Sept. 29, 2008

Today there was a crowd of people watching the TV screen in the library lobby watching the market panic plummet while the vote failed.

I missed most of the good trades because I had class today.  I traded a little later, made some money on GOOG and AAPL (long and short).

But it’s just really tragic to see the opinions expressed and actions taken today.  How long will it take to put together another deal while world markets crash and credit spreads go even higher?

We’ve dumbed ourselves down so much that we have no hope of getting ourselves out of this mess.

It’s a repeat of 1929.

Good luck to us all.  As for me, there’s lots of liquidity to daytrade this garbage.  But this is nothing like the 2001 bubble burst.

[Addendum:  Found an excellent additional read.  Will piggyback off of it in a post later.]

[Addendum 2: Is Morgan next? And then a massive bank-run collapsing the system? Nouriel Roubini speculates.]

Still Waiting on the Bailout Deal

It’s Saturday night and I think the political leaders are currently meeting right now in DC regarding the bailout proposals.  I’m guessing that tomorrow night (Sunday) is the key time to see if any deal will be announced.  I can’t see how it won’t be passed.  I think it would be taken as a major negative for the markets if no deal was made by Monday’s market open.

But I am not sure if this bailout will actually work.  It just might indeed be a literal bailout — just more money pumped (after the billions already injected) into the banks so that they can hoard their cash.  The TED spread, which tracks the spreads between different periods of interest rates, and therefore the cost of borrowing and lending, shows that credit markets are locked.  Credit right now is worse than it was after 9/11.

Meanwhile world markets have been drifting lower but holding up from collapse.  This suggests that people are waiting to see the results of the bailout negotiations.  The locked credit market suggests that the finance sector doesn’t want to lend out money right now and is trying to re-capitalize itself so it can fight off further market selling and takeover attempts.

This means that businesses are not getting capital.  They can’t invest and will have problems doing business with each other.  It’s been like that for about two weeks now.  This should bomb the GDP numbers in the future.

So if we give all this money to banks, will that make everything better?  Will getting the bad mortgages off their books fix things?  Clearly it would help straighten some books, but what’s unclear is what the banks will do with the money they get.  They have to date simply held on to the money and not released it again.  Also, money is being destroyed with deleveraging going on at a massive rate.  This forces the sale of stocks, which has depressed stock prices at the end of the day most days of last week.

Also unclear is whether there will be a reinstatement of previous regulations that did a fairly good job of preventing junk debt speculation.  NYTimes had a great op-ed pointing this out.  Without some vision of what proper regulation will look like, we will fix nothing with this bailout and it will end up sinking us.

There’s really no options left if this bailout saga doesn’t go through…  Though, I’m hoping for a bit more clarity and transparency on how the money will be deployed; sadly I don’t think it will come.  We’ll have to deal with a lot of pain, unemployment, and recession either way, I think.

Chances are that we’ll be on our own as citizens and taxpayers, while kleptocrats continue to raid the government coffers.  On this, Naomi Klein puts the events within the “shock doctrine” model in a recent interview.  And contrary to foreign nations’ beliefs, this will sink the world’s economy too, even if it doesn’t have as much bad debt.

My Paper on American and Japanese 3G Networks

I wanted to post the paper I wrote for my “political economy of international communications policy” class last semester (Spring, ’08).  The topic of my research was how the build-outs of the networks in the US and Japan along with cultural differences led to the uses of cell phones and bandwidth that we can currently observe.  I then looked forward into the future to see which country might provide a better operating environment for my web service,

Here is the link (Microsoft Word .doc, no viruses):

The Government Finally Gets Serious

I almost fell out of my chair yesterday while reading for class. I luckily had CNBC on and they announced that Hank Paulson was talking to Congress about a big move to save the markets, using Congress’s unlimited balance sheet, as Steve Leesman just said on CNBC.

I bought as soon as I could and scalped it for some money… And in general I’m very happy that they made this move. I think this is a serious change unlike previous stopgap options. Will it work? Not sure, but it is at least a move that makes sense.

A lot should happen this weekend…

Whew! And was I reading for class while watching the market and CNBC? Uh… So anyway…

Financial Crash

I’ve been watching the market tick-by-tick this week and it’s been nothing but failed bounces and hard selling.

Credit is most assuredly locked again like it was at the end of 2007. This time, insurance (AIG) and mortgage lenders (Fannie Mae and Freddie Mac) are included. It’s not just investment firms, hedgies, etc. anymore.

The Fed has shot its wad in cash infusions although it’s pumped a lot more in this week.

All those failed firms this week will have had to have sold much of their positions, driving down prices for invested companies as well.

I am almost positive that a lock on credit markets has reduced new business investment to next to nothing — compounded by businesses’ fear of their own dwindling demand — and so the economy should finally slip into solid negative growth. So far economic growth has managed to hang on but I don’t think there’s any escape this time.

Interestingly, people are blaming this as a nationalizing socialist move, when in fact it’s propping up the system. The guys in power are as anti-socialist as you can get and no one really cares about the little guy here. You don’t hear Bush on the air at all trying to calm the people. The people can go fuck themselves, as far as the people on the top are concerned. This is purely about saving the system that they’re bailing out firms like AIG.

Speaking of Bush:

It’s not clear whether the entire financial system will collapse in the next week or two. Chances are pretty high that they won’t, and I’ve been looking for a big bounce to happen, without success so far.

But businesses are deathly scared; where will any new economic opportunity come from until this all clears out?

Banking Disaster

Cramer on what’s going on, again.

Here’s a working theory (that is, I’m not an insider, and this theory isn’t fully fleshed-out or researched):  Hank Paulson is a Goldman guy — he was a Goldman Sachs CEO along with former government guys like Robert Rubin (now at Citi) and John Snow, who were both treasury secretaries.

Paulson seized the Fed’s purse-strings (by Bush’s will) from Bernanke, who’s mainly an academic.  Paulson opened up the Fed to protect the big institutions.  Money is pouring out of the Fed now.  It added $70 billion in reserves just today. The story is not that the US is turning socialist by bailing out Fannie Mae and Freddie Mac.  The story is that executives are being propped up and being allowed to exit with their money while shareholders get screwed.  FNM and FRE are worthless, as are Bear Stearns and Lehman, in terms of common stock.

It’s kleptocracy.

The upside for the big banks, like JP Morgan (who bought Bear Stearns on the cheap), Bank of America (who snatched up Merrill Lynch), and Goldman Sachs (a feeder for the government), is that they eliminate their main competition and get assets on fire sale.

Meanwhile the news is concerned about poor finance guys in Manhattan losing their jobs, and the government turning into a communist state with state-owned banks.  Keep in mind that Wall Street guys earn six-to-seven figure salaries, and Bush is as anti-socialism as you can get.

Mark Cuban, who’s turned into a tool, is correct in his assessment of banks’ executives:

“If you run a major hedge fund or fund of any kind, once you have put enough cash in the bank to get to your “F U Money Level” there is absolutely no reason not to throw the Hail Mary pass and make high risk investments every chance you get.”

The main story is not being told.

Tom Friedman

Every week in my internet class, we have to post a reading reaction.  Here’s my post this week from the class blog:

“My problem is that he takes those metaphors too far at the expense of painting an accurate picture of what’s going on.  Friedman notices the right things but often simplifies everything else to make his metaphors work.”

Stereotyping Grad Programs

In my “What’s Shaping the Internet?” class last week, we were talking about universal communication access briefly when the only MBA student in the class commented that he thought it was all a waste of money and that he believed “the free market should handle it”.

I am so freaking tired of hearing that phrase.  It’s a red flag phrase that is hammered into the heads of MBA students everywhere.  They parrot it constantly.

Really?  The free market will just do everything?  Ask an MBA you know to explain the rumored Fannie Mae/Freddie Mac back-stopping this weekend.  I bet his head will spin trying to rationalize keeping the financial system afloat while at the same time advocating free-market creative destruction.

It’s offensive that MBAs and free-market advocates are taught singularly this way of thinking, even though they paid tens of thousands of dollars to go to schools which should be teaching that the lines are not so clear, that government policies, free-market finance and trade, societal and cultural norms, and a multitude of other factors all work together to promote success.

Most of my classes deal with policy at some level and that’s a lot of what differentiates my program (foreign service/international affairs) from other programs at our university, even those within the Georgetown School of Foreign Service.  The closest program to ours is the public policy program.

Let me explain that.

The MBA students are taught that business is the way the world really works, and this has been reinforced by the latter half of the 20th century in their minds.  They are not so wise on policy issues or how business climates are developed in the first place.  Apparently, a market emerges out of a vacuum.  And as far as marketing goes, you can sell something to anyone regardless of whether he wants it or not.  And debt financing and business operations are hindered by government oversight, which is without exception always corrupt.

Business people tend to blank out whenever the conversation doesn’t involve “i-banking”, structured finance, bond rates, “adding value”, or case studies.  They’re akin to the daytraders I used to listen to on IRC — vague business knowledge but no real insight into what actually works and what doesn’t.  No ideas.

Then we have our security studies students, most males of whom are total tools.  Few actually served in the military but happily suckle from the teat of the government through the DoD, DHS, or…as they love to say during their personal introductions in class…as a consultant for a large government agency.  Give me a fucking break.  Wow, you have a clearance and you peddle bullshit intelligence analysis that none of your politically-appointed bosses will ever read.  That’s so cool.  Better keep that on the downlow lest Osama be sitting behind you in class.

You can spot security studies guys usually because they exude some degree of shallowness and insecurity in their starched blue shirts, red ties, and cheesy jackets.  Sometimes with a lanyard tied to an ID card in their breast pocket for cool-guy effect.  The girls are usually pretty cool — I think you’d have to be in such a male-dominated world.  The guys who are worth talking to are usually pretty humble and down-to-earth and don’t identify with the rest.

If you see an Arab, chances are he’s in the Arab Studies program or my program.  Security studies is notoriously conservative and more than a few people I’ve met are vaguely racist towards Arabs.

As for my program, we’re networkers and generalists and are interested in a lot of subjects.  It’s the broadest of the programs.  People hype up a rivalry between us and Johns Hopkins SAIS but it doesn’t really exist — many people share friends across schools, including up the road at Harvard and Fletcher.  At our house party last night, I heard a couple people say people had told them our program is a bit elitist…  But I’ve never heard that around town — usually there’s a healthy respect across campuses and within employers.

So get back to this guy in my class…  I had to make sure I spoke up and commented on his free-market bs.  He’s literally saying this in a class taught by a policy advisor who helped Al Gore to bankroll a nexus between government, academia, and business for a climate that gave birth to the internet.  That’s either really firm on a position, or plainly ignorant.  I’m voting on the latter.

That stuff really sets me off.  How is it that in today’s day and age, we still have to argue that companies, NGOs, government, universities, and individuals have to all work together pretty tightly in order to progress?  How is that happening in discussions at a grad student level?

To be fair, most people in our programs are incredibly open-minded and always seeking to find or refine questions for today’s problems.  But it can be very worrying to see guaranteed future leaders of this country proposing junk ideas.

On My Development Class

So I’ve had a few months to think about my int’l development orthodoxies class last semester. I couldn’t explain why, but I always had a thorn in my side about that class.

I ended up getting a B, even after talking on several occasions privately with my prof and usually being the lone contributor of the dissenting opinion in our weekly reading reports, published online for all the students to see.

I was really pissed about getting a B because I felt like I put forth more effort than most (in fact knowing for sure that many didn’t even do all the reading) and that I would contribute in more ways than just blowing hot air by making dumb, forced comments in class, which the prof always tried to get me to do more.

He claimed that I didn’t cite enough evidence for my claims, which is probably true to some degree but now that I think about it, I really do think there were ideological differences that played a part as well. I am notoriously bad at being thorough in justifying my opinions (you need only read this blog to see that) but in general my intuition is usually right. If you disagree with someone, it’s much harder to see their opinion as justified or backed up with good evidence. I was dealing with a class of future institutioners and a prof who had a history of institutionalized work.

I remember vividly one time in my globalization class (which had several of the same students) when I went off on some rant about Iraq because our book that week was on the Bush reasons for war. The professor stopped me after I’d said something to the effect of “well, the ultimate goal of capitalism is to achieve a monopoly, right?” She actually told me that that was impossible to prove and that we should move on… (I think I also said in the same class that we should’ve at least gotten a shitload of oil out of Iraq if the neocons were to succeed at their plan, and we even failed at that, another statement that received no feedback.)

That really rubbed me the wrong way because it seems so self-evident that a company’s basic goal is to make as much money as possible for its shareholders. The best way to do that is to push out all your competition and achieve complete pricing control. I don’t buy into the bullshit of corporate social responsibility very much except that hopefully it’s some bridge between raw capitalism and some future, enlightened state.

Read this article about the profit-maximization of businesses under Bill Gates’ “creative capitalism” proposal. There are three things that I see wrong with capitalism the way Americans are taught about it:

One, it requires a competitive market in order to work properly. The assumption is made that if the government is not involved, then any company that exists in a space is going to maximize efficiency. No, it’s maximizing profit and not necessarily benefit to the customer. Efficiency is not required in a monopoly or oligopoly. A competitive market, by the way, is not the same thing as a “free” market, which is what neoliberals want.

Large distortions take place when companies get the government to give them subsidies or legal protection or monopoly status. Which is what’s happened in a lot of areas in the US right now. Many of the most “successful” companies in the US live completely off sucking the teat of the US government in no-bid contracts and high-level networked deals.

Capitalism is war — companies SHOULD be fighting it out with each other. But the government has to ensure that that level playing field exists.

Two, that companies will be “good”. Muhammad Yunus describes this well in his latest writings. Basically, a company that purports to care about a community or about the environment or about political issues only cares to the extent that it doesn’t interfere with the true bottom line, maximizing profit. Usually being “socially active” helps some other agenda the company has, like establishing a presence in a foreign country or pushing policies that will help it get favorable status in an industry. Double and triple bottom lines are bullshit.

A company should always be assumed to make profit regardless of how it affects others. Business is warfare. Companies fight with the gloves off — there’s no “honor” or “generosity”.

I made the same analogy when I was in the military. We were soldiers, and we were trained to destroy and to kill. That’s it. That was our job. To make us win the hearts and minds was plain naive. To have us doing policing duties was stupid. To think that we could become good friends with Iraqis and Afghanis was what the government told the people to placate them. Our job was to kill, and whenever we were around with our weapons, missions, and intelligence, lots of people died. It’s like in the movie “The Siege”, when Bruce Willis, playing an officer, implores Congress not to deploy the Army to protect New York City during a terrorist threat. Of course, when the Army ends up coming in, it starts torturing suspects and intimidating the populace. Nature of the beast.

Three, the way that corporations work right now, it’s rare that the top executives and board have much of a stake in the success of the company any more. People are involved in multiple boards of directors and they tend to cash out fairly quickly once making a profit. And bad CEOs continue to be hired by other companies after destroying the last one. So you have a CEO class that takes turns leading companies without any accountability, while their salaries and bonuses and options packages continue to bring them more money. The idea that it’s in a company’s long-term interest to serve its customers and deliver the best product or service is not necessarily true because the owners are no longer always stake-holders.

This would seem to contradict my claim that companies seek to maximize profit. So I guess the point is that everyone is basically following the maxim “get rich or die tryin'”. In other words, the floating executives are earning as much easy money they can no matter what the negative impact will be, and so are companies as a whole. Long-term success is devalued.

Francis Fukuyama is often quoted for his “End of History” theory that stated basically that after the Cold War ended, there was no ideological opponent for capitalism. This has certainly been true in the US. “Government” is such a bad word in the US that companies have run amok. But really you need a government to represent the commons and the people, because for companies, they are going to keep innovating new ways to monetize whatever they can, as they should. It is warfare, and you need both sides.

What’s funny is that for anyone to say this publically is suicide. Claims of socialism and communism and big government quickly follow. But man, I’m all about capitalism and entrepreneurship and exploiting niches. But I at least have the sense to look at the bigger picture, and know that there should be laws and standards and regulations to stop me from going too far.

So going back to that development class, we kept being told that the Washington Consensus was pretty bad, but what else is there? If we can’t deny that no country has succeeded without economic growth, then how can we toss that out as a metric? Aren’t the World Bank and IMF and development agencies better now that they’re not trying to force structural adjustment programs on unsuspecting countries?

Every week in my dissent paper I would dispute those challenges… Intuitively, but perhaps not empirically, I’d resist what we were being taught.

Now, with some hindsight and more reading, I understand more about why I resist the main development line being espoused right now. It makes me far more suspicious about the entire development field. It makes me suspicious of my fellow development colleagues who will end up pushing a top-down agenda at the World Bank, USAID, and self-righteous NGOs. Isn’t there a third way? Or multiple other ways to help reduce poverty and encourage freer markets and encourage bottom-up democratic movements?

Privatization of the Military

I’m reading about Donald Rumsfeld’s declaration of war on the Pentagon that he issued on September 10th, 2001. He basically said he was going to gut the military and outsource everything to contractors.

Now this is interesting because I realize now that all these weird things I witnessed while in the Army were weird precisely because of the privatization movement that was taking place.

For instance, one of the first things I noticed was that we didn’t have to do KP duty, or Kitchen Patrol, in basic training. While in the past, soldiers would have to serve all the food to the other joes, by the time I got to Ft. Leonard Wood, soldiers were only helping to hand out some foodstuffs at the end of the line.

Later I would see that we were put on task for mowing lawns and picking up garbage far less often around post, as lawnmowing is now mostly outsourced. Soldiers still have to go around base and pick up trash though, if contractors can’t do it or if the new contract is awaiting budget approval.

But it wasn’t until I got to Iraq that I saw the biggest change. We were issued brand new uniforms with digital camouflage patterns on them. We were issued tan boots that didn’t require any polishing. This meant that all soldiers who would enter the Army afterwards would never know the joys of laboriously polishing their black boots anymore (except for jump boots). All our gear was replaced with gear that matched the new pattern, which must have cost the US government a fortune since even simple rucksacks cost easily over $150 each.

KBR, then a subsidiary of Halliburton, ran the show in Iraq. From billeting to food to construction to cleaning, they ran all the logistics. You could get Subway and Pizza Hut in Iraq easily. Massive chow halls with all the food you could eat. Contractors racing around post in personal SUV Escalades. Parking lots full of unused pickup trucks.

Our IT was outsourced to one of the big contractors and all our equipment was expensive, not fully functional, and created by the companies you see lining the highway on the way to Dulles Airport in the DC area.

There was, of course, Blackwater.

It always just struck me as weird to see so many civilians doing jobs that we’d traditionally done. Needless to say, in most cases this is great for soldiers — they can focus more on war-fighting.

But it shows the massive transformation that took place under Rumsfeld and that will be institutionalized into DC for the rest of my working life. The corporatist bubble that started within the military has expanded into homeland security (all of DHS can be scrapped in my opinion) and I imagine that will be expanded to take over local governments as well, soon, as well as anything else that businesses can rip off from the government.

These are powerful times.