Hope is not a plan

The IMF warned today that current estimates of $400-600 billion in economic losses worldwide in the wake of the mortgage crash in the United States are likely to be well under the mark. The IMF predicts final worldwide losses on the order of $1 trillion.

The IMF releases its biannual World Economic Outlook on Wednesday and already has said it would cut half a percentage point off its forecast of 2008 global economic growth, to 3.7 per cent.

The unusually harsh biannual report, particularly critical of Wall Street, comes ahead of the IMF and World Bank spring meetings in Washington over the weekend.

The IMF, whose stated mission is to maintain global financial stability, said there was a collective failure to appreciate the extent of debt taken on by a wide range of institutions - banks, insurers, government-sponsored entities and hedge funds.

Like a sort of inverse ponzi scheme in which debt is sold around in a big circle until everyone is holding onto their share of nothing, the global finance market has overextended itself and is now likely to radically overretract itself in response.

On the note of debt-laden entities, the IMF is planning a sale of 12.7% of its gold stock, an amount that should be worth about $6 billion. This sale has to be approved by quite a few member nations within the IMF, including us, so it's not yet a sure thing.

The funds from the IMF's gold sale would be used to buy US government and corporate bonds to generate income and plug a $400m shortfall in funds that is projected over the next two to three years.

This also prompted the IMF to make $100m of spending cuts from its budget over the next three years to 2011.

Notice how the previously poor countries no longer need emergency aid quite so often, as they're building up reserves. Sounds smart.

al Jazeera article

Leonid Fedun, vice president of Russian oil giant Lukoil recently indicated that without major spending on new reserves, Russian oil production could be expected to fall off sharply in the next decade.

In fact, Russian oil output fell for the first time at the beginning of this year, primarily on the back of poor weather and supply issues in Western Siberia. However, the larger problem of the depletion of proven reserves is one that will severely limit Russian oil production in the near future as long as no money is directed into developing new reserves.

Analysts at Citigroup recently said annual increases in Russian output could "no longer be taken for granted" but argued that production was expected to rise until 2012.

"I believe the decline will continue for quite a number of years."

This is not strictly a peak oil issue, in that it is understood that additional oil reserves assuredly exist in Siberia. However, high taxes and a lack of financial incentives to explore for new reserves means that companies have been avoiding extra costs and simply leaning on their available oil fields. As a consequence, the Russian oil industry may hit the bottom of its collective barrel without any replacement in sight.

BBC article

In a recent policy piece in Science Magazine titled The MPG Illusion, Richard Larrick and Jack Soll bring up the issue of how the basic way we visualize fuel efficiency -- in terms of miles per gallon -- may mislead us into making incorrect choices when it comes to prioritizing changes we make in favor of more efficient vehicles.

In short, increases in fuel efficiency among low efficiency vehicles have a much more dramatic effect than increases in fuel efficiency among higher efficiency vehicles. Consider this excerpt from the article:

To illustrate these issues, consider the criticism that has been directed at adding hybrid engines to sport utility vehicles (SUVs). In a New York Times Op-Ed column, an automotive expert (4) has said that hybrid cars are like "fat-free desserts"--they "can make people feel as if they're doing something good, even when they're doing nothing special at all." The writer questions the logic of granting tax incentives to buyers of "a hypothetical hybrid Dodge Durango that gets 14 miles per gallon instead of 12 thanks to its second, electric power source" but not to a "buyer of a conventional, gasoline-powered Honda Civic that gets 40 miles per gallon." The basic argument is correct: The environment would benefit most if all consumers purchased highly efficient cars that get 40 MPG, not 14, and incentives should be tied to achieving such efficiency. An implicit premise in the example, however, is that an improvement from 12 to 14 MPG is negligible. However, the 2 MPG improvement is actually a significant one in terms of reduction in gas consumption... A car that gets 12 MPG consumes 833 gallons to cover that distance (10,000/12); a car that gets 14 MPG consumes 714 gallons (10,000/14). The roughly 120-gallon reduction in fuel used is larger than the reduction achieved by replacing a car that gets 28 MPG with a car that gets 40 MPG over that distance.

This isn't just an abstract concern -- studies with American consumers back the idea that by cleaving to the MPG standard, we confuse ourselves about what constitutes real gains in efficiency. This has implications for upgrading vehicles as a response to resource limitation, both in the abstract ("Let's use less petroleum") and in the personal and specific ("How 'bout I spend less money on gas for my next car").

In other words, make your van more efficient before you make your car more efficient, if you have to choose. And, if you're mandating efficiency via legislation, focus on the low end first, because it's where the largest gains can be made.

You can also hear an interview with the authors on the June 20, 2008 Science Magazine podcast.

Although I originally picked this up from the Houston Chronicle, it's a copy of this New York Times article:

Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

So what's the upshot? Well, if you had Fannie or Freddie shares, they're pretty much worthless now. In addition, this means that the United States -- and thus, you -- is picking up billions and billions in liability. As one commenter over at the Houston Chronicle aptly said:

What model ! Privatize the profits, and socialize the loss ...Welfare state for coroprations and tough love for middle class and below . This bailout is nothing but a massive transfer of wealth from the US taxpayers to astronomically rich private investors and foreign governments. [Their spelling and punctuation]

And indeed, it is. The Republican model since the beginning of the Reagan administration has been to talk the talk of helping out average Americans while offloading Federal money to wealthy individuals and corporations - often not American owned - and shifting the tax burden to those same average Americans. The disloyalty to our country and its citizens has been profound, unethical, and cruel.

It is, in a word, immoral.

The Congress today reached an agreement* on a modified version of George Bush's bailout plan, pushing seven hundred billion dollars into large companies that took too many risks and are now in danger of collapse.

It is, once again, your tax dollars at work. That's seven hundred billion dollars on top of about nine billion dollars that already went into the IndyMac rescue and over two billion dollars that's gone into other failed banks in 2008.

This should, one would wish, finally put paid to the lie that is modern Republican pseudoconservativism. Real conservatives are howling in dismay at this bailout. If you really, honestly believe in conservative capitalism, then this is a market correction and that should be that. The business that fail should fail. In contrast, if you believe that the government can't let these businesses fail, then you shouldn't be letting them taking drastic, stupid risks in the first place.

This is the plan of people who won't put cash aside to prevent home foreclosures, and who self-righteously talk about "welfare reform", but are then willing to spend over two thousand dollars, from each of us, to bail out corporations. Keep that in mind. Keep that in mind as you look at who lauded widespread deregulation, and then thinks it's okay to suck up two grand from you, from your spouse, from each of your kids, to pay for a corporate executive's errors.

Unfortunately, we're stuck with this bill now, unless the next session of Congress can be convinced to revoke it or it doesn't pass in the voting stage despite the agreement of Congressional leaders.

Fortunately, you have a chance to speak, loudly, with your vote in November. I'll hand it off to John Ibbitson here:

But now there really is no practical alternative. John McCain helped create this emergency. He's partly to blame for it. Under the circumstances, rewarding him by voting for him would be perverse.

But the watchman state at least needs to be a watchman. Deregulating past the point of common sense, so tainted food starts making its way onto shelves, municipal water supplies become lethally contaminated and banks take risks so hazardous they imperil the global economy, is an abdication by government of its duty to serve and protect its citizens.

Let's repeat that last part.

"An abdication by government of its duty to serve and protect its citizens."

John McCain, along with the rest of his breed of false conservatives, has abdicated this duty. While I still hope real conservatives will retake the Republican party, in the meantime, McCain and his ilk cannot be allowed to do any more damage.

BBC article on the bailout
The full text of the bailout

*I am full of corrections on this one. I wrote before about it having passed -- obviously, the agreement was reached, but voting had to wait for, you know, a workday. Click here to see how that turned out.

The single, glaring flaw in contemporary economic policy has been its faith-based nature. Despite the ability to empirically evaluate how people will behave, Alan Greenspan and his followers chose to believe that the market was basically always right, and that things would work out optimally. Notably, the 2007 Riksbank Prize in Economic Sciences (i.e. the Economics Nobel Prize) was given to recognize research into the design of economic systems in light of the fact that things are not optimal.

In testimony before Congress yesterday, Alan expressed his "shock" at investor's lack of self regulation even though it would have been in their long-term best interest:

Greenspan said he was shocked at the banks' inability to self-regulate and blamed over-eager investors for the sub-prime housing meltdown that led to the financial crisis, our correspondent said.

Apparently, our boy Al has never seen an overweight person of any kind (and a good one third of adults in this country are obese). Humans did not evolve in an environment of plenty, or of collaborative financial planning for optimal group outcomes (especially not that second one). We regulate things that can go drastically out of balance specifically because people don't always regulate themselves in their own best interests. Some people are opportunists, others criminals, but most just won't be able to see how their behavior plays into the system as a whole. Certainly, people aren't especially good at self regulating and just deciding not to optimize their own gain.

Faith-based economics is a poor practice, Alan Greenspan's citation of a prior lack of collapse as evidence of success notwithstanding.

BBC article
al Jazeera article

As the proposed bailout bill for the three major automobile manufacturers in the States failed to make its way through the Senate this week, a renewed wave of calls have gone out for some form of funding for these tottering companies.

"Given the current weakened state of the US economy, we will consider other options, if necessary including use of the TARP program, to prevent a collapse of troubled automakers," White House spokeswoman Dana Perino said.

She added that it would be "irresponsible" to further weaken the economy by allowing the Detroit car companies to fail.

TARP is the current financial industry bailout, which is a good fifty times the size of the proposed automotive bailout, and which went through with, oddly enough, less debate. That said, the fact of passing one with little negotiation of debate does not require that a second bill -- even one that is significantly smaller -- without proper consideration.

I was in D.C. through most of this week, which means I had a chance to listen to C-SPAN on the radio of the frankly poorly designed Ford rental that I was driving. The mantra of those supporting the bailout was that "three million" jobs depend on the industry -- that's a quarter million employed directly by GM, Ford, and Chrysler, with the rest in the industries that support them. I agree that it would be unreasonable to let hundreds of thousands or millions of skilled manufacturers suddenly lose their jobs.

But if that's the real issue, then why do we need to have three automobile manufacturers in this country?

Other than a sense of tradition and, potentially, a lack of imagination in adapting to change over time, there's no real reason that we should have the trinity of manufacturers that we currently do. I've been told by a competent analyst whom I trust that the world should have about four major automobile manufacturers -- clearly, three of these aren't going to be in the United States. With that in mind, if the real issue is saving three million jobs, then perhaps we could put this money into supporting the sideways transfer of all these skilled manufacturers into new, twenty-first century manufacturing jobs?

Is it better to patch holes in the debt structure of failing companies than it would be to support retraining of skilled manufacturers for construction of, say, alternative fuels infrastructure? Given that the coming century will necessarily be marked by the blossoming of a new wave of energy and fuel technologies, why would we choose to be the makers of bad twentieth century technology when we could, instead, be the world-leading experts in, and exporters of, cutting-edge energy infrastructure?

The two-choice question of "bailout or economic collapse?" is a false dichotomy. We have a clear third option -- spend money to invest in our workers, to build a new manufacturing base, and to seize the coming technology wave and make it a fundamentally American product. Let the automobile companies consolidate. Two companies would be just fine. Let's free those skilled workers and put their aptitude to a incredibly good use.

This is our chance to steal a march on the rest of the world. It's time to take the third option, and prosper.

BBC article

As the Madoff scam continues to unravel, we naturally have a round of people who are involved in hedge funds pointing to governments, indicating they should have detected and stopped the fraud:

In a statement, Bramdean said: "The allegations made appear to point to a systemic failure of the regulatory and securities markets regime in the US."

(Bramdean Asset Management)

Antonio Borges, chairman of the Hedge Fund Standards Board, said the scandal highlighted the need for "robust governance practices and oversight via independent boards, which will challenge management procedures and behaviour".

I, however, am inclined to echo this sentiment:

"City figures cannot call for light touch regulation yet at the same time complain that regulators missed risks that the industry failed to spot," said Simon Morris, a partner with City law firm CMS Cameron McKenna.

"It's the unequivocal job of the fund manager to check out the bona fides of whoever they chose to pass their customers' money onto," he said.

BBC article

Oil prices dropped to below $34 a barrel today on ever-decreasing demand, as economies worldwide compress. This is a dramatic drop-off from peak prices that were approaching $150 a barrel just a bit earlier this year. Although this shift has been reflected in a welcome (and significant) reduction of retail gas prices in the U.S., it also shows how having an extreme upper demand for oil creates problems for both suppliers and users.

One fuels researcher I know points out that the trend for quite a while has been for the absolute price of oil to go down, which people tend to miss by dint of looking at and comparing prices in non-adjusted dollars. Consider this oil price chronology from DOE that's in nominal (non-adjusted) dollars:

That certainly looks horrifying. Here's the same chronology, adjusted for inflation via the consumer price index:

Once we've adjusted for inflation, you can see that we were actually just approaching the price of oil around the time of the Iran-Iraq war prior to the most recent collapse. The current $34 price tag for a barrel of oil adjusts to about $6.50 in 1970 dollars, which is lower than any point on that second graph, although the aftermath of the Asian economic crisis almost made it to that point.

Previous spikes in the absolute and nominal prices of oil have convinced our country to work on alternative fuels, but subsequent dips have just as quickly shelved those efforts. There is already major concern in the current alternative fuels community that the worldwide recession will lead to yet another shelving of those efforts. Hopefully, the current climate crisis, in combination with an understanding that oil prices will necessarily go up again, will keep us from making that kind of short-sighted decision again.

You can see those DOE energy chronologies here.

al Jazeera article.

I find this intriguing given the recent GAO report on possible tax havens. The BBC's Panorama show is covering the issue of tax havens with a very interesting perspective. In light of the astonishingly high debt of the government of the United Kingdom, the willingness to overlook tax havens as being just part and parcel of general capitalism is waning.

Panorama highlights the recent case of the buying of financial records from an LGT Trust IT employee by the German government:

This week, Klaus Zumwinkel, disgraced former boss of the German Post Office, became the first big name to be convicted of tax evasion thanks to Kieber's evidence.

He was forced to pay back 3.9m euros, was fined one million euros and given a two-year suspended jail sentence.

...and goes on to remind us that a full eighteen of the world's major tax havens are Crown Dependencies or British protectorates, suggesting that the UK is in a unique position to do some clearing up work all on its own.

The Panorama show in question has already aired, but you can read the summary here.

I've been talking with a friend recently about the incredibly damaging dichotomy that exists in how we treat individuals and their finances versus corporations and their finances. CNBC in particular has been going after homeowners, couching the concept of walking away from a failing mortgage as somehow immoral, even as they happily push for the necessity of the feared Federal government subsidizing significantly more poorly made decisions at the corporate level by buying up "toxic" debts.

With that in mind:

The highlight news piece all day today was the newly announced efficiency targets for American vehicles. I'm unwilling to dip too deeply into the discussion that certainly surrounds this, but I think it's interesting to note two things:

1) Anyone who complains about the up-front cost increases in cars clearly needs to do the arithmetic about lifetime fuel use on the vehicle, even if "lifetime" just means five years or so.

2) Alan Mullaly has clearly decided that Ford is winning this whole "collapse of the American auto industry" event, and now that GM is bleeding out in a Detroit back alley, he's cool with not trying to promote the status quo vis-a-vis fuel efficiency.

al Jazeera article

(It's also nice to hear that new CAFE standards are coming, since they've been static since 1990 or so.)

Consider a modern fable of interconnectedness.

China, in an effort to clean the air before the recent Olympics, shut down a large swath of industrial production, including production that supplied acetonitrile. Around the same time, a hurricane shut down acetonitrile production off the American gulf coast. Things might have picked back up since then, but for the global economic downturn, which has naturally led to a decline in production of acrylonitrile, which is used for production of resins and plastics. As it happens, much of the acetonitrile produced comes as a by-product of acrylonitrile production.

So what does that mean here in the U.S.? Well, notably, it means that if you're trying to synthesize DNA for research (say, for example, you were researching a recent epidemic disease), your DNA would cost significantly more, because acetonitrile is the most important solvent used in the DNA synthesis process.

Derek Lowe breaks it down here in a writeup from earlier this year. Much as we saw during the 2002 West Coast port shutdown, modern just-in-time shipping and manufacturing and highly efficient use of material streams mean that we are prone to all sorts of curious knock-on effects that, while they are predictable, are not necessarily intuitive or on our mental radar, except for those people who work directly on managing these supply lines and production methods.

Following the default on a $50 million payment by former property owner Page Mill, a housing complex in East Palo Alto's Woodland Hills neighborhood has reverted to bank control. Following an unsuccessful attempt to auction the properties, Wells Fargo is now left as the owner of 1,800 residential units, making it the single largest landlord in East Palo Alto.

The properties had a county-appointed caretaker since September, when Page Mill stopped maintaining them due to "cash flow issues." According to this article in the Mountain View Voice, local residents are basically pleased that Page Mill has now been entirely removed from the equation, and look forward to better treatment under Wells Fargo's management.

Reuters reports that Scott Rothstein is facing 50 years in jail for carrying out a billion in fraud via a classic ponzi scheme. Although the first-blush response is to be glad that white-collar crime is being treated seriously - and it should be, as this is a sizable fraud that doubtless hurt many people.

That said, this is the white-collar equivalent of harsh sentencing for crack users while cocaine-snorting lawyers get mild time in club prisons. Rothstein and similar scammers are little fish compared with the significant and ongoing fraud carried out by major financial institutions. It's easy to feel that rush of satisfaction that "something is being done," but it's important to remember that there's continuing, dramatic fraud and a bevy of other crimes being carried out by major financial institutions. The big fish institutionalize their crimes, and still haven't been dealt with.