Explaining his decision to spend $26 billion to buy the 77 percent of railroad operator Burlington Northern that Berkshire-Hathaway doesn't already own, Warren Buffett said, "Most important of all, however, it's an all-in wager on the economic future of the United States. "I love those bets."
The Wall Street Journal opines:
Mr. Buffett's move appears to be a bet that the freight industry is poised for recovery, though it hasn't shown much of a rebound yet. The best that most rail executives have said about freight volume is that it seems to have bottomed. Mr. Buffett has said that he uses weekly railroad carload data as a proxy for the economy's health.
HTWW will henceforth add "weekly railroad carload data" to the list of economic indicators it follows. If it's good enough for Warren Buffett, it's good enough for me. But I'm a little leery of the "all-in" poker metaphor. When you decide to go "all-in" in a hand of poker, you push every last chip in your stash into the center of the table. If you win, great, you are a high roller.
But if you lose, you are done, out of the game, finished, over. Since Mr. Buffett is wagering on the "economic future of the United States," I, for one, sure hope he's not bluffing.
As the year 2009 finally lumbers to its unlamented end, the zeitgeist smells foul. In the U.S., the right bemoans a socialist takeover while the left decries a corporate sellout. All the rest, clinging to the middle, have a hard time finding anything to cheer for, as they scramble to keep jobs and homes and health. It's been a decade of war and financial disaster, and now, just in time for Christmas, a terrorist attack for the icing on top! If this is a harbinger of what the 21st century has to offer, going forward, we had better stock up on the antidepressants.
Call it the price of success? Ten years ago, American triumphalism was at its peak. We were the lone superpower, dictating the Washington Consensus as the answer to all the world's economic development problems, preening ourselves as we regarded our mighty technological prowess and the downfall of communism. But now comes the midlife crisis, popping up in end-of-the-year think pieces everywhere. What's the theme? It hasn't been just a bad year but also a "big zero" decade, and even worse, the end of optimism.
To wit: In a remarkable piece of handwringing published today in the Financial Times, "Self-Doubt Tarnishes Brand America," Edward Luce observes the decay of "American intellectual hegemony" and declares that "the metallic rust of decline has crept into the American soul."
Meanwhile, over at the Wall Street Journal, we are offered a glimpse at the annual Christmas letter sent out by Guy Hands, the founder of private equity firm Terra Firma Capital Partners.
We need to question the accepted wisdom that a truly global market benefits all citizens in western developed nations. Indeed, I suspect we will, in time, see globalization as the driver that delivered a massive transfer of economic power from the west to the east.
Over the long term it will result in an ever growing class of permanent poor being created in the west. I also suspect new graduates will find it increasingly difficult to get the jobs for which they are qualified. It is the young and the poor in the west who will pay the cost of global human resources competition.
No doubt: Globalization makes it tougher to compete — though we can argue whether it is ultimately more economically devastating to workers in the formerly flush West than relentless technological innovation. (For example, my own industry, journalism, is being remade by the Internet, not China or India.) But that's quibbling: Globalization plus technological progress together are squeezing Western workers in a giant vice grip.
It didn't use to be that way. Once upon a time, all you had to do was be born in the U.S., or West Germany, or Japan, and, barring certain disadvantages such as race or gender, a headstart on grabbing for the good life was all but assured: widespread levels of affluence and a steadily rising standard of living unmatched throughout all of human history. Now it's not so easy — in part because of this "massive transfer of economic power from the west to the east."
Of course, from the East's perspective, it's maybe not so bad. As FreeExchange notes, "the economies of India and China basically doubled in size over the [last decade], dealing a major blow to poverty in countries that are home to over 2 billion people, one third of earth's population." I'm betting that that there are few citizens in those countries who would be excited about a return to the halcyon days of the 20th century, or who would be so prone to decry the fact that global markets don't benefit all the citizens in Western developed nations.
One person's massive transfer is another's rebalancing. For centuries, Western Europe, the U.S. and a handful of other countries dominated the global economy by force of gunboats and market capitalism. That's over, or at least in serious jeopardy. But should this change of fortune be read as a marker of Western decline or as the natural, inevitable rise of the rest of the world? We've all seen how the West can no longer enforce its will at World Trade Organization or climate change negotiations. Should we lament the loss of hegemony — which makes it easy to get things done — or celebrate the rise of multipolarity — which makes it much, much harder to cut a deal?
There's also, as Andrew Sprung points out at Xpostfactoid, the encouraging news that globally, life expectancy is up, child mortality down, and the poverty rate is shrinking at an accelerating pace.
Maybe, as 2010 approaches, it's time to suck it up a little bit, and instead of bemoaning how screwed up everything is, take some time to think about the vast global trends that may make the 21st century a better time to be born in China or India or Brazil than has been true for centuries — or ever. Or if that kind of one-world thinking is too hard to reach, we can perhaps settle for smaller victories. I, for one, am very glad the Christmas bomber didn't kill anyone, that the prospects for the U.S. economy are nowhere near as frightening today as they were a year ago, and that we at least seem to have our attention focused on the important problems — energy, climate, healthcare, financial regulatory reform — instead of just blithely ignoring them.
Rust in the soul? There's nothing here that a little WD-40 and some elbow grease can't fix. Or at least, that's HTWW's New Year's resolution.
I have a confession to make. I have been suffering from painful flashbacks lately. Memories of the 1970s force themselves, unbidden, into my mind. Memories of the high school assembly where we students were handed WIN (Whip Inflation Now) buttons.
Grownups who were unable or unwilling to take the policy measures necessary to reduce inflation told us children that price inflation was our personal responsibility, just as similar cowards and charlatans today tell us that addressing global warming is a moral responsibility of ordinary people, not a technological issue to be resolved by governments and utilities. I remember the U.S. retreat under fire from Indochina under President Gerald Ford and the debacle of the Desert One mission to rescue the American hostages in Iran under President Jimmy Carter.
And then there is the most painful memory of all: the killer rabbit. On April 20, 1979, a White House photographer captured an image of the beleaguered President Carter using his paddle to fend off a rabbit as it swam toward his fishing boat in Georgia. The photo was suppressed until the Reagan years, and Carter's press secretary explained that the creature was a ferocious "swamp rabbit." But headlines like "President Attacked by Rabbit" gave a comic spin to the widely shared feeling that the U.S. government had become feeble and ridiculous.
I've got those killer-rabbit blues again. And I'm not the only one.
Some Democratic partisans have claimed that the pathetic, lobby-written healthcare bill is the greatest expansion of social insurance in the U.S. since Medicare. Possibly true, but so what? Passing the greatest social reform since the days of LBJ is easy, like being the greatest novelist in Lichtenstein or the greatest tap dancer in Mongolia. There isn't much competition. Since the 1960s our increasingly paralyzed Congress seems to have become incapable of enacting any reform that isn't trivial, or botched, like the creation of the Department of Homeland Security, or corrupted beyond recognition, like the healthcare bill.
Nor is the pathology limited to the legislative branch. Whether under Republicans or Democrats, whether the threat is Hurricane Katrina or Umar Farouk Abdulmuttalab, America seems to be facing a general crisis of state incapacity. Money can be found by Democratic and Republican administrations alike to bail out campaign contributors on Wall Street, but not to repair our crumbling infrastructure.
The U.S. fought and won World War II in less time than it took to adequately protect U.S. soldiers against primitive weapons in Iraq. We are told that we have to stay in Iraq and Afghanistan indefinitely, because withdrawing would be admitting failure. Translation: We haven't won and are unlikely to win in the foreseeable future, if ever.
And now the narrowly averted Christmas massacre in the skies above Detroit. I don't think I'm overreacting when I say that if ever overreaction on the part of a citizenry has been justified, it is now. We the people deserve to be angry. It's not as though Abdulmutallab came up with a clever new tactic while our national security agencies were focused on the last tactic. He used more or less the same tactic as the "shoe bomber," Richard Reid, and nevertheless got through every layer of international and national security.
It's almost as though Osama bin Laden had been allowed through screening at Boston Logan, used a box cutter to hijack a jet, and would have crashed it but for the heroic intervention of other passengers defending themselves after their government failed to defend them.
Forget Democrats and Republicans for a minute. Every American should be asking the same questions: Why are we paying these people?
Our elected leaders and public servants can't do the hard stuff, and they can't do the easy stuff either. They can't provide universal, affordable healthcare, of the kind that all other advanced industrial societies have. They can't give us a system of banking that channels money from depositors to productive enterprises in our country, without being channeled into gambling with obscene profits skimmed off for the gambler-bankers. They can't win wars or avoid unwinnable ones. They can't even repair bridges and keep levees in operating condition, tasks mastered by the relatively primitive ancient Romans and ancient Chinese.
And now, after two invasions justified in the name of the "war on terror," the creation of a cumbersome Homeland Security bureaucracy and a Patriot Act, and countless studies, reports and hearings, it turns out that we Americans may have to defend ourselves against jihadists. First we were told ad nauseam that it was our job to identify possible terrorists in airports and bus terminals and train stations. What next? "Passengers are advised to be prepared to throw themselves if necessary on the flaming traveler next to them in the aircraft, in order to prevent a bomb from detonating. Please watch the demonstration by the flight attendants."
The reality as well as the perception of government incapacity threatens liberalism more than conservatism. After all, if public safety deteriorates, antisocial plutocrats can retreat into doormanned buildings and gated communities and hire their own private security forces, and rural conservatives can amass home arsenals. And if the costs of personal security reduce the room for taxes for public goods, well, then, so much the better, from the perspective of certain strains of anti-government conservatism.
In contrast, America's modest and inadequate system of social democracy rests on economic growth made possible by effective government provision of basic public goods. Economic growth in turn rests on physical security — the protection of citizens against criminals in their midst and hostile or law-breaking foreigners. Libertarians to the contrary, the indispensable preconditions for the free society are effective armed forces and police forces, be they citizen militias or professionals.
Social democracy, in the form both of middle-class social insurance like Social Security and Medicare and means-tested programs for the poor, is a luxury of countries with secure borders and advanced, functioning mixed economies. You can have a generous welfare state only after you have effective soldiers, police forces and intelligence agencies and well-run industries, infrastructure and utilities.
If global war or a civilization-threatening natural catastrophe forced us to choose to save some functions of government at the expense of others, we would put security over wealth and redistribution. We would sacrifice the Social Security Administration and the Commerce Department in order to keep the Pentagon, in the hope of regenerating the fleshy tissue of the economy and the social insurance system in the future around the hard skeleton of the state.
Twentieth-century progressives and liberals took this order of priorities for granted. Theodore Roosevelt the environmentalist and reformer was also police commissioner of New York as well as assistant secretary of the Navy and commander of the Rough Riders. Franklin Roosevelt had a major in navalism and power politics, as it were, and a minor in electrical utilities. FDR came relatively late to the idea of social insurance. Any list of Americans who symbolized New Deal liberalism in the public mind would include Adm. Hyman Rickover of the Navy and the Atomic Energy Commission and David Lilienthal of the Tennessee Valley Authority.
Following the Vietnam War, however, the two parties specialized, with the Republicans specializing in national security and "law and order" and the Democrats specializing in defending existing social insurance programs like Social Security and Medicare and proposing new ones like universal healthcare. Because security against foreign attack and domestic crime comes first, even in the left-liberal tradition, properly understood, it is hardly surprising that Republicans have dominated the presidency except in the 1990s, when the Cold War had ended, and beginning in 2008, when the fear of al-Qaida-inspired jihadism had gone down (perhaps temporarily).
This doesn't mean that progressives should try to prove they are as tough as conservatives by invading countries unnecessarily, or keeping Guantánamo open, or torturing terrorists, or supporting the barbaric death penalty. Nor do they need to adopt neoconservative rhetoric or strategy. But it does mean that the party of activist government is doomed unless it is first and foremost the party of functioning, competent, basic government — national defense, law enforcement and functioning public utilities, including utility banking.
Not all Democrats are progressive, but in our two-party system, the Democrats are the more progressive party. At the moment the relatively progressive party owns the national government, and the national government's first job is to control its own borders, keeping out enemies like Abdulmutallab. National defense requires striving to eliminate illegal immigration and punishing those who break our immigration laws because the same lax law enforcement that permits the "good" illegal immigrant nanny to cross the border and the "good" foreign student to overstay her visa inevitably empowers terrorists and criminals.
Democrats shouldn't see this as an irksome task that is necessary to win the credibility they need for their social insurance reforms. Like the progressives and New Dealers, they should take it for granted. Physical security comes before economic security.
It wasn't my personal duty back in the '70s when I was a high school student to "whip inflation," and it is not my personal duty now to be vigilant in the airport or to be prepared on airplane flights to overpower a would-be mass murderer on a terrorist watch list who has brought easily detected explosives onto the plane. We hire politicians and pay public servants to do these tasks — not to try their best to do them, not to come up with procedures to make it likely they will be done, but to actually do them.
If our officials can't provide the basic goods of an advanced society — secure borders, safe streets, a functioning economic infrastructure — then we need to keep firing them until we find somebody who can do the job.
Never mind President Obama's audacity of hope. It's the audacity of the banks that takes your breath away. Mean old Mr. Potter in "It's a Wonderful Life" seems like Father Christmas by comparison.
A recent report that Citigroup and Goldman Sachs may have received preferential treatment getting doses of the swine flu vaccine was enough to give Ebenezer Scrooge the yips. Then came news that in order for us to get back the taxpayer bailout money we loaned it, Citigroup is receiving billions of dollars in tax breaks from the IRS.
And there's a new study this week, "Rewarding Failure," from the public interest group Public Citizen, revealing that in the years leading up to the financial meltdown, the CEOs of the 10 Wall Street giants that either collapsed or got huge amounts of TARP money were paid an average of $28.9 million dollars a year.
In 2007, that amounted to 575 times the median income of an American family. Now, thanks in part to the banks' monumental malfeasance that led to our economic swan dive, food stamps are now being used to feed one in eight Americans and a quarter of all the kids in this country. A new poll from the New York Times and CBS News reports that more than half of our unemployed have borrowed money from friends and relatives and have cut back on medical treatments. The Times wrote, "Joblessness has wreaked financial and emotional havoc on the lives of many of those out of work ... causing major life changes, mental health issues and trouble maintaining even basic necessities."
Yet according to the nonprofit Americans for Financial Reform, the reported $150 billion that Wall Street is paying itself in compensation and bonuses this year would be enough to solve the budget crisis of every one of the 50 states or create millions of jobs or prevent all foreclosures for four years.
All of this wretched excess is occurring as more and more people can't afford a roof over their heads. Foreclosures were up another 5 percent in the third quarter -- 23 percent more than a year ago. Fewer Americans are willing to buy foreclosed properties, and the Obama administration's foreclosure prevention plan has been a bust so far -- way too timid, critics say, and many of the banks won't play ball, refusing to negotiate in good faith with homeowners desperate to hold on.
We got a firsthand look at the crisis this week when thousands lined up at the Jacob Javits Convention Center just a few blocks from our Manhattan offices to attend a mortgage assistance event sponsored by the nonprofit Neighborhood Assistance Corporation of America (NACA). So many showed up for this leg of the "Save the Dream Tour" that on many days, staff and volunteers stayed to help until 1 in the morning.
NACA has had success getting homeowners and banks together to work out a deal to prevent foreclosure. But the big banks' return to the government of the TARP bailout money with which we underwrote them over the last 14 months is a mixed blessing -- great to have the cash returned so quickly, terrible because any leverage Washington held over the banks because of the loans virtually vanishes with the payback. They're back in the saddle and not inclined to be of much assistance helping anyone else out, especially those in mortgage trouble.
As Andrew Ross Sorkin of the New York Times wrote in the wake of Obama's Monday meeting with Wall Street's top guns (three of whom failed to show up because of airport delays)
Executive compensation, leverage limits and lending standards were all issues that Washington said it planned to change -- and when the taxpayers were the shareholders of these firms, it probably could have done so. But now the White House has been left in the position of extending invitations, rather than exercising its clout. And in the figurative and literal sense, it is getting stood up.
Afterward, Obama said, "The problem is there's a big gap between what I'm hearing here in the White House and the activities of lobbyists on behalf of these institutions or associations of which they're a member up on Capitol Hill."
That's putting it mildly. This week, the American Bankers Association sent out an update and "call to action" memorandum crowing over its success in watering down the bank reform bill that was approved by the House and urging its members to beat back similar legislation in the Senate. Self-righteously, it concludes, "As one of your New Year's resolutions, please vow to do everything in your power to show, and to have your colleagues in your bank show, your Senators the right path to true reform."
It helps when the right path is paved with silver and gold. As "Crossing Wall Street," a November report from the Center for Responsive Politics, notes:
The finance, insurance and real estate sector has given $2.3 billion to candidates, leadership PACs and party committees since 1989, which eclipses every other sector ...
The financial sector has also been a voracious lobbying force, spending an unprecedented $3.8 billion since 1998, while sending an army of lobbyists to Capitol Hill to make its case. That's more money than any other sector has spent on influence peddling. Not even the healthcare sector, which spun up a lobbying frenzy this year over health reform, has spent more.
The banks are making a list and checking it twice. And we shouldn't forget that during his run for the White House, the finance sector filled Obama's stocking with $39.5 million worth of campaign contributions, more than for any other presidential candidate.
God bless us, every one!
Research support provided by "Bill Moyers Journal" producer William Brangham and associate producer Katia Maguire.
At Bloomberg, columnist Joe Mysak has written a quite enlightening article detailing how Pennsylvania municipalities and school districts got themselves into big financial trouble getting played for suckers by bankers selling "synthetic fixed-interest rate" swaps.
It's a complex subject that Mysak explains well, and if you're interested in unraveling the mysteries of interest rate swaps, I'd recommend that you read his full column, instead of my attempting to summarize it into unintelligibility. But the basic gist is simple: The municipalities and school districts were trying to be too clever by half, hoping to save money through financial sleights of hand that ended up costing them far more than if they just issued traditional fixed-rate bonds.
Mysak's column is based on a 78-page report by Pennsylvania's Auditor General, Jack Wagner.
The Pennsylvania Auditor General, Jack Wagner, is no fan of swaps. His report concluded that they are "highly risky and impenetrably complex transactions that, quite simply, amount to gambling with public money." He asked the state to forbid their use, recommended municipalities avoid them "from this day forward," and advised those who did use them to terminate the things immediately.
Just so nobody would misunderstand, Wagner asked the General Assembly to prohibit the state’s municipalities from using swaps "or any of the specific devices and techniques encompassed therein currently in existence or yet to be invented in connection with the issuance of public debt."
Yet to be invented! Take that, financial innovation!
Best line from Mysak, in reference to the fact that the municipalities were ill prepared to deal with the consequences of their financial bets gone wrong:
As the Pennsylvania auditor general pointed out, municipalities rarely budget for financial-instrument catastrophe.
But who does?
Nouriel Roubini takes a look at the gold bubble and gold bugs in his latest Project Syndicate column and comes to the conclusion that while "there are several reasons why gold prices are rising... they suggest a gradual rise with significant risks of a downward correction, rather than a rapid rise towards $2,000, as today's gold bugs claim."
Roubini echoes something I noted a week ago. If investors think economic recovery will be "anemic" there could be "a rise in bearish sentiment on commodities -- and in bullishness about the U.S. dollar." So they Fox News hypesters pushing gold as the only answer for troubled times could be leading their disciples right off the cliff.
But then there's Roubini's kicker!
The recent rise in gold prices is only partially justified by fundamentals. Nor is it clear why investors should stock up on gold if the global economy dips into recession again and concerns about a near depression and rampant deflation rise sharply. If you truly fear a global economic meltdown, you should stock up on guns, canned food, and other commodities that you can actually use in your log cabin.
Of course who is to say that fearful investors aren't doing all of the above? After all, gun sales in some of the most depressed parts of the U.S. have gone through the roof in the past year.
If you had watched angry senators, from arch-conservative Republican Jim DeMint to arch-liberal Independent Bernie Sanders, grill Federal Reserve Chairman Ben Bernanke during his confirmation hearing earlier this month, you would be excused for raising your eyebrows at the news that Time magazine would declare him 2009's Person of the Year. Republican Sen. Jim Bunning looked Bernanke straight in the eye and called him the "definition of moral hazard"! Here's a man who by his own admission failed to anticipate how bad the financial crisis would become -- and who ends up saluted as the hero who saved the global economy. Tea-partiers and progressives are both undoubtedly having fits.
But Michael Grunwald's looooooong profile of Bernanke does a pretty decent job of defending and explaining Time's choice. Whether you nod your head or snort in disagreement depends on one question, above all else: Do you believe that Bernanke's aggressive actions as Fed chairman prevented a second Great Depression?
If the answer is yes, then it is a no-brainer. Of course he should be Person of the Year. Heck, give him person of the decade, or 21st century. There is much unhappiness in both conservative and liberal quarters about the state of the economy, about unemployment, deficits, compromises on healthcare and regulatory reform, bailouts and foreclosures and all the rest. But nothing we are looking at right now is anywhere near as bad as another full-fledged depression would be.
As Bernanke told Time, "the markets were in anaphylactic shock" (and I'm betting he's the first winner of the Person of the Year award who is comfortable with using the word "anaphylactic" to describe an economy in a state of severe allergic reaction to the point of near paralysis and death). A year ago at this time, anyone who understood the depth of seriousness of what was happening had a hard time not feeling the kind of fear that makes it hard to sleep at night. 2009 could have become one of the worst years, economically speaking, in U.S. history.
So Bernanke, who, as everyone knows by now, made his bones as an academic scholar by studying the Great Depression, went into overdrive:
From Time:
...[H]e conjured up trillions of new dollars and blasted them into the economy; engineered massive public rescues of failing private companies; ratcheted down interest rates to zero; lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash; jump-started stalled credit markets in everything from car loans to corporate paper; revolutionized housing finance with a breathtaking shopping spree for mortgage bonds; blew up the Fed's balance sheet to three times its previous size; and generally transformed the staid arena of central banking into a stage for desperate improvisation. He didn't just reshape U.S. monetary policy; he led an effort to save the world economy.
And guess what? We didn't plummet headlong into a depression. At least not yet, we haven't.
But of course we don't know, and we will never know, what would have happened if Bernanke had sat tight. And of course there were many things that could have been done a lot better, particularly the bailout of AIG, and the failure to push through real regulatory reform immediately, when it might have had a chance to succeed. And then there's the long Greenspan-Bernanke legacy of light supervision and easy money, which created some of the basic conditions for the financial crisis in the first place. All that explains why Bernanke is not being regarded as a hero in Congress, and why popular dissatisfaction with the Fed is sky high. With unemployment over 10 percent, we're looking for someone to blame. Bernanke, the most powerful person in the world when it comes to executing economic policy, is an obvious choice. And there is a growing chorus on the left that accuses Bernanke of becoming complacent now that the worst is past, and not being aggressive enough on the unemployment front.
Still. As Grunwald writes, "It's no consolation to the 1 in 6 Americans who are underemployed, the 1 in 7 homeowners with a delinquent mortgage or the 1 in 8 families on food stamps, but there would be far more joblessness, foreclosures and hunger were it not for Ben Bernanke."
I think most economists, whether conservative or liberal, would agree with this assumption. It's a tough call to make, lauding someone as a hero because of something that didn't happen, but upon reflection, it doesn't seem all that crazy.
UPDATE: Felix Salmon, smart, as usual.
Why Hopenhagen Turned into Nopenhagen.
Thomas Friedman and the DIY Economy
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