sake, but because the people watching already knew it was necessary. It's hard to imagine how a handshake between Ronald Reagan and Mikhail Gorbachev could have "legitimized" communism, or shown weakness in a time when many of us went to bed each night wondering if we might awaken to a nuclear winter--or worse, not awaken at all.

I won't bother defending President Obama, as he seems quite capable of doing it for himself:

"It's unlikely that as a consequence of me shaking hands or having a polite conversation with Mr. Chavez that we are endangering the strategic interests of the United States. . . . Even within this imaginative crowd, I think you would be hard-pressed to paint a scenario in which U.S. interests would be damaged as a consequence of us having a more constructive relationship with Venezuela. . . .We had this debate throughout the campaign, and the whole notion was, is that somehow if we showed courtesy or opened up dialogue with governments that had previously been hostile to us, that that somehow would be a sign of weakness – the American People didn't buy it. And there's a good reason the American People didn't buy it — because it doesn't make sense."

So it boils down to this: as long as Barack Obama can so plainly state his point, the conservative media will need a lot more than Newt Gingrich and Jimmy Carter to justify their latest temper tantrum.

1. Having elections only make you a democracy if the ballot boxes aren't stuffed.

In Case you Missed it, the Rules have Changed

I begin at 7:27 AM Pacific Standard Time. The Dow Jones Industrial Average is up nearly 6/10% from yesterday's close. Ye-haw. Can't wait for that quarterly report on my 401K to see how much retirement I don't have anymore. "Comrade" Paulson defended this week's continuous losses, with nearly 1,000 additional points shaved from the Dow's average, arguing that it's, "too early to look for encouraging signs." He might consider having the new temporary head of his bailout, a 35-year old from--you guessed it--Goldman Sachs, to look into getting some of that $85 billion back from AIG. Oh wait, the Fed's lending them another $38 billion.

It's 8:15 PST and the Dow is down over half a percent. . . .

I'm halfway through my lunch and the Dow has slid almost 3% since opening today. The Senate sweetened up the bailout (AKA "rescue") bill with tax cuts to get the House Republicans on board. How do they think we're going to pay for all of this? The "debt clock" near Times Square in New York had the dollar sign removed from it as another digit was added to our National debt--now over $10 trillion. The debt clock was first installed in 1987 when the debt was still just $2.7 trillion and when Reagan was still in office. Ah, the good old days of "don't tax and spend anyway" Republicanism.

In an oft quoted statement by Michael Hudson, Adam Smith said that no government had ever repaid its debts, and the same can be said of the private sector." For many, the free market system is more than just an economic strategy: it is the American ideal. The idea of the public seizing ownership of these banks which managed to fail--in spite of the hallowed doctrine of Milton Friedman, as espoused by Reagan, Bush and Bush--has the free market purists going insane right now. Most of them would like to let the market select which companies survive and which ones die out. The only problem is that, through a protracted war of attrition by the deregulationists, they managed to get what they wanted. And so, anti-trust violations went uninvestigated. Banks grew in size and dwindled in number. Suddenly we were faced with an ultimatum: rescue the banks--the ones that were allegedly too big to fail--or face a catastrophic economic collapse, the likes of which have not been seen for almost 80 years.

My lunchbreak is over. The market has fallen by nearly seven percent since this morning. My folks lived through the Great Depression. From the way the stock market keeps falling, it looks their kids get to live through one, too. I sure am glad we managed to save the banks though. . . .

It's 5:17 PM PST and I just finished working. The market dropped another 678.91 points (7.3%) today, closing at 8,579.19. An economist who was a clerk/pickup driver for the rental car agency told me that the market doesn't fall usually below the peak of the previous boom. I'm not sure, but I think the rules may have changed. The Dow last peaked at 11,723 in January of 2000 just before the Dot-Com bubble burst. Maybe I misunderstood him and he meant that it never dropped below the previous trough; if that's the case, we've still got another 344 points to go.

I'm optimistic. Those 344 points might just last me through lunch tomorrow.