Posts Tagged ‘financial’

What to do about North Korea.

Wednesday, July 5th, 2017

The North Koreans launched a new two stage missile, which signals more escalation of their part.

The two-stage missile launched Tuesday by North Korea will be classified by US intelligence as a brand-new missile that has not been seen before, US officials told CNN.

The first stage of the missile is believed to be a KN-17 liquid fueled missile, which is well-known to US intelligence and has been previously launched by North Korea.

Ahead of Tuesday’s missile test, US satellites had seen evidence the KN-17 missile was being prepared for launch.
But at some point prior to launch, the North Koreans attached a second stage atop that missile.
The focus now is on the capability of that second stage, and how it technically contributed to making Pyongyang’s latest test its first ever intercontinental ballistic missile (ICBM) launch.

The next step will be the development of a solid fuel missile which could be launched with little warning.

NK launch

The trajectory was high and short but the second stage could be programmed to go much longer range.

It is apparent that the US policy going back to Bill Clinton and his “Deal” to stop the Norks nuclear program, has been a complete failure, like so many of Clinton’s deals.

On Oct. 18, 1994, Clinton approved a plan to arrange more than $4 billion in energy aid to North Korea over the course of a decade, in return for a commitment from the country’s Communist leadership to freeze and gradually dismantle its nuclear weapons development program, according to The New York Times.

The “complex” deal was to de-escalate the situation on the Korean peninsula, where the two Korean nations never negotiated a peace treaty after the Korean War ended in armistice in 1953.

“This agreement is good for the United States, good for our allies, and good for the safety of the entire world,” said Clinton in 1994. “It’s a crucial step toward drawing North Korea into the global community.

The drawing-in never happened.

I can only imagine what Hillary Clinton would do if she were President. The mind boggles at the thought.


The “Deep State.”

Thursday, February 27th, 2014

UPDATE: From Zerohedge: Is the deep state fracturing among the elites ?

History suggests that this low-intensity conflict within the ruling Elite is generally a healthy characteristic of leadership in good times. As times grow more troubled, however, the unity of the ruling Elite fractures into irreconcilable political disunity, which becomes a proximate cause of the dissolution of the Empire if it continues.

We live in interesting times.

This essay on the blog of Bill Moyers, a left winger and former LBJ press secretary who is almost 80 years old, is interesting. It has the usual leftist slant on the topic but also includes many good observations.

There is the visible government situated around the Mall in Washington, and then there is another, more shadowy, more indefinable government that is not explained in Civics 101 or observable to tourists at the White House or the Capitol. The former is traditional Washington partisan politics: the tip of the iceberg that a public watching C-SPAN sees daily and which is theoretically controllable via elections. The subsurface part of the iceberg I shall call the Deep State, which operates according to its own compass heading regardless of who is formally in power. [1]

Moyers had a significant role to play in the early stages of this administrative state.

Failure to recognize the distinction between the way in which the Department of the Army operates and the standing operating procedures of military organizations in the field has frustrated generations of field soldiers, who have taken for granted the necessity for tight management at the top, known to them as unity of command.This struggle for executive control within the Army has
taken place during a period of increasingly centralized authority over individual and corporate activities throughout American life.

Moyers has more of a role here than he admits. After some nonsense about Republican “obstructionism,” he says this:

Despite this apparent impotence, President Obama can liquidate American citizens without due processes, detain prisoners indefinitely without charge, conduct dragnet surveillance on the American people without judicial warrant and engage in unprecedented — at least since the McCarthy era — witch hunts against federal employees (the so-called “Insider Threat Program”). Within the United States, this power is characterized by massive displays of intimidating force by militarized federal, state and local law enforcement.

I think it is interesting to see that the left, certainly Moyers territory, sees this.

During the time in 2011 when political warfare over the debt ceiling was beginning to paralyze the business of governance in Washington, the United States government somehow summoned the resources to overthrow Muammar Ghaddafi’s regime in Libya, and, when the instability created by that coup spilled over into Mali, provide overt and covert assistance to French intervention there. At a time when there was heated debate about continuing meat inspections and civilian air traffic control because of the budget crisis, our government was somehow able to commit $115 million to keeping a civil war going in Syria and to pay at least £100m to the United Kingdom’s Government Communications Headquarters to buy influence over and access to that country’s intelligence. Since 2007, two bridges carrying interstate highways have collapsed due to inadequate maintenance of infrastructure, one killing 13 people. During that same period of time, the government spent $1.7 billion constructing a building in Utah that is the size of 17 football fields. This mammoth structure is intended to allow the National Security Agency to store a yottabyte of information, the largest numerical designator computer scientists have coined. A yottabyte is equal to 500 quintillion pages of text. They need that much storage to archive every single trace of your electronic life.

Yes, indeed.

Government life is typically not some vignette from an Allen Drury novel about intrigue under the Capitol dome. Sitting and staring at the clock on the off-white office wall when it’s 11:00 in the evening and you are vowing never, ever to eat another piece of takeout pizza in your life is not an experience that summons the higher literary instincts of a would-be memoirist. After a while, a functionary of the state begins to hear things that, in another context, would be quite remarkable, or at least noteworthy, and yet that simply bounce off one’s consciousness like pebbles off steel plate: “You mean the number of terrorist groups we are fighting is classified?” No wonder so few people are whistle-blowers, quite apart from the vicious retaliation whistle-blowing often provokes: Unless one is blessed with imagination and a fine sense of irony, growing immune to the curiousness of one’s surroundings is easy. To paraphrase the inimitable Donald Rumsfeld, I didn’t know all that I knew, at least until I had had a couple of years away from the government to reflect upon it.

The IRS bureaucrat begins to see that the Tea Party is a threat to his pension and continued nice life. That, of course, is not what Moyers is concerned about.

The Deep State does not consist of the entire government. It is a hybrid of national security and law enforcement agencies: the Department of Defense, the Department of State, the Department of Homeland Security, the Central Intelligence Agency and the Justice Department. I also include the Department of the Treasury because of its jurisdiction over financial flows, its enforcement of international sanctions and its organic symbiosis with Wall Street. All these agencies are coordinated by the Executive Office of the President via the National Security Council. Certain key areas of the judiciary belong to the Deep State, such as the Foreign Intelligence Surveillance Court, whose actions are mysterious even to most members of Congress. Also included are a handful of vital federal trial courts, such as the Eastern District of Virginia and the Southern District of Manhattan, where sensitive proceedings in national security cases are conducted. The final government component (and possibly last in precedence among the formal branches of government established by the Constitution) is a kind of rump Congress consisting of the congressional leadership and some (but not all) of the members of the defense and intelligence committees. The rest of Congress, normally so fractious and partisan, is mostly only intermittently aware of the Deep State and when required usually submits to a few well-chosen words from the State’s emissaries.

This is what some of us refer to as The Ruling Class.

There are now 854,000 contract personnel with top-secret clearances — a number greater than that of top-secret-cleared civilian employees of the government. While they work throughout the country and the world, their heavy concentration in and around the Washington suburbs is unmistakable: Since 9/11, 33 facilities for top-secret intelligence have been built or are under construction. Combined, they occupy the floor space of almost three Pentagons — about 17 million square feet. Seventy percent of the intelligence community’s budget goes to paying contracts. And the membrane between government and industry is highly permeable: The Director of National Intelligence, James R. Clapper, is a former executive of Booz Allen Hamilton, one of the government’s largest intelligence contractors. His predecessor as director, Admiral Mike McConnell, is the current vice chairman of the same company; Booz Allen is 99 percent dependent on government business. These contractors now set the political and social tone of Washington, just as they are increasingly setting the direction of the country, but they are doing it quietly, their doings unrecorded in the Congressional Record or the Federal Register, and are rarely subject to congressional hearings.

Remove some of the obligatory left wing rhetoric and I agree with this completely. Read the rest.

In 2013, General David Petraeus joined KKR (formerly Kohlberg Kravis Roberts) of 9 West 57th Street, New York, a private equity firm with $62.3 billion in assets. KKR specializes in management buyouts and leveraged finance. General Petraeus’ expertise in these areas is unclear. His ability to peddle influence, however, is a known and valued commodity. Unlike Cincinnatus, the military commanders of the Deep State do not take up the plow once they lay down the sword. Petraeus also obtained a sinecure as a non-resident senior fellow at the Belfer Center for Science and International Affairs at Harvard. The Ivy League is, of course, the preferred bleaching tub and charm school of the American oligarchy. [4]

Exactly. Think about global warming and energy policy, matters Moyers neglects.

Permanent deficits are not Keynesian

Wednesday, September 7th, 2011

John Maynard Keynes, in addition to being the brother of the author of the first book on blood transfusion, was a famous economist whose policy recommendations have been widely abused by politicians for 50 years. His first widely known book was on “The Economic Consequences of the Peace.” It predicted that the harsh peace treaty would ruin Europe, a prediction that came true in 1929.

Reparations were set at a level that Keynes perceived would ruin Europe, Woodrow Wilson refused to countenance forgiveness of war debts and would not even let the US Treasury officials discuss the credit program. While Keynes’ proposals were far sighted, few others at the Versailles Conference understood their importance and Keynes’ proposals would have been controversial in nations such as France, Britain and the US.

Another critical insight was his prediction of the consequences of inflation.

Keynes outlined the causes of high inflation and economic stagnation in post-WWI Europe in The Economic Consequences of the Peace.

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Keynes explicitly pointed out the relationship between governments printing money and inflation.

“The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”

It is significant that the US has debased its currency the past 40 years far more than the average citizen realizes. The present dollar is worth about 40 cents in 1970 dollars. Using the methodology at this site, which uses US Department of Labor data, a $100. item in 1970 would cost $582.60 in 2011 dollars. That uses a cumulative inflation rate of 482.6%. Using that calculation, the present dollar is worth 20 cents in 1970 currency.

The most common attribution to Keynes is the “pump priming” role of running budget deficits. However, his theory was the “countercyclical” principle of government budgets. That supposes that the government runs surpluses in good economic times, then deficits in bad economic times. Keynes assumed that these two phases of government action would cancel each other out. His work was based on his theories of how the Great Depression occurred. His apologists have used the Second World War as an example of Keynesian economics. They do not mention that the high deficits that were run during WWII were funded by US citizens who bought war bonds. Inflation was limited by price controls and consumption was limited by rationing. The excess income that was generated in war industries was invested in the national debt. We were not borrowing from another country and, after the war, the budget rapidly paid off the war debt.

What we have today is very different. Here is a useful explanation. There is more explanation here.

If Keynes were alive today, what would he think of President Obama’s fiscal policies?

He would roll over in his grave if he could see the things being done in his name. Keynes was opposed to large structural deficits. He thought that they chilled rather than stimulated the economy. It’s true that we’re stuck with large deficits now. The goal should be to reduce them, not to take on new spending that makes them worse.

Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn’t understand that the proper policy in a democracy recognizes that today’s increase in debt must be paid in the future.

Read the rest.

How the Left Lies to Itself

Saturday, August 6th, 2011

Here is the latest post on Political Animal, a leftist blog sponsored by Washington Monthly, a leftist magazine.

Political Animal

August 06, 2011 11:05 AM
A timeline of events
By Steve Benen

Let’s take a stroll down memory lane, shall we?

1980: Ronald Reagan runs for president, promising a balanced budget

1981 – 1989: With support from congressional Republicans, Reagan runs enormous deficits, adds $2 trillion to the debt.

Reagan did not have a Republican Congress during his two terms. He did have a Republican Senate for his first six years. Bob Dole was Majority Leader, which was no help in cutting spending.

Lie #1

1993: Bill Clinton passes economic plan that lowers deficit, gets zero votes from congressional Republicans.

Bill Clinton passed a tax increase which Republican predicted would slow economic growth. Bush had also raised taxes at the insistence of Democrats and a recession cost him re-election.

1998: U.S. deficit disappears for the first time in three decades. Debt clock is unplugged.

The fact is that Republicans took over both houses of Congress in 1995, the House for the first time since the post-war era. The stock market took off and revenues poured in from a good economy and the internet bubble which burst in 2000.

2000: George W. Bush runs for president, promising to maintain a balanced budget.

2001: CBO shows the United States is on track to pay off the entirety of its national debt within a decade.

In fact, the national debt kept climbing and the “surplus” was on paper only. Bush inherited the recession that followed the bursting of the internet bubble in 2000.

2001 – 2009: With support from congressional Republicans, Bush runs enormous deficits, adds nearly $5 trillion to the debt.

The Bush deficits were declining the last two years of his term and the Democrats took over Congress in 2007. The Bush deficit in his last year was 10% of the present deficit. Notice Steve Benin doesn’t provide numbers.

That shows the deficits Obama inherited. Notice the increase after the Democrats took Congress in 2007.

2002: Dick Cheney declares, “Deficits don’t matter.” Congressional Republicans agree, approving tax cuts, two wars, and Medicare expansion without even trying to pay for them.

This is a matter of policy choices. I am no fan of Bush in the spending department. He should have vetoed some spending bills that Hastert told him to sign. It was no fluke that Hastert’s district, after he retired from Congress, was won by a DEmocrat.

2009: Barack Obama inherits $1.3 trillion deficit from Bush; Republicans immediately condemn Obama’s fiscal irresponsibility.

The condemnation was of his plans to spend wildly.

2009: Congressional Democrats unveil several domestic policy initiatives — including health care reform, cap and trade, DREAM Act — which would lower the deficit. GOP opposes all of them, while continuing to push for deficit reduction.

No one with any economic knowledge would believe that Obamacare and Cap and Trade would lower the deficit. The most serious effect Obama has had thus far is the avalanche of regulation that has descended on business making anyone with money unwilling to invest. That is where jobs come from and the economy is stalled.

September 2010: In Obama’s first fiscal year, the deficit shrinks by $122 billion. Republicans again condemn Obama’s fiscal irresponsibility.

The economy may have begun to recover on its own, which is what usually happens in the absence of an activist government. Then came the impact of Obama’s and Pelosi’s spending.

October 2010: S&P endorses the nation’s AAA rating with a stable outlook, saying the United States looks to be in solid fiscal shape for the foreseeable future.

An exaggeration.

November 2010: Republicans win a U.S. House majority, citing the need for fiscal responsibility.

December 2010: Congressional Republicans demand extension of Bush tax cuts, relying entirely on deficit financing. GOP continues to accuse Obama of fiscal irresponsibility.

The left does not understand that government does not create wealth. Raising taxes in a recession is what Hoover did. I wouldn’t think they would want to copy him but they learn nothing.

March 2011: Congressional Republicans declare intention to hold full faith and credit of the United States hostage — a move without precedent in American history — until massive debt-reduction plan is approved.

July 2011: Obama offers Republicans a $4 trillion debt-reduction deal. GOP refuses, pushes debt-ceiling standoff until the last possible day, rattling international markets.

This is another lie. Obama and Boehner were close to an agreement and then Obama insisted on tax increases after agreeing not to do so. He responded to complaints from the left which is fixated on tax increases.

August 2011: S&P downgrades U.S. debt, citing GOP refusal to consider new revenues. Republicans rejoice and blame Obama for fiscal irresponsibility.

Another lie. The S&P report said the debt levels are too high and the agreement did not do enough to cut spending.

The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

There have been several instances since the mid 1990s in which I genuinely believed Republican politics couldn’t possibly get more blisteringly ridiculous. I was wrong; they just keep getting worse.

Steve Benen is a contributing writer to the Washington Monthly, joining the publication in August, 2008 as chief blogger for the Washington Monthly blog, Political Animal.

There was a time when Democrats understood economics. Those days are over. They have convinced themselves that money grows on trees. They are destroying this nation’s finances, with help from many Republican professional politicians. The only hope is the tea party and turning Obama out in 2013.

The following essay expresses my feelings better than I can.


Coolidge Summing up

Sunday, May 15th, 2011

Coolidge believed that the wedding of government and business would lead to socialism, communism or fascism. Hoover considered Henry Wallace a fascist for supporting the McNary-Haugen bill. Hoover, ironically, was to bring on the Depression by progressive measures that might have been called a form of fascism. The farm bill would be re-introduced under Hoover and die. Only during the New Deal would it find enough support to become law. The summer of 1927 was peaceful and prosperous. It was the summer of Babe Ruth’s 60 home runs. The Yankees would win the World Series and end up with a winning percentage of 0.714, still unsurpassed. In September, Gene Tunney defeated Jack Dempsey in the fight marked by the “long count.” The “Jazz Singer” came out that fall, the first talking feature picture. Charles Lindbergh flew the Atlantic in May of 1927. He and Coolidge were much alike yet different. Both were shy and diffident but Lindbergh was happy to cash in on his fame while Coolidge refused all offers after he left office.

Coolidge arranged for Lindbergh to return to the states aboard a US cruiser, Memphis, where he was met by a crowd and by cabinet members, then there was a huge parade through New York City. Lindbergh and his mother stayed with the Coolidges at the temporary White House where Dwight Morrow, close friend of Coolidge from Amherst, introduced the young aviator to his daughter Ann. Aviation stocks, along with many others, soared and the Dow Jones Average by year end was at 200, the record high.

In his December 6, 1927 State of the Union message, he mentioned an economic slowdown and asked for the same things he had been requesting; sell Muscle Shoals, help farm cooperatives and keep spending down. In May of 1928, he complained to reporters about Congressional spending. “I am a good deal disturbed at the number of proposals that are being made for the expenditure of money. The number and the amount is becoming appalling.” He managed to get another tax cut passed including a cut in the corporate tax rate. The surplus that year was $398 million.


The USA as a fiscal system.

Monday, March 14th, 2011

Powerline today has an analysis of the USA as if it were a firm applying for funds from Kleiner, Perkins. The presentation has a number of slides, which I will reproduce here.

The net worth of the US is on the right side scale. The trend is pretty obvious. The small improvement is probably a sign of some recovery in the past year.

Spending has followed historical events, such as World War II. The trend, however, is not good. After 1930, spending on entitlements began and has grown out of control.

Defense spending is blamed by leftists but there has not been a lot of defense spending since Vietnam.

Taxes have followed a steady trend line until Obama was elected. The sharp rise has not helped as costs far outstrip revenue.

What, then, is the problem ?


Entitlements plus interest alone will exceed revenue by 2027. That’s 6 years from now.

The left wants to raise taxes.

How high must tax brackets go ?

How do we compare to other countries ?

Better than some and not so good as others.

Can the left stop denying reality and start to discuss the reality ?

Where did the stimulus go ?

Tuesday, January 25th, 2011

Two distinguished Stanford professors of Economics have published an analysis on where the stimulus money went. The results are not surprising but the details are interesting.

During the recent recession, the U.S. Congress passed two large economic stimulus programs. President Bush’s February 2008 program totaled $152 billion. President Obama’s bill, enacted a year later, was considerably larger at $862 billion. Neither worked. After more than three years since the crisis flared up, unemployment is still very high and economic growth is weak. Why have such large sums of money failed to stimulate the economy? To answer this question, we must look at where the billions of stimulus dollars went and how they were used.

Keynesian stimulus packages come in three basic types. In the first type, the federal government puts money directly into the hands of consumers. The hope is that consumers will use the money to increase their purchases of goods and services. In the second type, the federal government directly purchases goods and services, including infrastructure projects, equipment, software, law enforcement, and education. In the third type, the federal government sends grants to state and local governments in the hope that those governments will use the funds to purchase goods and services.

In each case, according to Keynesian theories, the increase in purchases will stimulate additional economic activity over and above the initial increase in purchases. The 2008 stimulus was mainly of the first type, while the 2009 stimulus was a mix of all three types.

The 2008 (Bush) stimulus was of the first type. The Obama stimulus was mixed.

Take a look at Graph 1, which shows both income and consumption in the economy as a whole from the start of 2007 to the present. You can see the big blip in disposable personal income in the spring of 2008 as checks were sent out. But consumption did not increase at all around the time of the stimulus payments. What happened to the money? It went to pay down some debt or was simply saved rather than spent on consumption.1

This should not have surprised anyone. Long ago, the Nobel Prize–winning economists Milton Friedman and Franco Modigliani explained that individuals do not increase consumption much when their income increases temporarily. Instead, they save most of the funds or use the money to pay back some of their outstanding debts. Friedman and Modigliani demonstrated that most people, when deciding how much to consume, consider more long-lasting, or permanent, changes in income. Because one-time increases in transfer payments and temporary tax rebates are, by their very nature, temporary, people should not have been expected to alter their consumption patterns. The Friedman-Modigliani theory, called “the permanent income” or “the life-cycle” hypothesis, profoundly influenced macroeconomic thinking for decades. It was, oddly, ignored in the development and enactment of the stimulus of 2008.

The Bush stimulus was a waste but, at least, it went to taxpayers and was relatively modest compared to what followed.

The American Recovery and Reinvestment Act of 2009 (ARRA) repeated this mistake. The amount paid out to households was smaller and delivered over a longer period of time than the 2008 stimulus, but the largest portion of increased payments was made in the spring of 2009. You can see the resulting blip in income in Graph 1.

Again, there was no noticeable effect on consumption. Instead, individuals used the money to shore up depleted bank accounts or pay off overextended credit card bills. As had been true a year earlier, the temporary cash payments failed to create consumption and, as a consequence, failed to increase production and employment.

Graph 1 also illustrates the failure of another recent stimulus attempt: the 2009 “cash for clunkers” program. For a temporary period, this program provided a one-time subsidy if individuals purchased a qualifying new car and simultaneously traded in their old car. The program’s objective was to increase the demand for new cars to spur production and employment.

By definition, a one-time subsidy cannot cause a permanent increase in consumer demand. So what happened? Consumers merely shifted forward in time the purchase of a new car by a few months. This behavior is evident in the lower-right-hand part of Graph 1. Consumption rose sharply as consumers responded to the temporary subsidies, then came right back down. There was no net increase in consumption to bolster the recovery.2

Read the rest.

To sum up:

To sum up: the federal government borrowed funds that it mainly sent to households and to state and local governments. Only an immaterial amount was used for federal purchases of goods and services. The borrowed funds were mainly used by households and state and local governments to reduce their own borrowing. In effect, the increased net borrowing at the federal level was matched by reduced net borrowing by households and state and local governments.

So there was little if any net stimulus. The irony is that basic economic theory and practical experience predicted this would happen. If policymakers had only remembered what Milton Friedman, Franco Modigliani, and Ned Gramlich had said, we might have avoided these two extremely costly policy failures.

There is nothing new under the sun.

H/T Powerline

Charles Payne

Saturday, January 9th, 2010

There is a radio program on Saturday afternoons by a guy named Charles Payne. It’s a finance and investment show. Until I saw a Glenn Beck show recently, I had no idea Payne was black. He has a great life story and is on the Beck show right now with an audience that is all black. It’s an interesting show. Payne grew up poor in Harlem and, as long as he can remember, he wanted to be a businessman. His great desire as a kid was to have a briefcase. Finally, for Christmas, he got one plus a calculator inside it. He says it was his best Christmas ever. He joined the Air Force so he could go to college on the GI Bill.

What a great life story ! What a contrast with the Reverend Wright church !

He readily admits he voted for Obama and I can certainly see why he would do so. His explanation is that he was hoping the example, of Obama coming up through education, would counteract all the stereotypes of black kids reaching success only as rappers or professional athletes. He’s disappointed but I think he has a good point about Obama being a better example for kids.

I am very impressed with this guy whose investment show is the best I have found on radio. The life story is just a bonus. I am also impressed with Beck. I am not impressed with the ridiculous Harry Reid, who shows once again the racism of the left.

The healthcare precipice

Friday, December 18th, 2009

A few days ago, President Obama said the Democrats stand on the precipice of a health reform bill. Truer words were never spoken, at least by him. What is Harry Reid doing ? The theory seems to be to pass something, no matter what it is, so that Democrats can claim success.At one time we had two bills, the Senate version and the House version. Now, no one knows what is in this bill. It is simply amazing. His hurry to pass something may come from his realization that, as time to understand the bill passes, the public likes it less and less. No one knows what it will cost because the CBO has been given false data to analyze.

For some time, I’ve suspected the answer is that congressional Democrats have very carefully tailored their individual and employer mandates to avoid CBO’s definition of what shall be counted in the federal budget. Democrats are still smarting over the CBO’s decision in 1994. By revealing the full cost of the Clinton plan, the CBO helped to kill the bill.

Since then, keeping the cost of their private-sector mandates out of the federal budget has been Job One for Democratic health wonks. While head of the CBO, Obama’s budget director Peter Orszag altered the CBO’s orientation to make it more open and collaborative. One of the things about which the CBO has been more open is the criteria it uses to determine whether to include mandated private-sector spending in the federal budget.

Why is this being done ?

Our federalist system, the separation of powers, our bicameral national legislature, six-year terms for senators, staggered Senate elections, and the Senate’s procedural rules all exist precisely to prevent what Reid is trying to do: ram a sweeping piece of legislation through Congress without due consideration.

This is the fascist way.

Jonah Goldberg’s book, Liberal Fascism enraged the left well before the election of Barack Obama. It might be time to read it again. If you doubt these people are fascists, here is their suggestion for political opponents. If you are a Congressman who does not vote for the favored bill, you should be expelled from Congress. One party rule.

The problem is that it won’t work. The Democrats would be even worse off if they pass it than if it fails.

If Democrats need to appeal to Independents and moderates to hold their majorities, then passing this bill is a terrible idea. The most recent polling shows that 81% of Republicans and 69% of Independents oppose the healthcare plan (with 74% of Republicans and 57% of Independents strongly opposing it). With majorities of Independents strongly opposed to the bill, it’s really hard to imagine any boost in Democratic turnout from passing the plan being enough to surpass the ensuing backlash from Republicans and Independents.

It isn’t even clear that there will be a boost in Democratic turnout. The latest version of the Senate bill holds little appeal for progressives.

Maybe this will teach them that we are not ready for fascism yet.

The danger of models

Monday, December 14th, 2009

There is a very pertinent article today on the dangers of putting too much faith in models, based on inadequate information.

We’ve now lived through the same new disaster twice. Computer simulations, more or less universally adopted as the solution to a major problem, turned out to have been based on flawed assumptions and faulty data. As a result policy or markets became heavily skewed in an inappropriate direction. Wall Street’s risk managers and climate change scientists both acted as super-salesmen for a paradigm that turned out to be flawed. After two examples of the same error have each cost the world a substantial percentage of a year’s GDP, we’d better figure out how to avoid further examples of this syndrome.

I have previously linked to an article that compared Obama to Mikhail Gorbachev. I think this comparison is also valid and interesting.

As the credit crisis of 2008 recedes into history, the part in it played by misguided computer models, particularly in the risk management area, is becoming generally agreed. Rating agencies made assumptions about the probabilistic independence of different home mortgages that were unfounded. As a result many of their AAA ratings proved to be completely spurious, particularly in the subprime area where the loans’ vulnerability to a house price downturn was especially extreme.

Investment banks managed their risks based on the “Value-at-Risk” risk management paradigm, which assumed that the distribution of securities’ returns was approximately Gaussian (normally distributed), with a very low probability of high losses. The “Basel II” system of global capital adequacy standards for banks, which came into effect in 2008, just in time for the crash, was so impressed with these models that it ruled that any bank using such obviously sophisticated and superior modeling techniques could calculate risks on its own, without reference to the crude guidelines deemed appropriate for smaller, less mathematically attuned houses. The Securities and Exchange Commission (SEC) essentially agreed with the Basel Committee; from 2004, it allowed the largest U.S. investment banks to manage their own leverage, under the theory that no mere regulator could match the exquisite precision of a modern VaR-based risk management system.

The model and the confidence placed in it by financial managers who should know better resembles and old paradigm, confidence in machines that we don’t understand. The “black box” is an example. It had happened before. Programs were written by physics PhDs who did not understand finance for financial experts who did not understand programming.

It’s not as if Wall Street had no warning; mathematical models based on modern financial theory had caused huge losses as far back as 1987, and had caused the collapse of Long Term Capital Management in 1998. Yet the world’s best remunerated people went on using the mathematical models that had caused moderate sized disasters before, only to watch them cause a truly impressive disaster in 2008. It must have been some kind of compulsion.

Then we come to global warming and the cap and trade legislation that relies on the theory.

Turning now to my other example, that of global warming: the possibility that excess carbon dioxide, through a “greenhouse effect” might cause a global rise in temperature is based on well-established chemistry and physics. Deniers of the possibility of global warming are thus being as irrational as the extreme eco-alarmists; global warming is indeed possible because of physical and chemical processes that are perfectly well understood, indeed fairly elementary.

The difficulty arises in estimating whether it is actually happening. The rise in temperatures so far observed is well within the level of “noise” in global temperatures over a period of a century or so, let alone the more extreme fluctuations that have taken place when the observation period is extended to millennia. It is thus necessary to match the very limited temperature data we have, stretching back no more than a century on a worldwide basis, with secondary observations of such things as tree rings and ice cores, synthesizing the result with a computer model of what is believed to be the carbon forcing process in order to predict the range of possible future warming effects.

This is of course a very similar process to that undertaken by Wall Street’s rating agencies and risk managers. Assumptions and simplifications are made, without which it would be impossible to construct a model. Then the model is matched up against a few years’ observations in real time, being “tweaked” as real data comes in that does not quite fit with it. By the time this has been done, careers have been invested in the model, institutions have been built around its predictions and eminent people have become enthralled by its results. It thus takes on the appearance of a scientific reality as solid as Newtonian mechanics.

The economic effects of this model are even greater than the effects of the financial models.

The political left continues to lie about the causes of these recurrent crises, even Nobel Prize winners.

The first big wave of deregulation took place under Ronald Reagan — and quickly led to disaster, in the form of the savings-and-loan crisis of the 1980s. Taxpayers ended up paying more than 2 percent of G.D.P., the equivalent of around $300 billion today, to clean up the mess.

I’m sure that Paul Krugman knows the story of Fernand St Germain and the midnight amendment that brought down the S&Ls.

By the time Ronald Reagan took office in 1981, two-thirds of the nation’s S&Ls were losing money and many were broke. If all the problem thrifts had been shut down right then, the government’s insurance fund would have covered their debts.

Instead, the government delayed an average of two years-and, in some cases, as many as seven years-thus allowing bankrupt S&Ls to go on losing billions of dollars. This delay also gave S&Ls a chance to gamble on questionable investments, in an attempt to regain solvency. But first they had to convince Congress to deregulate them.

One night in 1980, Representative Fernand St Germain (D-Rhode Island), whose $10,000-to-$20,000-a-year restaurant and bar tab was paid for by the S&L industry’s chief lobbyist, proposed raising federal insurance on S&L savings accounts from $40,000 to $100,000- even though the average size of an S&L account was $6,000. He waited until after midnight, when only eleven representatives were still on the floor of the House; they approved his proposal unanimously.

But St Germain was just getting warmed up. In 1982, he cosponsored a bill that removed all controls on what S&Ls could charge for interest and released them from their century-old reliance on home mortgages.

That was Regulation Q.

Around the same time, the Reagan administration ended the requirement that S&Ls lend money only in their own communities, allowed them to offer 100% financing (i.e. no down payments), let real estate developers own their own S&Ls, and permitted S&L owners to lend money to themselves.

These changes were like taping a sign to the S&Ls’ backs that read, “Defraud me.

This has little to do with models but I ran across that Krugman column which is so duplicitous that I had to add a comment.