Madoff: Humanity’s Paramount

Psychologists wonder why people are endowed with the ability to learn the part of Hamlet or understand calculus when neither skill was of much use to mankind in the primitive conditions where his intellect was shaped. [...] The solution: we use our intellects not to solve practical problems but to outwit eachother. Deceiving people, detesting deceit, understanding people’s motives, manipulating people–these are what the intellect is used for.

Perhaps Bernard Madoff, as the glorious product of human evolution that he is, should be praised for having outwitted others to the tune of billions of dollars.

Distracted

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. That’s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses).

The Big Takeover – Rolling Stone

Mess-ame Street

Fire!

When a fireman sees a house on fire, he sounds an alarm, dons his turnout gear, bravely rescues the occupants and puts out the fire.

When an investment banker sees a house on fire, he quietly sells the burning house short, uses the proceeds to buy a larger house for himself and, when someone suggests that his taxes be raised to help the homeless, he rails against the dangers of socialism.

Fire! – The Big Picture

Is Treasury Playing Hands-Off With Citigroup To Please The Saudis?

Today marks the day when Citigroup shares fell to under $1/share after trading higher than $50 less than two years ago.

Those holding Citigroup shares fall in one of three camps:

1) Those who don’t pay attention to their portfolio, still holding Citigroup because they don’t know any better
2) Those who have written off their investment and are planning on harvesting the stock-loss tax deduction
3) Those who consider Citi a distressed play and are betting on the remote possibility that equity holders will remain whole after a bankruptcy or nationalization

It’s somewhat of a foregone conclusion that Citi, with its massive balance sheet of souring loans, will be nationalized, bailed out, or reorganized in bankruptcy court. The massive tower has been teetering for quite a while now — it’s not a question of if, but when.

So why has the Treasury Department failed to act?

My admittedly speculative conspiracy theory on the subject: the Saudis called, and ordered US regulators to keep their hands off Citigroup lest Prince Al-Waleed bin Talal have his ownership stake diluted or eliminated.

Al-Waleed has pumped billions into Citigroup in order to keep it afloat. If equity holders were wiped out, Al-Waleed wouldn’t be able to recover his investment from Citigroup’s potential post-recession recovery.

This may be a situation in which international political considerations trump domestic financial-health regulations.

Boom Goes The Dynamite: Citigroup Under $1.00 – DealBreaker

Boys Will Be Boys

“Back in 2001, as the Internet boom turned into a bust, M.I.T.’s Quarterly Journal of Economics published an intriguing paper called “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” The authors, Brad Barber and Terrance Odean, gained access to the trading activity in over 35,000 households, and used it to compare the habits of men and women. What they found, in a nutshell, is that men not only trade more often than women but do so from a false faith in their own financial judgment. Single men traded less sensibly than married men, and married men traded less sensibly than single women: the less the female presence, the less rational the approach to trading in the markets.”

Wall Street on the tundra, by Michael Lewis – Vanity Fair

Still Fit For The Job

“There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. [Prime Minister] Haarde, though, is a trained economist—just not a very good one.”

Wall Street on the tundra, by Michael Lewis – Vanity Fair

On Thin Ice

“…we arrive at the 101 Hotel, owned by the wife of one of Iceland’s most famous failed bankers. It’s cryptically named, but instantly recognizable: a hip Manhattan hotel. Staff dressed in black, incomprehensible art on the walls, unread books about fashion on unused coffee tables—it’s the sort of place bankers stay because they think it’s where the artists stay. Bear Stearns convened a meeting of British and American hedge-fund managers here, in January 2008, to figure out how much money there was to be made betting on Iceland’s collapse. (A lot.)”

Wall Street on the Tundra, by Michael Lewis – Vanity Fair

Dilbert: Bailout Hearings

Via Dilbert.

Barney Frank: Irony

Barney Frank (D-MA) is largely noted for two things: serving as chairman of the House Financial Services Committee during the 2007-2009 economic recession, and saying incredibly stupid things regarding that same crisis (most notably he was shouted down by Bill O’Reilly on FoxNews).

As I’ve just accidentally discovered, it seems he was at times famous for other behavior.

According to The Washington Post, in April 1985 Rep. Frank answered a classified ad in The Washington Blade — D.C.’s gay weekly. The man on the other end of the personal ad was Steve Gobie, a 28 year old male prostitute. Rep. Frank paid Gobie $80 (roughly $150 in today’s dollars) for sex, and proceeded to hire Gobie as his aide/driver and allow Gobie to use his apartment for prostitution.

Attempts to expel or censure Frank were led by Republican member Larry Craig (who himself was later embroiled in his own gay sexual scandal).

If that isn’t irony, I don’t know what is.

Stocks Chart Scores

Stock charts turned into music using Microsoft Songsmith. Some of the songs are pretty catchy.

Investing and the NFL

Why investing in the stock market as an individual is akin to a being a lanky guy suddenly found playing football against an NFL team:

Watch a pro football game, and it’s obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, ‘I don’t want to play against those guys!’

Well, 90% of stock market volume is done by institutions [mutual funds, hedge funds, and program traders], and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared — the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.

-Charles Ellis, Yale University Endowment

You’ve been warned.

Trading With the Big Boys – The Big Picture

Why an ***hole is always in charge

By Greg Palast

John Thain is the guy that looks like a Clark Kent doll you saw grinning from page one of your paper Friday morning. Thain was just fired by Bank of America because the square-jawed executive demanded a $30 million bonus after losing $5 billion in just three months at the bank’s Merrill Lynch unit. In addition, Thain spent over a million dollars redecorating his office while, at the same time, the U.S. Treasury was bailing out his company with billions in aid. Thain’s office re-do included the installation of a $35,000 toilet bowl.

Thain was robbed. He shouldn’t have been fired; he should have gotten a $60 million bonus — and Obama should immediately hire him as Secretary of the Treasury in place of that tax-dodging lightweight that’s been nominated, Timothy Geithner.

Here’s the facts, ma’am.

Thain was CEO of Merrill Lynch, the big brokerage firm. On a good day, Merrill is worth zero. A week before it was about to go out of business, Thain sold this busted bag of financial feces to Bank of America for $50 BILLION.

I’d say that’s worth a bonus.

But it gets better. When the bag broke and another $5 billion in losses were discovered at Merrill, Thain went to the U.S. Treasury and got ANOTHER $20 BILLION to cover Bank of America’s bad financial bet — from us, the taxpayers.

Now that certainly deserves a bonus. And let’s face it, a butthole that big needs a $35,000 toilet.

Instead, the guy that paid the $50 billion, Bank of America Chairman Kenneth Lewis, is keeping his job. Lewis is the same guy that just spent billions more on buying Countrywide Financial, the sub-prime mortgage loan sharks that have brought America to its knees and put Bank of America into effective bankruptcy. (Note to Mr. Lewis: the only thing worse than getting cancer is PAYING for it.)

But dumber than Lewis is the loser who OK’d paying Bank of America for its losses on Merrill, who traded a pile of turds for a stack of gold — our gold from the U.S. Treasury. That was Tim Geithner, Obama’s pick for Treasury Secretary, who’s now answering questions at Senate confirmation hearings about his funky tax filings.

Tiny Tim was head of the New York Federal Reserve Bank during the Bush regime. Along with Bush’s Secretary of the Treasury, Geithner came up with that $700 billion bail-out that loaded banks with loot on their way to insolvency. Bank of America got $25 billion of it to spend on Thain’s company Merrill. That was before the extra $20 billion was weedled by Thain.

So why, President Obama, have you given us Tiny Tim to save our sorry nation’s economic behind? What’s with that?

In another life I was an economist. Really. So here’s the economic facts of life: Our valiant young president is going to have to borrow a trillion dollars to bring our economy back from the grave. He’s got to borrow it, no choice about that. But who in their right minds will lend it to us? I can tell you the number one job of a new Treasury Secretary will be to con Saudi sheiks and Chinese apparatchiks into lending us another trillion (they’ve already lent $2 trillion).

Who in the world can talk them into it?

The answer came to me after I went this afternoon to see my proctologist, a brilliant doctor with one eye and really long fingers. (OK, I made that up.) The good doctor told me that hoary old joke about the heart and brain and rectum getting into a fight about which one was more important. When the higher organs made fun of the butt-end, the rectum went on strike. After a month, the brain and heart couldn’t take it any more — the whole body was about to explode. So they told the rectum, ‘You win.’ And the rectum said, Now you know why an asshole’s always in charge.

There’s our answer. Instead of an easily duped, incompetent weasel like Geithner for Secretary of the Treasury, what we really need is a lying bucket of evil snot, a flaming red take-no-prisoners asshole. A guy like Thain that can sell a piece of crap like Merrill for billions — twice — is just what we need to shake down the sheiks. “America for Sale! Cheap!”

And Thain comes with his own gold-plated toilet.

Greg Palast is the co-author of Steal Back Your Vote, a comic book co-authored with Robert F. Kennedy Jr. Watch Palast’s investigative reports on BBC Television’s Newsnight and in Rolling Stone Magazine. For more info go to GregPalast.com.

Kicking Madoff

Via DealBreaker.

Stimulus Spending Doesn’t Work

Stimulus Spending Doesn’t Work: Tax cuts are the best way to stimulate economic growth
by Anthony Randazzo

A stimulus package has two objectives it must meet in order to qualify as successful: First, it must generate quick economic recovery. Second, that recovery must lead to sustained economic growth.

Contrary to popular belief, the government spending programs implemented during the Hoover, Roosevelt, Ford, and George W. Bush administrations that intended to generate this kind of economic stimulus did not create sustained economic growth or reduce unemployment long-term. Neither did Japan’s years of stimulus spending in the 1990s bring Japan’s economy out of recession. Stimulus packages are never fully successful.

The myth that stimulus works, achieving these ends, stems from the thought that increased demand for products will encourage increased production and thus spur economic growth. President-elect Barack Obama and Congress are beginning to debate a proposed two-year, $775 billion stimulus package that includes up to 40 percent in tax cuts. However, there are very practical reasons why this and other stimulus packages—either cash distribution or spending projects—don’t work the way they are projected.

1. Stimulus packages frequently misdirect national resources

Stimulus spending draws economic activity to short-term projects (such as expanding a road or fixing a school roof) but as a result pulls resources away from investment in sustainable economic projects (based on what the market demands). The federal government, with its limited knowledge and lack of price signals represented in a market economy, can’t always know how best to spend money.

2. Stimulus packages don’t increase aggregate consumption

In order to inject money into the economy, the government has to take money out of the economy. Whether by increasing taxes, national debt, or printing the money (growing inflation), the government has to damage long-term wealth in order to provide short-term economic activity.

3. Stimulus packages don’t create sustainable jobs

Infrastructure projects create jobs because they require workers. You need construction workers to build a road, but once the project is complete, the jobs go away. The contracting firm that used stimulus money to hire workers no longer can afford to keep them on staff. Employment is not sustained. As a result, the worker, while employed for a short-term period of time, is not able to seek long-term employment. The worker, while likely grateful for the short-term job, is still not sure if, or when, the next job will come. As a result, they will still likely limit their spending, thus reducing consumption and overall economic growth.

4. Stimulus packages increase national debt or cause rapid inflation

In order to pay for any stimulus—whether building roads or building schools—the government has to pass the cost on to future generations. The national debt more than doubled under New Deal spending during the Great Depression. While there may be some short-term economic activity, the weight of the national debt will limit economic growth in the future. Alternatively, if the government printed money to avoid debt, inflation would grow, also hindering sustained economic growth.

5. Stimulus packages are pork-laden and caught up in federal bureaucracy

Large government spending programs fall victim to pork spending. The U.S. Conference of Mayors recently submitted over 11,000 projects that are “ready to go” on their national infrastructure wish list. Duck ponds, dog parks, sports parks, tennis centers, and swimming pools were all part of the infrastructure stimulus that the mayors say is “needed” for economic recovery. Private firms and industries nationwide will line up to try and get their piece of the federal money, regardless of whether this will result in the most efficient use of tax dollars. The rent seeking behavior will deter politicians, under pressure from donors and constituents, from putting the money to the most effective use.

Tax cuts are a much better way to stimulate economic growth. Allowing companies to keep more of their revenue is an incentive to create more wealth and thus promote economic growth. Allowing individuals to spend more of their own money as they see fit helps the market more accurately understand demand signals than when the government just spends trying to create demand out of nothing.

Some of the tax cuts Mr. Obama has proposed will be helpful. Letting firms write down their losses to reduce tax bills will allow firms to keep much needed capital in the economic downturn. And any tax incentive to help employers keep or add jobs will be beneficial.

Stephanie Cutter, a spokeswoman for President-elect Obama, said Monday that the incoming administration was trying to create private-sector jobs through a package that has a big and immediate impact. “We’re guided by what works,” she said, “not by any ideology or special interests.”

If that’s the case, they should look carefully at the pitfalls of stimulus spending. The national debt is already approaching $11 trillion and the federal budget deficit for 2009 may top $1.2 trillion. The nation needs fiscal responsibility from its government more than it needs a stimulus.

Anthony Randazzo is a policy analyst at Reason Foundation. An archive of his work is here. This article originally appeared at Reason.org.