OurFuture.org Blogs: Ned Boudreau

Obama: One Term President

Ned Boudreau — Wed, 11 Nov 2009 02:22:30 -0800

Obama: One Term President
One wonders: What is the relationship between the driving habits of the Chinese and the meltdown in global financial markets? The former issue has baffled me since I first arrived in China almost six years ago; the latter, since first I read reports of troubles in the credit market in The Economist and The Financial Times during the late spring and summer months of 2007. As an avid but informal student of culture who has traveled in many countries -- and previously lived in Africa, England, Germany, Israel, and Sweden -- I was shocked and appalled by Chinese drivers' complete disregard for human life. As a teacher of economics, I was stunned and increasingly angered by the behavior of mindless lemmings on Wall Street and in Washington, D.C. who marched the global economy off a cliff.

Speaking of the drivers, I've been assaulted by motorcycle riders three times, by car drivers six times. Four of the six car assaults were, quite literally, life threatening. Another, down in Fujian, involved a minivan driver on a pedestrian walkway. From a dead stop, he accelerated as I walked with students beside his van. His left rear-view mirror knocked me into stout, high shrubs, which immediately bounced me back up. I had just time enough to punch and kick his vehicle before walking into a clear area from where I motioned him to come to me when he jammed on his brakes to exit the van. Yes, I was incensed, wanted to fight: I had already seen, over two years in Shanghai, mothers and infants all but run over by bus or van drivers who ignored traffic wardens or stop signs. Yet the most irksome incident occurred as I walked back with a friend and his two Chinese-American daughters from fetching ice-cream for the girls, aged eight and six. It happened at the intersection of Bi Yun Lu and Lan Tian Lu here in Pu Dong. We walked with the light in the painted pedestrian crosswalk. We were two-thirds the way across the four-lane road when a taxi came around the corner -- and sped right at us. He could have gone around us into the right lane of Bi Yun heading East. The driver slowed to a crawl to navigate between our group and the cement curb of the median strip. My friend yelled "Hey!" but I leant over to give the taxi's trunk a smack sounding somewhat like a gunshot or firecracker. The driver tapped his breaks as I raced around to kick his door into his face as he emerged. (To quote one of my martial arts instructors, a former U.S. Navy SEAL who served in Vietnam: "Technique is secondary only to the original ferocity of attack.") He sped off.

Now don't get me wrong. I love living in Shanghai, else I would not. Yes, there is a beautiful woman involved (three-plus years and counting), as well as excellent friends both Chinese and ex-pat. Plus I cannot even begin to describe how fond I am of The Poets and Shakespeare Players from the university where I taught the first year in China. They are simply the finest, funnest and most creative young lasses and lads China has to offer -- they are the future. We hold reunions as often as possible; they treated me to dinner last Christmas Eve. Yet I cannot explain the difference between their excellent, civilized manners and those of the murderous, loutish Chinese drivers. Even my Poets and Shakespeareans simply sigh in resignation at Chinese driving habits. One hears a great deal about "5,000 years of continuous civilization" -- but it is nowhere apparent on the streets of Shanghai or Beijing or other major cities. Pity that; it gives the lie to all that nonsensical talk about “civilization.”

As for the cretinous lemmings on Wall Street and in D.C., they are an even greater scandal. The crises in the credit and related financial markets have MADE IN AMERICA stamped all over them. Iceland is a bankrupt nation due to its banks’ investments in toxic U.S. financial instruments; other nations teeter on the brink of insolvency – including the U.S.A., where many of the major banks believed “too big to fail” are insolvent if one marks their assets to market, as should be done in reality as opposed to imaginative accountancy stratagems created to avoid reality. It is just for this reason that the much bally-hoed “stress tests” were a joke, a fraud and -- to an honest mind not blinded by ideology or the corruption of crony capitalism -- a crime. (But don’t take my word for this; consult others here http://www.ft.com/cms/s/0/ 8bacf162-4a08-11de-8e7e-00144feabdc0.html and here http://voices.washingtonpost.com/ezra-klein/2009/05/this_is_what_regulat... _captur.html. For a detailed, riveting analysis, read Willem Buiter’s Lessons from the North Atlantic Financial Crisis; it’s only 81 pages.

The supposed “masters of the universe,” those “wizards of Wall Street,” were and are guilty of group-think, of bone herd mentality. They believed the “Morgan Mafia” that created CDO’s (collateralized debt obligations) had eliminated risk in financial markets. They believed CDS’s (credit default saps) – the wildest form of unsecured speculation – were legitimate financial instruments. They did not listen to economists and investors (Warren Buffet, Joseph Stiglitz, Paul Krugman, Noriel Roubini, Dean Baker, Nassim Taleb, others) who warned of dangers. They believed their impossibly complex, fantastical computer models despite Taleb’s warnings regarding such. Then, like the lemmings and criminals they are, they joined hands and blithely walked the global economy off the proverbial cliff. Their addiction to profits at any cost proved to be simply, entirely irrational. They acted like sex or drug addicts.

And the lunatics are still in charge of the asylum. Timid Timothy Geithner is a proven tax scofflaw, a failed regulator -- as he admitted before Congress -- as well as yet another tool or fool for Wall Street. For example, as reported in The New York Times, legislation he recently sent to Congress was written by Davis, Polk and Wardwell, a law firm representing and lobbying for the banks. (The link is here: http://www.nytimes.com/2009/04/27/business/
27geithner.html?pagewanted=7&sq=Geithner&st=cse&scp=2). This simply is crony capitalism – in other words, corruption – at the very highest levels of government.

Geithner’s plan for disposing of toxic debt still on banks’ books calls for inflating yet another speculative bubble -- with the majority of profits privatized, the majority of risks socialized, no Plan B. Geithner is simply and solely another cretinous lemming. His strategic plan has done and will do nothing – repeat, nothing – to boost expectations or confidence over the long term. (Ben Bernanke can be credited with walking the U.S. financial system back from the brink, but at the future risk of very high inflation. More ominously, he has invented new programs for lending huge sums to banks and other financial entities, programs that are entirely under the radar of oversight and supervision by elected officials or regulatory agencies.)

Lawrence Summers is, like Geithner, a protégé of Robert Rubin. Rubin was Secretary of the Treasury under Bill Clinton. Rubin was the chief mover – with Phil Gramm, the mastermind -- behind deregulation of the banking system. Summers was brought from Goldman Sachs to the Treasury Department by Rubin, then Summers replaced Rubin as Secretary when Rubin took a $20-million per year job at Citigroup. Summers, with Gary Gensler, another Goldman Sachs crony Rubin brought aboard, aggressively lobbied Congress not to regulate credit default swaps. (Another chief lobbyist for not regulating CDS’s was Alan Greenspan, who has been revealed for the idiot savant he is: Good with numbers but brain dead due to ideology.) The credit default swaps are at the heart of the crises in the credit and financial markets. They were responsible for the implosion of AIG (American Insurance Group), which so far has received some $162 billion in bailout funds from the government – that is, from U.S. taxpayers, their children and probably their grandchildren.

So there you have it: Of the five primary enablers of the deregulation that caused the meltdown in credit and related financial markets, thus leading to the current global recession, two of them -- Rubin, Summers -- are top economic advisors to President Obama, who chose Gary Gensler to head the Commodity Futures Trading Commission. Little Timmy Geithner, tool of Wall Street and self-confessed failed regulator (and, don’t forget, tax scofflaw), presides over Treasury. In other words, the lunatics are still running the asylum: the cretinous lemmings who led us over the cliff are still in control.

Lemmings, all. The lot of them ought to be taken out and, if not hanged for treason and sabotage, at least exiled to frozen tundra where they can do no further harm. (Harsh? Well, how many lives and nations do you want them to destroy?)

The fact is that the markets failed. “Market failure” or “externality” is a concept enshrined in even the most conservative Neo-Classical economics textbook. A “negative externality” is defined as follows in Principles of Microeconomics (Rich Bernanke 2002, 278): external cost (or negative externality) a cost of an activity that falls on people other than those who pursue the activity. What is most galling is that the negative externality was caused by management and workers in financial markets; that is, entrepreneurs, managers and labor. Entrepreneurship and labor are two of the four “factors of production” in all economics textbooks, Keynesian or Neo-Classical. This “human capital” includes, in this case, regulators (like little Timmy Geithner), the rating agencies (which were, of course, ready and willing accomplices to their paymasters, an example of crony capitalism at its most egregious), mortgage agencies and bankers, among others including the U.S. Congress – none of whom heeded informed voices calling for oversight and warning of imminent disaster. It would be hard to find or even imagine a more damning condemnation of laissez-faire free markets unconstrained by regulations and the rule of law. Alan Greenspan had all the powers he needed to nip these crises in the bud, (link is here: www.federalreserve.com.) But he did not because he was entirely blinded by his irrational belief in free markets. Cretinous. We won’t even go into the other lemmings: Gene Sperling, Greg Baer, Linda Robertson, et. al., who were lesser figures, foot soldiers – smaller lemmings -- in the war on regulation and the rules of law.

Further, Barack Obama is chained to his economic advisors, who were and are tools and pawns of Wall Street. This makes President Obama a stiff, a stooge, a tool, a slave owned by Wall Street. I use that pejorative intentionally, to wake up or alert the President. There is another, even more demeaning term for Obama’s enslavement to Wall Street (which supplied, thanks to Robert Rubin, at least 10% of Obama’s campaign expenses). But my mother was furious I used it. So I changed it to “slave”. You can suss it out.

Note that no one can accuse me of racism: My closest friend is Alexander Korletey Tettah, who was my second in command when I served with the U.S. Peace Corps in Ghana for 27 months, 1995-1997. His nickname is “Jehrawn.” He saved my life when a green mamba was poised some three inches from my right boot. We were bushwhacking up a very steep trail at the time, way off the beaten track, miles from a hospital. It was my turn in the lead, clearing bush. I stopped to warn Alex of a thick band of army ants just ahead. Alex replied in a voice of absolute command he had never used before and has never used since: “Uncle Ned. Don’t move.” From an informal survival guide circulating in West Africa at the time: “If you are struck by the green mamba, sit down and light a cigarette. You will not have time to finish it.”

Almost a year later, Alex’s sister, the exquisite Vida (now dead), and one brother, Ransford, arrived at my digs 2245 hours: “Uncle Ned, Jehrawn is very sick. Can you help?”

They handed me a prescription written by a doctor at the local hospital: 115,000 cedis - at the time, some $65 - for a cerebro-spinal menningitis inoculation and related medicines. That sum was more than Jehrawn and the four wage earners in his family would make in two weeks. Certainly they did not have that amount to spare; all moneys went to school fees and food. So I conscripted a pickup truck, we piled in, then I climbed over the wall of the closest pharmacist's compound to beat on his door at 2315: “I need medicines!”

When Jehrawn's family and I arrived at Otua Hospital in Odumasi, Manya Krobo District, Eastern Region, just before midnight, the nurse grabbed the inoculation and other medicines and emptied them into Jehrawn - through new syringes I’d purchased. No way was he going to be jabbed with a used needle. He was stone cold to my touch, deep in coma.

Early next morning I went back to call on the chief of medicine, a smiling young Ghanaian who trained in England. Per the wonderful Ghanaian custom of hospitality, he immediately called for sodas for me, Vida and Ransford. The doctor laughed and laughed because, he said, he was delighted to hear me refer to Jehrawn as my “brother." That young Doctor is still a hero to me because he saved Jehrawn's life -- and because he told me the truth.

I asked the Doctor, "What would happen to Jehrawn if I had not arrived with medicines last night?"

"He would be allowed to die."

"But why?" I demanded.

The Doctor explained. I will remember his words til the day I die: "Your brother is a black man, so I will tell you. My friend, we are in Africa. Medicine is very expensive. We practice a type of financial triage. If you cannot pay, you will die. Your brother is very, very lucky." He informed me that the single greatest cost -- on top of the spinal tap, the hospital bed, ongoing care "if he survives" -- would be medications. I agreed to pay.

Jehrawn recovered. He was in a coma for almost five days, during which the CSM fever burned twenty-five pounds off him. When he came to, his left leg was, he said, "dead," and he had lost hearing in his left ear. He stumped around on a cane for a month or so. But just three months later he and I guided tourists on a traverse of Krobo Mountain, the sacred, ancestral home of the Krobo tribe and clans amongst whom I lived.

During that trek, from under a rock by the side of the trail, a green mamba streaked through his legs and over my left boot. My crew of sixteen men was working below us at the southernmost spur of Krobo Mt., building an ecotourism facility and tree nursery. They did backbreaking labor for 3,500 cedis -- just under $2 -- per day. Zeke Obu, my foreman, told me they were very glad to have steady employment at "propah" pay almost double the national average of $1 daily. Jehrawn, his wife and daughter – my heart’s delight, sweet Anne Marie -- now live in Davis, California. We are planning on moving back to Ghana to start businesses, contribute to development.

So: Wake up, Barack Mr. President Obama: The crises are yours from your inauguration. But your economic advisors are the same cretins who put us in this situation. They have showered their cronies on Wall Street with trillions of dollars. They have done little to nothing to address the gravest threats to economic recovery -- foreclosures and unemployment. Foreclosures on American mortgages are the root cause of both crises, as The Economist and The Financial Times have reported repeatedly. Foreclosures are at a record high and are projected to increase throughout 2009 and into 2010. As long as such toxic debt enters the financial system, there is no hope of economic recovery. Increasing levels of unemployment will add to the rate of foreclosures. It is as simple as that. Yet your economic advisors shower all their attention on Wall Street – the source of the meltdowns. They protect the doctors who prescribed a regimen of medications for an otherwise healthy patient who consequently died. They ignored all warnings and advice.

Thus, Mr. President, failure and crony capitalism might well be your legacy. Hence, if you do not change course by sacking your chief financial advisors and addressing the root causes of the crises, you will be a one-term executive. And I, for one, will have no reason to debate your failures.

Yet perhaps I digress: What can possibly be the cause of such irrational behavior among Wall Street players and Chinese drivers? Their actions prove the opposite of economic theory.

Well, some years ago I was privy to a conversation among the Ladies of our clan. My youngest sister and my sister-in-law were in the living room, where my mother, our matriarch, held court as she knitted some nameless thing. My sister and sister-in-law chatted about the differences among their children, who were born within months of each other, girls first, then boys, all four of them less than three years of age. My terribly refined British sister-in-law was mystified by the differences between her male and female children at such an early age. So, too, was my youngest sister.

My Mother, however, was not. She said, “I know.” After more than a few moments of speculation – as I hung quietly in the kitchen – my mother said, “Testosterone poisoning.” We howled with laughter.

Me Mum was prescient. Traders and wheeler-dealers on Wall Street and elsewhere were oblivious to their testosterone levels, the engine – cause and effect – that drives them. In other words, irrational behavior. There is a great deal of evidence to support this conclusion. See the following links here:

http://www.bloomberg.com/apps/news?pid=20601124&sid=akWXksOOzQIo&refer=h...

And here:

http://online.wsj.com/article/SB120846072638623669.html

And here:

http://www.scientificamerican.com/blog/60-second-science/post.cfm?id=is-...

And here:

http://www.bloomberg.com/apps/news?pid=20601124&sid=akWXksOOzQIo&refer=h...

A Time magazine list of 25 people to blame for the financial crises does not include a female. (www.time.com/time/specials/packages/article/0,28804,1877351_ 1877350, 00.html). I have not been assaulted by a female driver in Shanghai. To my empirical mind, the case is closed: Testosterone poisoning.

This verdict in no way absolves those responsible. Rather, it points to the need for stronger regulatory supervision, to prevent the lemmings from repeatedly indulging in irrational behavior, in their mistakes, their crimes, their addiction. The problem is, however, that the lunatics are still running the asylum. Their chief enabler – their Commander-in-Chief -- is Barack Hussein Obama. Who, as a result, most likely will be a one-term president. He will then join the cretinous lemmings in their legacy of shame, failure, economic sabotage and treason.

Mr. President, wake up: It’s the economy, stupid!

We your supporters wish you well, wish you two terms. But you must lead, not merely speechify. Get tough. Spend political capital; bang heads. Play hardball. Or join the losers in the Cretins’ Club.

word count: 3,141

Ned Boudreau teaches Economics in the International Baccalaureate Diploma Program at Shanghai Pinghe School in Shanghai, China. He holds a M.Sc. degree in Development Economics.

Cretinous Lemmings

Ned Boudreau — Tue, 19 May 2009 08:37:45 -0700

Sent to Michelle Obama on Mother's Day:

May 10, 2009

Dear Mrs. Obama:

You have the President’s ear, of course.

Well, please tell your man that the financial crises are now entirely his. He has surrounded himself with economic advisors who are chief among the cretinous lemmings who led us over the cliff. Summers worshipped at the alter of his mentor, Robert Rubin, who is now in disgrace for running CitiGroup over the same cliff. Timothy Not Ready for Prime Time Geithner is another Rubin clone who has been in bed with the Wall Street elite for years. Plus Geithner has admitted publicly that he is, as we learned, a failed regulator. (Talk about letting the fox guard the chicken coop before -- and after -- the fox got in!) Together with the likes of Alan Greenspan, Summers and Geithner are among those most responsible for the crises and global recession. (Greenspan, blinded by ideology, proved to be an idiot savant much like Chance, the anti-hero of Jerzy Kosinki’s Painted Bird: He spoke enough of the right, opaque, cryptic words to wander into power.) Hence, lunatics are still running the asylum.

Thanks to these lunatics, your husband has inherited a mess of Herculean proportions; has more than the Augean Stables to clean after eight years of the previous regime. But that is beside the point. Markets are not self-correcting, else your husband would not be in this mess, nor would captains of finance and industry now be on welfare. But your man’s advisors are famous for their deregulatory “leave it to the markets to solve the problem” madness. The markets failed. Further, Summers, Geithner and their ilk showered trillions on Wall Street, mere billions on Main Street. Yet as The Economist reported many times, the root cause of the mess is foreclosures, which are predicted to continue. Thus toxic debt will continue to infect the financial markets until this issue is resolved; thus the credit and financial markets will not heat up. There are good plans for dealing with this; Geithner’s is not one of them: He intends only to re-ignite the speculative bubble while privatizing rewards and socializing risk. He has no Plan B. If I were he in a corporate setting, I would be sacked for incompetence. Not to mention crony capitalism -- that is, corruption. For one example among many, legislation Geithner recently sent to Congress was drafted by Davis Polk and Wardwell, a law firm that not only represents banks but the professional lobbyists’ trade group specializing in the financial sector. I assume you do not wish the Obama legacy to be one of incompetence and corruption.

I voted for your husband; wish him only well; hope he can turn the country around. But he will be only a one-term president if he does not address Main Street issues by firing Geithner and Summers.

Please inform your husband. Or just scold him. He’ll listen, won’t he?

Looking forward to your reply.

Cheers and happy Mother’s Day,
Ned Boudreau

word count: 495

Ned Boudreau teaches economics in the International Baccalaureate Diploma Program at Shanghai Pinghe High School. He can be reached at fireofwords@hotmail.com.

From China: Polluters Are Not Patriots

Ned Boudreau — Sat, 24 Jan 2009 03:06:04 -0800

From China: Polluters are not Patriots

On May 12, 2008 an earthquake measuring 7.9 on the Richter Scale caused over 87,000 deaths and some $80 billions in damage. Imagine that you were a successful entrepreneur with substantial investments in land, buildings and capital goods in the Sichuan earthquake zone. Obviously, the majority of your employees – the human capital that makes your business viable – live in the quake zone.

With this in mind, let’s brainstorm the issues of pollution and patriotism; of whether or not citizens, business professionals or other agents who cause or allow preventable pollution are patriots or criminals. We start with the following thought experiment: If you had known ahead of time that the quake was imminent, would you have tried to prevent or mitigate the disaster? We can assume that most people would say, “Yes.” Certainly, of the ten or twelve friends to whom I posed this question, each replied with a surprised “Of course” or an annoyed “Yes, of course!” The word duty was mentioned; it also appeared repeatedly in the media, often as civic duty or social duty, when volunteers were asked why they rushed off to offer any assistance they could provide in the quake zone.

Next, let’s think in terms of nations and the globe. The United States, with just 4.6% of the world’s population, is the greatest producer of the greenhouse gases that cause climate change: 7.181.4 million metric tons of carbon equivalent in 2006. China, with 20% of world population, ranks second in terms of greenhouse gases: 5.322.69 million metric tons in 2006. Combined, the U.S. and China accounted for almost half -- 46.48% -- of all greenhouse gas production in the world: 26.9 million metric tons in 2006. Note that my source is the Energy Information Administration of the U.S. Department of Energy. Note, too, that carbon dioxide in the atmosphere, at 375-387 parts per million (ppm), is at the highest level in some 675,000 years. Prior to the Industrial Revolution, the level was 270-290 ppm. Anthropogenic carbon (or equivalents) is injected into the atmosphere at a rate of 4.1 billion metric tons per year. Since 1750, atmospheric methane – a far more potent greenhouse gas – has increased 150 per cent, from 700 parts per billion by volume (ppbv) to 1,751 ppbv today.

Whether or not humans cause global warming is not the issue here. The issue is that we contribute to it by fouling our own nest – our nations, our globe. Some of the gases we put into the atmosphere destroy the ozone layer that protects all life as we know it. (Check the Web for simulations based on real-time monitoring of the ozone holes over the Artic and Antarctic, and how they wax and wane. Or check the Web for actual reductions in Arctic ice. Scary stuff.) Furthermore, we know what happens when greenhouse gas emissions reach levels with which the atmosphere cannot cope: Environmental meltdown results. This should not surprise anyone who has read the science. Ilya Prigogine, the 1973 Nobel laureate in chemistry, proved that once the symmetries of complex dissipative systems in dynamic equilibrium are fractured, the systems will collapse, with unpredictable results. Our Earth is one such system on a grand scale. Ozone holes, glaciers and Arctic ice in retreat, entire Antarctic ice sheets plunging into the sea: These are indicators that global, environmental symmetries are under dramatic assault. Unlike the Sichuan earthquake, climate change due to global warming is a train wreck – rather, a chemical catastrophe -- in slow yet rapidly accelerating motion.

For the flint-eyed “realists” out there, the captains of industry, finance and business, who may not be moved by such facts and figures, I recommend The Summer of Acid Rain, in the 19 December 2007 issue of The Economist: ”Molten iron raining down like cowpats; ice floes at New Orleans. The weather of 1783 was an extraordinary case of sudden climate change driven by atmospheric gases.” Those gases traveled the world; they came from an Icelandic volcano that erupted over months. You may or may not be moved by the accounts of mass starvation in Alaska, Egypt, Iceland and Japan; of deaths in Europe caused by poisoned air. It was not good for business.

I bring these issues up each year with my students of economics because the majority of them intend to go into business. A few of them report they plan to enter government to serve their country. When we study economic growth and development, the concept of negative externalities, such as pollution, comes up. (Negative externalities are external costs or effects that are borne or suffered by people who are not parties to a given economic activity.) I try to make this issue as personal as possible. As in past years, I asked this year’s students, “Do you love your parents?” Of course they did. “Do you love your grandparents?” Again, they did. “Do you think your grandparents love you?” By that time, they were a bit restive, if not angry. One young lass said, “Teacher, of course they love me! What does this have to do with economics?” So I asked her if she would love her children and her grandchildren. “I know I will,” she replied, in a tone both disdainful and furious. I assured her I was certain she would. “Now, bear with me, OK? Raise your hands to answer. How many of you are patriots, love your country? Love China?” They all shot their hands into the air; a few of the lads all but leapt out of their seats. They demanded to know why I was asking them such personal questions.

Well, the answer went something like this: “The looming environmental meltdown will affect -- adversely; significantly -- you, your children, your grandchildren, your country and your world. Listen, kids: The Economist reported, in August of 2004, that 70% of all water in China is so polluted by industrial, agricultural and human waste that it is unfit for drinking or bathing, and much of it is so toxic it cannot be used for irrigation. Just think of Tai Lake! The 20 most polluted cities in the world are here in China. So if you go into business, industry or government, your love of family and your love of country will be proved by whether or not you solve or mitigate the problem of negative externalities. You cannot assert, with any rationality or logic, that you love your family or that you are a patriot if you knowingly continue to poison the water, land and air your family and your country rely on for their very existence. So I ask you: Is it patriotic or criminal to pollute or allow preventable pollution?”

The same is true for my students’ elders anywhere in the world: Whatever else they may be, polluters are not patriots, and very well might be criminals. Politicians take note.

(word count: 1,142)

Ned Boudreau, a native of Central New York, teaches economics in the International Baccalaureate Diploma Programme at Shanghai Pinghe School in Shanghai, China.

An Open Letter to the Most Responsible Lads

Ned Boudreau — Sun, 11 Jan 2009 02:58:48 -0800

An Open Letter to the Most Responsible Lads

January 10, 2009

Ben Bernanke, Chairman of the Board of the Federal Reserve:

Per The Economist, the root causes of the current crises are house prices and mortgage defaults. If it is true that you once said you would “rain money from helicopters” to prevent recession, then the deluge is falling primarily on Wall Street banks and related firms in the money markets. This is akin to rewarding the team of doctors who prescribed a medical regimen for an otherwise healthy patient who consequently died. Neither the crises nor the recession will end until their causes are addressed with a strategy for (1) halting mortgage defaults that continue to generate toxic debt and (2) internalizing the now global negative externality of some $300 billion to $600 billion to $1.2 trillion in toxic debt instruments still in the system. (Estimates vary, as you know.) The problem is not liquidity. As the Financial Times reported at least twice this year, there is more than enough liquidity in global markets. The problem is toxic debt still in the financial system and the continuing creation of such debt as a result of foreclosures, which are predicted to grow through 2009 if nothing is done to stop them. Thus, no single financial institution is willing to take the next hit of write-downs worth billions, so they are sitting on their moneys as they wait for others to take the hit. No amount of liquidity will change that, the London Inter-Bank Overnight Rate (LIBOR) and your discount window be damned. Also per The Economist, the “whiff of panic” in drastically lowering discount window interest rates adds to uncertainty.

Also, please note that I use your textbooks, co-authored with Frank Rich, in my International Baccalaureate Organization economics classes. Your definitions of market failure and externalities describe the crises perfectly.

Hank Paulson, Secretary of the Treasury:

Please stop floundering about; you are further panicking the markets. The decision to allow Lehman Brothers to fall was one of the four “worst mistakes” of the year, according to the Financial Times. That decision was not yours alone, of course. But changing your mind – twice – on major objectives of the Troubled Asset Relief Program (TARP) program evidently was: You announced the changes, and wrote a defense of them in an op-ed piece for the New York Times. Such floundering merely causes further uncertainty, thus panic, thus further freezing up of the credit and related financial markets. So please decide on a strategic solution and stick to it. Two excellent strategies were recommended by economists out of Columbia University (C.J. Mayer) and the University of Chicago (James Heckmann, a Nobel Laureate), among others. Please read and consider them. Address the root cause(s) of the crises. Sure, sure: The decision reported last December 4th, that the Fed would help homeowners, is very welcome. So just do it. That’s where the continuing generation of toxic debt originates. Jesu meine Freude!

Also: Note that a lack of transparency and accountability regarding where TARP funds are going is causing a tsunami of disgust and outrage among American taxpayers. Read the usual chat sites. Disregard that at your own risk.

Speaking of ‘risk’: You were an investment banker. Why is it neither you nor Goldman Sachs did your own risk assessment of the collateralized debt obligations (CDO’s) at the heart of the crises? Humm . . .

Barney Frank, Chairman of the House Financial Services Committee:

Reliable sources report that some -- perhaps many? -- banks will not use TARP funds to extend credit. This was the primary objective of your bailout. Instead, some or many of them plan to use TARP cash to purchase other banks to augment their capital bases, thus their balance sheets.

Therefore, please do not – repeat, not -- release one more dime of TARP funds until and unless Ben and Hank put together a credible strategy, and then sign a contract to adhere to that strategy. Their tactical, floundering approach simply adds to uncertainty, thus to the crises. In fact, I recommend you rally your colleagues in both House and Senate to sign into law the conditionalities the TARP program should have included in the first place: transparency and accountability; a cap on executive compensation; elimination of bonuses; and – most urgently – a requirement that TARP funds be used to make loans rather than to acquire smaller banks or other agencies, etc.

Take them all – pols and appointees -- out behind the woodpile for a good old fashion whooping if they don’t. Play hardball; they deserve it.

Lads: I wish you well. Hope you get things right soon.

Cheers and best regards,
Ned

* Oh, yes! Before I forget: Alan Greenspan, former Chairman of the Federal Reserve:

I am sorry to say it, but the two crises were “Made in America” -- by you. Yes, you.

You were warned about the mortgage market and the housing bubble by two of your own Board members. You are responsible for the “easy money” policy that stoked both the Internet bubble and the housing bubble. Further, you refused to use the Fed’s regulatory powers to order audits of dubious assets and highly suspect lending by banks because, you maintained, the Fed does not have such regulatory powers.

I beg to disagree. Just this weekend, I perused at great length the Commercial Bank Examination Manual and related pages on the Fed’s own website. (In case you did not read that document, it is here: http://www.federalreserve.gov/.)

"The apparent froth in housing markets may have spilled over into mortgage markets. The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other, more-exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny." Those are your words, as reported in major media such as The Economist and the New York Times in 2005. Yet “froth” can and does create “bubbles.” Your “froth” and easy money policy resulted in the housing bubble that now has brought the international financial system to its knees. Thanks to you, Iceland is bankrupt.

Yes, yes, I read how you and others like you are experiencing “shocked disbelief.” That was during your testimony before Congress on 23 October of last year. Yet you said the same thing in 2002 and through to this day – after the Savings and Loans meltdown; after Enron, then WorldComm, then all the others – when you insisted that there was no need for further regulation; that businessmen’s reputations would prevent them from offering inferior products. Your documents and speeches are all available on the Fed website or other media. Yet even Shakespeare knew better: How quickly nature falls into revolt//When gold becomes her object! (Henry IV, Part 2, 4.5.65-67)

Please note that, over the past few weeks since your last Congressional testimony, I’ve also read your publications of 1963, 1969 and many others, including your autobiography. Hence I must conclude that your failure to appreciate or research risk in the mortgage market was based on a blind faith in markets – all evidence to the contrary be damned and ignored. Yet, as we all know, Neo-Classical economic theory is partially based on the concept of market failure: (In other words, markets may often not achieve constrained-Pareto optimality – roughly, social welfare – or exist at all.) For example, the Marginal Social Cost of commuting via car is offset by the Marginal Social Benefits of productive work, stable household incomes, contributing to GDP and so on. At that equilibrium point the negative externality – supposedly -- ceases to exist. Yet even though the externality is internalized, the pollution caused is not reduced to zero. Hence pollution by tens of millions of commuters increases despite all best efforts of markets. Similarly, the dual crises: The buying and selling of CDO’s benefited many people for a few years and seemed to contribute to both Gross Domestic Product and social welfare (Pareto optimality), yet later imposed dreadful external costs on counter-parties, as well as on third parties – read, all Americans, and millions of others – who were not engaged in the economic activities that caused the crises. (Ben’s definition of externality.)

All your dissembling and all your protestations to the contrary, you are to blame. Your blind faith in your ideology blinded you to reality. I do not know how to describe you: a callow virgin of 82 years who believes – all empiric evidence to the contrary – in the inherent goodness of business men and business women, much to your credit; a mere ideologue, much to your debit side; or an idiot savant who speaks rather well. Sorry: You rather remind me of Jerzy Kosinski’s protagonist, Chance, in Being There. I am sure you’ve read it.

Now please be so kind as to fade into silence. Your reputation is not merely tarnished; it is -- with Robert Rubin’s -- entirely shattered among those of us who ‘followed the money’ and did the research. Research was your specialty in your youth, with your clarinet. (Did you ever play through Benny Goodman’s concerto? Or Alex North’s? But I digress.) You really should have done more research. Shame on you.

word count: 1,511

Ned Boudreau, a native of Syracuse, NY, teaches economics in the IBDP (International Baccalaureate Diploma Programme) at Shanghai Pinghe School in Shanghai, China. He holds an M.Sc. degree in economics.