David Bruce Allen

Women of the World Unite

Life, we all know, is a bazaar; we barter, we exchange. In politics, exchange can be excellent and fair, as when power is passed from one democratically elected government to another in an inaugural ceremony where the victors celebrate and the losers acclaim the just victor. Exchange can be marvellous and exalting, as when men and women freely exchange vows to love, honor and respect. Exchange can be sad and honest, when vows are freely undone and we face sadness alone.

Or exchange can be done Taliban style. The Taliban men exchange women. They are quite smart about how they do it. They have a complex cosmological system they call Shariah that explains all the W's -- who, what, when, where, how and for how much. The only W they don't explain is why. They say God designed the system for our benefit so who the hell are we to so much as ask.

For the most part, male Taliban are tribesmen who, like most human beings, enjoy puffing themselves up over what they own and can exchange. They have pretty much nothing, but they do have women. So they exchange women. It's a one time exchange model, which means the upmost care is required. Fortunately, since God designed the system, there is a wel-defined social system and cultural edifice that spells out the behavior of men and women up until the big day of the exchange and comes with complete instructions on the proper use of the acquired merchandise. It's all great fun for the guys who now will never want for someone they can tell what to do. For the girls, they can be secure knowing that they will never have to take a decision for themselves ever again. For a sociologist, it's a funcionalist's dream; unless you don't like the role you have been given because there is no way out. Funny thing about the arrangement is that the guys almost never complain, but the girls, sometimes the girls get weird ideas...

To be honest, the "developed" world wouldn't give a damn about the Taliban except that Bin Laden hung out with them and now the Taliban now run large parts of Afghanistan and are some 70 miles from Islamabad, the Pakistani capital. The Pakistani Army, nice guys, are not willing to die to stop the Taliban from imposing their version of the happy family. Some of them actually like the idea. 

This has the Obama Administration worried since Pakistani government has nuclear weapons to manage. The rest of the world ought to be worried too, but appparently they don't really believe the Taliban will conquer Islamabad and get the nuclear weapons; or maybe they don't believe the Taliban could read the instructions on how to use them.

For whatever reason, there just aren't enough governments willing to send their boys to die to save the Pakistani girls from the Taliban rules. In any case, they`re just girls. Girls who will become somebody's woman.

Women of the world, you can stop this. Women of the world you can unite and form an all-women armed forces to defeat the Taliban and wipe out Shariah rule. Us men, we cowards, we will fund you. We will write comic books about you. We will convert the Che Guervara t-shirt factories of the world to "Women of the World Unite" t-shirt factories. We will buy millions of coffee mugs with Michelle Obama flexing a bicep. There will be a concert in Central Park by famous women artists, and anonymous male musicians will volunteer to play back up. We will get rich while you die fighting the Taliban, fighting for freedom.

... Women of the world unite!

P.S. Book leave starts tomorrow.

Checking in with Obama; Checking Out

Over the past year, I have been setting out positions that are signficantly different from President Obama's. In this last post before I go on book leave, a brief summary and assessment are in order. Please keep in mind that I am an Obama supporter, delighted to have left behind the worst Administration in the history of the United States. To the issues.

1. I said no to giving money to the banks. I said "maybe" to buying the banks. I said do everything we can to say people's homes. Obama's team made less of mess than Bush's, but we could have done better. For example, they bungled corporate governance and the new board at AIG. Unhappily, a lot of this work is quite technical, and unpredictable. I am going to leave the Obama team to keep muddling through this one. It's an important problem, but far from our worst.

2. No bail out for Detroit. I did say, Yes, however, to funding efforts to create a new car company that builds cars people want and that protects the environment. High-profile firing of car company executives satisfies the mob, but it won't do very much. A big minus for the Obama Administration.

3. Get out of Iraq and Afghanistan. Obama's team, led by Clintonites and Bush holdovers, has gotten us deeper into Afghanistan, languishing in Iraq, and fumbling with prospect of Pakistan falling apart. Obama's strategy is to get or allies on board. Unfortunately, our allies jumped ship ages ago. From the beginning, my proposal was to get out and let the Chinese, the Indians and the Iranians, all of whom really have something to worry about in Asia, deal with the Taliban. Let them take the hit while we watch and monitor. As for Iran, in particular, Ahmadinejad is slowly preparing his own exit. He can not manage the Taliban, drug addiction and economic failure. Iran has educated women and achieved low-birth rates; Iran is far more modern than Ahmadinejad. Appealing to nationalist fervor won't work much longer.

4. Now to the war I'm worried about. The war began in Mexico and has spilled across the border. On the Mexican side, human decency is losing the battle against human and drug trafficking and politics by murder. The hopeful news is that the Mexican President is the good guy. Calderón may be the first real Latin American hero since Ché Guevara. (That comparison should make some people crazy.) Obama should spend whatever it takes and do whatever it takes to support Calderón. It won't be easy. As the war spreads to the U.S. side, Arizona has asked for helped and other states may soon follow. Obama will be pressured to herd up illegal immigrants,throw them out, and forget about the real problem. The U.S. cannot live with a failed state on its southern border. Unhappily, the U.S. has not had a coherent immigration, border or drug policy for a quarter-century. We desperately need them now. I am not sure the Obama Administration has any idea what to do. This is a human tragedy aching to become an international disaster.

5. I asked for a children's bill of rights. It all starts with education and health care for ALL kids. We are failing on both. Obama has a few nice programs, but there is no comprehensive strategy. Every study of the last 20 years starting with the famous 1983 "A Nation at Risk" report has the U.S. near the bottom of the pile in education with few prospects of improving. Local control and funding of educational standards no longer works, particularly as increasingly class-segregated housing patterns condemn the neediest children to the underfunded, crumbling facilities. No patchwork of well-intented programs can substitute for a real national program. On health care, none of the current proposals on the table (none yet seriously under review) will provide the comprehensive community-based health care children need.

If Obama can take care of these five tough problems, he will be my hero. That's not fair; he already is my hero. If Obama can take care of half of this, he will pass from hero to miracle worker.

*    *    *

As I am neither a hero nor a miracle worker, and as I have no influence on Obama Administration policy, there is no reason to be concerned about my taking leave from this blog until September to work on my long-delayed book on corporate social strategy. See you all in the fall.

Best regards,

David 

Barack Obama Meet Clint Eastwood

"Gran Torino" gives us Walt Kowalski, a sanitized version of Clint Eastwood's "Dirty Harry", the vigilante cop who frees the hippie-sogged, sexy streets of San Francisco from vermin (less politely called human scum) leaving the hippies free to do their dirty stuff -- and Harry Callahan free to get down and dirty, too. That's democracy, for you.

"Gran Torino" aims for higher truths than those of the groin and the guts. It's the wrong choice. In "Gran Torino", the Oscarized Clint Eastwood plays to his sensitive (insufferable) "Bridges of Madison County" persona, and we feel ripped off.

Let's face it, we should have never believed the adverts claiming that we were going to get the best of both Clints. We should hav been wary of the 90% of www.rottentomatos.com extolling Mr. Eastwood's development into a cinema auteur demi-god.

One should never forget that apotheosis is just one more step on the evolutionary road to boredom and B.S. But Eastwood is crafty, and like Woody Allen on the downhill, there's always reminders of a more glorious past. Your entire macho would have to be dead not to enjoy as Mr. Eastwood impishly pointing his finger at the enemy as if it were a gun. And then there's the high point of the entire movie, when Eastwood beats up a young bully three score years less than his four score years. There was so much macho macho juice on the screen that I forgot that Kowalski had been spitting up blood like a consumption victim in "Death in Venice".

Eastwood is as smart a filmmaker. He uses all that nifty foreplay to trick us into thinking that Walk Kowalski is going to give us a Hally Callahan catharsis made of pure adolescent male voyeurism ... But no! In the final act, Eastwood makes a last minute appeal for sainthood and he sends Kowalski down in a hail (shitstorm) of bullets. [I should be sorry to have ruined the ending for those who have yet to seen the flick... but I am not.]

This was more than some of my movie cronies could take. A rather mean-spirited, politically incorrect acquaintance of mine (certainly not a friend) insisted that it all makes sense because Harry Callahan is Irish and San Francisco is hot, white, and a paradise for straight males (all those women and so few real men), while Walt Kowalski is Polish and Detroit is cold, black, and a paradise for absolutely nothing except the depression of your choosing, be it psychological or financial.

A literary-minded acquaintance did a hermeneutic riff on this and stated that In our post-American, post-contemporary world in which national identity is dead and cities take on their own social structure and cultural identity sometimes known as neo-tribalism, San Francisco IS LOST IN TRANSLATION without the sex and Detroit IS TRANSFORMERS without the bateries..

This analysis was stupid, but it sounded good it at the time. Which is about the best I can say about "Gran Torino".

 "Gran Torino" is a simple, Frank Capra update about sacrifice and doing the right thing. Like Capra, and the Obama Administration, Eastwood offers his own impossible, "Mr. Smith Goes to Washington" blueprint for re-building America. In the best Hollywood-Washington tradition, "Gran Torino" wears its heart on its sleeve and asks us not us not that a movie make sense, but rather whether a movie can help us save do our duty to save our country.

"Gran Torino" is Clint Eastwood's plan to bail out Detroit. Following his wife's death, Walt Kowalski has nothing better to do than polish his Gran Torino and "bail out" the Hmong immigrant boy, Thao, who lives next store. Poor Thao. Not only does he get bossed around by his smart ass sister, he has no luck with the girls, and, to top it off, Thao is getting harrassed by a Hmong gang led by his bad, faux doppelgänger cousin who has given him an ultimatum: Join us, Momma's boy, or you're dead meat.

You see, the cops can't do anything about the gang because the gang has the neighborhood is terrorized and nobody will testify against them. So when gang forces Thao to try to steal Kowalski's Gran Torino, Thao can't say no. And to make a long story a bit less tedious, Kowalski will end up stepping in to save the "gouks" the "slopes", as he calls them, the same S.O.B.s he sliced and diced in Korea 50 years ago. He does it, we learn, because Thao's family has real family values, the one's Kowalski's own kids and grandchildren have lost.

For 90 odd minutes, Eastwood stacks up the events of America's decline until 80-year old Kowalski is all that is left between Thao getting his ass kicked forever, the end of America, anarchy and the demise of mankind.

It's a tough, convoluted sell. The whole, orchestrated point of "Gran Torino" is to get Walk Kowalski to the moment when he organizes his own death by gangland assassination in front of the entire hood so that there will be so many witnesses, this time, that the police can finally arrest the bad guys.

To make sure we get the point, Eastwood show us Kowalski riddled with bullets, the arrival en masse of the police, several takes of the handcuffed killers getting carted away, and we even hear the voice of authority intone, THIS TIME THERE ARE PEOPLE WHO WILL TESTIFY.

All of which means: for years the gangs have ruled the streets and only human sacrifice can put a stop to the violence and lawlessness. (By the way, just so we don't think Kowalski is a fool, we are led to believe earlier that he may be dying of an incurable disease and thus his act of heroism is more like euthanasia than suicde.)

Now that I have spoiled the plot of the movie for those of you who haven't seen it yet, let's turn to the slippery slope (Kowalski calls the Asians "slopes") of symbolism on which Gran Torino treads.

Setting: Detroit, working class neighborhood, Kowalski, disciplined craftsman who worked all his life in a car factory, now lives in a neighborhood "taken over" by immigrants, good and bad, who will either save the neighborhood or kill it. The "Gran Torino" is a Ford, Kowalski's baby. The Gran Torino, like the cars still built in Detroit, just sits there on the driveway, looking pretty, doing nothing. The Gran Torino is a plot device. The boy tries to steal it to impress his cousin, gets caught, his mother does the traditional thing, putting Thao at the service of Kowalski whom he has harmed, and Kowalski takes on the reformation of the boy, and in so doing, changes himself.

But if Kowalski can save his own soul, that does not mean for a minute that he can save the neighborhood, just as Obama has not chance of saving Detroit.

That's where the symbol of the The Gran Torino comes in. You can polish the damn thing until you are the Karate Kid, but the Gran Torino was always just a gas-guzzling hunk of metal, not even much good for stock car racing. It was third-rate even in its own class -- sometimes called "muscle car" -- because, it was supposed, you needed muscles not a brain to drive one. It was precisely one of the losers that Detroit turned out year after year. The lifetime of the Ford Torino, 1968-1976, dovetails with Vietnam (we got symbols upon symbols upon symbols in this movie), and with the successful incursion of Japanese cars into the U.S. market. It was the beginning of the end for Kowalski, Kowalski's neighborhood and American industry.

Ford phased out the Torino 1976, five years after the first DIrty Harry came out. It was now 1976. The VIetnam War had just ended, and the Hmong, whom the U.S. had recruited from Laos to fight on the losing side, were brutally persecuted and ended up seeking asylum in the U.S. This didn't go so well, at first, either, with entry restricted mostly to men who had fought with General Vang. The passage of the Refugee Act of 1980 permitted Hmong families to reunite. Eventually more than 270,000 emigrated to the United States.

In 1971, when "Dirty Harry" came out, Americans worried mostly about drugs and crime. We were flush, fighting the war in Vietnam was good for the economy. Besides only "expendibles" went to Vietnam -- blacks and poor whites. We didn't say poor blacks, back then, because black meant poor. I saw "Dirty Harry" in a theatre in Syracuse, New York. The audience was mostly Walt Kowalski types, but my age, and they howled every time Dirty Harry mowed down one of the dirty slime that were making our streets unsafe. The critics called the movie sick, fascist, but it was brilliant, honest, deplorable movie-making.

In 1976 the that last Torino came off the assembly line, Gerald Ford was President.and the sexual revolution was now part of popular culture. Now it wasn't just hippies and "Dirty Harry" having a good time. It was everyone. Though there were some rumblings about those Japanese cars taking over the market, no in Detroit was much worried about the car business -- except, apparently, Walt Kowalski. Only Walt knew that that the Gran Torino would sit in his driveway three decades later all dressed up with nowhere to go. That is, until Thao showed up and a needed a car to go out on a date. Only it wasn't that easy. For Thao to get any, Walt would have to get himself killed and leave the Gran Torino to Thao in his will so his stupid niece didn't get her hands on it and ruin it, the same way America had ruined her.

That's the story of "Gran Torino". Eastwood leaves us feeling good that Kowalski died in peace. You walk out the theatre thinking, "There's a real man. Those Hmong ain't so bad. Maybe there is hope for America."

But then you start thinking. There are more bad guys like that Hmong gang and now there's no Kowalski to fight against them. And poor Thao. He got stuck with the Gran Torino, living in a neighborhood where there's no work and no more Kowalskis to die so he can live in peace. No one expect Thao to become the next Kowalski, do they?

Suddenly, you don't feel so good. And starting thinking about Obama. Poor Obama. He's got to save Thao, the Gran Torino, the automobilie industry, Detroit, and the rest of America. And he's got to do without Kowalski. Maybe Clint Eastwood should have killed off the old guy so fast.

I posted a comment

I did it. I promised never to. I just posted a comment on Paul Krugman's column. It is simple and direct, a concession to newspaper readers who probably aren't interested in reading what I have to say and open Krugman's column to read Krugman (or on his blog) -- which is the reason, of course, why I don't post comments on other people's columns, much less a man who walks around with a Nobel Prize taped to his forehead.

And so in order to justify to myself what I have done and to avoid a punishment of 300 hours of community service, I am recycling the commment here in my blog. This will also save you from having to click through to Krugman's column, though of course you may want to know what a Nobel prize-winner had to say himself.

Dear Prof. Krugman,

Your analysis is right, but you don't provide solutions. Here goes.

The first step is to reinstitute the key previsions of Glass-Steagall separating investment banking from commercial and retail banking and to regulate (perhaps prohibit) the securitization of home mortgages.

Only through legal and regulatory restrictions will it be possible to reduce the destructive effects of an overblown financial services sector. Yet while regulatory reform can help fix some of the worst practices of the financial services industry, modifying self-destructive consumer behavior is much more difficult. You correctly cite the damage done by credit card debt. The extraordinarily high interest rates charged by banks on credit card debt is an institutionalized system of taxation on the unsophisticated. This noxious system is maintained by aggressive marketing that legitimizes self-destructive behavior.

What's the solution? The quickest way is to apply interest rate laws (usury laws) already on the books in most states in the United States. These rates are mostly between 5% - 15%; some states use a Federal Reserve rate plus scheme. Unfortunately, banks are permitted to sign private contracts setting higher interest rates.

If we take these measures, we can begin to reduce the size of the financial services industry in the economy, and we might even bring back the days when banks did banking and the real economy grew at reasonable, healthy clip.

No doubt, none of the measures I am suggesting will be taken.

David Bruce Allen

It's a dog's life

With my kids, I been singing a silly little ditty that goes,

O Obama ... now don't you cry for me ... Instead of 20 in the slammer, I got millions from AIG.

"Populist backlash." That's what they are calling it -- all those angry Americans venting and venting, in need of anger control therapy.

The problem has been around for a long time. Clint Eastwood did some venting in Dirty Harry (1971). Then there was Howard Beale in Network (1976). Remember Albert Finney and his huge, tortured face screaming at the cameraI don't want you to protest. I don't want you to riot. I don't want you to write to your Congressman, because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street. All I know is that first, you've got to get mad. You've gotta say, "I'm a human being, goddammit! My life has value!"  So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell,

"I'm as mad as hell, and I'm not going to take this anymore!!"

30 plus years later, Americans are still mad, are lame protesters, and hardly ever get up out their chairs. Since the Vietnam War, one administration after another has flubbed the opportunity to use the great wealth of America to build a better and more just society. It feels awful to say, but the last President with the brains and gumption actually do something was that crafty puller of dogs' ears Lyndon Johnson. Nixon spent all his vulgar energy on foreign policy (the Democratic Party was on the list of foreign enemies), then along came Jimmy Carter who seemed like a nice guy but turned out to be clueness, which brought us Ronald Reagan.  Reagan ushered in three decades dedicated to building the economic pie. The pie got bigger and bigger, and as it did we got 50 million without health insurance, a third-rate education system that consigns the poor to ignorance, the largest prison population in the world, global warming, terrorisim, endless wars ... and a severe recession that melted the pie that paid for the loan that paid for the house that Jack built ... and lived in ... and went bankrupt in ...

No wonder those bitter folk in Pennsylvania cleave to their guns and their religion.

Obama promised to fix everything -- even the recession if we just gave him enough time. He got off to a pretty good start -- bye bye Guantánomo, a little house-cleaning at Justice, an improvised $115 billion education rescue, a Presidential order banning torture, D.O.D. contracting reform, Hillary Clinton sanitizing America's reputation. There's even a national service bill working its way through Congress, and promises of immigration reform. It all sounds good.

And yet the people are mad.

Yesterday, March 23rd, Geithner presented his new improved toxic asset buy back; two ex-Clinton policy wogs were appointed to top posts, Neal S. Wolin to be Mr. Geithner’s deputy Treasury secretary, and Lael Brainard to be under secretary for international affairs. The Dow Jones rebounded to 7,775.

And yet the people are mad.

But the Clinton clan is happy as a clam. They are proud of themselves. They work 15 hours a day to bravely provide the American people with liberal politics and liberal programs everyone can feel good about.

And yet the people are mad.

Don't get me wrong, the Clinton clan is smart and the programs are worthy. My problem is that their strategic objectives are restoring America to what it was before Bush and then strutting around Washington. That's not quite what we're looking for.

The purpose of Geithner's financial rescue package is to restore Wall Street to what it was, what Don DeLillo so incisively described in Cosmopolis. The Clinton clan who run the Obama Administration are happy ambling down the same short, windy, winding streets home to Robert Rubin, John Thain, Abe Greenburg, Edward Lilly and several thousand other Wall Street moguls and hedge fund whizzes whose extraordinary wealth is proof to them that the system works. Some are Republicans, a good many are Democrats; in either case, they pay for the election campaigns. Some, the Republicans, are social Darwinists; for them, the losers are simply losers, and the system doesn't make mistakes. The many are Democrats, willing and able to help those with less. They support liberal social polities; they give much to charity; they hold dinners to honor themselves and other like themselves who help make the world a better place.

For lots of us, the Republican litany is a bit hard to take. The Democrats at least profess to wanting to make sure all children have health care coverage, whatever the sins of their parents. The differences  between the two parties do matter. Even so, they share a big piece of our ideology: the rich know better and they decide policy.

They used to call it noblesse noblige.  We bless, you please. You spend, we squeeze. The trick is to pretend that we and you is the same. Get on message: WE, the rich, and WE, the people, are in this together.

Understand the social contract. We, the rich, make the rules that keep us rich, but we promise not to make we, the people, more miserable. On the liberal side of the Wall Street sidewalk the message has not changed since Merrill Lynch got bullish on America and Smith Barney stopped making money the old-fashioned way and between this takeover and that takeover ended up as a piece of Citibank where they helped melt the pie. The medium, the money, is always on message.

And I'm mad. I admit that the Clinton Democrats throw serious money at social ills, but they are not committed to addressing the fundamental problems of social structure and institutionalized legal corruption that have prevented us from fulfilling the promise of America.

I believe Obama truly wants to attack poverty, provide health care, fix education, but that won't happen as long as he is tied to the Clinton clan. It won't happen without campaign finance reform and Congressional reform, without assisting Mexico to remove the drug mafia from power (the Mexican border is our Afghanistan), without national prison reform, without education and health care reform that guarantees every child's right to achieve his or her potential. The obstacles to each are great. If Obama can't even keep his promise to campaign on public funds or to stop earmarks, it is hard to be optomistic.

No doubt, we will take small steps forward, we will work on education, energy, regulatory reform. It will be intense, bills will be passed and money spent and some good will be done. But little will change. It makes you want to sit Obama down with season 1 and 2 of The West Wing and explain to him how a bunch of very smart, well-intention (and also sexy) people can get nowhere. Is there any better description of the Clinton clan?

The Obama of these first two months is not what, we, the people, voted for.  We elected Obama, hoping against hope that he was sane, honest, independent, and would get us out of this mess. We voted for Obama because he was not John McCain. We voted for Obama and against an incompetent candidate running in the shadow of the worst President in the history of the United States. And we did not ask Obama to load up his administration with Clinton retreads and Wall Streeters, like Tim Geithner and Larry Summers. We simply don't trust those people. We threw them out of office eight years ago.

And still we want to believe in Obama.

At least I did, and then Jay Leno came along to take away from me the Obama I had invented in Iowa last year. Jay Leno took Obama on one of his famous Jay-walking tours during which he asks inane questions to ordinary men and women and getting seriously inane answers back. Obama's people had set it up perfectly. Leno asked about the feckless Wall Street monsters who had gotten us into the trouble, and Obama told us that the worst, most evil part of it was what that the crimes were "legal" and that it would take a long time to undo the damage. Obama told us that he, too, had been stunned by the AIG bonuses, that he, too, like us, was angry.

Jay, regular guy, was helping us to get to know Barack Obama, regular guy. Except, we did not vote for Barack Obama, regular guy. We had 16 years of regular guys, one a smart smart ass the other a not so smart smart ass. One peeking under skirts under desks, the other peeking under desks for missing WMD.  We voted for Obama because he wasn't part of that ugly White House. We voted for someone who could make a speech, loft up an ideal in his hands. We voted someone who did not need us to love or like him, but someone we can trust to do what needs being done and then take the heat.

That's not the Obama I saw on Jay Leno. As the interview wound down, Leno, as scripted, tried to help us to see the human side of our President . Leno asked about the yet to be acquired White House dog. Obama bantered. It was cute. Obama said the dog was a campaign promise. The audience laughed. The laugh was phony, desperate, false. It's awful learning things about the President we don't need to know. It's like those bad joke where the patient goes to psychiatrist and helps the psychiatrist with his problems. It was painful, awkward, un-Presidential. And then, suddenly, chatting about the dog, President Obama made his only useful policy statement of night. He said,

"You know, they say in Washington that if you want a friend, get a dog."

Maybe it's not too late. If that dog is smart enough ...

... And the people shouted "Death to AIG"

As small but angry crowds of Americans hit the streets in nearly 100 cities to protest against the $165 million in bonuses to AIG,it is the perfect moment to reaffirm why I have insisted that AIG should have entered bankruptcy months ago. Bankruptcy is the normal course of events when a firm can't pay its debts and its debtors "demand satisfaction". Instead, the government stepped in to prevent what we were told would be chaos in the financial markets.

Unfortunately, first the Bush Administration and now the Obama Administration have made a mess, leaving us with bankruptcy as the only option for AIG.

Businesses are supposed to die when they fail. That's how it works. Wisely, we have built the institution of bankruptycy to make failure as orderly as possible. Accordingly, we have bankruptcy law and bankruptcy courts. Bankruptcy is a complex institution that requires other institutions to function properly. We must have a regulatory system that prevents business firms from putting the entire economy at risk. This is the purpose of competitive policy -- the prohibiliton of monopolies, collusion, dumping, etc. Governments set the rules of the game. The current crisis and severe recession is a result of regulatory failure. When AIG went bust, we were told that the economic system was threatened, which eliminated bankruptcy as an option. Now, we, the people, own 80% of a company that is nothing more than financial market detritus.

Was the government right to rule out bankruptcy?

We all know that firms only should exist when they can make a profit, or, can be reorganized, often via bankruptcy. to make a profit. Eliminating insolvent firms is good for us. We create greater social welfare if inefficient firms are weeded out. The process is not painless. In normal economic conditions, we take care of employees who lose their jobs via unemployment insurance and a healthy job market. In a severe recession, additional measures are taken to assist the unemployed including extended benefits, re-training, increased government spending on infrastructure, etc. It's social democracy, and it works better than anything else we have come up with. (By the way, social democracy includes free health care for everyone under 18 and over 65 and guaranteed low-cost health care for everyone else. We are working on that.)

Returning to the issue at hand. In a financial crisis, which is preferable, intervention or bankruptcy?

The easy answer: it depends. The problem with intervention is that it is very difficult to get right. It is customary at this juncture in the discussion to point to Sweden. Sweden's intervention in the 1990s did not include saving banks where there was no value to be rescued. Instead the shareholders of dead banks were wiped out, the economic clock was turned back to zero, and the state took over. The employees kept working at their jobs. The liabilities and assets were taken over, but the banks died. The old owners were replaced by a new owner and a new firm was born. When those banks could turn a profit, the owner put them up for sale and pocketed the profit. Chapeau.

To be fair,the Swedish government did buy toxic assets from banks, and bad banks were set up to take on the bad assets. Yes, it was all a bit messy, as these things are. The big difference between the Swedish and American interventions was that Sweden acted to protect its citizens and the financial system rather than the bank and its shareholders, while in the U.S. we have acted to save the banks and their shareholders believing that this would save the financial system which would somehow save our citizens.

The Swedes were right. They would have killed AIG. AIG is worth nothing; the brand name is worth less than nothing. Foolishly, the U.S. government took 80% of nothing. With close to $200 billion sunk into AIG, as of today, March 21st 2009, the firm has a market capitalization of $3,4 billion. The $3.4 billion is a gift to AIG investors. And as the U.S. government continues to pump in money, these shareholders stand to profit from the investment of we, the people, in a "private" company whose managers, incidentally, haven't figured out yet that they work for a state-owned company. No wonder people are confused and angry.

Why did the U.S. government get this wrong? Our problem is that we can't fathom why a government would want to own a business. And so, Barack Obama insists on telling us that the government is not interested in owning banks, though since we did invest in AIG we have a right to "claw back" the $165 million in bonuses to the bad bad people who got us into this bad bad mess.

The really bad news is that we do own AIG, but since won't admit it, we can't even begin to figure out how to run it. The only solution is to let AIG go into bankruptcy where the sum total of its parts will mercifully be valued at nothing, and the company will effectively die. We can hope that when whatever new company (companies) emerge from the salvagable parts the new owners will be smart enough not to call it AIG.

The Obama Administration readily admits that the investment in AIG had nothing to do with the value of AIG assets, and all to do with trying to prevent AIG's diseased parts from infecting other parts of the financial system and the economy as a whole. Unfortunately, the government "investment" strategy in AIG was a failure from the start, as was the other "investments" in banks and toxic assets and the rest of the grabbag of measures. Unhappily, the financial system freezed up and we have the severest recession since the Depression.

From the beginning, there were only two legitimate choices AIG and the rest of dead banks. One, wipe out the shareholders and turn them and their horrifying balances into state-owned enterprises. Two, send them to bankruptcy court. The Barack Administration swore that bankruptcy would mean chaos. Afraid to take outright ownership, the Adminstration chose "investment". The goverment invested nearly $200 billion in AIG and then handed the hot potato over Mr. Liddy, and now an outraged citizenry is in the streets protesting.

Bankruptcy and chaos sounds like a pretty good deal.

AIG + ALM + SOL = $165 million x 1,000 = $165 billion + $5 billion + ....

You all, no doubt, know that AIG stands for American International Group. SOL, ignoble acronym, is the familiar "shit out of luck".

On the other hand, not many people know that ALM is Asset and Liability Management. ALM is old-fashioned bankers' work. You lend money (credits) and call them assets; you borrow money from customers (deposits) and call them liabilities. 

Here's the tricky part. Deposits, since the banks have the money, seem like they ought to be assets. But they are not. That`s because customers can come to teller window and ask for their money back. At the same time, assets can also be very annoying. The bank can call in loans whenever it wants because people pay home loans back on a schedule. This is asset and liability mismatch. Hence, the need for ALM. It is the banking business take on the old cash flow problem. Banks call it liquidity. 

AIG is not a bank, but an insurance company. But AIG was happy to help the banks get pesky assets of all kinds off the books by turning them into off-balance sheet finanacial instruments. They sold the financial instruments to thier clients, who sold them to other clients, who repackaged them and sold them back to AIG and so on. No one worried because the off-balance sheet financial instruments were backed by solid assets.

And so AIG made scads of money playing the ALM game for the banks and other companies and so did their sophisticated employees. AIG's employees realized that they could make ALM game as complicated as their imaginations and computer skills would allow. It was fun. They made bets about bets about bets ad nauseum. Ad infinitum.

AIG ad nauseum-ed ad infinitum until ad infinitum turmed into simple nausea. The assets that backed the paper that backed the paper that made AIG rich went bust and then we, the people, were told that if we did not pay for the mess, all hell would break loose. We did not know what that meant, but we got the living bejesus scared right out of us by Hank Paulsen and friends and we put up the money. And we hoped that the injection of coritsoned billions and more billions into AIG would do the trick and kill the pain of the damaged assets and AIG go away and leave us alone.  

No such luck (NSL). Our new President, Barack Obama, held a press conference yesterday for us to vent our righteous indignation right alongside him over $165 million in contractual bonuses to the same AIG geniuses (SOBs) who got us into the mess. Live on national television, President Obama, instructed ourTreasury Secretary, Tim Geithner, to leave no stone unturned in order to find a way  to stop the checks from going into the mail.

NSL. President Obama knows that we can't undo the contracts, and Secretary Geithner also knows that the $165 million is actually an investment in trying to get back some of the more than $165 billion we, the people, have invested (sunk) in AIG. Our stake in AIG is more than 1,000 times more than the bonuses.

If we stop the bonuses, the people who got us into this mess will have no incentive to help us get some of our money back. We could try moral suasion with them, but I suspect most them don't know that term. We could threaten to send them to Guantánomo, but Obama has promised to close it down. We could try to bar them from working for other companies where they could bet against AIG positions and cause us, the people, to lose even more money, but that is also illegal. We could draft them into the Armed Forces and send them to Ciudad Juarez. I have lots of evil ideas about what to do with these people, but none will get our money back for us.

What I would really want to do is go back in time and let AIG go bankrupt. Bankruptcy is what happens to companies that have more liabilities than assets on their balance sheets and not enough cash to pay the bills. It is what should have happened when the paper that AIG swapped (off the balance sheet) went AWOL. AIG you are SOL. 

Getting out of Afghanistan, Getting out of Iraq

I admit that I am gloating. Support for bailing out of Afghanistan is growing. Today, Lawrence Gelb in the New York Times made the same argument I made last year: 1) The Taliban and Muslim terrorism are a bigger threat to China, Russia, Iran and Pakistan then they are to the United States; 2) Our goal is to stop Muslim terrorism not save Iraq and Afghanistan; 3) We can't win in Afghanistan without losing at home. Of course, Mr. Gelb said this much more politely and professionally, including all the necessary historical and geo-political references, etc. and so on.

Mr. Gelb calls his approach "common sense". I don't much like common sense. I prefer strategy. To President Obama, his common sense and common decency tells him that Americans have a responsibility to the Iraqis and the Afghans now that we are involved in their lives. The strategist in me says, Oops we got this wrong, let's get out of her as fast as we can. (Out of politeness, the strategist does say he is sorry as he leaves.)

The apology is probably unnecessary. It turns out that the strategist's approach has two fundamental advantages. It works better, and it may even be morally superior. Psychologists agree. Rule number 1. Bad relationships make you crazy. In order think straight, you have to get out first. Once you are out, then you can think about how to fix the mess left behind. Rule number 2. You end up hurting yourself and others less when you close down bad relationships. It's the right thing to do. 

Unhappily, Obama remains trapped in our never-ending Iraqi guilt trip. He wants to "withdraw responsibly" from Iraq. The phrase sounds likes something teenager lovers say when it is already too late. I realize the joke is in bad taste, but that precisely why it is necessary. The consequences in Iraqi are shocking and in even worse taste. Every day American soldiers are fighting in Iraq means that more young American are wounded or killed unnecessarily.

We need to withdraw from Iraq now in an orderly fashion. Orderly is not the same as responsible. Orderly means that we announce that we have achieved our goals and we organize the logistics of withdrawal. I expect to be accused of cynicism and ignorance. I am happy to take the risk, and I accept part of the charge of ignorance. I have no idea what will happen in when we withdraw from Iraq, but I suspect that no one else does either.

Obama and the generals prefer to pretend that they have things under control. This means pulling out in stages, leaving a contingent behind to help the Iraqis, and so on. If it works, Obama can take the credit; if it doesn't work, Obama can say he did the right thing. In either case, Obama will feel good about himself, though this will be small consolation for wounded and dead Americans and their families.

On the other hand, if Obama does it my way and Iraq falls apart, he will be villified. He might even feel guilty. Of course, the American soldiers who went home won't complain, nor will the rest of Americans whose tax dollars may go to something useful for a change.

Ditto on Afghanistan. As I have said on numerous occasions, let the Iranians, Pakistanis and the Chinese fight the Taliban and Muslim terrorism. This a backyard problem for them, not for us.

Obama's voice

Greek myth gave us Caco, half man, half satyr, who vomited flames and smoke after swallowing and chewing up men. As humankind advanced, we sought to banish Caco, and invented cacophony, by which poets intentionally eat up consonants and breathe out harsh sounds. For example, "Dick Chaney takes kick backs from contractors."

The Bush administration invited Caco to the party with his old brutal deadly habits. Caco skilfully forged an unholy alliance with cacophony. Men, women and children were tortured and immolated and made the detritus of suicide bombers and collateral damage while the caophonists (e.g., Fox News, Rush Limbaugh) provided (and still provide) apology.

Fortunately, civilization has resurfaced in America. Our election of Obama was as much a rejection of Caco and cacophony as it was a celebration of Obama's mellifluous and inspirational idiom. Now that Obama is in office and Caco on the run, the next challenge is to restore rational behavior and dialogue. If the campaign trail, Obama gave us cadence and metaphor, soft consonants and soaring vowels, as President, Obama has taken on a plainer speaking style, the euphony expunged, as if by effacing voice and self we might hear once again the common sounds of men and women struggling to make a living, stay healthy, educate their children, care for the aged.

In this, our age of exhibitionism, Obama has wisely chosen to turn down the volume so that we might concentrate on the facts of our situation and reason together. This is far harder than he imagined. Obama wagered that the quieting of voices itself would change behavior. Perhaps, in a different age, he might have been proven right. But in our age of exhibitionism, the louder and more strident the voice, the more likely it is to be heard ... and rewarded.
 
The meritocracy Americans extol never existed. Institutions, custom, habit, inscribe our lives and the powerful have always been able to structure social and economic institutions to their advantage. Left to their de-regulated, meritocratic devices, we get not Plato's Republic but rather a sanctimonious, self-serving cacophonous defense of the status quo as the god-given order of things. This is a clear and present danger that requires our constant vigilance. We ought never to forget that our collective well-being has always depended on our ability to build and sustain institutions that encourage the moderation of those in power.

This the principal message of Gibbon's "Decline and Fall of the Roman Empire". Our better institutions  may tame Caco via a collective will to make a society that limits power in a civilized manner. Gibbon gave us three virtues that defined Rome: its principles of government, its universal spirit of toleration, and the commitment of the people to the nation. Today, we add a fourth virtue, a voice both powerful and soothing enough to suppress cacophony. We were warned by Orwell, Huxley and McLuhan: The voice itself sometimes is the message.

America, Europe, Spain: Do you want to get depressed?

Fortunately for Americans, the Presidential elections coincided with the country sinking into chaos. In crisis, Obama feels free to clean the Augean filth that clogs our institutions. He has started where the stench is worst, Guantánamo, closing down the military courts. He then signed an executive order to curb the worst lobbying abuses, and has set in motion military withdrawal from Iraq. The stimulus package is underway. The new budget is on the table. It's all messy and difficult, but at least headed in the right direction. Iraq and Afghanistan are headed in the wrong direction, but that for another day. Today is to talk about the economic mess in Europe, in particular Spain.

The Europeans are just starting to figure out that they may be in even worse shape than the United States. All the leaders of the big five -- France, U.K., Germany, Italy and Spain (where I live) -- remain in office though their countries confront severe recessions. Each head of state -- Sarkozy, Brown, Merkel, Berlusconi and Zapatero -- has opted for an expensive ramshackle patchwork of local programs that work against a coordinated EU response.

In Spain, where I live, President Rodríguez Zapatero has been reduced to begging Obama to help make the crisis as short and painless as possible. His Finance Minister, Pedro Solbes, announced that Spain was "out of options". In order to find good news, Spain has fixated on Obama's inauguration, Obama's first day in the White House, the First Family, and so on. When Rodríguez Zapatero came into office nearly 5 years ago, his first act was to fulfill his election promise of pulling Spain's troups out of Iraq. This was probably the last time he made most Spaniards happy.

Spain's economic situation far worse than in the U.S. Unemployment is expected to reach 18%-20% in 2010. The government's big plan includes 8,200 million Euros for municipal governmentsto spend on small "necessary" projects to create jobs, few of which are likely to last more than a few months. Much of Spain's basic government services, e.g., health care, have been devolved to the 16 autonomous regions, each specialize in inventing rules, procedures and IT systems that are incompatible with the others. The Autonomous Regions  spend and spend and spend and then complain that they are not getting their fair share of the pie from the national government, which promptly promises to recalculate allocation of funds in the manner most beneficial to that particular region.
 
It would also unfair of me to lash out at my adopted home's President without offering a few ideas for helping Spain get through the bad times.

1. Raise gasoline taxes and spend the money on public infrastructure projects.
2. Offer tax incentives (not subsidies) for couples to have children. Spain's birth rate is dismally low. Moreover, births are concentrated among the poor and immigrants, who generally require more services. The while middle-class has little interest in providing services for these children since middle-class couples customarily have but 1 child. (This is a wonderful case for friki econ; and I suspect I will be accused of all manner of illiberal sins for suggesting that it makes sense to provide incentives to the white middle-class to make babies when my only point is that it is good economic policy.)
3. Negotiate a deal with the banks to provide a 1-yr. interest only moratorium on home loan payments.
4. Suspend the government-funded home building program and use the money to underwrite the sales of already built but unsold housing to low-income families (not just the white middle class). Fixed-rate 30-year mortgages included in the package.

Now to Spain's worst and most intractable problem. Spain's autonomous regional and local governments are out-of-control, debt-ridden and rotten with corruption largely due to an absurd system of financing. (Another case of friki incentives.) These governments are months, even years behind paying suppliers and contractors, many of which have gone out of business. One owner of a small firm walked out onto the boom of a crane and refused to come down until he was promised payment. The town government agreed, demonstrating that everything is negotiable and that, in fact, they had no supplier payment plan in place.

Much of the mess comes from financing local government through tax revenues from construction and housing sales. During the boom years, this worked, and there were hundreds of millions left over for local politicians and bureaucrats. In many towns it was normal to find rags-to-riches stories of politicians and small-time contractors. In Spain, it is also customary to find elected officials who have spent there entire working lives as politicians. Spain's President is a professional politician. Many professional politicians have been elected to various legislative bodies as number "X" on a list of the party's candidates. Most have never been elected to office in a head-to-head contest. They have never even had to win a party primary. Political careers are made within parties by men andwomen whom no one outside the political party knows anything about. Young men and women start out working for the party in their early twenties and are proteges of and apprentices to more powerful party members. The stench is medieval. When the opposition Partido Popular lost the Presidential/Parliamentary  elections, the losing candidate, Mariano Rajoy, went right on being the head of the opposition party, enjoying all the privileges as the opposition leader, challenging Zapatero in Congress and travelling around the country extolling his virtues and those of his party. From time to time he is reminded that he's lost the Presidential elections twice, but he's not going anywhere. He has nowhere to go.

Back then to pretending to fix the financing problem. A special office in the Ministry of Finance should be set up to monitor government spending at all levels; the office must have the power to enforce fiscal responsibility and root out corruption. The Parliament should act by abolishing voting for lists of candidates and offer match candidates to specific offices. The byzantine system of financing the autonomous regions and local governments also needs a complete overhaul -- not to mention the educational and judicial systems, the last of which seems straight out of Bleak House.

None of what I am suggesting has any possibility whatsoever of coming to pass. Neither of the two leading parties nor any of the regional nationalist parties have the remotest interest in reform. In Spain, like the rest of Europe, pessimism is realism -- just a little more so. 

Bogus Bonuses

President Obama called the bonuses paid to banking sector executives, "shameful". He then said,“There will be time for them to make profits, and there will be time for them to get bonuses.”

He was right about "shameful", but he fudged it on bonuses, as if there were good old days we could go back to when a CEO received an "honest day's pay for an honest day's work". In a complex economy, this is close to impossible. It is inevitable earnings of investment bankers, hedge fund managers and CEOs of large companies will depend far more on social norms than long-term economic performance. Don't get me wrong. The elite of big business and finance are talented people; there is, however, scant economic justification for the pay they receive.

Even when firms do well, pay is not truly linked to performance because firm success does not usually depend on asset specific human resources. In simple English, there are thousands of people who could and would do the same work as well for a lot less money. Economist call this market failure. The rest of us use words like "unfair", "it's all about who you know not what you know", and so on. Obama, in writing the new rules on employment in his administration, is trying to put a dent into this sort of "legal corruption". In publically traded corporations, this job belongs to the Boards of Directors; they have failed miserably despite reform by the major stock exchanges.

The "man in the street" firmly believes that the market for the big money-making positions is rigged. He is right. You need to be part of the right circles to bring in the big deals, big clients, and big payoffs.

No, this does not mean that you can be a dolt and run a successful hedge fund or be CEO of General Motors. You need to be smart enough and focused enough to get the necessary education and professional and personal polish to be accepted as part of the economic elite.

However, there are thousands of people who qualify, but don't get to the top. We are told that the weeding out is meritocratic and that the incentives and rewards for success are such that the best are tapped for the most important and most lucrative posts.

Unfortunately, management research shows little correlation between pay and performance, though this only covers those who are in the elite. It is difficult to compare the potential performance of those who don't make it to those who do. Anecdotal evidence from my 20 years of consulting and teaching, I have been involved in a number of CEO searches and replacements, I nearly always found men and women further down the food chain who I was certain could do the job just as well, or better, than the individual selected. I have confirmed this with other consultants and academics.

Social norms are a more powerful determinant of CEO selection and pay than individual or firm performance. Our problem is that we have constructed the wrong social norms.

Nonetheless, there are people who make millions and earn it. For example, I have argued that professional athletes are worth what they get paid. Christian Ronaldo, striker at Manchester United, put a price tag on himself the other day at 100 million pounds. There will be takers, I promise. Kobe Bryant and Lebron James are worth even more. In fact, the NBA had to invent salary caps to prevent the stars from taking all the money and ruining the game. Here we have market failure invoked to save an industry. It's a nice turnaround on CEO market faiture; in team sports the stars make more than their coaches.

Why are Ronaldo, Bryant and James worth so much? Quite simply, nobody else can do what they do as well as they do and there are hundreds of millions of people who want to see them do it. There are thousands, perhaps millions, however, who can do what John Thain did at Merrill Lynch, perfecting his toilet training in a $35,000 commode.

Fixing America: Obama's To Do list

The TO DO list for Barack Obama put together by our best and brightest is clear. When he gets the Oval Office on Day 1 on desk all he will be asked to fix ... everything.

We all know why there is so much to be done. The foundations of society are off kilter. Education and work, the two things that take up most our lives, need to be retooled -- from pre-school imagination building to post-doc innovating. We need to rethink what is worth doing and worth learning how to do.

Deciding what to do and to get it done will require a lot more than good ideas and smart people to implement them. Without clear values and objectives it is hard to know where to start and we run the risk that we will initiate well-developed, well-intentioned programs that end up getting up fighting with each other for resources and make matters worse. 

To make sure that we get it right, it would not hurt to remember how we got into trouble. 9/11 turned out to be the zeitgeist shift we knew it would be, but precisely in the wrong way. We had the worst possible gaggle of bunglers and thieves running the country when the American people needed to trust its leaders in the worst of times. As a reward for its trust, the American people got bonzied, lied to, their present stolen and their future buried in debt.

Obama, in his speeches, has made it clear that he understands this. He has also demonstrated that he understands that the Bush Administration's disdain for law, principle and logic was the dierct result of American society decades long confusion of meritocracy with social Darwinism, and personal merit with selfishness and greed. It took more than eight years of the  Bush Administration to build a vulgar go for it in your face culture.

Obama's humility and self-control was a welcome change. And I had hoped that the President-elect would also make as clean a break as possible from our political past. I have been disappointed. Via his appointments and his announced policies, Obama has decided that it is better to co-opt the devil that got us into the mess than send them into exile. Historians, I realize, will tell us that it is impossible to run a government without skilled managers from previous administrations. Perhaps, but that does not mean that nearly every key position must go to an ex-Clinton administration professional politician.

Nor does it mean we must go on a spending spree that tries to tackle every problem at the same time and appears not to express any particular set of values or priorities other than the diffuse notion that the crisis requires action. Action is required, but only in so far as they clearly respond to the values and the objectives that we have set out. (Herbert Simon's Administration Behavior, which I have lauded on more than one occasion, explains this quite well.)

Let me give an example of what worries me. Obama has committed to cutting taxes for the middle class to put more money in people's pockets and increase spending. Sounds greats. Only one problem. The people who actually have a job will do well with inflation and housing prices falling as long as they keep their jobs. If they lose their jobs, they won't be making any money to save taxes on.

Obama and his advisors seem to believe that they know how to tackle the recession. The truth is no one knows, and no one knows how long it is going to last. This means that we need to decide on what we want to fix in America and work on fixing that, invest our government money in doing those things so and not others. Once again, in his speeches Obama seems to understand the concept, but in his speeches, the priorities are set out too generally and there are too many programs being floated.

If we are to get our house in order, Obama needs to do just a couple of things very well. I will set out what I think those things are. If he does, who knows, maybe even get the economy will get back on track. Odd as it may seem, fixing the economy is likely to be the result of getting other things right. I don't believe it can come from a grab-bag of economic stimuli.

So here are the priorities.

1. Get out of Iraq and Afghanistan now. They are lost causes. The Bush Administration got rid of a brutal Saddam Hussein regime in order to turn Iraq into an American controlled sink-hole of death and corruption. Afghanistan is even worse. In addition to death and corruption, there is the flourishing heroin trade. Getting out of Iraq and Afghanistan will save American lives, billions and billions of dollars, and no longer give our enemies an excuse to kill and hate us. We will have more money to spend on fixing America, our military can recover from the disaster, we will feel better about ourselves.

Please note that I did not mention anything about the impact of our leaving on Iraq and Afghanistan. Strategically, it is hard to see how we would be worse off; among other things, pulling out of Iraq and Afghanistan might make managing the more important relationship with Pakistan much easier. Please keep in mind that Muslim terrorism is an even bigger threat to China and India and Europe than it is to the United States.]Morally, there are serious questions about responsibility. My answer is that it is hard to see how either Iraq or Afghanistan would be worse off if the U.S. were gone.

2. Provide all American children with the world's best health care and education. Poor children are being punished and it hurts us all. I am happy to pay for community health care centers, teachers for math, music, chess. We need to increase school days, after school activities. Local community funding for schools is way of guaranteeing inequality. The federal government must provide more equal opportunity ... and it will be expensive, especially at the beginning. I am happy to spend billions here. It's a great investment. Healthier and better educated children mean spending less down the road on fixing more messes, including prisons. It will also give Americans a sense that our society fairer. A large piece of America's discontent is that there is a perceived fairness gap that is based on real painful injustices. The benefits are incalculable. The American people are expecting Obama to act on these injustices starting with health care and education.

3. End U.S. dependence of foreign oil. Easy to say, hard to do. In fact, it is so hard to do, that there is the temptation to drop the idea and talk instead about a bunch of projects like efficient cars, efficient buildings, fixing America's infrastructure. This may lead, however, to the problem I set out before -- too many projects going after money and none of them done right and. There is no substitute for an old-fashioned mission. Fixing the economy sounds like a good mission, but the pieces are too hard to fit together because we don't know how it will work. Combating global warming isn't the right approach either; the danger is neither clear enough nor present enough for most Americans. Ending dependence on foreign regimes that are happy to bleed Americans dry seems to me to be the right approach: clear enemy and clear benefits. And it fits in quite nicely with getting out of Iraq and Afghanistan.

This is probably enough for Obama to do. I look forward to celebrating the inauguration with you next week.

Gaza

Like many of you, what little holiday cheer I had left was dashed by war in Gaza.

Sadly, Gaza is an old story. Another chapter out of the Old Testament, the New Testament, and the Koran and the nasty stories we learned as children. The ugly stuff starts with Eve ... and then there's lots of men betraying men, women egging men on to evil, and God punishing mankind for being naughty and stupid. God, it seems did not endow human beings with much of the rational decision-making that fill up the fantasy lives of economists. Fortunately, it wasn't all horrors. From time to time, God granted us a pious man or woman, and there were moments of joy, psalms were written, feasts were had, heads were anointed with oil, cups ran over. And there were many prophets who spoke to us, giving us advice. But then, after Mohammed, the God of the three great male monotheistic religions stopped giving us prophets. 

Yet we sorely need a prophet who can get us out of the Gaza Strip trap. What if I offered to take the job? 

I need to be careful. If word got out that I thought I had the stuff to be a prophet, I would be diagnosed as delusional though I am blessed with a good job, a loving spouse and children, though I generally make sense when I speak. The men in the white coats would drag me away though I insisted it was not my fault God picked me to have a heart to heart.

So let's play "what if". What if God came to me and said, 

"There is hardly a piece of my good Earth that has not been claimed, won, lost, regained, claimed again and so on and so forth by the nations of man. Whomsoever calls himself and his fellows a nation has built that nation by conquest and blood."

And I said to God,

"Like Gaza?" 

God assented, and I continued,

"I wish a plague on the houses of Hamas, Isreal, Hezbola, Iran, Egypt, Syria, Saudi Arabai, the United Nations, the brotherhood of man, and most of all the Palestinian rulers, starting with Yassir Arafat, the consummate crook who turned the Palestinian territories into a Hobbesian nightmare."

I went on, not giving God a chance to get a word in, and I asked, "What can we do? Why, Lord, have you forsaken us?"

And God had pity on me, and he said, "Oh ye of little faith. I have not abandoned you. I have given you the answers. Use your brain, man."

And I listened to God. First, I had to figure out where we are and how we got here. Since the founding of Islam in 622, Christians and Muslims have spent half of their time killing each other and the other half divvying up most of the planet between them. Only in East and South Asia did the Chinese, the Japanese, and the Indians manage to hold on to their own ancient cultures and religions. (Not that these are any less brutal or unfair.) 

The only serious competitor to the Christians and Muslims in the West, the Jews, were crippled by a no recruiting strategy, and ended up driven into disapora, sometimes tolerated, sometimes abused, mostly hated, until they were delivered into the hands of the Nazis, after which the Christians in the United Nations granted them a sliver of mostly barren land they call The Holy Land -- to relieve their guilt for the Holocaust.

As we know, unfortunately for the Arab Muslims living in Palestine, it was a raw deal. No one had asked them what they thought about giving the land they were living on to make the new state of Israel. They were forced out, and to the surprise of the Europeans and Americans, ended up in camps on the West Bank and Gaza instead of being "assimilated" in Egypt and Jordan. The Palestinians and their camps soon became trapped between the incompetent, medieval and cruel Arab leadership and the competent, modern and cruel Isreali leadership. Thus generations of Palestinian Muslims became victims in an increasingly Muslim world, while Israelis Jews became occupiers after 2,000+ years of getting their collective behinds kicked across the planet.

That's how we got to this losing proposition for Palestinians and Israelis. Is there a solution? If by solution we mean an end game, the answer is, Yes. At some point the Israelis will lose. It's a matter of demographics: 100 muslims to every Jew. God commands man to be fruitful and multiply. He knew what he was talking about. Numbers matter. 

And so, having followed God's command to think, after having exercised as much thought as I could muster, I said to God,

"The war may go on for decades yet. Perhaps not. Perhaps, a prophet ... Perhaps, a pill ... Perhaps, an ecological disaster."

I said,

"This is horrible! I don't know what the hell to do."

I fell silent, and as I got up to return to my ordinary life and kiss my daughters good night, God stopped me and said,

"Keep thinking."

Bailing out on the bailouts

 

 

Nice, nice, very nice;

Nice, Nice, very nice;

Nice, nice, very nice --

So many different people

In the same device.

 

-- Kurt Vonnegut

 

 

BACKGROUND

 

There are lots of smart people describing the mess we are in. I read The New York Times and The New Yorker mostly, where professional journalists have incomparable access to the world’s most important decision-makers and our best minds. These journalists, the media elite, work hard to do their job monitoring the elites of the other estates.

 

Thomas Friedman, of the flat world, is fixated on our collapsing infrastructure, fractured educational system, and inane business culture. His articles detail failure upon failure made palatable by a dash of optimism and a catchy title like "Time to Reboot America".

 

He and his colleagues, in an attempt to veil despair, regularly finish up their missives with a plea to the Office of the President-Elect to save our skins. Paul Krugman is a pro at it (see "Barack be good"). Though as a Nobel-prize winner he is smart enough to have figured out that Obama ain’t off to such a great start, vacationing in a luxury beach home, taking the Clintons and most of their team on board in this winter of discontent, and signing  up Rick Warren to inject a dose of insipid truth in our inaugural prayer.

 

We, the people, would like, and deserve, something better from our elites. For if the economy is in recession, we the people have fallen into depression. In the traditional season of religious celebration, American Christians try to cope with having supported a Christian government that abandoned the poor and justified torture; American Jews reel at the sins of Bernard Madoff and a Wall Street where too many Jews participated in the pillage; and American Muslims try to understand why in mosques around the world intolerance and terrorism are glorified.

 

[I have just portrayed Americans as caring and concerned. Some will find this absurd, or, perhaps, even disingenuous. But I assure you that the ¾’s of Americans who think the country is going in the wrong direction are not just concerned about money. They want peace, justice, and fairness, and still believe, wisely, that religious faith is a private matter. As I travelled in American east this summer and talked to people, what they were most tired of was the unbridled arrogance of the elites, their abuse for power and refusal to take responsibility for their actions. Sadly, Americans do not expect that things will improve, even with Obama.]

 

Yes, this is an unhappy season in America, and we are hurt and confused by the social, economic, and moral catastrophes of Iraq and Katrina, and the disaster waiting to happen in Afghanistan. And we fear that the bailouts will only help to keep the fools and knaves responsible in power.

 

 

THE RIGHT INFORMATION, THE WRONG STORY

 

In a fortnight, the bailouts have lost most support. The word coming out of Washington seems to be "what in God's name was Hank Paulsen thinking". Suddenly, everyone has figured out that putting money into third-rate automobile companies is an investment in widgets. The newspapers and blogs are split between liberals and conservatives complaining about the lack of controls, and liberals and conservatives bemoaning perennial government incompetence. And yet, the litany remains the same:  The bailouts are necessary... a necessary evil... better than... we would be worse off...

 

In print, on television, on talk radio, in the internet, the news and commentary is a non-biodegrable downer, the same story over and over and over, a Clockwork Orange remake.

 

The news is that President Bush, not content with destroying the American military, debasing the American legal system, plunged head-first into "saving the sinking system”. To make sure it went right, that the bailouts were "nonpartisan", he appointed Henry Paulsen, a seasoned veteran of the same corrupt crowd that got us into the mess, financial crisis czar. To make sure were not confused by a new style of government we got Katrina-inspired improvising, right down to the single entry creative accounting: Jot down on a restaurant napkin to whom the money was sent; the rest will take care of itself.

 

Nice nice very nice. It allows us, Obama supporters, to feel superior to the Bush republicans. But, alas, feeling high and mighty is just a second-hand emotion (my apologies to Tina Turner). The story leaves out most of the cast. The American Disaster Actors' Guild includes Democrats, Republicans, and Independents. Its members embrace all religious and economic faiths. They are financiers and lobbyists, lawyers and judges, filmmakers and fashion designers, politicians and professors, and not just two of every kind but enough to fill up the ballrooms of political party fundraisers and the client list of private offshore banks. Aboard the Ship of Fools, we find elites of every estate, who found in the economics of Friedman and Schumpeter the explanation of privilege as the necessary and just consequence of the system.

 

They are good people. They give much in charity, the Gateses and the Madoffs and Saudi “royal” family, the monopolists, the Wall Street insiders, the legitimate rulers of countries and the imperial CEOs. The richer they are, the more they give to those who have less and less. The more they give, the more they are honored by each other at gala charity events where they take pleasure in knowing that they have done well. And they bemoan that there are so many in need.

 

Starting with themselves, of course. They need the bailout. Not to save their businesses, but to save their souls... and their skins. They have done the math. They know that bailout is chicken feed alongside the trillions of wealth that these same honest men (and some women) generated buying and selling companies and swapping futures (our future). This while Americans got the lie of cheap home loans and overpriced credit cards and were asked at the same time to thank the people who it did to them for building a system that would allow any man or woman of talent to reach his or full potential.

 

It was a whopper of a lie, an economic Elmer Gantry of a lie, and anyone who could look at the numbers knew it. While rich got richer, the poor got poorer, their schools worsened, their health care worsened, and when Obama got caught off-camera explaining to a young campaign worker that those who had gotten the short of the stick take refuge in the guns and religion, the privileged elite and their victims both cried foul. Talk about a case of the Stockholm syndrome.

 

Well, the sad truth is that Obama was right and no one wants to know how bad things really are. The toxic assets have hit the fan, the detritus is spread around us, and all the elites have to offer is an Rumsfeldian “stuff happens” and a couple of bogus bailouts.

 

Stuff happens all right. Over the past quarter-century in America, the elites have promulgated 3 basic ideas or rules for living. First, risk is good. Those who take risk prosper. Let creative destruction live! Second, the "system" can handle any shock, any amount of chaos – the law of the market and meritocracy will keep us on course. The system, they say, is bigger than greed, stupidity and corruption. The system is a self-regulatory marvel, as irrefutable as St Anseln's ontological proof of the existence of the God. Third, the output of rules 1 and 2 is that those who end up with the biggest pieces of the pie obviously deserves to have them, while the poor shlubs who go bankrupt deserve to have to pay back what they owe the rest of their lives.

 

The system failed. Now what?

 

The answer proposed by the elites is bailouts and government stimulus packages. I say, NO, to the first and maybe to the second. The bailouts are a masterfully perverse way to maintain power. Please, don't be taken in. Neither the financial crisis nor the demise of the automobile industry was a case of a bizarre outlier bursting onto the statistical grid. As I have argued before, no black swan alighted on the entire financial grid and brought it down. No, this financial crisis is an old-fashioned Newtonian bubble that has gone bust in real not Einsteinian time. We have long understand how and why financial systems fail, just as we know that the automobile companies failed by making crappy cars. We also know how societies fail. To this we turn.

 

 

HOW SOCIETIES FAIL

 

"A society," Jared Diamond wrote, "contains a built-in blueprint for failure if the ELITE isolates itself from the consequences of its actions". [(emphasis mine) Diamond won the 1998 Pulitzer Prize in general nonfiction for "Guns, Germs and Steel: The Fates of Human Societies," and in 2005 published "Collapse: How Societies Choose or Fail to Succeed."]

 

Diamond's work has sought to explain the factors that cause successful societies to hit the skids. He has his big 5: self-inflicted environmental disaster, climate change, fearsome enemies, lost trade, the sins of elites. The Big 5 frequently interact, customarily with significant multiplier effects.

 

On the first four factors, Jared Diamond is brilliant. However, on the subject of elites and the various sins they inflict on the citizenry, he is, as we are, pretty much in the dark. Elites lose their way, and though we can explain what went wrong and how they screwed up, often it is hard to explain the enabling why. Cognitive psychology, following the failure of ego psychology to explain much of anything, has tried. It has not done very well either. Neuroscience would like to explain, but has not gotten very far. Philosophers I admire, e.g., John Searle, hope that neuroscience can someday help us figure it out, but I have strong doubts.

 

My aim is far more modest. I would be happy to find some relationships between causes (incentives) and outcomes and try to change the incentives, and together we may be able reinstitute the necessary checks and balances to constrain the behavior of the powerful as we seek to reinstill civic society values. In the tradition of American pragmatism – James, Dewey, Rorty – I seek to restore civil society to its lead role, assuring that government does it job making the rules that keep the playing field as close to level as possible. This means getting government back into regulation and restoring the checks and balances that might have prevented the privatization of war and prisons.

 

I would like to be hopeful. But I am afraid, however, that even Obama does not get it. By calling on the old Clinton team, he is depending on some of the same crew that got us into trouble. Though not in same league of bunglers and crooks as the Bush team, the Clintonians are still an arrogant bunch who believes that they deserve to lead. They lack humility, and even worse, they are short on ideas.

 

When the lucky ones among us – a.k.a. elites – believe that they merit power, and that their exercise of power is in the best interest of everyone, then the rest of us are almost certain to get the same bad old deal – more corruption, more failure, and…bailouts. The bailouts are to the American democracy what rigged elections are to dictatorships. We hear the ancient refrain of the powerful, the professional abuser stroking the hand the injured hand of the abused: “Stuff happens, I am sorry I hurt you, but you need me.”

 

The elites would like us to forget that the bailouts are the work of precisely those who shouted most loudly that market meritocracy is the best and fairest mechanism for distributing power and wealth. These are the same elites who assented when the personal bankruptcy laws were stiffened, who stood by when the rules of the game were rigged to allow banks to raise credit card interest rates at will, who dined with the lobbyists, who left government and to become consultants and write the government contracts; these are the wise guys who bought and sold the loans and derivatives that are all part of the same device.

 

Nice nice very nice. I began this post with a silly piece of verse from Kurt Vonnegut’s Cat’s Cradle. In Cat’s Cradle, Vonnegut invents a simple religion, Bokononism, based on an openly agreed to game of deceit in which everyone is willingly trapped because there is no other option. The end, inevitable, is an indifferent though good-natured goodbye to civilization. We know how societies fail.

Please do NOT Save: Why GM, Ford and Chrysler should not get our money

For years I believed that managerial incompetence in the U.S. automobile industry had no limits. I was right. But that was only part of the story. Now these giants of industry and their million lobbyistreplicant march on Washington is on the cusp of a monster bailout that promises to suck $15 - $25 billipn out of the American taxpayer in the first tranche. (This is peanuts, of course, compared to what was wasted on AIG, but I have already exhaled sufficient spleen on that topic.)

The three big automakers are singly and collectively underserving of a red cent, but the most undeserving of all is Cerberus, the savior of Chrysler. Cerberus is run by Stephen Feinberg, who by all accounts is smart and, by the standards of superrich hedge fund moguls, modest in his impudent arrogance.

Feinberg is said to run Cerberus like Jack Welch did G.E., driving his team of gifted super-managers in a never-ending quest for superior resource allocation and asset leveraging, squeezing value out of every activity. Mr. Feinberg apparently had worked magic since launching Cerberus in 1992 .. until he bumped up against the machinery of Detroit.

Since July, 2007, when Daimler handed Chrysler over to Cerebus for free, grateful to having the lemon off its hands, Mr. Feinberg’s men have managed to lose sales even faster than they cut costs. And now, having failed, Cerebus’s has become just another supplicant in Washington, spending millions on lobbyists, among them former V.P. Daniel Quayle, Cerebus’s “chairman of global investments”-

For the past several months, Cerberus has been marketing a  GM - Chrysler merger, despite resistance from management at both automakers. The principal beneficiary of the merger would be Cerebus, which would get itself off the hook on the simple (and correct) assumption that Congress is afraid to let GM enter bankruptcy.  

Curiously, Cerberus executives insist that money is not the issue. It is about what is best for Chrysler and best for America. As if they knew.

Like most Americans who are convinced that the executives who run American companies have no idea what is best either for their companies (which they should) nor for American (which is not their job), I cringe whenever CEOs start talking about selflessness and their contribution to society.

According to the polls, most Americans had a bad feeling about the bank bailout, and they don’t feel much better about the car bailout. Some, like me, especially dislike bailing out Cerberus, a privately-held company that has approximately 15 times the resources it has invested in Chrysler. It's hard to see any justification in not asking Cerberus to pay for its mistakes. I have not forgotten that Cerberus lobbied hard to undermine fuel efficiency regulations that were good for America, but that Cerberus believed were bad for Chrysler. Why should we now have to swallow nonsense about what Cerberus tells us is good for America?

Of course, my being annoyed at Cerberus is not an argument against the bailout. The bailout idea stinks on its own merit.

First, automobile industry executives from all the big three have demonstrated that they are incompetent and will not spend bail out money wisely. Second, Henry Paulsen’s crew is not of much use either; if they handle this as well as they handled the bank bailout, we can expect several rounds of the Big Three coming back to feed at the trough. Third, if Paulsen’s crew is incompetent, don’t expect Congressional oversight to be any better. Fourth, if Cerberus, GM, and Ford have collectively spent over $10 million lobbying for the bailout, we have every reason to assume that they will spend whatever else they need to “convince” Congress of lots of other bad ideas, including industry “self-regulation”.

With these considerations in mind, Let’s look at our options.

1.

Do what the car companies ask for. In the best case scenario, the American taxpayer hands over the $15-25 billion they want, negotiating all sorts of restrictions on executive pay and tight Congressional oversight. Even so, we would still then have to watch the same losers who got into this mess play at corporate reorganization. We end wincing and whining and whinging as we wait for the three-headed motorized monster to ask us for more money. It is hard to imagine a worse scenario. To be fair, there is an upside. Congress might call fomer V.P. Daniel Quayle, a top executive at Cerebus, as an expert witness at Congressional hearings that would be broadcast on C-span for all of us to watch. Perhaps , Quayle could debate Al Gore on carbon emissions.

2.

Take care of the auto workers. We could pay approximately 200,000 automobile workers currently employed at the big bad three $50,000 a year for 5 years  (cost: $50 billion) and send them out into the wild in search of life’s meaning.

Unfortunately, this would be considered a failure. It would be an admission of defeat, like pulling out of Iraq.  Surely, the unions would protest, and we would be told that life would lose its meaning for the now unemployed, but finally well-off, autoworkers. I am reminded of what happened in Great Britain when they closed down the coal mines and the poor coal miners were deprived of the opportunity to die from lung disease. Perhaps we can invent a fate for our autoworkers in which they do not lament the loss of spending the day working on an assembly line.

We would also have to deal with the 100,000s of other workers whose jobs depend directly and indirectly on the auto industry. Perhaps we could re-use, re-tool, re-invent, do some re-creative destruction. There is no easy way to calculate what would happen if we reinvented our energy and transportation industries. Could the same workers be put to building high speed trains, electric cars? Could they learn something new and useful? How long would the transition take, how painful would it be economically and socially?

3.

One possible answer to some of the questions raised is to have the U.S. government (or the Bill and Melinda Gates Foundation) invest $25 - 50 billion in a brand new automobile company with the mission to build fuel efficient, ecological cars people might actually want to buy. And given that government makes regulatory policy, we could hope for new highly restrictive environmental regulations that would just happen to favor our own new American car company. In the old days, this was called industrial policy. Sadly, though it sounds great, it usually fails. That’s because governments tend to screw this kind of thing up in the long run. (Japan made it work for a while.)  Though governments tend not to care about such things, most of our trade agreements prohibit such action.

4.

Now to my proposed option. BANKRUPTCY. This would require them to reorganize under the supervision of the courts, rather than under the supervision of a government guided by the insights of corporate lobbyists. Bankruptcy would cost the taxpayers nothing -- at least directly -- though it could result in serious ugliness, economic and social. Bankruptcy could turn out badly, though I hope not quite as badly as bailing out the car companies. It also means we can spend the money on something else.

5.

Finally, one more option. We could give all three car companies to Cerberus for nothing, taking them all private, with the condition that they hire Henry Paulsen tomorrow. We promise to give Cerebus 50% of the opportunity benefit of not having Paulsen spend U.S. taxpayer money from here to January 20th. 

Please let me know which option you prefer. Of course, if you have your own better option, let me know as well. Enjoy the show.