Monday, October 31, 2011

Wealth Distribution in the U.S. and the End of the American Dream.

As I was listening to NPR over the week-end, I heard even more disturbing numbers coming from the Congressional Budget Office, which is anything but partisan and proves, once again, the failure of the  trickle-down economic theory.

Between 1979 and 2007, INCOME grew by:
  • 275 % for the top 1% of households,
  • 65 % for the next 19 %
  • Just under 40 % for the next 60 %, and
  • 18 % for the bottom 20 %

The share of income going to higher-income households rose, while the share going to lower-income households fell.The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.

Most of that growth went to the top 1 % of the population.All other groups saw their shares decline by 2 to 3 percentage points.
More concentrated sources of income (such as business income and capital gains) grew faster than less concentrated sources (such as labor income).


Government transfers and federal taxes both help to even out the income distribution. Transfers boost income the most for lower-income households, while taxes claim a larger share of income as people's income rises. In 2007, federal taxes and transfers reduced the dispersion of income by 20 %, but that equalizing effect was larger in 1979.The share of transfer payments to the lowest-income households declined.
The overall average federal tax rate fell.

These numbers show that the American Dream is definitely over. And while the "Occupy Wall Street"  makes plenty of sense, the "Tea-Party" movement against taxation is not just economically wrong, it is a moral outrage, and the Republican ideology of tax-cuts for the rich is not only bad for the Americans, it is also un-American.

As James Fallows commented, "the result has been a more polarized American income distribution than any time in modern American history."

Why Regulate the Banking and Financial System.

Last week, we saw something unheard of: the French President and the German Chancellor spending most of the night trying to make deals with private banks over the debt of a European country. In exchange of writing off 50% of the Greek debt, the banks (which would have lost 100% of their money otherwise, since Greece would default anyway), were promised €35 billion in "credit enhancement" to mitigate losses they might suffer. (NYTimesBloomberg)

Evidently, the stakes were high – no less than saving the Euro, they said. OK. Maybe so. But there is still something extremely disturbing, even eerie in seeing our representatives so dependent on the will of private banks and credit rating agencies. You can probably blame it on the debt, yes, but maybe also blame on the banks themselves.

This week, Rachel Maddow offered a great reminder of the role of the banks in the current financial crisis. And boy, do we easily forget...! Once you start piling up all the scandals and frauds, there's plenty of reason to get angry and feel for the "Occupy Wall street" protest, considering the dire consequences we all have to pay.

After all, the SUBPRIME CRISIS of which the banks are responsible triggered this whole mess, including the current European crisis.
Justa quick reminder of what the sub-prime crisis really is (you can also look here, here or here and here) :
The banks relaxed their mortgage standards so that people with higher risk if default than prime borrowers (hence the word ‘sub-prime’) could buy a house, using their homes as collateral. This created a bubble.
When home values fell, those borrowers could not afford the adjustable rate mortgage payment and had to default.
But the best part is that the lenders did not even bear the credit risk in the mortgages they issued as they transferred the risks to third-party investors, including shadow banks (through a complex process called “securitization”), by slicing and dicing the mortgages.

But as if this were not enough, the subprime crisis was soon followed by a FORECLOSURE CRISIS. (here)
The homeowners who had to refinance ended up being evicted from their homes without knowing whom to turn to litigate their rights. Why? Because there is no way to tell who owns your mortgage and thus who the true owner of your home is.
And to make matter worse, there is no official guaranteed record of rights and ownership of mortgage loans because that has been privatized - it is now in the hands of a the holding company called MERS,  and currently sued by the state of Delaware
Worse still, if you can believe it, as a result of ‘bad paperwork’, banks even evicted people erroneously by providing false documents (called robo-signed documents - see here) in court – including people who duly paid their mortgage or – believe it or not- even people who did not have a mortgage at all. (Florida is a good case in point)

The scandal was so great that last year the major banks (including Bank of America, JP Morgan, Wells Fargo, and Citigroup) had to temporarily halt their foreclosure proceeding. (MSNBC)
Not only did banks screw up the little guys, they even purposely misled their customers and investors into buying shares of companies they knew were failing - Merrill Lynch  (see here) and Infospace  or,  Citigroup and Worldcom (here) or Goldman Sachs and Timberwolf (here or more recently here and here).

You might not see the connection with Europe… unless you are Greek.
Goldman Sachs is actually a name well-known in Greece or even in well-informed circles in Europe. It is one of the banks – JP Morgan & Chase is another - that helped the Greeks mask their true debt while betting defaults on the very debt they helped hide by acquiring credit protection on the cheap and eventually selling the swaps to the Bank of Greece. (NYTimes, Spiegel, but also here, here, here, and here)
As a result, of course unlike most European banks - the suckers in the game - neither Goldman Sachs nor JPMorgan has net exposure on Greek debt. Beautiful!

Essentially, it is all the same story. Whether it is subprime mortgages or debt obligations, the same scheme: making money by swapping the risk to third parties and betting against the investment the banks sold to their own clients while making huge benefits in the process.
This has been happening in the last decade and it is a well-established fact.

So what have been the consequences for these banks? Well, they have either lobbied politicians or scared them into thinking they, like Lehman Brothers, are too big to fail.

The result? Hardly a slap on the wrist: they have either accused low-level employees or made sweet deals with the SEC (Securities and Exchange Commission) in charge of the little regulation there is left. (Reuters, Propublica, also here), even if more it is not completely over yet.
“No major investment banker has been brought up on criminal charges stemming from the financial crisis. (…/…) Goldman, JPMorgan and Citigroup were all able to settle without admitting or denying anything, which, of course, is part of the problem. (…/…). Neither the Citigroup settlement nor any of the others come close to matching the profits and bonuses that these banks generated in making these deals.”. (Propublica)
This is all very important to understand because in this global economy it affects all of us, in America as well as in Europe (USAToday). At the core of the problem is the deregulation of the financial market and the banking system, which allowed banks to take unreasonable risk without taking the responsibility for it.
For this, we can thank both Republicans and Democrats who passed a law repealing Glass–Steagall Act in 1999, signed by Bill Clinton, which essentially removed the separation between investment banking and commercial banks as well as conflict of interest prohibitions between investment bankers serving as officers of commercial banks.
The result: too big to fail, they say.  Well, then, maybe they should be split up. The US has started implementing financial regulatory reform with the Dodd–Frank Wall Street Reform and Consumer Protection Act but more needs to be done.
Unfortunately, already the Republican candidates, including the most serious one, Mitt Romney, want to repeal Dodd-Franck and “deregulate Wall Street”. (Washington Post)

This is why the “Occupy Wall street” makes so much sense to the 99% of us who have to pay for this mess one way or another. 

Sunday, October 23, 2011

Iraq War 2009-2012: Lessons to Learn.

Last Friday, president Obama announced the withdrawal of the remaining US troops inIraq by the end of the year, thus giving an end date to the war in Iraq, which will have lasted 9 years – 2003-2012.
You might have thought this would make the headlines in the US, but not really, the economy (understandably) or even Albert Pujols’ three impressive home runs got more coverage (really ?).
This may be because, unlike the wat in Vietnam and its draft, the American people are not really personally connected to the war in Iraq.
« You have to knock on something like a 150 doors today before you’ll find a household from which somebody is serving » said an analyst on NBC evening news last night.

This piece of news should be an opportunity for assessing the achievement of the war. Lester Holt asked the only important question : WAS IT WORTH IT?
  • 4,469 US troops killed
  • 32,213 wounded
  • $700 billion

It might also be argued that the mess in Afghanistan is a result of too much manpower devoted to another war.
Words like « useless », « endless », « pointless », « questionably costly » were used in the NBC evening news presentation and it seems that the American media at least are beginning to look back and focus on the controversy of it all.
Toppling a brutal dictator like Saddam Hussein may have been the best thing that happened to Iraq but did the war have to last 9 years to have at the end of the war still a very fragile Iraqi government and terrorist attacks on a regular basis?
It might be worth remembering that the reason for going to Iraq was 9/11, with very early after the attack the notion that Saddam Hussein may have been somewhat linked to 9/11 and when that was debunked, the idea that Hussein had Weapons of Mass Destruction that constituted a threat to the US. Of course, the WMD, it turned out, did not exist.

What lessons to learn ?

Maybe the Bush administration really believed there were WMD and simply decided to sexy it up for argument’s sake, and maybe Saddam Hussein himself believe he had WMD. After all his behavior during the standoff in 2003 showed he was out of touch with reality.

But 9 years later, Bush’s  « MissionAccomplished » speech on the aircraft carrier USS Abraham Lincoln sounds like a cruel reminder of his incredible hubris. It is often said that Americans are good at winning wars but bad at winning the peace. There’s some truth in this, at least in most wars since WWII, and certainly in the wars of Afghanistan and Iraq.

Winning a war with a country that has a incredibly weaker army is easy, making the nation building efforts necessary to win the peace is much more difficult. It
requires the sort of man power that the US did not have. (some estimates say that between 250,000 to 450,000 troops were needed rather than the actual176,000 at its peak).
The US should have worked harder on convincing the UN to support the war and send troops to secure the ensued peace. But, to be fair, this is where I also blame French President Jacques Chirac for not allowing the vote for a new resolution that would have given Iraq a deadline for complying with the inspectors’ demands. (after all, the French intelligence alos believed he might have WMDs).
France’s foreign minister De Villepin (who was then deemed as a hero in France) was right when he said : “the option of war might seem a priori to be the swiftest, but let us not forget that having won the war, one has to build peace” (here) but it is precisely that veto that made the peace impossible to win. 

The lesson to learn is one of humility for both France and the US.
France should have let the democratic process of the UN vote take place and not play the “deal breaker”.  Even more importantly, the lesson is for the US - despite its might, and wealth, it could not afford a do-it-alone war in Iraq, unless it instituted a draft, which would have been political suicide.  

The nation cannot base its foreign policy and war decision on a mythical view of self as a lone rider with a few loyal men. What Bush failed to see is that even in the Frontier myth, the hero must respond to the demand of the community for cooperation to civilize and settle the Wild West. The result is that chaos is likely to remain in both Iraq and Afghanistan for a long time. 

Saturday, October 22, 2011

Deregulation, Not State Intervention Caused Economic Meltdown.

The Economist is a great magazine with often very good analysis, but certainly not when they imply that the entire financial meltdown is the fault of the state. 
In this week's issue "Rage against the machine, Capitalism and its Critics", they conclude : 
"It is worth remembering that the epicentre of the 2008 disaster was American property, hardly a free market undistorted by government."
Seriously? And no mention of the deregulation of the banking system that caused the subprime crisis? It is rather ironic to say that "state interference" should be the root cause of the problem. If anything, it is de-regulation that created the mess and the repeal of Glass-Steagal to control speculation from the 1980 to 1999. 
For capitalism to work, it needs a market with rules that guarantee the fairness of the game. The problem is that the free market was turned into a free-for-all in the last 30 years. 

Yes, politicians have been lazy by sustaining a system of debt that was more dangerous than they understood (and the Greeks were the worst among them) but the banks share the greatest responsibility.
Look at Goldman Sachs - it is not just that they helped the Greek mask its true debt, (whose blame should lie on the Greeks) but they also bet defaults on the very debt they helped hide by acquiring credit protection on the cheap and eventually selling the swaps to the Bank of Greece. (see NYTimes or even FT)

A system that makes it legal for a bank to lie and cheat needs to be changed, especially if they are « too big to fail ». The risks the banks take have been transfered to the states. As it has been said, you privatize the benefits, and nationalize the losses. What a bonanza for the banks !

Sunday, October 2, 2011

Wall Street Protests : Shameful Media Blackout or Journalistic Laziness?

Unlike europe, the United states does not have a tradition of organizing huge protests on a regular basis. And you haven't seen many big Americans protests probably since the 60s.

But this economic crisis has taken its toll, and seems to push people into acting and expressing their anger at corporate creed through street demonstrations. There have been protests all over the main cities - in Boston,  San Francisco, Los Angeles, Chicago and of course, New York City.

Despite weeks of protests, the protests did not make the headlines of the main-stream media (FAIR has a good report on this) - not even NPR. Only now, into the 3rd week of 'The Occupy Wall Street' protests, and after 700 people were arrested for blocking traffic on the Brooklyn bridge (USA Today, NYTimes), has the news made the headlines.
As Keith Olberman (of whom I'm not always a fan) noticed, it is remarkable that a few dozen Tea Party protesters get the full attention of the media, and not the hundreds of demonstrations of regular people all over the country. And the hypocrisy of some journalists who claim that "the numbers are not big enough" is preposterous. Here's an example from the Boston Globe :
It's hard to take a protest fully seriously when it looks more like a circus - some participants seem to have taken a chute straight from Burning Man - and when it's organized by a Canadian magazine and a computer-hacking group. (Also, organizers first declared that they would draw 20,000 protesters, but only 1,000 showed up. That's not a media conspiracy. It's math.)
(Source: Atlantic Wire).
And it is even harder to find information on the police brutality in the US media
Numerous incidents of police roughing up protesters were caught on film including one senior officer spraying mace at several female demonstrators being kept behind a police barrier.
Video of that attack went viral on the internet prompted mainstream media – which had mostly ignored the protests – to give them sympathetic attention. Computer hackers also released the name and address of the officer caught on film. Since then the occupation has garnered many new supporters and global press attention. (The Guardian)
It gets scary when the Chinese tell the world that 'the US Media Balckout is shameful'. Oh the irony.

So is this because most main stream media are owned by big corporations or is it just laziness?

Oh well, at least we have Jon Stewart to cover the news :

DSK in Law and Order - when Reality is Better than Fiction

American shows have a unique way of using fiction as a platform to discuss current events and national issues.

Last week, Law and Order SVU kicked off its new season with an episode directly inspired by the Strauss-Khan case, something you'd never see in France.
In the show, DSK is an Italian diplomat accused of raping a Sundanese hotel maid in NYC and arrested just before his plane takes off. The writers did not use their imagination very hard - the man is deemed to be Italy's next prime minister and the head of "the Global Economic Trust" and it is hard to believe them when they claim that they had to re-write about it. Overall, it seemed to me that the writing was pretty bad. The characters were a bit too caricatural and it tried to mimic reality too much and without the usual subtleness and ambiguities of other episodes.

Look at the initial scene :

In case the audience might not get it, one of the characters is heard saying "Another DSK case!". The writers of the show offer little criticism of the perp walk, as one the detectives (played by Ice-T) parades the accused in front of the journalists, telling him "Freedom of the press, baby!".
As the story develops, it turns out there are also concerns about the victim's credibility as she lied about her past and some newspaper imply she may be in for the money. But despite her lying, the main detective character in the show, Olivia Benson, still believes she was raped anyway, and she undoubtedly is who the audience will likely believe.

This is what's interesting about treating current events: you have to choose a perspective without the distance of time, and clearly in this case, the alleged rapist character is not only not very likeable, but he is also seen as probably guilty of the charges.
But this time it seems that reality was far more fascinating the fiction.

Big difference with reality:  there is a trial (This is 'LAW and order', after all!) and the man is convicted of a lesser charge and sent to Rikers for one year. This may be wishful thinking for many people even if in the end, it seems that we'll never really know what happened in the real case.

Terra Nova, a Cretaceous-period Sci-fi Western.

This time of year is the beginning of the new season for TV series in America.

TERRA NOVA was easily the most anticipated new show this fall. It is one of the most expensive series in TV history (the premier alone cost $20 million) and it is produced by Steven Spielberg. Personally, I had low expectations: it was advertised as a Jurrasic-Park-meets-Lost story and frankly, Dinosaurs get easily tiring. I suppose they're too big, voracious and dumb for me.

The first few minutes of Terra Nova looked promising - it starts in 2149 in a Blade Runner world where the environment has been destroyed to the point where there is constant smog over the city, air is so bad that you need oxygen masks and population has to be controlled through a two-children policy. We follow the Shannon family who broke the law by having a third child. I'll spare you the details, but basically, they manage to embark on a program of time-travel to Terra Nova, a Utopian human colony 85 million years back in time, which is where the dinosaurs come in.

Interesting detail, to avoid the grandfather paradox (you know, by killing an ant in the past, your grandfather may have never been born and you'll never exist), they are actually traveling to a different 'time-frame' - whatever that means.... OK. Why not.

The colony itself is a gigantic compound with sort of beach-houses and hippy-looking settlers headed by a benevolent-but-with-something-to-hide Commander. And of course danger looms outside the compound: the dinosaurs as expected, but also a group of dissidents called the Sixers because they arrived during the Sixth pilgrimage (and unrelated to the punk band as far as I can tell).

I have mixed feelings about the show: the story of the troubled teens sneaking out and getting into trouble (with the underlying message that seek kids, how you'll get into trouble if you don't listen to daddy?!) is so cliché that it is annoying, and the story may be too family-oriented for my taste. Basically, it does not seem to have the grander-than-life feature of space-opera Battlestar Galactica (possibly, the greatest Sci-Fi show on TV) or the angst of Lost  in its first season - except for some cryptic engraving on a rock which seem to indicate there was a a civilization once... or there may still be...
And even if the Dinosaurs are technically well done, they seem to be more of an annoying distraction.

One the most striking features of the series is its AMERICANNESS.  The pitch parallels the mythical narrative of the founding of America - settlers leaving an over-crowed, polluted, tyrannical motherland (Europe) to found a new civilization in the wilderness. Nature itself has to be conquered - one of the characters has to cut the fast-growing plants from the jungle . And so we are reminded that nature can be a threat to civilization -  a very American Frontier theme of taming nature.
The photography of the extraordinary landscape of thundering falls is not without resemblance with the paintings of the Hudson River School and the compound itself looks more like a besieged fort in the old West. Commander Taylor is like a sheriff/mayor figure who is the incarnation of the law of the compound and is an ambiguous dictator-ish leader. (the civilians seem to be under military law).
The leading characters are a family who've been given a chance to start all over again but who have to face the challenge of the hardships of the Frontier life. (And to make this clear, Commander Taylor tells them - and us : : "This is a frontier, so you have to grow up quick".). Their survival is also humanity's second chance - which is itself also a great American motif.

So in other words, Terra Nova is a Cretaceous-period Sci-fi Western. At this point, it could go one way or the other: it has the potential of becoming a great epic show if it focuses enough on the challenges of establishing the new social order, the mystery of the engraving, and the dissidence of the Sixers, and if the teens, the dinosaurs, and the family feud do not become too much of distraction.