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The Pope and Condoms

2009-03-18T12:02:00.002-04:00

It's No Secret That AIDS is an Epidemic in Africa.

Two-thirds of all AIDS cases in the world are in Africa alone. [9] This is why I was quite surprised to hear that Pope Benedict XVI actually said that the AIDS epidemic is, and I quote:

"a tragedy that cannot be overcome by money alone, that cannot be overcome through the distribution of condoms, which even aggravates the problems." [3]

Condoms Make AIDS Worse?

I was absolutely stunned. Apparently the Vatican does not understand the difference between rhetoric and views which are supported with actual facts and evidence.

The Vatican also says condoms can also lead to risky behavior but many contest that view.

Kevin De Cock, director of the World Health Organization's HIV/AIDS department, said there is no scientific evidence showing that condom use spurs people to take more sexual risks. [2]

"My reaction is that this represents a major step backwards in terms of global health education, is entirely counter-productive, and is likely to lead to increases in HIV infection in Africa and elsewhere," said Prof Quentin Sattentau, Professor of Immunology at Britain's Oxford University.

"There is a large body of published evidence demonstrating that condom use reduces the risk of acquiring HIV infection, but does not lead to increased sexual activity," he said.[2]

Kevin Osborne, HIV adviser at the International Planned Parenthood Federation, said: "All the evidence is that preaching sexual abstinence and fidelity will not solve the problems. [4]

“France voices extremely sharp concern over the consequences of Benedict XVI’s comments,” adding they posed “a threat to public health policies and the duty to protect human life,” the French foreign ministry said today in a statement distributed to reporters. [9]

The Pope's Myopia

Ignore for a moment that people will have sex anyway, with or without condoms, and abstinence-only education has almost no effect[6][7][8]. Forgive them for their ignorance of the African tradition of a widow marrying her dead husband's brother, a tradition which provides security for families in countries where there is no social safety net. [5] The Vatican is a group of people who don't have sex claiming to know how people who do have sex are going to react to the introduction of a product that they themselves will never use.

As if to demonstrate how irrationally dogmatic they can be, the Vatican bans condoms even if an HIV positive individual wants to protect their monogamous partner.

Two years ago, there was speculation the Vatican might amend its ban on condoms after Cardinal Carlo Maria Martini, the former archbishop of Milan, said that in couples where one partner had HIV/AIDS, the use of condoms was "a lesser evil".[4]

Refuting the Propaganda

Let us cut through the Pope's willful disregard for the truth and analyze the scientific evidence surrounding condom usage. The World Health Organization (WHO) says that consistent and correct condom use reduces the risk of HIV infection by 90% [4]. The Center for Disease Control (CDC) cites comprehensive and conclusive evidence that consistent and correct usage of condoms is highly effective. [1] A meta-analysis published by Cochrane Collaboration concludes that condoms can reduce the risk by 80%. [1]

"In a very poor area here in Cape Town, we have a person called the Condom King. He hands out upwards of 500,000 condoms a month and he also gives HIV awareness education. And he gives information how best to use the condoms. And the evidence that we have found there, based on a study with Doctors Without Borders, is that because of this concerted education campaign around condoms, together with the condom access, there's actually been a decrease in sexually transmitted infections in Khayelitsha. That is quite remarkable in an area which is very poor, where people have a lot of sexually transmitted infections and have a lot of transactional sex," she says. [3]

Do Not Let Perfect Be the Enemy of Good

Of course condoms are not perfect. As the Pope said, they aren't going to stop the spread of HIV alone. But this does not mean that comdoms are without use, or that they make the problem worse.

However, both groups [CDC and Cochrane Collaboration] warned that condom use cannot provide absolute protection. Condoms sometimes break, slip or are put on incorrectly. The best way to avoid transmission of the virus is to abstain from sexual intercourse or have a long-term mutually monogamous relationship with an uninfected person. [1]

He [Kevin De Cock, director of the WHO's HIV/AIDS department] said abstinence and reducing the number of partners were also needed. [2]

They [the Treatment Action Campaign (TAC), one of South Africa's leading HIV/AIDS advocacy groups,] first promotes abstinence, then they promote being faithful and then they promote condom use. It's called the ABC campaign: abstain, be faithful, condomize," she says. [Rebecca Hodes, TAC's director of policy communication and research] [3]

The Blood On the Vatican's Hands

Pope Benedict's approach is particularly disappointing in light of what happened after Pope John Paul II visited Africa in 1990. Pope John Paul said pretty much the same thing - using condoms is a sin - and afterward the AIDS epidemic became worse.

Today, more than 28 per cent of African children have lost one or both parents to AIDS. In 1990, at the time of the pope's visit to Tanzania, the figure was 2 per cent. [5]

Both Popes are using their bully pulpit to preach policies which will sentence millions of Africans to a slow and painful death. And for what? Because religious devotion against contraceptives is more important than protecting individuals, families, and whole societies from this awful disease?

[1] New York Times - http://www.nytimes.com/2009/03/18/opinion/18wed2.html

[2] Reuters - http://www.reuters.com/article/healthNews/idUSLI43220920090318?sp=true

[3] Voice of America - http://www.voanews.com/english/Africa/2009-03-18-voa28.cfm

[4] The Australian - http://www.theaustralian.news.com.au/story /0,25197,25206355-32682,00.html

[5] The Australian -http://www.theaustralian.news.com.au/story/0,25197,25206351-32682,00.html

[6] New York Times - http://www.nytimes.com/imagepages/2007/07/18/education/20070718_ABSTAIN_GRAPHIC.html

[7] Fox News - http://www.foxnews.com/story/0,2933,265940,00.html

[8] American Psychological Association - http://www.apa.org/releases/sexeducation.html

[9] Bloomberg - http://www.bloomberg.com/apps/news?pid=20601085&sid=ajyuJ1GGgHOE&refer=europe

Terence Corcoran: AIG bonuses should be paid

2009-03-17T08:56:00.004-04:00

This argument is so ridiculous that I almost thought it was satire. Here is the original. What follows is quoted in its entirety, with my systematic deconstruction of the various flawed arguments in-lined.

To use a current cliché, frequently deployed to humiliate bankers and CEOs: He doesn’t get it. Barack Obama, that is. He just doesn’t get it, and nor do millions of others who are following the U.S. President on his long destructive march against bankers and corporate executives for their alleged “recklessness and greed.” (I love when they use "alleged")

Those were the words Mr. Obama used Monday when he instructed his treasury secretary, Timothy Geithner, to “pursue every legal avenue” to block the payment of $165-million in bonuses to employees of AIG Financial Products. News of the payments sparked a demagogic explosion in Congress and the U.S. media, and the President seized the momentum and then got out in front of it. He loves a parade. (Excuse me, you're dripping condescension on my floor...)

There’s no need to repeat here the distorted content and hysterical tone of the AIG explosion. What is worth repeating, however, are some of the facts behind the AIG bonus payments. Much has been made of AIG CEO Edward Liddy’s letter to Mr. Geithner, explaining the reasons for the bonuses. For people who like facts with their hysteria, and can calm down enough to read it, the Liddy letter appears elsewhere on this page. (My, what a high horse you're riding on...)

Mr. Liddy had no involvement with establishing the original bonus plan, designed to “retain” AIG Financial Product specialists through 2008 and 2009. But he says he has “grave concerns about the long-term consequences of the actions we are taking” to reduce the contractual payments to AIG employees. He warns of AIG’s inability to retain the best talent. AIG, he says, will simply not be able to attract employees if they come to believe “that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”

Finally, after three paragraphs of vitriol, we have an argument.

First, note that Mr. Liddy lays the blame at the feet of his predecessor. Why, though, was a "bonus" established before the employees in question had rendered their services? I was under the impression that bonuses were used to reward people for performance after-the-fact.

Second, perhaps AIG doesn't want the best talent. The second-best talent might not have screwed the pooch so badly.

Third, I'm sure that no one will have any problem awarding bonuses for people who deserve them based on their performance. No one wants to stop AIG (or any other company) from giving bonuses to successful people. But doesn't it pervert the incentive structure if we award bonuses regardless of failure?

Fourth, the auto-workers had to make contract concessions as a part of the bailout. Same basic thing happened with the Continental Airline workers. I don't see you defending them, but I imagine that you don't really care about those little people who actually produce things of value.

Now their compensation is about to undergo adjustment down to zero by the U.S. President. They say you can’t fight city hall. Then what can you do with the mighty U.S. government, which is going to throw the full legal force of the state against you? Even if the AIG employees are legally and rightly entitled to their bonus payments — which they almost certainly are — they are about to get steamrolled by a populist president riding an anti-corporate wave.

First, their compensation is not being adjusted to zero. They are still receiving their salary.

Second, without the US government, AIG would be bankrupt and those employees would have neither bonus nor salary.

Third, you do not know that they are legally entitled to their bonus payments. Have you read their contracts? Do you know for certain that they did not violate any provisions? Do you know for certain that the contract is enforceable?

Of course, if you believe that AIG and its Financial Products group —through greed, recklessness and malfeasance — were the cause of AIG’s failure and the adjacent global financial meltdown, then you have no problem with rolling back the bonuses.

But the attack on executive compensation, Wall Street bonuses and bankers is largely without merit, a trumped up attack on the private sector — on markets and capitalism — to overshadow the real causes of the global financial crisis. In recent weeks, reports from U.S. Fed Chairman Ben Bernanke, the International Monetary Fund and former Fed Chairman Alan Greenspan added to the already mountainous body of evidence that massive government failure created a monetary- and policy-driven house of cards.

Last I checked, capitalism rewards success and not failure. If you still feel that this is an attack on the private sector, you should research income inequality. It would also be illuminating to look at executive compensation relative to the average worker in the US, compared to outside the US. Ask yourself who is actually creating value - the CEO who rides a private jet to ask for bailout money, or the Joe Six Pack who is working in the factory assembling the cars.

Writing in The Wall Street Journal last week, Mr. Greenspan all but conceded that the Fed missed the signals and implications from the flood of foreign-owned dollars cascading into the U.S. market — dollars that his monetary policies had created. But he said his 1% interest rate regime through 2003 and 2004 was not to blame.

Absurd on its face. Greenspan wants us to think that it was the fixed-interest mortgages that are causing the problem, and that those mortgages aren't correlated with the fed funds rate.

However, those mortgages were never the problem. Adjustable rate mortgages, some of which were pegged to indexes that are in fact affected by the fed funds rate, were the source of the problem.

Further, consider that the 1% interest rate was giving the finger to everyone who wanted to save, because your savings account couldn't get you a decent return. Naturally, the "global savings glut" went looking for somewhere else to put all that money...

Then Mr. Bernanke, current Fed chairman, in a speech last Tuesday, said we were experiencing the worst financial crisis since the 1930s, but, “Its fundamental causes remain in dispute.” While corporate behaviour may have played a role, Mr. Bernanke ran through a list of government-based causes for the global crisis. Mr. Bernanke cited global savings imbalances, the buildup of U.S. dollar currency reserves in China and elsewhere and the build-up of oil dollars among petroleum exporting countries.

The build-up of systemic risk — the rising odds that the entire system might crash — took place beyond the ability or even the responsibility of any one private bank or insurance company. No bankers or AIG executives are responsible for systemic risk.

If it were not for AIG, the risk would be far less systemic! The branch in question whose bonuses are under threat specialized in credit default swaps, designed to provide insurance against risk. However, with a little bit of doublespeak, they can avoid the regulatory requirements normally associated with insurance - common-sense requirements that were put in place to prevent systemic risk from happening. They became responsible when they chose to bypass these requirements that were put in place for safety reasons because they wanted to make more money.

The leading government-created disaster behind the financial crisis is U.S. housing policy and the multi-trillion dollar securitized mortgage market created by the U.S.-government backed mortgage agencies known as Fannie Mae and Freddie Mac. In comments in 2007, Mr. Bernanke reported that the two agencies, with $5.2-trillion in mortgage obligations, posed a systemic risk. Such risk, he said, occurs when “disruptions occurring in one firm or financial market may spread to other parts of the financial system, with possibly serious implications for the performance of the broader economy.”

First, Fannie and Freddie had pretty strong underwriting requirements. 20% down payment, for instance. No jumbo mortgages, either. They largely avoided the subprime market up until about 2004, when Wall Street investment banks cut out the middle man and started heavily securitizing mortgages on their own. Certainly Fannie and Freddie abused their political connections to leverage themselves to the brink, but you might be surprised to know that a lot of European banks were as leveraged as Fannie and Freddie because AIGFP's credit default swaps allowed them to skirt regulatory requirements.

The greater share of the blame goes to Wall Street investment banks (like Bear Stearns) that would bribe small, unregulated brokers with attractive fees to provide them with more and more loans regardless of risk, and then they bribed credit ratings agencies with still more attractive fees to label the different tranches of this toxic waste as AAA using poor risk models. Then they sold this ticking time bomb to investors, justifying their intentional fraud because this was what a CDS was for...

When Fannie Mae and Freddie Mack failed, because of the mortgage bubble they helped create, the systemic meltdown spread around the globe. The private sector, bankers and insurance companies, were the victims of a failed global financial regulatory regime.

First, when Fannie and Freddie failed, they were taken into conservatorship by the US government. Only the shareholders lost money because all of Fannie and Freddie's obligations are now backed by the full faith and credit of the federal government.

Second, the bubble was mainly in California, Arizona, Nevada, and Florida. This is where most of the unregulated brokers were - you know, the unregulated brokers who weren't under any obligation by the Community Reinvestment Act (CRA) to loan to minorities. They made big mortgages (alt-A or jumbo) for the McMansions that are currently losing value the fastest.

That conclusion is essentially the one delivered by International Monetary Fund officials in early March. In a brief report, “Initial Lessons of the Crisis,” the IMF reviews the regulatory disaster. It tries to put the blame on “market failure” and financial institutions for failing to recognize the looming systemic problems. But it is the regulators — who are really charged with detecting and preventing systemic risks — who failed to see the train coming down the track.

Try telling that to Chris Cox, who reduced the capital requirements for Wall Street banks in 2004 at their request, allowing them to leverage themselves out of existence.

Botched regulations, distorting accounting rules, misguided monetary policy, over-stimulative government policy — the list of state policy failure behind the crisis is long and much more significant than any of the individual deals done by AIG Financial Products. They sold products that made sense under the monetary and regulatory regimes established by governments all over the world. Market players do that. Bankers are not responsible for systemic risk.

I still find it amusing that the people who are selling a product for managing systemic risk are not responsible for systemic risk. Doublespeak at its finest.

But now, apparently, bankers and financial market actors are supposed to personally pay for the government-created systemic risk and collapse. In its report, the IMF suggested that in future, financial market compensation packages should be designed so that individuals are only paid the money after the passage of time. “An early priority should be to delink bonuses from annual results and short-term indicators.” Instead, bonuses would be paid as “deferred disbursements and allowing for some claw back as risks are realized.”

Pay people a bonus after they have earned it? That's crazy talk!

Private market players, in other words, are to bear the burden of regulatory failure. They would only receive their compensation after they find out whether governments and regulators have done their jobs and protected against systemic risk. In AIG’s case, Mr. Obama is punishing AIG staff for massive, global government failure.

They ceased to be merely "private market players" when they began actively lobbying the government to change the regulatory structure in ways that permitted the systemic failure to occur.

Mitt Romney on the economy

2008-11-19T11:16:00.005-05:00

Mitt Romney wrote in an op-ed to the NYT regarding what to do about the auto-makers. It's a good read, but in particular this part stood out to me.

The need for collaboration will mean accepting sanity in salaries and perks. At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. Get rid of the planes, the executive dining rooms — all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.

Beautiful words. It reminds me of business owners who are complaining about taxes being raised on companies who make really big profits. If they're so interested in the lower tax bracket, why don't they pay their employees a better wage? It sickens me to see executives exploit the productivity of their workers for their own personal gain.

Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.

This is a great idea in theory, but capitalism is cutthroat in practice. Imagine for a second that you're a company and you're focused on long-term appreciation and watching your balance sheet. Now imagine that you have competitors, and they're focused on the short-term; they're leveraging their balance sheet and taking risky bets, and right now the bets are paying off. Suddenly, you start losing all kinds of market share because investors can get better returns somewhere else. If you don't lower your standards to that of your competitors, you risk going out of business.

That must be how Daniel Mudd felt when he took over Fannie Mae in 2004. He had the following conversation with the CEO of Countrywide at the time, Angelo Mozilo.

Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.

“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.

“You need us more than we need you,” Mr. Mozilo said, “and if you don’t take these loans, you’ll find you can lose much more.”

Then Mr. Mozilo offered everyone a breath mint.

An honest businessman cannot make a living in a capitalist society that encourages market participants to be no more honest than those with the least honesty and lowest ethics.

Financial crisis

2008-11-18T15:08:00.002-05:00

Two videos from youtube with some nice animations and simple graphs.

America is a center-moderate country

2008-11-12T18:12:00.000-05:00

House GOP leader John Boehner told colleagues Wednesday, "America remains a center-right country. Democrats should not make the mistake of viewing Tuesday's results as a repudiation of conservatism."

Americans have repudiated unbalanced conservatism. Republicans have tried to drag this country too far to the right, essentially placing the goal posts at "center" and "right". Mainstream America voted to restore the goal posts to "center-left" and "center-right". We do not seek to do away with conservative ideology...we just want people like Rep. Boehner to know that we are a center-moderate country, with a healthy balance of liberal and conservative ideology.

This graphic from the New York Times illustrates my point perfectly. Each precinct in America is colored according to how the voting percentages shifted versus some previous election. A precinct that voted more Democratic in 2008 than it did in 2004 is shaded a blue, and vice versa.

This is how precincts compared between the 2008 election and Bill Clinton's 1996 election. Obama still has many more hearts and minds to win.

Someone over at the Huffington Post links to a poll with even more proof that America is not a center-right nation.

Various items - money

2008-11-10T12:32:00.002-05:00

So the bailout contained a hidden giveaway for corporations. The Washington Post has a lengthy article on Section 382, which was just modified by bailout legislation.

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes. ...

The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo. Wells Fargo declined to comment for this article. ...

Jones Day released a widely circulated commentary that concluded that the change could cost taxpayers about $140 billion. Robert L. Willens, a prominent corporate tax expert in New York City, said the price is more likely to be $105 billion to $110 billion.

AIG needs even more cash.

American International Group Inc. got a $150 billion government rescue package, almost doubling the initial bailout of less than two months ago as the insurer burns through cash at a record rate.

AIG will get lower interest rates and $40 billion of new capital from the government to help ease the impact of four straight quarterly deficits, including a $24.5 billion third- quarter loss posted today by the New York-based company. ...

To make the bailout affordable, the U.S. will reduce the $85 billion loan that saved AIG in September to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, the Federal Reserve said today in a separate statement.

I wrote earlier about disappearing economies of scale. I wonder, if the scale of their economy were larger, would Circuit City be filing for bankruptcy? The report alleges competition from Best Buy and Wal-Mart. However, I can't help but think that the loss of consumer spending doomed the relatively smaller retailer.

Various items - war

2008-11-10T12:17:00.003-05:00

US airstrikes bombed another wedding party in Afghanistan.

Tensions between American forces and the Afghan government over civilian casualties from coalition airstrikes spiked again on Wednesday with a report by Afghan officials that a missile from a United States aircraft had killed 40 civilians and wounded 28 others at a wedding party in the southern province of Kandahar. ...

In one of the worst cases of civilian deaths by an American strike this year, an attack aimed at a meeting of Taliban insurgent leaders on Aug. 22 killed at least 33 civilians, according to a Pentagon inquiry. Other investigators said the numbers were much higher. According to an Afghan parliamentary investigation, an airstrike in July in the eastern province of Nangarhar also struck a wedding, killing 47 civilians, including the bride.

So much for respecting other country's sovereignty.

The United States military since 2004 has used broad, secret authority to carry out nearly a dozen previously undisclosed attacks against Al Qaeda and other militants in Syria, Pakistan and elsewhere, according to senior American officials.

It also appears that Georgia threw the first punch.

Newly available accounts by independent military observers of the beginning of the war between Georgia and Russia this summer call into question the longstanding Georgian assertion that it was acting defensively against separatist and Russian aggression.

Instead, the accounts suggest that Georgia’s inexperienced military attacked the isolated separatist capital of Tskhinvali on Aug. 7 with indiscriminate artillery and rocket fire, exposing civilians, Russian peacekeepers and unarmed monitors to harm.

The AP writes that Obama is planning on shutting down Gitmo.

President-elect Obama's advisers are quietly crafting a proposal to ship dozens, if not hundreds, of imprisoned terrorism suspects to the United States to face criminal trials, a plan that would make good on his promise to close the Guantanamo Bay prison but could require creation of a controversial new system of justice. ...

Under plans being put together in Obama's camp, some detainees would be released and many others would be prosecuted in U.S. criminal courts.

A third group of detainees — the ones whose cases are most entangled in highly classified information — might have to go before a new court designed especially to handle sensitive national security cases, according to advisers and Democrats involved in the talks. Advisers participating directly in the planning spoke on condition of anonymity because the plans aren't final.

Disappearing economies of scale

2008-10-31T15:16:00.005-04:00

GDP fell 0.3% due to a decrease in consumer spending.

(CNN) Consumer spending, which makes up more than 70% of GDP, declined at an annual rate of 3.1% in the quarter, according to Thursday's report. It was the first time consumer spending fell since 1991 and the largest drop since early 1980.

What impact does this have on economies of scale? Consider that big screen TVs, surround sound stereo systems, and multi-core computers are made possible by economies of scale. There are many millions of American consumers, creating vast markets for a wide variety of goods to be sold.

Lately, middle class consumers' disposable income was supplemented by increased housing prices, which allowed them to use their homes as an ATM. The housing bubble has burst now, so where do consumers get new disposable income to help provide the scale necessary to make those new toys that we like so much? Credit cards are out of the question, given the credit crunch. Barack Obama's tax plan seems like a nice way to keep money in consumers' pockets.

Now, some people are whining because that tax plan amounts to socialism. This is totally bogus, but even if it weren't, the rich should stop to consider that in the absence of a middle class with disposable income, how will companies achieve economies of scale? Do you think that the rich can pick up the slack when consumer spending is 70% of GDP? If businesses lose the scale they have now, prices for goods will shoot up, and the wealthy might learn exactly what debt they owe to the existence of the middle class consumers.

If no one has any money to buy your stuff, do you think you'll still be rich? Go ask the auto-makers.

More on the financial crisis

2008-10-31T13:18:00.000-04:00

A Question for A.I.G.: Where Did the Cash Go?

The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October.

I wonder if AIG is doing the same thing as other banks across the country are doing with the bailout money. JPMorgan Chase is trying to acquire new banks, while others are paying off their executives. And we all know AIG blew over $400,000 the week after their bailout on a week-long spa resort.

“When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.”

This is what happened during Japan's lost decade. They didn't just write everything down and get on with it, instead they slowly and continually lost money.

Suspension of mark to market accounting certainly won't provide "full and honest information." Maybe a central clearinghouse for derivatives would help, but why would we want to regulate the market? "Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary," Greenspan said, even while Long Term Capital Management was collapsing months later (for much the same reason that there are no more Wall Street investment banks anymore).

The Myth of Wealth Redistribution

2008-10-27T22:28:00.000-04:00

There's been a lot of noise regarding Senator Obama's tax plan as wealth redistribution/socialism. There's also some noise about a radio show Senator Obama was on in 2001, but almost no one bothers to point out that he was lamenting the narrow-minded focus on court-mandated change, as opposed to a more proper focus on legislative-mandated change. I imagine that those against "judicial activism" should agree with him, but I digress.

First, it's a bad idea to throw rocks if you're in a glass house. Governor Palin passed a windfall profits tax on oil companies and passed the proceeds on to her constituents. She talks of Alaskans receiving an equitable share of the state's non-renewable resources. That explains her previous 80% approval rating as governor; if your governor gave every man, woman, and child in the state an extra $1,200, wouldn't you like said governor?

(Gov. Palin) Alaska—we’re set up, unlike other states in the union, where it’s collectively Alaskans own the resources. So we share in the wealth when the development of these resources occurs

I could go on about redistributing wealth to your cronies. For example, no-bid cost-plus contracts to the company which the Vice President is the former CEO of. The bailout for companies like Goldman Sachs, engineered by the former CEO of...Goldman Sachs. And so on.

Second, his plan is not a hand-out, but rather a hand up. Those who do not pay taxes are not going to get extra money back. Money will not be given to "lazy welfare bums" or "those who don't want to sacrifice and sweat."

(page 2) the “Making Work Pay” credit will provide a refundable tax cut of $500 for workers or $1,000 for working couples

Emphasis mine. By definition, working people are not on welfare.

Third, much of the noise regards "punishing the successful." I don't think anyone can honestly say that a higher tax rate will make someone reject a raise, so long as an increase in pay never means that you actually take less money in dollars home. Besides, if you don't like your tax rate, donate to charity or pay your employees a better wage and you can lower yourself to whatever tax bracket you want.

Don't we tax work more than we tax wealth? Are any of them advocating raising inheritance taxes? After all, the best way to get rich is to be born into it; this is not working hard, nor success, but aristocracy. Why not tax inheritance at a rate determined by the increase in the national debt during the lifetime of the individual?

The answer is because "punishing the successful" is a red herring. A progressive tax is not about punishing the successful, but about compensating for people who might not know when the concentration of wealth is causing a detriment to society. We rise and fall as one nation, and when your neighbor does better, you do better too. Remember, the Good Samaritan who helped and paid for the care of an injured stranger was credited by Jesus as more worthy than the Pharisee who simply walked by because the stranger was a pagan to him.

Think of the CEO who pilfers the pension fund for his company, runs it into the ground while receiving hundreds of times as much salary as a regular employee, and then gets a golden parachute worth $10s of millions for their failures.

Fourth, the tax rates are comparable to the rates under Clinton. Yet no one was calling Clinton a socialist. In fact, I suggest going back almost 100 years and looking at the tax rates in World War I, World War II, after World War II, and during the Cold War. For the highest bracket, they are in the neighborhood of 70-94%. But we weren't socialists back then, were we?

Put another way, Senator Obama is not proposing new taxes; he is proposing old taxes, most of which were legislated to expire sooner or later anyway. Taxes would just return to what they were previously, just a few years ago, for only the upper few brackets.

Fifth, what is so bad about taxes?

(Colin Powell) Taxes are always a redistribution of money. Most of the taxes that are redistributed go back to those who pay them, in roads and airports and hospitals and schools. And taxes are necessary for the common good. And there's nothing wrong with examining what our tax structure is or who should be paying more or who should be paying less, and for us to say that makes you a socialist is an unfortunate characterization that I don't think is accurate.

"Socialist", "communist", and "Marxist" stifle and suppress honest, open debate. It is just fear-mongering, meant to activate the amygdala and shut down the critical thinking regions of the brain.

Consider that taxes allow roads to be built and maintained, enabling the successful people to connect with consumers so that they can become rich in the first place. Taxes pay to maintain schools and for teachers to educate the workforce so that those successful people can hire competent employees. Taxes pay for health inspectors to make sure you don't get E. Coli when you go out to eat, to make sure that the plane you're flying in doesn't crash due to neglect, to make sure the home you live in meets public safety standards.

Who gets greater prosperity from the existence of roads and schools; the upper class, or the middle class? If our infrastructure falls apart, how will products be shipped to malls for consumers to purchase? Who will run cash registers if no one can do basic arithmetic? Doesn't it make sense that those who benefit most from government spending ought to contribute more of their income to it? Senator John McCain believed that back in October of 2000.

(I would like to point out that at just after 2 minutes, McCain admonishes the crowd for booing the speaker; imagine that, encouraging an open and honest discussion...)

In this video, McCain advocates a progressive income tax. Even Adam Smith (the "invisible hand" guy) advocates a progressive tax in The Wealth of Nations.

(Adam Smith) It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.

McCain moves on to discuss loopholes and how they affect the effective tax rate. So let's look for some examples.

(Reuters) The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.

Also, check out this graph. Although the maximum tax rate is 35% in the US right now, not even the richest actually pay more than 31%.

Further, consider that capital gains are taxed at 15% for the upper bracket. So if you're a rich CEO and you get paid in stock options, you're effectively getting less than half of the normal income tax rate on that income. Even Warren Buffet denounces the system where his tax rate is less than his secretary's. The truly insidious twist to this is that our 401(k)'s are taxed as regular income, and not capital gains, despite being in the stock market.

The rich are not only getting richer but they're also paying less in taxes. And for the super-rich there are quasi-legal ways to avoid paying some taxes altogether. It's not worth most people's time to itemize their taxes. Rich folks can also afford accountants who exploit tax breaks and exemptions for their clients, off-shore tax shelters like Ireland, or tax breaks that you can pay lobbyists to put into legislation.

McCain ends by saying that rich people are already doing well, and the people who really deserve a tax cut are lower income families who are trying to raise and educate their children.

Personally, I go even farther. Consider that "tax cuts for the rich" is an implementation of supply-side economics, which John Kenneth Galbraith likened to the horse and sparrow theory; if you feed the horse enough oats, some will pass through to the road for the sparrows.

More money for the middle class means more people going out to eat, to the movies, or the mall. It means more people going to the dentist or the eye doctor and buying glasses or contacts. It means deliveries of products to those places doing more business. It means big-screen TVs and surround sound stereo systems and multi-core computers made possible by the economies of scale provided by a large and vibrant middle class.

Ultimately, the owner of the company will make more money because he will have more business from a middle class who has more disposable income. He could make so much more money that it offsets the extra taxes that he's paying. Call it "trickle up" or "demand-side economics".

There is in fact some evidence of this. The table below shows that family income growth, after adjusted for inflation, is greater for everyone under Democrats than Republicans. Further, under Democrats, income inequality narrows, while under Republicans it grows. A growing inequality gap is one of the reasons American cities have economic inequality that rivals African cities.

Finally, I would like to tackle the "wealth creation vs. wealth redistribution" myth that is being peddled right now. Inflation adjusted wages for the lower 50% of Americans are pretty much the same as they were 40 years ago. Inflation is class warfare, allowing companies to give the illusion of higher pay without actually giving their employees more purchasing power, while officers in the company get extravagant pay packages, pensions, stock options, and so on. In order to continue consuming goods the middle class usually takes on huge debts using mortgages and credit cards. Sometimes the lower class (who has no connections with which to get a good job) must buy groceries or pay the electric bill with a credit card just so they can survive. Eventually those lower class citizens slide so far into debt that they must file bankruptcy.

Most of our wealth for the past several years has been "created" using mortgages (sub-prime, alt-A, jumbo, etc) and other debt instruments. How sinister that the "creation of wealth" is a debt owed by the poor to the rich. The top 0.1 percent now earn more money than the bottom 50 percent of Americans, and the top 1 percent own more wealth than the bottom 90 percent. And if you default on your mortgage, they keep the money you've paid so far, and they get the house, too.

How pervasive is our national debt? It's now over $10 trillion. $10,000,000,000,000. That's over $30,000 for every man, woman, and child in America. It grows by $1 million per minute. Last year, it cost $430 billion just to service the interest on the debt. This is what happens when you cut taxes and go to war at the same time - Treasury must sell billions of dollars of Treasury notes, and the biggest purchasers as of August 2008 are countries like Japan ($586 Billion), China ($541 Billion), the UK ($307 Billion), OPEC ($147 Billion), among others.

Someone must pay the debt sooner or later. If not this generation of Americans, then their children. For all of the noise about "tax and spend Democrats", people sure don't mind the "tax your children and spend" policy that pays for the wars in Iraq and Afghanistan. Such behavior is anything but patriotic.

Greenspan "shocked"

2008-10-24T11:48:00.000-04:00

(Reuters)Greenspan "shocked" at credit system breakdown

(NYT)Greenspan Concedes Error on Regulation

(Reuters)Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets

"I'm shocked, shocked!, to find that pimping Adjustable Rate Mortgages while interest rates are at rock bottom leads to an increase in defaults after interest rates return to normal!"

(Reuters)"this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said

Hm...in the unregulated Credit Default Swap (CDS) market, either party can sell the contract without letting anyone else know. The entire point behind derivatives was to spread the risk among multiple parties. The meltdown happens and you're SURPRISED to see that the effects are broad?

(NYT)Many Republican lawmakers on the oversight committee tried to blame the mortgage meltdown on the unchecked growth of Fannie Mae and Freddie Mac, the giant government-sponsored mortgage-finance companies that were placed in a government conservatorship last month. Republicans have argued that Democratic lawmakers blocked measures to reform the companies.

Uh-huh. It's all Fannie and Freddie's fault, despite the fact that Ginnie Mae (the government-owned mortgage securitizer) is just fine. Despite the fact that Bear Stearns fell first. Despite the fact that Fannie and Freddie's debts are all insured by the government now that they're under conservatorship, and yet AIG went down. No one else except Fannie and Freddie needs to be regulated.

Greenspan is, thankfully, not as shallow. He acknowledges that Fannie and Freddie are part of the problem. Keyword: part. Yes, they did some extremely shady things, but they have been shady for over a decade, throughout the Presidencies and Congresses controlled by every combination of both parties.

(NYT) But Mr. Greenspan, who was first appointed by President Ronald Reagan, placed far more blame on the Wall Street companies that bundled subprime mortgages into pools and sold them as mortgage-backed securities. Global demand for the securities was so high, he said, that Wall Street companies pressured lenders to lower their standards and produce more “paper.”

(Reuters)"Without the excess demand from securitizers, subprime mortgage originations -- undeniably the original source of crisis -- would have been far smaller and defaults, accordingly, far fewer," he said.

A surge in demand for U.S. subprime securities, supported by unrealistically positive ratings by credit agencies, was the core of the problem, he added.

Emphasis mine. Not enough people focus on the roles of the credit ratings agencies.

The Federal Reserve had broad authority to prohibit deceptive lending practices under a 1994 law called the Home Owner Equity Protection Act . But it took little action during the long housing boom, and fewer than 1 percent of all mortgages were subjected to restrictions under that law.

This is what makes me think Greenspan knew exactly what he was doing. He knew the credit ratings agencies were underpricing risk. He ENCOURAGED borrowers and lenders to use Adjustable Rate Mortgages while interest rates were ultra-low. He had to know that he was forcing investors to look for better returns in other markets when he held interest rates below inflation. He knew bad mortgages were being issued, and he could have stopped them...but he didn't.