Friday, December 21, 2012

Because the Darkness Runs So Deep, The Light Burns So Bright

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

             "While Christmas is undoubtedly a time of great joy, it is also an occasion for deep reflection, even an examination of conscience."

            -Pope Benedict XVI, Financial Times, December 20, 2012, "A Time for Christians to Engage the World"

"Maybe the Mayans were onto something after all. Perhaps the impending solstice marks the moment the ailing financial system - rather than our entire civilization, one hopes, finally reaches its grand climacteric and Ben Bernanke suffers the ultimate embarrassment of seeing all his proferred cheques bounce."

            -From a wishful thinker in Switzerland, December 20, 2012

            Maria Santos Gorrostieta Salazar was murdered by emissaries from the Mexican drug cartel on November 17, 2012. The Financial Times and the Daily Telegraph published obituaries, which is the source of the following. The two newspapers seem to be the only English-language media sources, so the story here is brief and perhaps contains errors. (For instance, I've also read she died on November 12, 2012; that, she had three sons, and, that she had two daughters and one son.)

           Gorrostieta had been mayor of Tiquicheo, a small town southwest of Mexico from 2008 until recently (before her death). She was 36-years old. She was to the manor born, a doctor, and "a glamorous figure who would always turn heads at political meetings." She left three children behind. Her husband had been murdered by the money interests when an attempt to kill Maria Gorrostieta failed three years before.

In the Financial Times' words: "Gorrostieta's no-nonsense manner, and, above all, her courage in the face of persistent threats, proved too much of an obstacle for the region's narcotics mafia. Last week her corpse was discovered at roadside."

A second murder attempt killed her brother. At that time, Maria Gorrostieta was shot three times, tortured, had to wear a colostomy bag and was in constant pain from that point forward. After that second attempt, she wrote a public letter which is published below. Questions were raised of why she continued. Her response is not one from an age of opinions but of convictions: "At another stage in my life, perhaps I would have resigned from what I have, my position, my responsibilities, but today, no; it is not possible for me to surrender when I have three sons, whom I have to educate by setting an example..." (Goethe was asked why, in this age (around 1800) we can no longer build Charters: "Because they had convictions, We only have opinions.")


Nor, could Gorrostieta abandon her responsibility to "keep on searching, scratching, negotiating plans, projects and actions for the benefit of all of society, but, in particular, for the vulnerable ones." More were becoming vulnerable, the Financial Times explained: "As the cartels have grown in size and strength, their turf battles have ever more frequently had devastating consequences for the civilians caught in the middle."


            This is a world in which a few cartels bequeath devastating consequences to those who lie under their control and who cannot escape.


The following is reprinted from, "Reporting on the Mexican Cartel Drug War":


[After the second attempt on her life, Maria Santos Gorrostieta was interviewed by El Universal. She was addressing critics who doubted the severity of her injuries. As a sign of respect, I thought it would be appropriate to translate a letter that she made public in which she explains what kept her going. I decided to translate the entire letter instead of the abridged version most commonly seen in news reports. She was a brave lady. -un vato]



Message to the citizenry


There is no doubt that life at times lacerates us with sufferings and humiliations that not all of us are able to understand completely, many times we tend to appear arrogant and stubborn before God's will. However, despite everything, I have had to bear losses that I would not wish on anyone, and have had to accept them with resignation and with the knowledge that it is our Lord's will, and have gone on, even with a wounded soul.


I know... that life surprises us at times, hurts us, makes us complain even about ourselves; it is well known by those around me that my life has not been easy, it has been permeated by sorrows and misfortune.


Despite that, and despite my own safety and that of my family, what occupies my mind is my responsibility towards my people, the children, the women, the elderly and the men who break their souls every day without rest to find a piece of bread for their children.


It is a great burden to know that among my responsibilities as city mayor is that of obtaining the benefits, the programs and the aid that I know will represent great improvements in the economy and in the quality of life of the people of Tiquicheo.


 One of the greatest sorrows that a human being can suffer is that of pain in the soul. This is seldom understood by people around us because they simply have not lived it or are indifferent to the suffering of others.


My life these past few months has received blows that I sincerely believe I do not deserve, since my efforts have always been focused on leading my people, my city, towards a better quality of life, to provide them the tools that will help them face the difficult economic situation that we are all going through.


Despite that, for some, my efforts and dedication have not been enough and they have regretfully celebrated the misfortunes I have suffered.


The inner strength that has moved me to get up, even when I'm dying, has served to demonstrate and make tangible the great commitment that I have with my ideas, my projects for the future, and, of course for the people who witnessed my birth and for whom I will get up however many times God allows me to, to keep on searching, scratching, negotiating plans, projects and actions for the benefit of all of society, but, in particular, for the vulnerable ones.


This is who I am...


[I have omitted poetry here that Maria Santos Gorrostieta Salazarattributes to an anonymous source.-- un vato]


At another stage in my life, perhaps I would have resigned from what I have, my position, my responsibilities as the leader of my Tiquicheo. But today, no; it is not possible for me to surrender when I have three sons, whom I have to educate by setting an example, and also because of the memory of the man of my life, the father of my three little ones, the one who was able to teach me the value of things and to fight for them; and, although he is no longer with us, he continues to be the light that guides my decisions, each of which, it goes without saying, is dedicated to getting my city out of its backwardness.


It's true they have attacked my physically and morally; one can still feel on my body the wounds from the bullets and from the disbelief of some who have doubts about my mutilated body. I struggle day to day to erase from my mind the images of the horror I lived, and that others who did not deserve or expect it also suffered. To them, my recognition, respect and love for the courage with which they faced their troubles and for their unconditional support for myself and my work.


I wanted to show them my wounded, mutilated, humiliated body, because I'm not ashamed of it, because it is the product of the great misfortunes that have scarred my life, that of my children and my family.


It is a living witness to the fact that I am a woman of strength and integrity, and that, despite my wounds, both physical and mental, I am still standing and still in the constant struggle to become a better person and a better leader of a city that still trusts me and expects results from its mayor.


You may ask, what is it that so attracts Maria Santos Gorrostieta Salazar today? Where does the power of her integrity reside, this public and political figure, from Tiquicheo, from Michoacan, Mexican and universal: in her works, in her life, or in her wounded body and her serene face? It is difficult to answer you from this hemisphere of my life, however, I would point out that transgression and resistance are conjugated in perfect harmony in my being.

Many persons have mistakenly doubted the severity of my injuries; today, the proof is in their hands, my mutilated body speaks for itself, evidence of how vulnerable we are, of our life's fragility and of God's wishes, which are always present in our daily sorrows.


To many, it may seem an act of insolence to show my wounds such as they are, but it was necessary because I had to give my version of the facts, what it really meant to be attacked like that and the traces that these attacks left on me and my people. Because everybody else could say, unsay, talk, invent, defame, except me; and now is the time and place to do so.


What you can see doesn't need much of an explanation; I simply want your understanding, support and consideration, because despite the fact that I show myself as somebody strong and unbreakable, inside of me, I am still a woman, fragile, a dreamer, a romantic, a mother, but one thing for sure, with an unquenchable determination to continue with my mission of service as head of this administration to which I was elected, and to help those who have less and that still live in a state of great vulnerability.


I firmly believe, in fact, I am certain, that my conduct during my term as mayor has been correct, since every one of the decisions I've made has been focused on serving my people. If the opposite had been true, it would undoubtedly have already been noticed. This is why I make available for anybody who wants to look at what has been done up to now. The accounting and my conscience are clean, the projects and actions are in plain view.


A year after a bloody incident


Throughout this year, I am here with an open mind and a quiet heart, several memories come to mind that no doubt history will judge me on; all I want to say is that walking on this rocky path has not been easy, that it has been permeated with disappointment and despair. I'll tell you that whatever trench I get, I will defend it with sword and cape, I am faithful to my ideals and to achieve my conviction and my objectives, always convinced that truth and authenticity will set us free. I am grateful with all my heart to those persons who have trusted in my work, to my children, my mother, my brothers, friends, collaborators and to the city that has given its unconditional support.


I have walked a long road towards freedom, and I have tried not to hesitate. I've stumbled along the way, but I've discovered that great secret; that after climbing a hill, one finds that there are many more behind that. I've given myself a moment of rest to look at the glorious landscape that surrounds me, the view back towards the road I've traveled. But I can only rest for a moment, because freedom brings with it responsibilities and I don't dare fall behind. My long road is not yet finished; the footprint that we leave behind in our country depends on the battle that we lose and the loyalty we put into it. Today, it is a privilege to be part of the history of Tiquicheo.


With love,


Maria Santos Gorrostieta Salazar 

Tuesday, December 11, 2012

Our National Deficit

"Under current law, the Treasury is technically allowed to mint as many coins made of platinum as it wants and can assign them whatever value it pleases. Under this scenario, the U.S. Mint would make a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Fed moves this money into Treasury's accounts. And just like that, Treasury suddenly has an extra $2 trillion to pay off its obligations for the next two years - without needing to issue new debt. The [current $16.4 trillion national debt] ceiling is no longer an issue."

            -Brad Plumer, Washington Post, December 6, 2012, "Could the 'Platinum Coin Option' Solve the U.S. Debt Crisis?"

            In reality, the U.S. Constitution permits Congress alone to "coin money," but technicalities are particularly in vogue for a country stumbling through its dotage. Author Plumer may be auditioning for The Onion, but he did cite the authority of Yale Law School (Professor Jack Balkin) for legal counsel. (As you probably deduced, Balkin teaches Constitutional Law.) As to its practicality, Plumer turned to one Joseph Gagnon from the Peterson Institute for International Economics: "I like it. There's nothing that's obviously economically problematic about it."

            Whatever Gagnon's reasoning, he is a candidate for the Federal Reserve Board, just as Balkin is a shoo-in for the Supreme Court. This proposed plan to wipe out the federal deficit involves more substance than the Fed's open market operations. Platinum is a physical element on the periodic table: it is real. Federal Reserve Chairman Ben S. Bernanke has preternaturally expanded the Fed's balance sheet - that is, he has declared over $2 trillion into electronic existence where nothing exists - since 2008. Simple Ben is a laggard here. If the Treasury can declare a platinum coin worth $1 trillion, why not stamp 100 coins at $10 trillion each, wipe out the national debt, and give every American a few million dollars? Everyone would be rich.

            The Washington Post, Yale, and the Peterson Institute are good brand names. In America, it does not matter what is stated but that it is declared by a revered source. Reuters reporter Cate Long recommended, in the wake of Hurricane Sandy, that the billions of dollars needed to repair busted infrastructure was there for the taking: "Tough times is no excuse to give away public assets to private entities. The most obvious source of funding for these projects would be for the Federal Reserve to purchase public infrastructure bonds instead of the $40 billion a month of mortgage-backed securities it has been buying." (See: "Can the Port Authority and MTA Afford Repairs After Sandy?"

Looking beneath the surface, Long has described how state and municipal debts are funded. The Chinese and Japanese are no longer dependable buyers of U.S. Treasury obligations. The Federal Reserve buys the majority of Treasuries. Without the Fed's backstop of the several-trillion-dollar deficit at such an unnatural rate of interest, it would be impossible for corrupt or incompetent municipal borrowers to find a buyer of bonds below 10%. As long as such proposals as Cate Longs' are written and read without acknowledging the obvious contradictions, To Be Foolish Will Be Very Heaven.

There will come a time when the U.S. Treasury will be unable to borrow at under 8%. At that moment, "tough times" will require "public assets [to be sold] to private entities." (Not "given," as Cate Long somehow concluded from a proposal recommending that "private funds can be used.") Corrupt or ossified municipal unions, which, too often, go hand-in-hand with corrupt or incompetent municipal governments, will retain control only so long as the Treasury receives accommodating bids. A failed auction and a 6% Treasury rate will relieve many faded organizations, maybe even Yale Law School, of underserved tenure. 

Monday, December 3, 2012

Exit, Pursued By Bear

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

"Just when scientific progress was supposed to be ridding the world of myths and ghosts, famous people became larger than life.... Fame was found increasingly fascinating. And it seemed to happen by popular demand. The general spread of education didn't make people more resistant to fame. If anything, it made them less resistant."

                       -Clive James, Fame in the Twentieth Century

            When Lombard Street crawls hat-in-hand to Bay Street, London is in trouble. The Bank of England, having ceded its once impregnable reputation as banker to the world, has cast its line for a Canadian to reign at the Bank of England.

Bank of Canada Governor Mark Carney has been lured to the post. He is leaving the Americas in the nick of time, but you would never know it from the reaction. The Daily Telegraph felt compelled to remind readers: "Mark Carney Isn't the Messiah," but it looks as though the myth of central-banking infallibility has not suffered a jot since September 29, 1998, when the Wall Street Journal published James Grant's warning: "Alan Greenspan Isn't God."

To start (and end) with, the Carney-led Bank of Canada has encumbered the country with a housing bubble that is starting to tumble. On April 29, 2012, Barrie McKenna anticipated just such a timely exit in the Toronto Globe and Mail. The "intensely image-conscious Mr. Carney" was already known to be "a candidate to head the Bank of England." McKenna was writing after Carney had publicly worried that "Canadian households as a whole are being overstretched, which creates risk for the economy." (Carney's hokum was addressed here before, on December, 16, 2010: See: "A Vote for Gold.")

            "Oh, no you don't," McKenna as much as said when he wrote: "Mr. Carney has kept the pedal to the metal for years now with ultra-low interest rates, flooding the financial system with easy money. That has kept Canadians buying homes while markets elsewhere in the world faltered." In 2005, Federal Reserve Chairman Alan Greenspan engaged in a similar legacy-building exercise when he noticed there was some "froth" in the housing market.

            A point of debate with Mr. McKenna is the word "falter." There may be exceptions (none come to mind), over the past few years, where a competent central bank stymied a budding housing bubble before it unleashed its horrors upon a population. (In which case, "falter" would fit.) Central banks have caused excesses in housing finance across six continents. Whether through incompetence or cowardliness they did nothing when the problems were manageable. Sometimes, they rooted for devastation when froth turned to bubble, after which, there is no return. The media's childish discussion of the heroics to be performed by Mark Carney at the Bank of England demonstrates a lack of integrity, responsibility, and intelligence

Housing excesses in Berlin, Oslo, Stockholm, Hong Kong, Hanoi, Iceland (again!), Melbourne, Nanning, Toronto, and Vancouver are in stages of bubble bursting. To see what Carney is leaving behind, some comparisons are made to the United States. These are meant to show that Canada is heading into a housing catastrophe. The numbers are calculated differently in each country so are only vaguely useful to judge the severity of Canadian indulgence.

The home ownership rate in Canada has risen from 64% to 70% over the past decade. In the United States, the ownership rate peaked at 68%. Remembering the skullduggery required to grasp the American Dream, Canadians are in for some shocking disclosures.

            Canadian household-debt-to-household-income is 163%. The ratio peaked in the U.S. at 160%.

            Construction jobs in Canada have grown to a larger proportion of employment than was true of the United States at its peak (which was 6%). According to Statistics Canada ( "Construction... employ[s] more than 1.2 million men and women. In 2010, 7.1% of employed Canadians aged 15 and older worked in the construction industry, an increase of 50.8% since 2000, when 806,900 people worked in construction." (The population of Canada is close to 35 million, about 1/9th the 314 million living in the United States.)

            Adding construction to the financial sector (FIRE: finance, insurance, and real estate), Canada is more leveraged into mortgages and related paraphernalia than was the United States at its housing peak. Over one-quarter of Canadian GDP is housing and financial-service related. Loonie holders (Canadian dollars) might hope the housing fever settled in the oil sands that surround Fort McMurray, but those who have been buying Canadian bonds are not simply betting on commodities.  

            Canadian housing starts have averaged roughly 200,000 a year since 2007. Multiply that by nine and Canada approaches the peak, U.S. building figures (2004: 1.9 million starts, 2005: 2.0 million, 2006: 1.8 million, 2007: 1.4 million).

            The signs of collapse are manifest: new housing supply is booming; housing demand is waning. Prices are too high for the average buyer (the average Canadian house now costing $350,000). Without the average buyer, house markets tumble. Home equity withdrawal rose from 2% to 8% of disposable income, which spurred spending, and mortgage debt has more than doubled over the past decade.

            How are those bullet-proof Canadian banks doing? Since 2000, they have expanded lines-of-credit by 700% when disposable incomes rose 70%. The five largest Canadian banks hold $400 billion of uninsured consumer credit. The Canadian Mortgage and Housing Corporation (CMHC), which insures mortgage loans, got giddy (increasing insurance to 100% of loans and to 40-year amortization periods in 2006). The government lifted the limit on CMHC insurance from $450 billion to $600 billion in 2009. The $600 billion limit is close to capacity, which may not excite a U.S audience, but Canada's GDP is around 10% of its southern neighbor, so the liability (in comparative terms) is around $6 trillion.

            On November 27, 2012, an "observer" at described an early indicator that the CMHC will drag Canada's credit rating down a few notches: "43 listings dropped to a cumulative total of 20%+ this week, 12 [fell] 25% and 6 [fell] 30% this week."

            The opinions of Carney's effervescence come from the same sources that never saw, nor understand today, how the central banks blew up the world. What is it, exactly, that Carney, or anyone else, is going to do at the Bank of England that will matter at all? Finally, since Goldman Sachs gave us Robert Rubin and Jon Corzine, who could be anything but horrified with another alum at the top?

Tuesday, November 20, 2012

Illusions Shattered: Rolling Off the Presses or Down the Hill

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

            At the children's mass on Sunday, the priest told the little angels:

            "I grew up in a country that's far, far away. Canada. Almost as far away as the suburbs. In Toronto.

            "When I went to school, every fall, chestnuts fell from the trees. Everybody at school collected as many chestnuts as they could. The kid who had the most chestnuts was the wealthiest. Don't ask me why. What can you do with a chestnut? Nothing. All you can do is collect them. I could never understand it.

            "Do you know how many chestnuts I had? Zero. None. I couldn't understand collecting these useless chestnuts, so I was the poorest boy at school. And the stupidest. I felt really stupid with no chestnuts. Everybody else was showing off their chestnuts, saying how rich they were, and I had nothing. I couldn't understand why chestnuts made them rich and I felt stupid. And poor.

            "I went to a Catholic School for 12 years. Right next to our school was the public school. In those 12 years, I never once set foot on the public school ground. Nobody else did either. Not one of the children at the public school set foot on the Catholic school grounds.

            "But, I had some friends in the public school. One lived across the street. One day he asked me: "Do you want to see my chestnuts?"

            "I'd love to."

            So he brought me to his bedroom. He had four shopping bags full of chestnuts in his closet. He and his father had gone to the airport and grabbed them all. He was really, really wealthy.

            "He asked me if I'd like some of his chestnuts. "Well, sure, I thought, why not?" And he handed me two, shopping bags, full of chestnuts. I started feeling rich as I crossed the street to go back home.

"Remember now: before, when I had no chestnuts, I felt stupid. Because chestnuts are useless. They were still useless but now I had them. I hadn't collected chestnuts because this didn't make you wealthy. Yet, everyone in school - except me - thought the more chestnuts you had, the richer you were.

"Now, I had two shopping bags full of chestnuts. They were still worthless, but because they were mine, all of sudden, I felt smart and wealthy."

"Then I had to decide how many chestnuts to bring to school to show how wealthy I was. The next morning, I carried both bags to school. Everybody gathered around me. They were all asking if they could have a chestnut: "Can I have one? Can I have one?"

"And, do you know what I said?"


"No! No! No! No! No!"

"Wow, did I feel rich. I strutted into my classroom with both bags and put them in the back of the room. At recess time, I went back, picked up my two bags, and walked to the playground, feeling richer than everyone else. I was waiting for all the kids to gather around me. Nobody did. They were saying: "Let's not play with him. He won't share his chestnuts." They all walked away.

"Our playground was different than most. It had two levels. The upper level was paved. The lower level was all grass. The slope from the upper to lower level was also paved.

"I was standing on top with my two bags of chestnuts. I was the richest kid in the school. Everyone else had gone to the lower playground. They were playing, having a good time, chasing each other, laughing, while I stood on the upper level, rich, and all alone. I felt so lonely standing there. I was the loneliest boy in the world.

            "So, do you know what I did? I rolled both bags of chestnuts down the slope and onto the grass. The kids turned as they heard the chestnuts rolling down the pavement. Everybody came running towards me.

            "I don't want you to misunderstand me: I was not being generous. I was lonely. I wanted friends. I wanted everyone to like me.

            "As they ran towards me, with all my chestnuts rolling down the hill and onto the grass, do you know what they did? They threw away their chestnuts. All at once, they recognized: The chestnuts were worthless! They couldn't do anything with their chestnuts except pretend to be rich. I had flooded the market. There were so many chestnuts now, all the kids got rid of them. We were all poor together. 

Saturday, November 17, 2012

They Won't Be Forgotten

Ed Harrison at Credit Writedowns, adding fuel to the outrage upon the announcement that "Doctor" Alan Greenspan will address the Annual Market Dinner of the Boston Securities Analyst Society, reminded the sans-culottes of an earlier pathetic effort:


"I'd like the record to show that I think you're pretty terrific, too. And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative."

            Ed's reminder inspired a search of "terrific" through a bag of quotes. Coming up empty, a search for "great" was fruitful. Following are the first few "great" quotes that showed up. They have not been vetted for accuracy. More to the purpose: for lack of accuracy. That the majority have proved to be so wrong (since they were saved at the time in anticipation) shows what a bunch of dopes is in charge. This may lift spirits of some who have been dismayed by the efforts of has-been institutions and the media to cleanse history. They won't be forgotten:


SEC'Y GEITHNER:  "The American economy was falling off the cliff in the fall of '08 and the first months of [Obama's] administration.  And he put in place the most creative, the most forceful set of economic measures we have ever done as a country.  And because of that, we've prevented a second Great Depression and the economy has now been growing for more than a year and a half, more than two million jobs in the private sector since job creation started again. Faster job creation than the last two recoveries." 


AARON TASK: "What are your thoughts about the fact that Alan Greenspan is considered one of Ayn Rand's greatest protégés?

Dr, YARON TASK, Ayn Rand Institute: "I think Alan Greenspan is responsible for this crisis by holding interest rates after 9/11, for 2-12 years, below the rate of inflation: He encouraged the debt boom, the credit boom, that occurred that we're really suffering from today."   


"It's the American economic boom. The greatest story never told."


 "Most [banks] would say, 'Our analysts are here just to do great research and follow companies,' but that's not reality. They have a lot more responsibilities - and investment banking is becoming more essential."


"To an important degree, banks can be more active in their management of credit risks and other portfolio risks because of the increased availability of financial instruments and activities such as loan syndications, loan trading, credit derivatives, and securitization. From the perspective of bank management and stockholders, the availability of advanced methods for managing interest rate risk leads to a more favorable risk-return tradeoff. For supervisors, the benefit is a greater resilience of the banking system in the face of a risk that figured prominently in some past episodes of banking problems."


"I think we are [sic] thankful that we have Ben Bernanke who is a great expert on the Great Depression at the helm. Uh, and I think he won't make the mistakes that the Fed made the last time around and so we're not going to have, I'm optimistic, anything as severe as the last episode."

The last episode, being, the Great Depression.


SCHIFF: "The basic problem with the U.S. economy is we have too much consumption and borrowing and not enough production and savings and what's going to happen is the American consumer is basically going to stop consuming and start rebuilding his savings especially when he sees his home equity evaporate and when you have the economy 70% consumption [sic], you can't address those imbalances without a recession...."

LAFFER: "What [Schiff's] saying is that savings is way down in this country but wealth has increased dramatically. The United States economy has never been in better shape. Monetary policy is spectacular.... I think Peter is just totally off base. I just don't know where he's getting his stuff."

SCHIFF: "It's not wealth that's increased in the past few years. We haven't increased our productive capacity. All that's increased is the paper values of our stocks and real estate, but that's not real wealth."

LAFFER: "Of course it is."


SCHIFF: "Art, why do a husband and a wife both have to work to provide enough income to support a family?" 

LAFFER: "Because they love their jobs at low tax rates....

SCHIFF: "No, they don't love their jobs; most women with children aren't working because they love their jobs. They're working because they need the income..."

LAFFER: "With lower tax rates, it makes it much more valuable to work. At lower interest rates, you can buy more [stuff] - it's great!"


"I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . ."


"I think we do have a great deal of froth in housing markets. There's no doubt about it. I don't think we're likely to see a large nominal price collapse, that is largely falling house prices, but I think we'll see much slower rates of growth in house prices after 2005."


"The mortgage market is going to be a great market in this country for a long time. We've got population growth. We've got people who are always going to want to live in homes that they own. It's going to be a great market."


"America is close to turning the page on this economic crisis.... [w]e have now reported three quarters of positive growth and the beginnings of job creation. As the economy improves, we are winding down the Troubled Assets Relief Program, and Congress is moving toward enacting the strongest financial reforms since those that followed the Great Depression. In fact, we are repairing our financial system at much lower cost than anyone anticipated and expect to return hundreds of billions of dollars in available but unused TARP resources to the American people. That is a rare achievement in Washington."


"The Federal Reserve and other government agencies have learned a great deal about managing economic affairs since the Great Depression.... Financial instability, which was not addressed by government...was a major contributor both to the depression in the U.S. and abroad. I believe the difference today is that we will address financial issues and try to maintain the integrity of our financial system.... We will not let prices fall at 10% a year."

FORTUNE'S July 23, 2007 COVER:

"The Greatest Economic Boom Ever" 

Friday, November 9, 2012

The Long View

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

            "Communications" ended with the long view advocated by a nine-year old. An adult may slot the family of Henry VIII as a model for modern dysfunctionality; while a child, unburdened by classification and definition, may see to the heart of the matter. Human tendencies echo across time under somewhat similar circumstances. "Somewhat" is where art and concentration must divine the applicable (or not).

The court of Henry VIII was followed, in due time, by that of Elizabeth I. The Virgin Queen had, like many leaders then and now, no convictions when she inherited the throne. Unlike many leaders (then and now) she understood the importance of staking her claim and betraying no qualms. The great 19th century Swiss historian Jacob Burckhardt wrote: "[H]er main characteristic was a queenly one: her strength of soul. When she trembled, at least no one was aware of it." (Quoting Burckhardt, as is true in all the below, unless stated otherwise.)

            In "Communications," Wall Street's best and brightest trembled at the mention of monetary policy. They are afraid of their own shadows.

            Elizabeth's "own religiosity was dubious, to say nothing of her creed." The pope's intervention established her solidity with the Church of England, after which, "complete supremacy was enforced" in the Anglican creed. "Elizabeth was the sole fount of truth and every authorization. This made Catholics who remained Roman guilty of treason ipso facto, even if they were perfectly quiet.... Elizabeth brooked no deviation. The persecutions did not stop short of the scaffold."

            We know there were martyrs, but they are always in a minority. As to the population at large, Burckhardt contends the "[p]eople were willing to put up with anything but a fight between heads of factions. They gave up parliamentary rights and safeguards against judicial arbitrariness, even the salvation of their souls, if only there was a firm government that steered the ship of state with a firm hand."

            (Gibbon preceded Burckhardt, writing of ancient Greece: "More than they wanted their freedom, they wanted security. They wanted a comfortable life, and they lost it all - security, comfort, and freedom, when the Athenians wanted not to give to society but for society to give to them, when the freedom they wished for most was the freedom from responsibility, then Athens ceased to be free." Too-Big-to-Fail bankers, stock-option-motivated CEOs, and politicians in cahoots with Fannie and Freddie come to mind.)

            The-then current attraction of Protestantism, the Reformation, "must have had an enormous attraction for all those who enjoy not having to do something any longer." [Burckhardt's italics.] A case could be made that today the something is "work." (Not to make light of those who have struggled years to find a job, at least in the United States, home of The Silent Depression.)

            There are seasons for impulse and inertia, for restlessness and repose. Christianity found favor and developed when "paganism, classical and otherwise" was still oriented to a "no longer existent middle class, its exhausted poetry and literature...and so on" The October 26, 2012, New York Times published an opinion: "How Food Has Replaced Art as High Culture." True or not, this is an acknowledgement that Western Civilization has exhausted most lines of achievement, of advance. It is, at the least, following the pattern of Will Durant's observation that civilizations are born stoic and die epicurean.

            The Reformation found sympathy in several countries of Europe at approximately the same time, at the end of another age; one that had exhausted its resources, leaving the people at loose ends. A few hundred years before that, Mohammed "hits upon a moment when a large strata of his nation were evidently highly receptive to an extreme simplification of the religious; his genius lies in his divining this." Elizabeth I not only achieved obedience by the stick but also by the carrot: "Her ministers, above all Cecil and Burleigh, were in the fortunate position of knowing their interests to be generally identical with the queen's." And to, Mohammed: "[F]rom the hegira addition to Mecca, which he promised [his followers]... [there was] the conquest of Arabia and the resulting booty."

            Circumstances differ. Today, the path to riches for the mislabeled "elite" combines the enjoyment of not having to do something any longer with extreme simplification. For example, and as addendum to "Communications," a Wall Street veteran with over 45 years of experience estimates that not 2% of the so-called professionals on Wall Street know how the Federal Reserve functions. That is, of the strategists, analysts, portfolio managers, and technicians quoted and interviewed, one in fifty understand the process by which the New York Fed buys (or sells) dollars for securities (or vice versa), the machinery by which interest rates are cut and bank balance sheets ebb and flow.

            Posing this proposition to a veteran with two decades of prying answers from Federal Reserve officials, he responded: "I'll go further than that. Not two percent of the people working at the Federal Reserve understand how the Fed operates. The same is true for those interviewed on TV. Most of them have no idea what the interviewer is asking. They say something they heard before they were interviewed, so the same opinions are repeated over and over."

The know-nothing club predicts the direction of the stock and bond market, both of which are .99999 correlated to the Federal Reserve's open-mouth policy, an institution of which a Norwegian telemarketer knows as much.

            The Latin poet Juvenal wrote:

"Nunc patimur longae pacis mala, saevior armis
Luxuria incubuit victumque ulciscitur orbem."

"Now we suffer from the ills of a long period of peace. Luxury, more destructive than war, has engulfed us and imposes retribution for our conquest of the World."

Thursday, November 1, 2012


Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)
            Jacques Barzun, who died last week at the age of 104, is known to most Americans, where he is still known at all, for one statement: "Whoever wants to know the heart and mind of America had better learn baseball..." Rarely is his explanation discussed. He saw a combination that was uniquely American: teamwork and technique. Boosters and critics of GDP growth as an end in itself should immediately recognize this truth. Barzun's observation helps explain why Americans were uniquely drawn to stock market technology bubbles. ("Were" - such a distinction between Americans and the rest of the world may have passed.)

Today's bubble-builders root for Apple's ascension to a $1 trillion market capitalization. Comparisons have been drawn to Cisco and Microsoft. But who remembers the post-Sputnik technology boom and bust in 1958? Or the bowling binge in 1962? That was whipped up by the introduction of the automatic-ball-return machine. Americans would be more efficient bowlers, spend, accelerate, and multiply, or some such New Economics interpretation. Bowl-Mor Corporation fell from $51 to $3-7/8; Fairlanes Inc., from $12-3/8 to $4-3/4; Major League Bowling, from $14-1/4 to 5/8; Sports Arenas Inc., from $14-1/2 to $1-1/8.

As to the application of technology, the October 31, 2012, King Report gathered bulletins from the embers: "Power could be restored in Manhattan and Brooklyn within four days, but other boroughs and Westchester County could be without electricity for a week." "[C]ell phone coverage is down as users in Manhattan battle signal failures. Many people are virtually cut off [sic - they are either cut off are they aren't - FJS] and have no way of contacting friends or family or calling for help if there are further emergencies." "A call to FEMA's news desk" found "even they didn't have any non-Internet information readily available beyond suggestions that people call 911 in an emergency."

Investors should watch this development closely: Consumers have dropped non-cell phones, declaring there is no need for Ma Bell's relic. However, this decision is often a means to cut costs. Lifting the veil on falling corporate revenues, many are reductions of spending on, if not formerly "necessities," objects and services that were not consciously considered an "expense." Cell phone or TIVO charges were not matters to ponder.

FEMA's response to those in need: "Well, those people who have a laptop with a little battery life in it can try that way. Otherwise, you're right."

Most markets, including the New York Stock Exchange, were closed Monday and Tuesday, October 29 and 30. The New York Stock Exchange's "main data center for U.S. markets is in Mahwah, New Jersey." It has no remote back up center. After 9/11, we heard: "just-in-case will replace just-in-time." This was specifically directed at the exchanges in New York. October 31 is the last day of the month and the last day of the year for most mutual funds. (Bonuses and retention are swayed by November 1 through October 31 performance). A breakdown at Rahway could have produced untold gains to the swift and the clever, but the exchanges are public now, and precautionary expenses are not accretive to NYSE shareholders.

The presidential election is less than a week away. The clear winners are political opinion makers. Now, no matter what they predicted and no matter who wins, consultants can blame poor forecasts on Americans subjected to a cone of silence rather than the incessant roar of electronic communications.

                                                                                                                                    Nevertheless, technology gadgets are dominant. Yet, in finance, knowledge is regressing. Is it also possible "just-in-time instead of just-in-case" has left us vulnerable, trusting our lives to an i-thing? Electronic communications betray shaky foundations and gee-whiz faith in spreadsheets and models is built on ether.

            Recent conversations reveal the loss of financial acumen.

            Balance sheets are not taught at business school. There will be exceptions, but it is normal to graduate from a celebrity business school without understanding the relationship between the income statement and balance sheet. This makes for frustrating discussions about corporate valuations within investment firms.

            Related is the ignorance of CEOs and CFOs who go about acquiring and spinning off businesses. It has been brought to these elders' attention that they are making such decisions without an appreciation of (for instance) the value of retained earnings vs. those from acquisitions. It makes no impression on top management that earnings that are neither retained nor paid out in dividends are a house of cards.

            Top business schools still drown students in efficient market theory and the capital asset pricing model. The theory is bogus; to those who still believed, it was shot full of holes in 2008; yet, finance professors who rose and landed astoundingly high-paying corporate directorships are not going to think differently.

From someone who attended a reception at his business school, after cornering two finance professors:

"Are you still teaching CAPM?"

"Of course."

"With a negative risk-free interest rate? How does that work?"

"You move it down....."

"How can you teach it when there's obviously no such thing as a risk-free rate?"

"Because that's what we teach."
"Yes, yes. That's what we teach."

It is also evident there is a new taboo when meeting with top-tier investment firm strategists and analysts. That is the touchy topic of monetary policy. Just try and ask a simple question to often-quoted Wall Street oracles: "Do you think Bernanke's policy is working?"

Silence. A cough or two. Then, one of the top-tier analysts dares speak: "Yes." This is the classic Emperor-who-wears-no-clothes. The financial celebrities cannot bear to either think or talk about it.

            My daughter (age 9) was reading a fictional biography of Anne Boleyn to me. Henry VIII was anxious to produce a male heir. Anne Boleyn was eight-and-a-half months pregnant when she had a miscarriage. Life went on at court as if nothing had changed.

            This called for an explanation: "Wait a second. Henry's court - the whole kingdom - was anticipating Anne was about to produce a male heir. Now, she's obviously no longer pregnant. And nobody says a thing? Nobody mentions it? That doesn't make sense."
            Daughter: "Of course it does. It's the same as when Bernanke and Obama say things that everyone knows aren't true but nobody says it. People don't change that much, Daddy. It will be about the same 500 years from now."

            "Keep reading."