The Juan Williams firing

It's one thing to be honest about your feelings regarding Muslims in public and then admit that something internally needs to be done to address this self-proclaimed bigotry. That is perfectly human and understandable.

But to be honest about those feelings and then use that in a justifying sort of way (i.e., y'know, I'm a black man who is obviously not a bigot, but I think Muslims are scary and we should be okay with that) is an entirely different thing. That is admitting your bigotry and saying that that is something reasonable and acceptable in our society. That kind of admission in front of millions of Fox viewers is not only unhelpful in the growing tension between Christians and Muslims, but completely destructive.

Andrew Sullivan and Glenn Greenwald also document the glaring hypocrisy of Juan Williams in the light of a speech he made in 1986 regarding racism against black men in NYC by jewelry store owners. He said the following:

Neither black nor white store owners are in business to display the virtues of admitting people of all colors, creeds, and fashions to their stores. They are in business to make money. I would want to take precautions to prevent robbery; I would look closely at people entering the store. The race of a potential customer would be one factor among many to be considered as I girded myself against thieves.

But in Washington and almost all other major cities, blacks do patronize jewelry stores. A jeweler in Beverly Hills who closed his door to heavily bejeweled Mr. T would be foolishly closing his cash register. Unless I am a racist, race and age cannot be the sole deciding factorsin calculating whom I will and will not let into my store. And I certainly would not close my door to, say, all young black men - not even to those who are casually dressed and behaving nervously. I would act cautiously in dealing with them, as I would with an antic, strangely dressed white man.

As a cabdriver I would apply the same considerations. Discrimination can be used judiciously. I would certainly exclude one class of people: those who struck me as dangerous. Nervous-looking people with bulges under their jackets would not be picked up; nor would those who looked obviously drunk or stoned. It all comes down to a subjective judgment of what dangerous people look like. This does not necessarily entail a racial judgment. Cabdrivers who don't pick up young black men as a rule are making a poorly informed decision. Racism is a lazy man's substitute for using good judgment.

The elevator question is disingenuous. I suspect you are suggesting that I am a white woman getting into an apartment building elevator with a strange black man. Of course, black women have just as much to fear as white women. Nevertheless, black women living in black neighborhoods ride elevators with black men frequently, and do so without being raped. In this situation and all others, common sense is my constant guard. Common sense becomes racism when skin color becomes a formula for figuring out who is a danger to me.

How could he possibly justify that statement with the one he just made on Fox News about Muslims? How?

P.S. Also, I highly recommend this very eloquent defense of NPR by Jim Fallows against the recent brutal attack (led by Fox) in the wake of the Williams firing.

Progressive taxes = Redistribution of wealth?

Here's an interesting quote from James Kwak today:

Most people think that a progressive tax system is redistributive. I’m not sure. The issue is who you think benefits more from government spending–the rich or the poor. The conventional answer is that the poor do, because they get “handouts.” But imagine a world without government. Who would lose more? Assuredly the rich, who would no longer have the armed forces, the police, and the courts (and the FDIC) to protect their property. I guess you could have a private security market, but how could you maintain, say, a financial system where most of your wealth is bits on a computer somewhere without a government to back it up?

Thoughts?

The "Trust Us" Presidency...same as it ever was

I am truly at my wit's end with our President. I fully admit that I was "hopeful" in voting for him a year and a half ago. I never considered myself "ga-ga" over the guy, but I was very excited at the prospect of having a presumably intelligent President who would surround himself with the best and brightest minds to tackle the toughest challenges that America has faced in many years.

In this post, I want to concentrate on a broad area on which he has, by any objective measure, completely failed to live up to his promises: civil liberties.

First, a quick thought on the term. It's really unfortunate that the term "civil liberties" has been turned upside down to mean something only a far-left nutjob would ever want to strongly and vocally defend (as the ACLU bashers love to do). But part of me is optimistic with the recent rise of libertarianism, which in full really means civil libertarianism. To see how weird this has become, just consider the word "liberty". Nobody would ever not defend that beautiful and profound word. You'll even see it on the signs of a vast majority of the Tea Partiers. Yet, when you put in front of it the word "civil", it all of a sudden turns Soviet Red to some people. It hasn't always been this way.

The cause of this rift in semantics seems pretty clear to me. There are some who only think Liberty applies to certain upstanding people. Those liberties of those upstanding people should be defended at all costs from all the evildoers of the world whether they be government or private entities. During the African-American civil rights era, these upstanding people were whites. Blacks didn't really deserve liberty, they argued. And it was really easy for people to divide the upstanding people from the non-upstanding people; just look at the color of their skin. We have obviously made leaps-and-bounds on racism issues since then but today we have a new division.

Today, these upstanding people are anyone who is not a terrorist. That sounds pretty reasonable. Terrorists are bad people, right? They don't deserve to have liberty because they are murderers who use fear to accomplish some sort of political goal. But who exactly is a terrorist? (What does terrorism even mean?) How would you recognize one so that you could make the conscious decision of limiting their liberty? I think when the word "terrorist" is mentioned, most of us conjure up images of something similar to the Libyans chasing Marty McFly in their VW bus with a bazooka pointed out the pop-top. But life, unfortunately, is not Hollywood. It turns out that as much as people like to think they know how to "spot a terrorist", it isn't as easy as just looking at someone's skin, is it?

But it doesn't necessarily matter who we think is a terrorist. More importantly, it matters who the military, intelligence, and law enforcement sectors of our government think is a terrorist. If they say someone is a terrorist, then they are a terrorist, right? Well, apparently more than a few people in this country believe that. And the crazy thing is that these apparently trusting people don't trust government any further than they can throw it on nearly every other issue! How strange. So what should a civilized society do?

Well, it turns out that we have a fail-safe for exactly these types of situations built into our form of government: the justice system. Fantastic! The fundamental tenet of the justice system is to sift through the evidence to determine whether or not people are who they are accused to be and to safeguard the civil liberties of all people under the control of the U.S. government (Yes, that means it can apply to non-citizens as well). But what happens when the traditional justice system isn't used in terrorist cases?...Welcome to the post-9/11 world and the era of the "War on Terror".

A favorite argument against using the justice system for suspected terrorists is that we are "at war" with terrorists. It is not appropriate to inject those with whom we are at war into the justice system because there's a non-zero chance that a real terrorist could be let free due to lack of evidence or some procedural error. They say that we are better off just playing it safe and detaining suspected terrorists (i.e., eliminating their liberty and keeping them far away from the justice system) indefinitely for the length of the war.

This type of argument has been made before in past wars. We surely do not want to put our prisoners-of-war into some courtroom (even though it's pretty obvious that they could be found guilty of some wrongdoing) because of the possibility of letting them go and re-engaging our troops on a battlefied. This has led to a very rigorous framework for how to handle prisoners-of-war that is the basis of the UN Geneva Conventions. But how does this situation apply to the "War on Terror", a war with a battlefield that encompasses every habitable place on Earth and with no conceivable way of formally ending the conflict with some sort of peace treaty or resolution? What we have today and what we have been dealing with for the last 9 years is a whole different animal.

The Bush administration essentially told us to Trust Them: "We know who the terrorists are and we will protect you from them." So they tortured and indefinitely detained suspected terrorists to keep us safe. But as it turns out, they picked up a lot of people who turned out to be completely innocent. The biggest reason for this was the enormous bounties being given to Afghan people who could produce "terrorists". Of course, someone would be able to produce a "terrorist" out of thin air if they were promised enough money to feed their starving family for a year. The bottom line is that we were scared after 9/11 and we flexed our muscle way too much. And in the process we extended the dragnet way too wide and picked up perfectly innocent people. But we never acknowledged it and instead tried our damnedest to extract whatever scraps of intelligence these people had (or could fabricate under the stress of torture) all in order to keep ourselves safe. (Quick note: I use "we" here because we should claim responsibility for the actions of those we elect)

So what, specifically, has President Obama done to continue this same set of horrifying policies? Here's a list that I have slowly been adding to over the last several weeks:

1. Not defending and actually investigating lawyers who admirably chose to counsel suspected terrorists in Guantanamo Bay. Doesn't anyone recall the time when another admirable person defended a bunch of hugely unpopular defendants accused of barbarism?
2. Attacking government whistle-blowers in the intelligence community for trying to expose these terrible policies and practices.
3. Actively fighting against habeas corpus reviews of detainees at Bagram prison even though the Supreme Court ruled against the exact same circumstance for Guantanamo detainees.
4. Ordering the explicit assassination of a U.S. citizen without any due process.
5. Developing a "legal" framework to indefinitely detain suspected "dangerous" terrorists. This is incredibly damaging. This would institutionalize and make bipartisan the policy of indefinite detention.
6. Perhaps the most dangerous aspect of Obama's strategy is using rhetoric to distance himself from the Bush doctrine of American exceptionalism but turning 180 degrees around when actually implementing policy and action. At least with Bush, we knew what we were getting because rhetoric was largely consistent with action.
7. Continuing to detain people in Guantanamo in the face of enormous evidence of their innocence.
8. Actively fighting against allowing Canadian citizen Maher Arar a day in court to address his claims of being tortured in Syria through the extraordinary rendition program.

My point with this list is to illustrate a wide-reaching and consistent stance by the Obama administration of effectively continuing the policies of the Bush era. While there are some glimmers of hope (like eliminating some torture techniques and writing pretty rhetoric in policy statements), this is still the same old stuff.

So what are the consequences of this type of behavior that completely ignores the justice system exactly at the time when it is most needed? I would consider two types: practical and moral (and they're inescapably linked) We have become a nation that is hated by so many people across the world because of the hypocritical combination of our beautiful rhetoric FOR liberty and freedom and our ugly actions AGAINST the same. It's the people who have been marginalized and alienated directly by our political decisions who become the new terrorists who then feel impelled to blow up scores of troops and innocent civilians in far away places. We have become less safe as a consequence of decisions that were made (albeit with good intentions sometimes) in the name of making us more safe. There will always be those with unyielding political views that we simply cannot get to come around no matter how principled and moral we behave; but it's those that are "on the fence" that we truly can negatively impact when we enact such horrifying and backward policies as our indefinite detention (and torture) system.

And on the moral question, I'm going to end with a quote from Kevin Drum specifically about torture but the same could be said about our indefinite detention policy as well:

I don't care about the Geneva Conventions or U.S. law.  I don't care about the difference between torture and "harsh treatment."  I don't care about the difference between uniformed combatants and terrorists.  I don't care whether it "works."  I oppose torture regardless of the current state of the law; I oppose even moderate abuse of helpless detainees; I oppose abuse of criminal suspects and religious heretics as much as I oppose it during wartime; and I oppose it even if it produces useful information.

The whole point of civilization is as much moral advancement as it is physical and technological advancement.  But that moral progress comes slowly and very, very tenuously.  In the United States alone, it took centuries to decide that slavery was evil, that children shouldn't be allowed to work 12-hour days on power looms, and that police shouldn't be allowed to beat confessions out of suspects.

On other things there's no consensus yet.  Like it or not, we still make war, and so does the rest of the world.  But at least until recently, there was a consensus that torture is wrong.  Full stop.  It was the practice of tyrants and barbarians.  But like all moral progress, the consensus on torture is tenuous, and the only way to hold on to it — the only way to expand it — is by insisting absolutely and without exception that we not allow ourselves to backslide.  Human nature being what it is — savage, vengeful, and tribal — the temptations are just too great.  Small exceptions will inevitably grow into big ones, big ones into routine ones, and the progress of centuries is undone in an eyeblink.

Somebody else could explain this better than me.  But the consensus against torture is one of our civilization's few unqualified moral advances, and it's a consensus won only after centuries of horror and brutality.  We just can't lose it.

The Humbling Experience of Being Wrong

From Felix Salmon today:

The forced retirement of Helen Thomas is further proof, if any were needed, that it’s still unacceptable, in public discourse, to be wrong in one’s opinions. I find that sad.

Thomas gave voice to an opinion which she then, almost immediately, retracted; no one, in thesubsequent debate, defended the substance of her remarks. She was wrong; everybody, including Thomas, agrees on that point, and no real harm was done to anyone but Thomas when the video of her remarks surfaced.

But if you turn out to be wrong, even temporarily, even only once, on a hot-button issue, that’s enough for effective excommunication from polite society. That, to me, is chilling: I’d much rather live in a world where people should be able to change their minds and should be allowed to be wrong on occasion. For surely we are all wrong, much more often than we like to think.

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This morning, I had an interesting conversation with Christopher Hitchens, who’s in town plugging his memoir. He professed to be a man of few beliefs, political or otherwise: “my only commitment is to a group of skeptics who are not sure of anything,” he said. But when I asked him what he wasn’t sure about, he started talking about galaxy formation, of all things. He said that “my greatest delight is being proved right in my own lifetime”, and said that he couldn’t think of the last time that he was wrong about anything. In other words, he’s highly skeptical of others, but utterly incapable of interrogating his own opinions with the same kind of approach.

Hitchens, in other words, would make an atrociously bad trader. He has the cocky-and-arrogant bit down, to be sure — in order to beat the market you have to think that you’re smarter than the market. But you also have to be incredibly insecure, willing to change your mind and your opinions very quickly.

At the beginning of the conversation, Hitchens expressed a certain amount of intellectual pleasure in noting that the statement “Christopher Hitchens is dead” is false now, but will be true in the future. But that’s trivial. When it comes to the opinions he expresses in his columns and books, he’s much less willing to admit that any of them are anything but certainly and timelessly true.

I try hard to believe the opposite: that many if not most of my opinions are wrong (although of course I have no idea which they are), and that many of the most interesting and useful things I write come out of my being wrong rather than being right. This is not, as Wilkinson noted to Cowen, an easy intellectual stance to hold: he calls it “a weird violation of the actual computational constraints of the human mind”.

But I think it’s undoubtedly worth working on, and, as I say, I think it’s one which is more common in women than in men. And I think it’s a serious weakness of Hitchens’ that he places so much importance on his being right. 

The Goldman Sachs hearings missed the point - PART 5

Okay...sorry for another extended delay. It's been difficult knowing when to jump into the mix here when the financial reform package was still being hashed out. It has now passed the Senate and will be molded together with the House bill in the next few weeks. But before I talk about that at all...let's discuss this issue of 'Too Big To Fail'.

As I mentioned in the last post, I see two major categories for reform: 1) Increasing the transparency of financial transactions from the credit-card consumer-level to the hedge fund-level, and 2) breaking up the "Too-Big-To-Fail" banks. In my mind, both are absolutely critical and one is nearly useless without the other.

I know the phrase 'Too Big To Fail' has been thrown around A LOT lately (almost to the point of becoming cliché) but what exactly does it mean? Again, let's go to my current favorite book (13 Bankers):

Certain financial institutions are so big, or so interconnected, or otherwise so important to the financial system that they cannot be allowed to go into an uncontrolled bankruptcy; defaulting on their obligations will create significant market losses for other financial institutions, at a minimum sowing chaos in the markets and potentially triggering a domino effect that causes the entire system to come crashing down.

No one in their right mind would ever argue for the existence of financial institutions that are Too Big To Fail. Fixing this problem was the rallying cry from nearly everyone in the financial world (both financiers and regulators) at the time of the near-collapse in late 2008. The reason that everyone appeared on the same side was because the problem caused by Too Big To Fail institutions was such a blatant affront to the very foundation of the free market that no one in their right mind would argue for their existence. And the consequences of bailing out Too Big To Fail banks was clear as day to everyone in late 2008: the mega-banks get the benefits of all of the risks that they took over the preceding years and the taxpayer bears the enormous cost of these risks once they exploded. It is privatized gains and socialized losses. Essentially...if you think Obama's health reform plan was socialistic, then this is even at another level beyond that (at least in a socialistic system, the taxpayer gets the gains as well as the losses).

And once an institution realizes that they are Too Big To Fail, they now have the perverse incentive to take more risks because they are implicitly backed by the federal government. This gives them an enormous competitive advantage over smaller banks who do not have this implicit government backstop. It is completely unfair and antithetical to everything that capitalism stands for.

One of the big rallying cries of the right during the financial reform debate has been to get rid of Fannie Mae and Freddie Mac (the government-supported entities that create liquidity in the housing market). And I completely agree with that argument for the reasons I discussed above. Fannie and Freddie are Too Big To Fail. But in order to stay intellectually consistent, those same people who argue for the dissolution of Fannie and Freddie should also be for breaking up the mega-banks for the exact same reason. Essentially, Fannie and Freddie are explicitly backed by the federal government and the mega-banks are implicitly backed by the federal government. There is zero difference when it comes to their power to corrupt our economic system.

This is why this is so frustrating. This should not be a left vs right issue. This is clearly not an example of the free market working as planned. But those against reform are buying the completely bogus piece of propaganda from those interested in keeping the status quo: "This is a government takeover of the financial sector!" Good sweet Lord...it's just amazing to see and hear the financial sector make this argument. The mega-banks have been holding the American government and taxpayers hostage for years and they are the ones crying about being taken over? Give me a friggin' break.

Another way to address the Too Big To Fail issue is through a re-implementation of the Glass-Steagal Act which was enacted during the Great Depression in 1933 to formally separate the plain-vanilla commercial banks (like the one where you have your checking or savings account) from the speculative and inherently riskier investment banks. The idea is to have the safer commercial banks backed up by the federal government [through the Federal Deposit Insurance Corporation (FDIC)] to protect against a bank run and conversely have the riskier investment banks not backed up by the government. However, this perfectly reasonable separation provision was quietly repealed back in 1999 as the market for complex financial products was just starting to go into full swing.

Along the same lines, another proposal is to eliminate proprietary trading, which is when banks use their own money for trading financial products to gain profit as opposed to using their customers money. This is better known as the Volcker Rule. More details can be found here.

So why do we need hard and clear rules on the size and type of banks instead of just relying on regulations?

Banks will inevitably find loopholes and ways to have their activities exempted because of their enormous and unrelenting power over the political world. If you don't believe me, just look up the source of campaign contributions for nearly every politician with any significant say in financial legislation. That's one of the benefits to running a Too Big To Fail firm; you have lots and lots of money just lying around to pay lobbyists to push legislators to do just about anything in order to fund increasingly expensive re-election campaigns. This political power is also quite potent with the regulators (known as regulatory capture). All in all, it has really turned our political-economic system into something more resembling an oligarchy.

So the only way to play ball with the mega-banks is to implement clear and decisive rules that would essentially break them up into smaller less politically powerful institutions.

But what about the argument that we need big banks to compete in an international market full of other enormous banks? Well, it turns out that, yes, we are not the only country with enormous financial institutions. Some countries have banks that are better dubbed Too Big To Bailout (this is part of the reason that Europe is in their current economic crisis). But even with that admission, there is still no credible evidence to suggest that we (as a country and as players in the market) need Too Big To Fail financial institutions. The megabanks are currently at such a bloated size that the usual economies of scale no longer apply. They really only got uber-huge (relative to GDP) in the last 15 years and back then they could still compete quite well. Also take this argument from Simon Johnson:

Even the biggest nonfinancial companies do not, under any circumstances, want to buy all their financial services from one megabank.  They like to spread the business around, to use different banks that are good at different things in different places – in part to prevent any one bank from having a hold over them.  Playing your suppliers off against each other to some degree is always a good idea.

There is just no evidence for having these megabanks around. They are enormous liabilities!

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Okay, so what about the financial reform package? Well, I think I'll save more of a discussion on it after it passes both houses but things do not look all that great. It is still largely a technocratic fix...i.e., they really are only addressing the regulation side of things and nothing really structural (e.g., the size of banks...Too Big To Fail). I'm afraid that we really missed a huge political opportunity in early 2009. Some of the new rules will surely help but we are still poised for another situation where a future President decides between two awful choices: A) another massive bail-out of Too Big To Fail banks or B) collapse of the financial system leading to another Great Depression.
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UPDATE: Just so everyone is clear on what exactly a megabank is, Johnson and Kwak would like to start with a limit of 4% of GDP for all banks and 2% of GDP for investment banks. That would make the following banks "mega-banks" and definitely Too Big To Fail:

• Bank of America (16% of GDP)
• JPMorgan Chase (14%)
• Citigroup (13%)
• Wells Fargo (9%)
• Goldman Sachs (6%)
• Morgan Stanley (5%)

The Goldman Sachs hearings missed the point - PART 4

Sorry for the delay. I have waited to finish these last few posts on the financial crisis (for a while at least) until I finished the book 13 Bankers. And by the way, I just cannot possibly recommend it more to those interested and willing to take the plunge head-first down the rabbit-hole that is our broken financial system. It is a fascinating and well-written book by some really brilliant guys.

Okay...so here's a short, convenient summation of what I went through in the last 3 parts (quoted from 13 Bankers):

The end result was a gigantic housing bubble propped up by a mountain of debt - debt that could not be repaid if housing prices started to fall, since many borrowers could not make their payments out of their ordinary income. Before the crisis hit, however, the mortgage lenders and Wall Street banks fed off a giant moneymaking machine in which mortgages were originated by mortgage brokers and passed along an assembly line through lenders, investment banks, and CDOs to investors, with each intermediate entity taking out fees along the way and no one thinking he bore any of the risk. 

So, as we all know, the bubble did end up bursting and today we are continuously faced with the consequences in the form of high unemployment, cuts in government services, etc. But you might ask yourself...didn't we learn our lesson? Well, I wish that I could say 'yes' but I'm afraid we, as a country, are not even close to learning the larger lessons of this crisis.

The way the current financial system is structured, a future president (regardless of ideology or party) will inevitably look over the edge into a dark abyss of economic chaos and face the same decision that the Bush administration faced in the fall of 2008 after an asset bubble burst (this last time it was housing, the time before it was dot-com's, the next time...who knows?):

• let the mega-banks fail and cause a banking crisis that would lead to another Great Depression (many, many times worse than the current economic recession) OR 
• pledge an enormous amount of taxpayer money to bail out the mega-banks.

Both of these ideas are horribly unsustainable. Another Great Depression would dramatically change the world's economic status. It would be absolutely devastating. Another Huge Bailout for banks would funnel more money away from taxpayers to the financial elite plus it would dramatically increase the government's debt burden (with the worst consequences experienced by future generations). So that's why we cannot let this moment just pass and say 'Boy...that was close...we sure did learn our lesson...that shouldn't ever happen again.'

We have not truly come to grips with this crisis as a country. Those that are unemployed or otherwise severely affected by this recession are undoubtedly hurting and very interested in solutions but, as a whole, we are poised to repeat this mistake again. (See this new data on the decrease in the savings rate for a taste of this idea). More people need to be told about how close we came to plunging into a Great Depression...how the commercial paper market (the short-term loans that companies depend on to cover payroll) momentarily froze in September 2008 (the This American Life episode on this is great...the very first story beautifully explains the commercial paper market). This is all poised to happen again.

Alright...splendid. What to do? Now...on to the actual financial reform ideas.
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I think it's easiest to just break it up into two basic strategies: 1) Increasing the transparency of financial transactions from the credit-card consumer-level to the hedge fund-level, and 2) breaking up the "Too-Big-To-Fail" banks.

#1: Increasing transparency of financial transactions


A fundamental assumption of a fully-functional capitalist market system is that everyone has the correct information available to them and then they use that information appropriately and efficiently to make a "correct" economic decision. But the critical lesson of the crisis is that this assumption is totally bunk. People are irrational and information is conveniently and strategically hidden from those who are being duped.

This has been happening at all levels of the financial system but most people are much more familiar with the credit-card side of things. I think most of us would agree that credit card companies have become exceptionally good at deceiving people into high interest loans and charging for hidden fees. This has got to stop. But it's not at the heart of the crisis.

The other side of the system is where the huge problem is...in that maze of crazy acronyms that is the complex financial products for the "sophisticated" investors; a market that became a house of cards, which then imploded to trigger the meltdown. While greed was definitely a primary driver on both sides of each transaction, lack of information was surely another. As was argued recently, it is clear that some people knew much more about the complexities (and associated risks) of these financial instruments than others. Firms like Goldman Sachs manufactured these products, had contact with the individual lenders that fed into the products, and were able to "negotiate" (i.e., pay for) good ratings from the agencies responsible for assessing these products. Therefore, they are at a distinct advantage when compared with the average (even sophisticated) investor.

Some people will just say "buyer beware" and trying to fix a problem like this with government regulation would be equivalent to a nanny state but I think this is a case where overly deceptive (and sometimes illegal as we are seeing with Goldman and JPMorgan) practices are hurting the overall machinery of the economy more than helping.

That gets me to my main point here, as wonderfully summarized (again) by 13 Bankers:

The core function of finance is financial intermediation - moving money from a place where it is not currently needed to a place where it is needed. The key questions for any financial innovation are whether it increases financial intermediation and whether that is a good thing. 

I think it can be argued that these deceptive practices and overly complex products do not do anything to move money from a place where it is not currently needed to a place where it is needed (think greasing the gears of the economy). We are no better off as an economy because of these practices/products. It is squarely the opposite...our economy is much, much more susceptible to disaster as a consequence of them.

So I would recommend increasing regulations on the complex financial products (derivatives) market to increase transparency. The assumption of abundant information is so incredibly important in this market because of the enormous risks that get compounded and correlated together with each new bet on the same set of assets.

Currently, the proposal that claims to deal with exactly these types of regulations would be in the form of the recently proposed Consumer Financial Protection Agency. While I realize that another huge bureaucratic regulatory agency is rarely a good solution to anything, what else would you propose we do in the light of what I just discussed?

Okay, I have rambled on for too long again...I will save the Too-Big-To-Fail issue for next time.

The Goldman Sachs hearings missed the point - PART 3

Okay...now that we have that little bit of background behind us, what about those hearings last week?

So Goldman Sachs was charged with committing fraud in the course of selling a synthetic, synthetic CDO to a group of investors that consisted of the German bank, IKB and which also led to a lot of money lost by the Royal Bank of Scotland (through, yet another big insurance deal/bet). The complex product was called ABACUS and it was put together by the "Fabulous Fab" at Goldman Sachs along with the close advice of a big-time hedge fund manager, John Paulson, who also, it turns out, was "shorting" (betting against) the synthetic, synthetic CDO. The SEC alleges that the company that originally packaged up the synthetic, synthetic CDO (their name is ACA) thought that John Paulson was on the long side of the bet...not the short side. Hence, Goldman Sachs was at fault for knowingly avoiding to clear up this misunderstanding with ACA and committing fraud in the process. Clear as mud, eh? (Try this timeline for a full rundown of this case)

But as I said in the opening post...the Senate committee really missed the point here. They didn't argue about the specifics of the fraud charge. Instead, they focused on the fact that Goldman Sachs was also on the short side of many of these mortgage-backed securities and other financial products that were implicitly backed by the mortgages of ordinary Americans. The senators emphasized that Goldman Sachs was essentially "betting against the American dream" and that's why they are such cruel people. In addition, they lambasted them for betting against the very products that they were selling to their investor clients. But as this great post from the Economist's Democracy in America blog points out, that's a pretty ridiculous thing to scold them over:

It's important to distinguish between the SEC allegations and the allegations being aired in Congress, which I believe some senators are intentionally trying to confuse. The SEC is alleging that Goldman broke the law in a very specific way. Binyamin Appelbaum of the New York Times explains, "Rather than asserting that Goldman misrepresented a product it was selling, the most commonly used grounds for securities fraud, the Securities and Exchange Commission said in a civil suit filed Friday that the investment bank misled customers about how that product was created. It is the rough equivalent of asserting that an antiques dealer lied about the provenance, but not the quality, of an old table." That type of misrepresentation or misleading is illegal, no doubt about it. On the other hand, the accusations emanating from Congress—that Goldman took the opposite side of its clients' bets on the housing market—are certainly not. As we say in our leader on the subject, "the idea of willing counterparties, with full and accurate disclosure, each seeking to profit from the other's inferior grasp, is central to financial markets."

This may not seem like an important clarification—in the eyes of many, the story of Goldman during the crisis is already written and the firm acted unethically whether it broke the law or not. That was certainly the mood on Capitol Hill yesterday. But at least consider the following. In his opening statement Mr Levin asked whether Goldman's actions in 2007 were "appropriate", not whether they were lawful. If we agree with him that Goldman's actions were indeed inappropriate, but also lawful, what does that say about the politicians who were tasked with making the laws?

So yes, the Senate committee did reveal the Goldman Sachs executives as exceedingly greedy people but what they did was largely within the confines of a very loose regulatory structure within the financial system...a structure that was created and supported by the very same body of government that was apparently scolding them for making incredible amounts of money only because of how that system was structured.

It's true that some of what Goldman Sachs allegedly did in the ABACUS deal (the center of the fraud charge) was truly illegal (willfully misleading their client into thinking that another big-time investor was actually betting on the same side as them when in fact that big-time investor, John Paulson, was on the opposite side of the bet and hand-picking the risky pools of mortgage-backed securities). For that they should definitely be brought in front of a court.

The whole point that I am trying to get at is that it is much easier for a government official to remedy a situation where a party committed an illegal act...you put them on trial and hope to find them guilty. But it's far more difficult for a government official to remedy a situation where a party committed an "inappropriate" act. The only way to remedy that situation in the financial industry is to change the regulations so that you make an "inappropriate" act against the rules (i.e., you get a big fine if you break them).

So that's where we are now...back to the question of government regulation...the dicey area where we are headed in Part 4. We will actually look at some of the elements of financial reform that include more regulations. What do you think should be the role of government in this situation?

The Goldman Sachs hearings missed the point - PART 2

So before I get on to subprime lending, I forgot to mention one additional structured financial product which is yet another complex combination of what I already talked about: the synthetic CDO. Recall that a CDO is a pool of pools of mortgage-backed securities. So an investor could buy slices (aka tranches) of a large pool of thousands of mortgages depending on what type of risk they wanted to take (keeping in mind that the higher the risk, the higher the return for the investor). A "synthetic" CDO is really just a combination of a CDO and a credit default swap. It's a bet that the slice of the CDO will (short) or will not (long) default.

And then yesterday, I found out that there is such a thing as a synthetic, synthetic CDO. (Yeah...you read that correctly). Again, these new products weren't built out of anything tangible...they were just bets. But it allowed more people to make more money off of a single mortgage transaction than ever before (no one had to go to the trouble of lending new money) and it gave investment banks the opportunity to collect more and more outrageously large fees.

Subprime lending: So now that this structured financial product wormhole-of-a-market had been created and CDOs, synthetic CDOs, and CDSs were flying off the shelves into the arms of salivating investors...they needed the gravy train to keep coming. But there are only so many houses in this country and so many responsible people that can afford to buy houses. Well, that pesky little fact didn't matter after the invention of the subprime loan. Traditionally, mortgages were long-term, fixed-rate loans that were labelled "prime" because the borrower met specific criteria like possessing good credit, a satisfactory income, and collateral (i.e., the property was in good enough shape so that the lender wouldn't get stuck with a lemon if the borrower defaulted). So that means "subprime" mortgages didn't have to meet these strict (and totally reasonable) standards. But since these new subprime loans were much riskier, the interest rates were set higher, which led to higher-yielding CDOs (exactly what the investors way down at the other end of the pipe were craving like crack cocaine).

I think everyone has heard stories about these loans..."no doc" and "stated income" loans were better known as "liar loans". The lenders didn't require anything to indicate that someone would be a reasonable and prudent borrower. And the "predatory" lenders would lure the unsuspecting borrower into the loan with arrangements of lower monthly payments in the first year (which then jumped up to prohibitively high levels thereafter) or the "pay option" where borrowers would pay less than the monthly interest (but the principal would go up). It was a total and complete sham! But it didn't matter to the lenders because they were making a killing off of the fees and then just sending it down the pipe to the gluttonous and completely uninformed investors. Those that did think about the quality of the loans would just convince themselves that the subprime loans were still good business because home prices would just continue to rise indefinitely. Here's another passage from 13 Bankers:

But that [risk of default] no longer mattered - at least not to the lenders or the investment banks - because the lending business model detached itself from the requirement that borrowers pay back their loans. Lenders made fees for originating loans; the higher the interest rate, the higher the fees. Then, when interest rates reset and borrowers became unable to make their monthly payments, lenders could earn more fees by refinancing them into new, even-higher-rate mortgages. As long as housing prices continued to rise, a single borrower could be good for multiple loans, each time increasing his debt.

This situation had disaster written all over it. It was a teetering house of cards. Again, 13 Bankers puts it better than I could:

The end result was a gigantic housing bubble propped up by a mountain of debt - debt that could not be repaid if housing prices started to fall, since many borrowers could not make their payments out of their ordinary income. Before the crisis hit, however, the mortgage lenders and Wall Street banks fed off a giant moneymaking machine in which mortgages were originated by mortgage brokers and passed along an assembly line through lenders, investment banks, and CDOs to investors, with each intermediate entity taking out fees along the way and no one thinking he bore any of the risk.

Finally, the bubble burst. Housing prices started falling. Huge mega-firms like Bear Stearns and Lehman Brothers (plus the government-backed Fannie Mae and Freddie Mac) collapsed into bankruptcy. Panic spread like wildfire into every nook and cranny of the banking system...even into places where no one would have ever suspected anything bad to happen. The government stepped in with a colossal bailout package for the firms still standing in order to keep the world's largest economy away from the edge of a deepening abyss. And now today...we are still trying to stay afloat after all of this with an unemployment rate still hovering above 10% and very few signs of a sustainable recovery anytime soon.
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Okay...so that's the ugly background. In Part 3, I'll get back to the recent Goldman Sachs hearings, which came about because of some fraud charges filed by the Securities and Exchange Commission (SEC) related to some synthetic CDOs that Goldman Sachs arranged.

[By the way, if you want another refresher on the crazy financial terms, try this glossary.]

My Sources on Making Sense of The Financial Crisis

Before I continue the financial crisis/reform discussion, I wanted to divulge the majority of my sources. While, I like to think that my opinions are unique and defensible in their own right, I cannot help but admit that I have been influenced by the following:

• Baseline Scenario: This is a blog headed by MIT economist, Simon Johnson, who is the former chief economist of the International Monetary Fund. It is their goal to make the financial crisis understandable to all who make the effort to understand it. The guys are brilliant and their arguments are very well-crafted and well-reasoned.
• 13 Bankers: I have been reading this book for the last few weeks. It is by the same two people who run Baseline Scenario.
• Planet Money: This is the NPR podcast that was created following the financial crisis in order to better explain the complexities to the public (a challenging and honorable endeavor). They do an excellent job of explaining the crisis (and many other economic issues) in an interesting and, often, very entertaining way.
• This American Life: This great NPR show teamed up with the Planet Money team to do 5 shows specifically on the banking crisis that are outstanding: The Giant Pool of Money, Another Frightening Show About The Economy, Bad Bank, The Watchmen, Return To The Giant Pool of Money, and Inside Job. If you have the time, I highly recommend downloading and listening to all of these for your next long car ride.
• Felix Salmon at Reuters: a great financial journalist who can grind through a lot of the technical details.
• A couple of PBS specials also helped: Simon Johnson and Michael Perino on the historical lesson of the Pecora hearings, Simon Johnson and James Kwak on the current crisis and reform, PBS Frontline episode on "The Warning" and the blunders of financial deregulation

An Externality

ex·ter·nal·i·ty    (ěk'stər-nāl'ĭ-tē)
n.   pl. ex·ter·nal·i·ties


1 : the quality or state of being external or externalized
2 : something that is external
3 : a secondary or unintended consequence


---------------------------------------------
I'm really not trying to be melodramatic here or lay out a big guilt trip but I think these types of accidents are critical for making ourselves realize the consequences of being an oil-addicted civilization. We won't see an extra 5 cents tacked on to our next total at the pump to pay for this disaster clean-up, but we are all truly paying for this accident in complex and long-lasting ways. We cannot afford to shy away and plug our ears.

The Goldman Sachs hearings missed the point - PART 1

Although the hearing yesterday was pretty entertaining (the word shitty was said more than a dozen times), I'm afraid that the committee completely missed the opportunity of the moment; the opportunity that would propel us into a new mindset for how the financial world should work in a sustainable economy.

I guess it should be to nobody's surprise that these hearings were a lot of theatrics and not that much substance. The committee members were definitely successful at painting the Goldman executives as greedy, disingenuous, arrogant, and unethical. The truth is, they really didn't even need to try that hard...especially after several e-mails were released from Goldman Sachs employees including from bond trader Fabrice Tourre (aka Fabulous Fab), who is the only Goldman Sachs employee named in the present fraud charge by the SEC. Here he is explaining to one of his girlfriends how he perceives one of the complex financial products that he created:

...a product of pure intellectual masturbation, the type of thing which you invent telling yourself: ‘Well, what if we created a “thing,” which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?’

He goes on to explain that he has sold some of these products "to widows and orphans that I ran into at the airport". That's lovely. What a swell guy.

So I am happy that these people have been clearly exposed as the greedy bastards that they are but the whole reason that this hearing was called in the first place was because Goldman Sachs was just charged with fraud. Not because they are greedy bastards. We are a country that is chock full of greedy bastards. That doesn't mean that we should drag them all into the chambers of Congress for a good grilling. Far from it.

No...what needed to happen was some tough questioning about how Goldman Sachs crossed the line from greedy bastards to lawbreakers. This really didn't happen because the Senators kept muddying the water by misunderstanding the issue.

So before I go further...a few explanations are needed:

I think most people perfectly understand that the underlying cause of the recession has to do with people taking out mortgages on homes that they really could not afford. That doesn't mean that they were the only ones at fault (far from it). The culture of the 80s, 90s, and 00s really solidified the idea of homeownership as quintessentially American. The government encouraged it at every opportunity that it could by creating incentives and keeping interest rates at very low levels. And in a lot of cases, homeownership is a great thing. But it's the combination of 1) the cultural appeal of homeownership, 2) the view that the value of homes would perpetually increase as an investment, and 3) the creation of new highly complex financial "innovations" in the 90s that dramatically increased the amount of money that could be made on mortgages that got us into HUGE trouble (This is why the discussion of these complex financial products has become so important...it has now become not just of interest to the Wall Street big-whig but to anyone who depends on a healthy economy)

So let's talk a bit about these new financial "innovations". In the book that I'm currently reading (13 Bankers by Simon Johnson and James Kwak...excellent so far) they break these up into three categories: structured finance, credit default swaps, and subprime lending. But before we get too deep into this, it's important to know that this whole twisted system is made up of two different sides: on one side you have ordinary people taking out mortgages and on the other side you have this long and enormously complex chain of different parties, companies, and investors. A few months after a mortgage contract was signed, it could have theoretically changed hands dozens of times and the affected parties could have been from all around the world (for more on this idea, listen to the This American Life podcast, The Giant Pool of Money...it's terrific)

Structured Finance and Credit Default Swaps: So when we think of investing, we usually think of buying something tangible, whether it is a stock, bond, gold, etc. But there are also other types of investments that are known as structured products that don't necessarily include these tangible assets in the product itself. For instance, you give $100 to a bank and sign a contract that says that the change in that $100 over a certain time period will be directly tied to the change in value of some foreign currency. Essentially...it's a bet. Investors call them pure derivatives. You can opt to be on the short (you get money if the currency value goes down) or long (you get money if the currency value goes up) side of the bet. An investor could do the same thing with interest rates in place of foreign currencies.

Another structured product is created by pooling actual financial assets (mortgages, student loans, credit card loans, etc.) together and then slicing them up in various ways. These are known as asset-backed securities [the major players in the housing crisis were mortgage-backed securities (MBS)]. They are different than the above example in that they aren't just a pure bet because the investor actually owns part of the asset. But commonly, these asset-backed securities are combined with derivatives or a derivative could be created based on the value of an asset-backed security. Another popular product was the collateralized debt obligation (CDO) which were pools of mortgage-backed securities (MBS). So yeah...pools of pools.

Is your head spinning, yet? Wait...there's more: the mighty credit default swap (CDS). I'm just going to quote directly from 13 Bankers (don't sue me, Pantheon Books):

A credit default swap is a form of insurance on debt; the "buyer" of the swap pays a fixed premium to the "seller", who agrees to pay off the debt if the debtor fails to do so. Typically the debt is a bond or a similar fixed income security, and the debtor is the issuer of the bond. Historically, monoline insurance companies [i.e., insurance companies that just sold insurance] provided insurance for municipal bonds, and Fannie Mae and Freddie Mac insured the principal payments on their mortgage-backed securities. With credit default swaps, however, now anyone could sell insurance on any fixed income security.

The line between "bet" and "insurance" is now largely obscured. The invention of the credit default swap has enabled the "sophisticated" investor to bet for or against any type of debt.

So why the hell would someone want to buy one of these complex transactions? Why were they even created in the first place? Well, the first purpose is to increase the amount of things that the market can invest in. The theory goes that now there are more products with a wide variety of risk associated with them and each has a unique set of characteristics to attract a specific investor. Second, these products should make it easier for businesses to raise money in that they can now hedge their bets (cover their asses) more efficiently. The consensus of the finance world was that these products made it much easier to manage financial risk (as long as you had the correct mathematical model to tell you what to buy). Everyone was drinking the Kool-Aid including all of the major government regulators over the last several decades (e.g. Alan Greenspan). Finally, another huge reason that these products were created in such abundance was that each new transaction led to fees for the banks that set them up for their "sophisticated" investor clients. Enormous fees! (A former trader said that Morgan Stanley earned $75 million on a single trade)

Okay...enough for now. The second part will deal with subprime loans and my main beef with yesterday's hearings.

Why I am closer to the left than the right...

There has been some interesting commentary recently about the problems those on the right have had with "epistemic closure" (i.e., closed-mindedness or groupthink). The argument goes that each political group suffers from this idea to a certain extent but the GOP and the right have been exceedingly stifled in this way. Patricia Cohen at the NY Times added to the discussion today. But I (as usual) really enjoyed reading Daniel Larison's take:

Where movement conservatives enable their political leaders to do more or less as they please, progressives seem far more willing to challenge and question “their side.” The siege and persecution mentalities that movement conservatives have long cultivated as coping mechanisms for their long history of domestic policy defeats and losses in the culture wars tend to make them far less willing to break with “their side,” which is why there is such importance placed on conformity and “team” loyalty. That means that movement conservatives typically have had to stifle, mute or otherwise water down any objections they do have to Republican policies under Bush. Then, once Bush is gone, for the sake of “the team” they feel they have to exaggerate their objections to Democratic policies and politicians to the point of absurdity to create sharper contrasts with the dismal record of Republican governance they just spent the last decade making possible.

And on conservative media outlets:

These media are popular because they tell the audience what they want to hear, they reaffirm the audience’s prejudices and assumptions, and they serve as a crutch for a movement that seems mostly incapable of producing superior arguments. Their relative popularity on cable television and radio could just as easily indicate conservative weakness inasmuch as these outlets have become hideaways where a conservative audience can avoid unsettling realities that contradict their ideological commitments. Part of the problem is that these media allow movement conservatives to become “untethered” from reality by actively protecting their audience from unpalatable and unwelcome truths, so it is much harder to learn from past errors when those errors cannot even be acknowledged as having been made. In recent months, movement conservatives have been working hard to try to rehabilitate the Iraq war before it is even over. Even when faced with one of their most grave, terrible errors, most conservatives have responded by becoming what Millman called “minimizers, avoiders, and abandoners.”

More dangerously, being “untethered” means that producing actual evidence for an increasingly bizarre view of the world matters less and less. Assertion becomes more important than proof. We see this in the frequent, virtually unanimous insistence that Obama went on an “apology tour,” or the near-universal conservative assessment that he “betrayed” Poland and the Czech Republic over missile defense, or the common view on the right that Obama undermines allies and treats rivals gently. None of these things is true, but they have become true for a great many movement conservatives through constant repetition. The hysterical over-reaction to the Nuclear Posture Review that basically changed nothing is one of the most recent episodes when the desperate need to reclaim the national security mantle has forced movement conservatives to make the most laughable, unserious arguments. At best, relevant policy experts on the right will pay little attention to these arguments from activists and pundits, but they will hardly ever directly criticize or attack the latter. This permits the activists and pundits to continue on as if their arguments remained valid and had not already been dismissed as nonsense. 

Goldman Sachs charged with fraud

If this doesn't wake people up to the need for financial reform, I have no idea what else possibly could.

Goldman Sachs is the most powerful investment bank in the United States and it is very likely that they will be convicted of fraud (something that people have been saying for a while now). Think about that. Our main investment bank is a fraud.

And this news comes after a week of many other well-reported stories on financial fraud. Last weekend, NPR's Planet Money and This American Life (along with ProPublica) exposed the dark inner-workings of a Chicago hedge fund. Then the NY Times on Tuesday reported that Lehman Brothers (whose bankruptcy - which was the largest ever - ignited the banking crisis and the current economic mess we are in) used a secret company to channel their enormous risks associated with their mortgage-backed securities.

Our financial system in this country is broken. Reform is desperately needed in order to keep our economy going in the long-term and to avoid another Great Depression or Big Bank Bailout. I have no idea why the "Tea-Partiers" do not grasp this idea.

I hope to write more on this issue in the coming week as it will be (finally) front-and-center in the media world.

In the meantime, I highly recommend watching this and reading this.

Andrew Sullivan on Sarah Palin

Well, this pretty much sums it up:

She creates her own reality, and that is an incredibly important talent for a party base that desperately wants to live in another reality (a kind of souped-up version of 1950s culture and late nineteenth century economy). Her book - a fictional account of an imagined life - sold well with the GOP base because they too want a fictional account of America's current standing in the world and an imagined set of viable policy positions. She so lives and breathes this magical-realist culture she doesn't need to channel it. She knows we can keep social security and Medicare and global power for ever and balance the budget without any taxes - because that is what she wants to know. And she has never let reality get in her way. Reality is one of those doors she keeps crashing through.

An incredibly dangerous precedent set by Obama

For those that have not heard, it has been confirmed that President Obama has ordered the targeted killing of a U.S. citizen suspected of being a terrorist or supporting terrorists in Yemen. Here is what I wrote to Sen. Feingold after I heard about this:

Dear Sen. Feingold,

I am writing to you today to express my absolute disgust over hearing yesterday the confirmation that President Obama has ordered the assassination of a U.S. citizen, Anwar al-Awlaki. He is suspected of being an al-Qaeda member. The key word there is SUSPECTED. He is a U.S. citizen suspected of being a terrorist (he hasn't even been charged with a crime like treason). Instead of handling this case according to the traditions of law and justice like every U.S. citizen should and must expect, President Obama has usurped these bedrock principles and has essentially become the Judge, Jury, and Executioner.

I can understand that national security issues are always challenging to deal with but this action sets an extremely dangerous precedent. What is to stop the President (or future Presidents) from ordering the assassination of other U.S. citizens who are away from a battlefield? This is absolute insanity.

Please continue to harshly criticize the administration in its horrific effort to destroy the foundational principles of our country and society.

Sincerely,

Eric Booth

But wait...you might be thinking, "Hey, I thought Obama was soft on terrorists..." That has got to be one of the most ridiculous myths currently plastered across the media (specifically at places like Fox News). Although his rhetoric might sound nicer and more reasonable than Bush/Cheney, his actual policies for the "War on Terror" have followed in lock-step with what they did.

Just ask yourself, how is this any different than the Good vs Evil mentality initiated by Bush/Cheney? Somehow they just think that the American public will just blindly believe them when they declare someone as a Terrorist who they feel is dangerous. Where is the skepticism of our government? Just because the President or the military says that someone is a terrorist, doesn't magically make that person a terrorist. That should go without saying. We have the justice system set up for this exact reason. The government can't just declare that someone broke the law and hand out their punishment without the use of the judicial branch.

And even if they were a terrorist, we still can't just assassinate them...especially if they are an American citizen. That is insane and contrary to the very foundation of our country. Some could reasonably argue that our wars in Iraq and Afghanistan (no matter what you think about them) give the U.S. military the right to kill
terrorists in a battle situation. But targeted killing far away from a battlefield is an entirely different thing. Obama, Bush, and Cheney may think that the "battlefield" is the entire surface of the Earth, but if that is true, then there is no limit to their authoritarian power (and no end to this perpetual War). All they would have to do is declare someone as a terrorist (i.e., our enemy in the War on Terror) and then assassinate them no matter where they are. Judge, Jury, and Executioner are all conveniently wrapped up into one Executive decision.

The Executive branch was never intended to have this much power. With this much limitless power, abuse is just inevitable. It is insanity, plain and simple...and the President who was supposed to be the Constitutional scholar is continuing the destruction of our American principles of justice and the rule of law.

With all that said...the most frustrating thing about this whole mess is that I would vote for Obama a second time if it kept a Republican like Romney or Palin out of the White House. As vile and despicable as Obama's positions are on the War on Terror, the GOP front-runners are even more extreme (I mean, they laugh about how soft Obama is on Terror...sometimes I feel like I'm taking crazy pills).

Lessons from the horrific WikiLeaks video - UPDATED

So if you missed it, a group called WikiLeaks released a video showing an attack by U.S. troops on 12 people in Iraq in July of 2007. The soldiers in the Apache helicopter thought that the 12 men were insurgents. It turns out that they were not and two employees of Reuters news were killed in the attack. Their cameras were mistaken for AK-47s and rocket-propelled grenades (RPGs). After the initial attack, a van pulls up and several unarmed men get out to carry the wounded away. They are then attacked by the same Apache helicopter. Two children in the van were seriously wounded.

I should warn you that the video is very disturbing. Here are a few lessons that I am taking away from watching it and the ensuing reaction that I've seen thus far.

Lesson 1: Although some of the actions taken by the troops in the helicopter were terribly wrong and appeared to violate the Rules of Engagement (firing at unarmed civilians trying to remove the wounded), these troops should not be blamed or vilified for what happened. Those of us who have not served in the military will never know what it's like to be in those situations where it is kill or be killed. This occurred right at the peak of the Awakening and this part of Baghdad was one of the most dangerous in the country. American troops were being killed, RPGs were shooting down helicopters. While it is absolutely sickening what is on that video, we have to be careful not to disparage those who fight in the military under excruciating circumstances that we cannot even begin to comprehend.

Lesson 2: This is what happens when the U.S. invades countries and battles insurgencies. This is what happens when people support a war of this kind. Horrible, horrible things happen to innocent people. It's not that we are bloodthirsty savages...it's just the unassailable fact that we will inevitably kill innocent civilians when we are fighting an insurgency in a country where a large percentage of the population perceives us as an occupying force that should get the F%&K out of their country. We should not blame the troops for this event. We should blame the government who went to war and ourselves for allowing it to happen.

Lesson 3: This is not an isolated or even a terribly rare incident as an active duty soldier in Iraq puts it. Glenn Greenwald adds:

This incident is commonplace, not unusual, because it's what war is and it's what has been happening in our wars throughout the decade.  We just don't usually see it, and this time we did.  That -- and the fact that Reuters journalists were killed and it thus generated more pressure than normal -- are the only things that make it unusual.

Another example came in a NY Times article yesterday that described a cover up of another horrific incident in Afghanistan back in February of this year involving the all-too-common mistake of confusing militant insurgents with innocent and unarmed civilians.

Lesson 4: The people who hate the U.S. and are inspired to take up arms against us do not hate us because they hate freedom or Lady GaGa. They hate us because of events like what happened in July 2007 in New Baghdad. The most important lesson that all of us should know by now is that the people we are fighting in the "War on Terror" are not all crazed and irrational people (even though it's a lot easier to justify a war against people like that). They respond the same way that we would if our innocent family members and friends were killed by a foreign military...with outrageous anger. The simple act of realizing that our military actions in Iraq and Afghanistan are sometimes counterintuitive (not to mention horribly oppressive) to our own goals of national security is so easily missed today. We ignore it at our peril.

UPDATE: I should have also mentioned this under-reported story under Lesson 3: The NY Times reported a few weeks ago that Gen. Stanley McChrystal (senior American and NATO commander in Afghanistan) said the following while taking questions from troops:

We really ask a lot of our young service people out on the checkpoints because there's danger, they're asked to make very rapid decisions in often very unclear situations. However, to my knowledge, in the nine-plus months I've been here, not a single case where we have engaged in an escalation of force incident and hurt someone has it turned out that the vehicle had a suicide bomb or weapons in it and, in many cases, had families in it...That doesn't mean I'm criticizing the people who are executing. I'm just giving you perspective. We've shot an amazing number of people and killed a number and, to my knowledge, none has proven to have been a real threat to the force.

Quite a frank admission coming from a lead commander in Afghanistan. 

Is Health Care Reform a "Big F*#king Deal"? PART 5

I'm a little burned-out on the health care issue at this point (as I'm sure you are as well), so this will be the last in what has become a 5-part series.

I wanted to end with a little politics. No one can deny the incredible passion that this issue stirs in most Americans. Politicians on both sides of the aisle are professionals when it comes to playing on these passions.

So let's finally get to the question posed in the title of the series...Is this Health Care Reform a "Big F*#king Deal? Well, sure it is. There are some new and sweeping regulations on the health insurance industry. That's pretty damn big! Creating tax disincentives to essentially require companies to offer health insurance to their employees and require all Americans to be covered is a big change.

But is it really the embodiment of Stalin and Hitler...communism and fascism. Of course not. It is all about the degree to which our health care system is socialistic. Arguments could be made that any government subsidization of health insurance (e.g., Medicare) is socialistic. But we've had Medicare since the 60s and you didn't see the Tea Partiers up-in-arms during the Bush or Reagan administrations to repeal Medicare? No, you didn't...especially since a lot of Tea Partiers are currently getting Medicare and are quite satisfied with it (they are not exactly the bastions of intellectual consistency...remember this?)

Another great example of why the hysteria is so unwarranted is because a lot of what is in the bill is very consistent with ideas that Republicans have put forward many times before in the past. Take, for instance, what Mitt Romney (former GOP Presidential candidate) actively fought for and implemented in Massachusetts. David Frum did a great job of pointing out the similarities between "Romneycare" and "Obamacare". As Frum puts it:

Romney sharply distinguishes his healthcare preferences from Barack Obama’s. For him, the red line is the public option. He adamantly opposes it. Yet in many other respects, there is common ground. Like Obama, Romney worries about the malign incentives of fee-for-service medicine. Like Obama, Romney regards the status quo as unsustainable. Like Obama, Romney is a big fan of the healthcare journalism of Atul Gawande.

And of course, the public option has now vanished from the Obama plan. Which means that the federal plan bears a closer family resemblance than ever to Romney’s idea: regulated health insurance exchanges, mandates to buy insurance for those who can afford it, subsidies for those who cannot. Romney’s preference would be to omit the mandate for those who “can demonstrate their ability to pay their own health-care bills.” (176) That would be precious few of us. And he wants to allow states ample leeway to innovate without hindrance by the federal government.

Romney frames the distinction between his preferences and President Obama’s as “free enterprise and consumer-driven markets or government management and regulation.” (193)

It’s hard to avoid the suspicion that these two technocrats have more in common with each other on this issue than either does with his party’s more fervent supporters. With this one difference: shout outs to CEOs in Ch 7 – 3, including one to the CEO of drugmaker Novartis.

It's true that this legislation has a lot of flaws in it (as I've tried to point out). But those flaws are not because it is too "liberal" or too "socialistic" (there is no public option for God's sake!). In the grand scheme of American politics, it is actually very centrist and parts are even somewhat conservative.

So why is the right acting so unhinged and rabid about this whole plan? Well, I've tried to be kind and sympathetic in my mind as I've tried to figure out where all of this hatred comes from...but in the end, I am actually pretty cynical about this (maybe not quite as cynical as this, though). It really just seems that, in the eyes of the Republicans, the debate versus the Democrats has turned into a completely irrational game between two competing professional sports teams (or, better yet, two WWF wrestlers). If the other side likes something...well, then our side doesn't like that (even if we might have liked it before). It really is obstructionism at its finest.

The GOP could have acted like grown-ups during this whole health care reform debate and realized that the Democrats, after a major political victory in 2008, were seriously going to pass something. They could have put forth rational arguments about why the Obama way of tackling the health care crisis was the wrong way to do things. But they didn't...all they did was provide raw meat to the massive angry populace (and rightly so, this economic depression is devastating for a lot of people) with their cries of Fascism and "Baby killers". This is the main critique that David Frum wrote a week ago (before subsequently getting fired by the right-wing think tank who couldn't handle the criticism):

A huge part of the blame for today’s disaster attaches to conservatives and Republicans ourselves.

At the beginning of this process we made a strategic decision: unlike, say, Democrats in 2001 when President Bush proposed his first tax cut, we would make no deal with the administration. No negotiations, no compromise, nothing. We were going for all the marbles. This would be Obama’s Waterloo – just as healthcare was Clinton’s in 1994.

Only, the hardliners overlooked a few key facts: Obama was elected with 53% of the vote, not Clinton’s 42%. The liberal block within the Democratic congressional caucus is bigger and stronger than it was in 1993-94. And of course the Democrats also remember their history, and also remember the consequences of their 1994 failure.

This time, when we went for all the marbles, we ended with none.

Could a deal have been reached? Who knows? But we do know that the gap between this plan and traditional Republican ideas is not very big. The Obama plan has a broad family resemblance to Mitt Romney’s Massachusetts plan. It builds on ideas developed at the Heritage Foundation in the early 1990s that formed the basis for Republican counter-proposals to Clintoncare in 1993-1994.

Barack Obama badly wanted Republican votes for his plan. Could we have leveraged his desire to align the plan more closely with conservative views? To finance it without redistributive taxes on productive enterprise – without weighing so heavily on small business – without expanding Medicaid? Too late now. They are all the law.

I completely agree and think that some conservative ideas could have really helped this bill. But we didn't get that.

All in all, it's bad enough in this country that we only have two parties running the show. But when one completely excuses itself as it throws spitballs from the corner of the room, then we're all worse off.