Tuesday, December 30, 2008

The Blago, Bobby and Roland Show

What fresh hell is this? - Dorothy Parker

C'mon, Blago.

I mean, really, what were you thinking when you did this?

If you saw the press conference this afternoon, I sincerely hope that you first scratched your head and then threw something at the television.

Well, that's what I did.

Not, mind you, because this sort of political theater surprises me. No, it was because of the situations that now might arise because this unfit-to-serve governor persists in thinking that he still has some sort of de facto legitimacy.

Let's look at the three main players in the press conference one by one. This will, I think, make some things clear.

Roland Burris. He has indeed had a long career of public service in Illinois, serving three terms as the Comptroller and one as the Attorney-General among other positions over the past forty years. It is true, then, that he would be pretty well qualified for the job of fill-in senator.

What is unfortunate is that Burris did what he did and accepted the nomination from Blago. He is not, however, strategically innocent. A cynic, like myself, would say that Burris is at the end of his political life and figured, "why the hell not?" He is seventy-one years old and would most likely serve until 2010 and then bow out. He saw his last chance at a national political position and, seriously, what politician could resist?

Another part of Burris's decision, and one that relates to the most damnable of our three conferees today, is the fact that he happens to be an African-American. Now, this is more of a fact of the matter than a qualification, but the next person to be discussed did not see it this way.

Bobby Rush Here is where the political theater really comes into this. If you watch the aforementioned press conference, it seems that Congressman Bobby Rush (D-IL) seemed to appear out of nowhere to support this ill-timed and possibly untenable decision. If you look really close, though, it seems that it is more a case of he showed up accidentally on purpose.

And, oh, what he said when he got there.

Bobby Rush implored the press and their consumers not to "hang or lynch" Burris because of the allegations against Blago. He went on to say that since Barack Obama was the only African-American Senator, that it is only right that his successor be an African-American. He seemed to imply that this would be the right thing to do.

This is race-baiting of the worst kind. First, he uses a purposely loaded phrase like "lynch" in reference to a black man. This was, to my mind, a calculated move to make the press feel ashamed and perhaps lay off. This is a perverse use of the horrific history of lynching as a form of terrorist action against blacks in America. Rush should feel ashamed of dredging up this shameful chapter in our history to score cheap debating points.

He then went on to suggest that, simply because the Senator who vacated the seat in question was black, therefore his successor should also be black. This, for me, goes beyond suggesting that race is a qualification rather than a fact of the matter. This suggests that the whole process of appointing people to serve in what should be elected offices is not only permissable, but in some cases, it can be morally superior. I reject this idea completely.

The people of Illinois elected Barack Obama to serve as their Senator. The people of Illinois, therefore, should be allowed to choose his successor. Bobby Rush, I suspect, knows this and chooses to ignore it. Our third person, sadly, also seems to have a real thing for ignorance...

Blago What do today's events say about Blago that we don't already know? Well, he was as good as his word that he was not going to quit and that he retained all of the powers of the governor. He also seemed to be perfectly willing to nominated a candidate knowing that he will go to Washington with a cloud over his head and the prospect of not being seated by the Senate leadership.

This raises issues at the national level about the power of the Senate to refuse to seat an appointed replacement for a Senator. I imagine that the Constitutional nature of this power will be much discussed in days to come. Read the part of the Constitution in question here.

What Now? As far as Burris is concerned, he made his decision, he will go to Washington, he might not get seated and he better be prepared to be at the center of a constitutional battle.

Bobby Rush has shown his allegiances and seems, for now, to be in the Blago camp. He has also shown that he is not above dealing out a whole deck of race cards and using charged imagery to get what he wants. In other words, he is, and shall remain, a politician.

Blago seems capable of mind-boggling levels of self delusion. He is either an adept strategist trying to make the best of a career-ending crisis or he is actually delusional, as some have speculated. In a strange way, I hope it is the latter.

The anti-Blago forces are consolidating their position. Who are the key players? I'd say that the main forces against Blago at the state level are Lieutenant Governor Pat Quinn, Attorney-General Lisa Madigan, House Speaker Michael Madigan, Illinois Senate Majority Leader Emil Jones and Secretary of State Jesse White.

At the national level, this most recenty Blago move sets him against Illinois Senator Dick Durbin, Senate Majority Leader Harry Reid and (perhaps most powerfully) President-Elect Barack Obama.

So, good luck with all of that, Blago.

So, what do we have to look forward to in 2009? In the words of the great Kinky Friedman: "Smile. It only gets worse."

Wednesday, December 24, 2008

Echoes Of Holidays Past

This is the first Christmas season that I am spending without my mom. Everyone told me it would be really hard on me. In a way, it really has. In another way, though, it hasn't.

It has been hard because this time of year seems to be one full of nostalgia, a time where the stories and memories of the past (holiday-related and otherwise) are very much at hand. It is no different for me. It does not help, therefore, that mose of these stories and memories involve my mom.

It has also been hard because, although we are doing much as we have in the past, it is simply not the same nor will it ever be, I imagine. We decided to go ahead with Christmas Eve at our house. The house is cleaned (almost), the food is all set, the guests are invited and everything seems to be in hand. Yet, in a really big way, it just does not feel right.

My mom coordinated these events in the best way possible - she made it look really easy. I guess in helping to spearhead the effort this year, I realize how much my mom did and it just makes me miss her all the more.

This point, though, relates to one way in which things have not been as hard as they could be. There is comfort in carrying on, in doing all of those things that we have always done. Getting out the same old decorations, setting up the same old tree, preparing the same old food - these actions give a sense of continuity, a feeling of connectedness with all those memories and stories that are so much a part of who I am.

As a historian, history and memory are my stock-in-trade (I happen to think they are very different from each other, but that is for another time). In my professional life, I (and other academic historians) treat the past as a subject of interest, a battleground for personal biases, a grand interpretive puzzle and a constant source of reconsideration and argumentation. I have been tempted to treat my own history in the same manner. I cannot, and especially not now, come to do this just yet. Perhaps I never will and perhaps this is for the best.

For now, I will allow the past to give me the comfort that it has done and continue to consider what role it will play in whatever normal life will be like from now on.

In closing, and in relation to these reflections, an excerpt from a short story has been much on my mind recently. These thoughts on the season and the past coupled with staring out at the weather we have had in Chicago to bring the last sentences of "The Dead" from James Joyce's The Dubliners very much into focus recently. I will leave you with that and my wish that you draw comfort and strength from your past this holiday season.

  • "A few light taps upon the pane made him turn to the window. It had begun to snow again. He watched sleepily the flakes, silver and dark, falling obliquely against the lamplight. The time had come for him to set out on his journey westward. Yes, the newspapers were right: snow was general all over Ireland. It was falling on every part of the dark central plain, on the treeless hills, falling softly upon the Bog of Allen and, farther westward, softly falling into the dark mutinous Shannon waves. It was falling, too, upon every part of the lonely churchyard on the hill where Michael Furey lay buried. It lay thickly drifted on the crooked crosses and headstones, on the spears of the little gate, on the barren thorns. His soul swooned slowly as he heard the snow falling faintly through the universe and faintly falling, like the descent of their last end, upon all the living and the dead."

Thursday, December 18, 2008

Multum In Parvo

(I intend posts with the above title to become a semi-regular feature here at COTL. I run across a lot of stuff in my reading, research and boredom that I think is interesting, but that may not need extended commentary on my part. There are also some things that I find funny, amusing or ironic that are in the same category. I want to share these with my readers (you are there, right?) and open them for comment and discussion. If discussion or interest seems to warrant it, I will comment at more length. In the meantime, you can rely on my regular extended commentary on, well, whatever the hell is bothering me at present. So, without further ado...)

  • An interesting article linking the Bernard Madoff debacle with the idea of affinity fraud. I wonder how much this had to do with the scope of Madoff's deception? Also, the term "Ponzi scheme" has been bandied about a lot without much explanation. Click here for that.
  • The latest person to jump on the "capitalism is dead" bandwagon? The guy who created Dilbert. Give me a break.
  • "I, Pencil" turns fifty years old. It is one of the clearest expositions of why and how free markets work. Read it here (don't worry - it is really short).
  • This year's version of America's Safest (and Most Dangerous) cities is out. Lists like this fascinate me, especially the criteria that they use.
  • One in-depth take on the relationship between Central Europe and Russia. I would be more worried about Central Asia and the Transcaucasus, though.
  • I cannot get this song out of my head for some reason. Read more about why people get songs stuck in their memories here and here.

Tuesday, December 16, 2008

Santa Claus Meets The Dismal Science

You knew this post was coming, right?

You know, the one where Will drags boring crap like history and economics all over the clean, pristine rug that is the Christmas season.

Well, folks, I'm at the door and I am going to do a real number on that carpet, so hold on...

First, let us bypass the soundbyte-take on the economy and Christmas. In this view, for this year, they both suck and will do so for the forseeable future.

I want to delve deeper, to get at some of the basic motivations for why we behave the way we do between Thanksgiving and New Year's.

In this cause, I intend to focus on a few central questions: why do we give gifts? Why don't we just give everyone cash? What is the broader social function of gift-giving, especially around a holiday?

Why Do We Give Gifts?

In many rituals and customs for people around the globe and through time, the giving of gifts has been and remains central to the meaning and execution of those rituals. What makes a gift exchange a special sort of relationship? I believe it is two things: reciprocation and a different rendering of value.

First, I say "reciprocation," but I should really add the two words, "or not." One thing that is central to a market or barter economy is the fact that there is a quid pro quo, or if you give something, you expect to get something of value in return. In gift exchange, this is not really the case. There are some sorts of gift-giving where reciprocation may be implied, but not required. If reciprocation is required, and enforced by some sanction, then it is not truly a gift exchange.

Second, a different rendering of value. Some economists think that part of the value of a gift given to another is that you spent a lot of time making it or picking it out (to use the terminology, what are your sunk costs for this particular gift?) There is another side to this, courtesy of the always-brilliant David Friedman...more on him below.

All of these notions fall under the idea of a mixing of a gift economy with the market economy that usually governs our economic relationships.

Have I answered my original question? Well, as ever, yes and no. It seems that we give gifts to each other and these gifts are not necessarily reciprocal and they are not valued in the same way as other things. This is, to me, confusing.

Let's ask a more specific question that I think will clear up things a bit...

Why Don't We Just Give Cash?

This is the classic question concerning gifts for many economists. The answer that usually comes back, furthermore, interests a more general audience because of the seeming coldness and insensitivity of it.

Many economists believe that, to a greater or lesser extent, the only really acceptable gift in any situation is cash. What we should all do is just take the amount of money that we would have spend shopping, paying for and wrapping gifts and just hand it out to the intended recipient.

Let me guess. For many of you, this idea seems repellent, but you are not completely sure why.

On one level, it is a completely sensible idea. Money never spoils, is always the right color, shape and size, it is accepted for goods and services anywhere and it is exchangeable so that it can travel globally. Why do you buy the man who has everything? Nothing. Just hand over the cash.

For one such classic view, see this 1993 article by economist Joel Waldfogel. If you don't want to read it, Waldfogel's main point is that the deadweight loss for most individuals' holiday purchases is 18% higher than what it should be. In other words, people get an 18% better deal if they just spend money on themselves. A gift of cash would allow them to do this.

On another level, though, I am sure that this idea makes a lot of you squirm. Why? As I said before, it is hard to define, but there seems to be something, well, rather impersonal and cold about just cutting someone a check. We all do it in some situations, but why not in all situations?

This is when some thinking on the part of some sharp economic minds is in order.

Mankiw and Friedman on Gifts

In this excellent post from his always interesting blog, Greg Mankiw discusses gifts as a form of signalling. To boil it down, Mankiw argues that people know their own preferences better than those of others. If your boss decided to pay you in merchandise that he/she chose, you would probably complain. Why, then, is our reaction so different when someone we love does the same thing?

Mankiw goes on to say that it is also an asymmetric information problem and is related to signalling. If you are giving a gift to a loved one, you have information that they do not, namely, how much you love them. If you do love them, then you will spend the time to learn their preferences and pick out a good gift. This gift serves as a signal to the other person of your level of affections. Even if you pick out a bad gift, the reciepient still knows that you put effort and money into it, so the love must be there. If you give cash to loved ones, surmises Mankiw, you are signalling that you are not even willing to try.

David Friedman, on the other hand, argues in this post at his excellent blog that the best way to conceptualize it is having two individuals in one body. One is a short-term pleasure maximizer, the other a long-term utility maximizer. The short-term me is the me that always wants another beer, more gyros or an extra hour of sleep. The long-term me is the me that tries to hold off these short-term pleasures for a gain in the more distant future.

Friedman argues that buying gifts shows that both the long and short term me care about you. The short-term me cares because I am forgoing extra resources for me in order to buy a gift. Long-term me cares because I will have a few less dollars and a little less time when I retire. See, we BOTH love you!

Great, Will. So What?

I have never been someone to leave well enough alone. I cannot accept that we do things because we do them. What fun would life be then?

No, I have always been inclined to the sort of thinking we see above by Mankiw and Friedman. Take a behavior that we do and ask why we do it. Go on. Anything. This is the very basis of the social sciences which, to my estimation, are all behavioral sciences. Today, we have delved into why we pursue a certain sort of behavior at this time of year.

Does this mean that I will practice what I preach and just give cash? Well, if you think that, you sort of missed the point. Cash is an acceptable gift for some people and not for others. Why the distinction? Go back and read the previous section again.

Can't I just accept a gift, not ask why someone did it, cram some fruitcake in my gob and shut the hell up? No, sorry. I will take that gift, but wonder why we do this with each other. I will cram said fruitcake in said gob, but I will ask if this is a good deal for me and why. Oh, and I will ask why so many people hate fruitcake? Buy this fruitcake and thank me later.

So, I think that there is time in all situations to dig deeper, to demand more. That is why I am an academic and that is why I write this website. I hope you agree that these are worthy pursuits. I know I do.

Oh, and if you are intending to send a gift my way, let me deal with the asymmetric information problem for you.

Wednesday, December 10, 2008

Crisis and Turmoil: Take Your Pick

They have nothing to do with each other, naturally.

I wrote two posts today and you can read them below.

They concern:
  • The constitutional crisis caused by the proroguing (don't worry...I define it) of the Parliament in Canada.
  • The constitutional crisis caused by the fact that Rod Blagojevich is the latest (and perhaps mose egregious) of a long line of corrupt scumbags to control my home state.

Check them out and let me know what you think.

I will warn you, though. I might be done with Canada; I am probably not done with Blago.

Blago's Downfall: Don't Act Surprised

Just don't.

Not even if you don't care about politics in Illinois or anywhere else.

Nobody was shocked when they read this news yesterday.

Well, I can think of one resident of the northwest side of Chicago who might have been a *little* surprised.

This story is still developing, naturally. There is much to be said, though.

The Facts (Or Something Like Them) Let's get the facts (whatever the hell those are apart from the official complaint) out of the way first.

Blago was involved in a multi-year campaign of graft, kick-backs and pay-to-play politics. He won re-election in 2006 in a strong Democratic year versus ineffective Republican opposition by making the other side look worse than himself. Things started to get hairy for Blago more recently with the trial of political operative, fundraiser and fellow scumbag Tony Rezko. Read all about that here. Blago's name just kept coming up over and over again as using people like Rezko as his shake-down men for campaign contributions.

Rezko was not the entire story, though. In the most recent set of allegations, backed up by wiretaps of Blago and his flunkies, he continued his cash operation seeking money from people involved in a $1.8 billion dollar tollway deal. He offered $8 million in funding to Children's Memorial Hospital while seeking a $50,000 contribution from the president of that hospital. He diverted horse racing revenues into his coffers. Read more (if you are not pissed off enough) in the statement by federal prosecutor Patrick Fitzgerald here.

Most explosively, though, he seemed to offer the now-vacant U.S. Senate seat of now-President Elect Obama to whoever was willing to cough up the most money. Read about that here and the person who was supposedly willing to pony up here. Of course they all deny it. Never believe anything until it is officially denied.

Nobody should have been shocked because of the people involved and the political culture from which they emerged. Illinois state politics have been mired in sleaze for decades and this is just the latest chapter. Much has been written over the last day and a half about just why this is.

A Bit of Illinois Political History (Stick With It Here, Folks) Let me give it a go. We have a history in the last sixty years of corruption in Springfield and in Chicago that often feed each other. Three Illinois governors since 1945 have been convicted and sentenced to jail (those being Otto Kerner, Dan Walker, and most recently George Ryan). Chicago's corruption scandals are too numerous to mention here, but take a look at Operation Silver Shovel to get an idea of the more recent brand of Chicago corruption. Believe me, it goes back to the very beginning in the nineteenth century.

Why did this political culture develop in a place like Illinois? Well, I will make two main suggestions. First, look at the demographics in Illinois. Take a gander at this population density map of Illinois and I think you will immediately get what I am about to say. There is one part of the state that has always (and will always) have disproportionate influence and it ain't Peoria, Carbondale, East Saint Louis or even Springfield.

This means, to me, that the brand of politics that are the order of the day in Chicago will be the way that the state largely works. Also to be considered with this first point is the fact that there has often been tension between Chicago and Springfield. To soften this tension and get the wheels of government moving, certain things have happened in the past (and I ain't talking about having a nice chat over tea). To put it in the words of an old Chicago ward heeler, "I like a guy who takes cash...you always know where you stand."

What are the roots of this culture in Chicago? Well, you need look no further than the city's immigrant past. Waves of immigrants passed through and settled in Chicago beginning in the middle of the nineteenth century. They didn't always have access to the channels of power in the city because of poverty, bigotry, illiteracy and other factors that were common to immigrants from Europe to nineteenth century America.

They didn't stand for this situation for long. They began to organize in their neighborhoods and tie themselves to certain politicians who promised to help them in exchange for, ahem, some consideration. It also worked the other way, the politicos plying the masses with booze, food, women (remember only men could vote in most places until 1920) and all manner of vice to get their votes. It was through this cycle of pay-to-play politics (sound familiar, Blago?) that the city's political culture was born and raised. It gave rise to Carter Harrison, "Big" Bill Thompson, Anton Cermak, Richard J. Daley, Richard M. Daley and, yes, Blago.

Why did these immigrants do what they did? Mainly, well, because they had to. More speculatively, though, I have always wondered about the connection to politics in their countries of origin and how that played out on the streets of Chicago. Most came from non-democratic states where governments ranged from democracy-for-some and outright feudalism. These people, coming from such places, were already skilled at circumventing the system. They did it in (Poland, Ireland, Bavaria, Italy and a dozen other places). Why not do it here too?

How Do You Solve A Problem Like Blago? So, what happens next? The biggest concern seems to be who will choose Barack Obama's successor as Illinois's junior senator. Attorney General Lisa Madigan (who just happens to be the daughter of Illinois General Assembly Speaker Michael Madigan) seems to think that there is a constitutional provision to strip the governor of his power.

While this might (or might not) solve the problem of who should pick Obama's successor, there is still the larger problem of what to do with the Scumbag-in-Chief of the Land of Lincoln (who should be rolling over in his grave, apparently). There is a forced resignation, there is impeachment, there is perhaps state troopers who are a good shot who could keep their mouths shut. I am kidding on that last one. A little bit, anyway.

What will hopefull happen is that he will resign soon, handing power over to Lieutenant Governor Patrick Quinn. Quinn is not THAT corrupt and could be trusted to take advice in appointing a successor for Obama and carrying on the business of state government. Hell, all Blago did was find ways to feather his nest, so it couldn't be that hard. Then he should sit somewhere uncomfortable while his greedy, corrupt, profane, sullied, disgraced ass is dragged over the coals in Springfield during an impeachment trial.

The only problem there is how many of the denizens of the state capitol would have to recuse themselves for, ahem, conflicts of interest.

We shall see what Blago's fate is and if this has any long-term effect on the political culture of Illinois...or we can see this all happen again when the next group of lunatics gets to run the asylum.

I shudder at the answers to those questions.

Political Crisis...In Canada?

Yes, you read the title right.

Probably had to look twice, though, didn't you?

It's just that those two ideas rarely appear together.

In the last few weeks, though, they have with some frequency.

You may have heard something about this. That is, you may have heard of it if you keep up with international news or happen to be Canadian. It is an interesting story nonetheless and one worthy of our attention.

A bit of background about the Canadian government might help clear things up. Canada's government is a parliamentary system very similar to the one in the United Kingdom (and many dominions and former colonies of the British as well as this map shows).

In systems such as the one in Canada, the "government" actually refers to the party with the most seats (most Members of Parliament or MPs) in the lower house of the Parliament. Canada's Parliament is composed of two houses, the Senate and the House of Commons and the Sovereign as represented by the Governor-General (more on this below). The Senate is largely appointed and need not concern us here.

One appointed official who DOES concern us here is the Governor-General. The Governor-General is an appointed representative of the head of state in Canada, who just happens to be this lady. The role of the Governor-General is largely ceremonial (as is the role of the Queen in Canada). One duty that is often just ceremonial is the calling and dissolving of parliament.

Now, in a parliamentary system, elections don't just happen every four years. What happens is that there is usually a time limit (which is five years in Canada) for any government in which they must call a general election. In Canada, they just held a general election on October 14 of this year. Read about it here. Before this can happen, though, the prime minister, who is currently Stephen Harper of Canada's Conservative Party must ask the Governor-General to dissolve the House of Commons and call for an election.

O.K., you say, that's great. Canada has a fascinating and British-esque form of government. "Where's the crisis you promised?" you ask, with a mixture of mild annoyance and strong boredom. Well, here it comes.

In the last election, Harper and the Conservatives didn't get a majority in the House of Commons. What this means is that they didn't win in enough ridings to gain complete control of the government. This leads to what is called a minority government, which often happens in systems where though two parties may dominate, there are other serious contenders for the votes of the electorate. In Canada, the two dominant parties are the Conservatives and the Liberals. The other parties that are represented in the House of Commons are the New Democratic Party, Bloc Quebecois and the Green Party.

Now, in a minority government, the party with a plurality forms the government, but the position of this government is never very secure because of the possibility of something called a no-confidence vote. A no-confidence vote is proposed in Parliament by the opposition to the government in an attempt to weaken a government or, in some cases, cause its downfall. If a government loses a no-confidence vote, it usually has to resign or call for a dissolution of parliament and a general election.

Back to our situation...it seems that Harper was on the verge of facing a no-confidence vote in the House of Commons. Instead of going through the vote, which it seems that Harper and the Conservatives figured they'd lose, Harper went to the Governor-General and asked that Parliament be prorogued. The Governor-General agreed.

Prorogued? What the hell does that mean? It means to suspend Parliament without dissolving it (and thus needing to call new elections). The power to prorogue the Parliament in Canada rests with the Governor-General. The power to ask for Parliament to be prorogued, furthermore, rests with the current Prime Minister.

What has come of this situation? Well, the Liberals have had a leadership change to professor-cum-politician Michael Ignatieff. What this will mean for the party going forward is anyone's guess, but he seems to be a bit stronger of a personality than former head Stephane Dion.

The intervening month, observed a Canadian friend of mine, will give a chance for some heads to cool and others to roll, as they already have. I suspect he is right.

(ADDENDUM: Why did I write all of this? First, I think political dynamics in parliamentary systems are interesting. Second, it is fun to talk about anything approaching political crisis when it involves a usually placid place like Canada. Third, I hadn't written a long post about a political situation in a non-sexy foreign country in a while. I'll bet you're glad THAT drought is over.)

Friday, December 05, 2008

Celebrate Repeal Day! Drink Alcohol Today!

Today we celebrate a great moment in our national history. A day when it was realized that morality cannot be legislated without disasterous consequences. A day when a nation reeling from economic depression was at last given a (legal) release valve. A day when the forces of the nanny state were sent packing, or at least for a while.

For on this day seventy-five years ago, December 5, 1933, the Twenty-First Amendment was ratified, repealing the provisions of the Eighteenth Amendment. Our nation's dark period of Prohibition had ended. Americans could legally drink again.


Repeal Day, though always important to us in the drinking community, has languished as a broader national commemoration. This website, started by a bartender in Oregon, is a step to remedy that. More needs to be done, though.

Why was alcohol prohibition tried in the first place? It was a strange marriage between Progressives and Christian Evangelicals and others. Centrally, though, the Progressives thought that mankind could be made better if alcohol was unavailable. Evangelicals believed that alcohol was the root of what they saw as the moral degridation of humanity. Alcohol caused people to do wrong. God does not want us to do wrong. Alcohol, therefore, is an abomination of God. That is rather simplified, but you get the idea.

What did Prohibition accomplish? Well, a lot. A lot, however, that its supporters didn't expect. Click here for a great overview of the effects on Prohibition on crime, health, demand and prices. Generally, though, crime rose instead of fell, more people died of alcohol-related causes rather than less, demand and prices both increased (this rarely happens in a free market). Oh, and it gave rise to organized crime and all the spending and manpower needed to "fight" it. Click here for more on that aspect.

How did it get repealed? It became clearer and clearer to the American people that the Eighteenth Amendment was doing more harm than good. Women were espcially critical here. Just having been given the vote in 1920, women flexed their political muscle for repeal. People like Pauline Sabin and her Women's Organization for National Prohibition Reform were important in the groundswell for repeal.

Franklin D. Roosevelt and the Democrats ran with a Prohibition repeal plank in their 1932 platform. By "election season" in 1932, most Americans were ready to see Prohibition behind them and for this (and other reasons, naturally) FDR and the Democrats won in 1932.

It was on December 6, 1932 that Senator John J. Blaine of Wisconsin (we are really proud of this here), submitted a resolution to Congress proposing the submission to the states of the Twenty-First Amendment to the U.S. Constitution. It was finally ratified by the thirty-seventh state (Maine) seventy-five years ago today.

How should we celebrate? Purchase and consume alcohol. Simple as that. It can be a case of beer with your buddies, cocktails with your significant other or a bottle of scotch by yourself. It does not matter. Do it because you can. Do it because our forebears saw the error of social engineering and trying to limit the freedom of people to ingest anything they damn well please.

So, the idea of prohibition is ancient history, right? Wrong. I won't go into this at length here, but we still prohibit free individuals from access to certain substance. I am talking about what are now considered "illegal drugs." Read this interesting research report from the Cato Institute on the relation between alcohol and drug prohibition.

Where can I learn more? Click here for a great website at SUNY-Albany on the "Great Experiment," its times and (thankfully) its downfall.


Tuesday, December 02, 2008

Celebrate Liberty...Dress Like A Slob

(NB: This post was partially inspired by my first-and last-exposure to this television show. There was a marathon on, my bad ankle was acting up and the remote was across the room. I finally get around cable and this is what happens. It also has a lot of things that I have been thinking about for some time)

I have often heard it said that everyone develops their own sense of "style." I have never been sure what to make of this rather nebulous term. In other words, I do not know really what style means to me or to others.

I, furthermore, do not see my self really ever caring about this. If pressed with the question, "what sort of look were you going for there?," I would really not know what to say. I usually have some smart-assed remark ready to hurl like "annoyed middle-manager of a moderately successful mid-level corporation" or "annoyed mid-level bureaucrat in a non-sexy government department."

So, why do I dress the way that I do? Mostly practical concerns. I want to hide my nakedness (believe me, the world wants NO part of that). I am, at present and for some time now, usually stony broke. I have to comply with some vague, non-specified dress code for whatever job I have.

Do I care at all what my clothes look like? Well, yes and no. I want them to be clean and in reasonable repair. As for color, I shy away from anything bright or attention-getting. Frankly, if they sold buttoned-down collar shirts (in any pattern or sensible color) in a roll like paper towels, I would buy them in a second.

Why then, Will, are you writing about this? It comes from a connundrum that I had upon viewing the above-bookmarked television show.

On one hand, I believe that people should be able to spend their money on whatever consumer goods strike their fancy. This is why markets are the best and most fair way to allocate resources. People, making their individual decisions for selfish reasons, end up fulfilling the desires of all concerned. Sound familiar? It should.

On the other hand, and quite differently, I felt myself feeling that pursuing some sense of a "current style" went against the fundamental freedom of all people to allocate their resources as they see fit. In the past there were sumptuary laws that limited access to certain forms of consumption. The only barrier to individual consumption, the only fair barrier anyway, should be prices set in free and open markets.

Another source of my qualms has been some notion that people in other countries (particularly European ones) are thought (by themselves and us) to be "better dressers" than Americans. This is perhaps not the place to speculate on this score, but I would figure that this is a subset of the argument that Americans care about quantity over quality, breadth over depth and practicality over fashion. I am not sure why I felt this way, but I did and somewhat still do.

Why is this? I think it comes from the mere fact that in saying that someone looks "better" dressed a certain way, it makes a value judgement on that person's resource allocation decisions. It also makes a value judgement on the right of that individual to do exactly as he or she likes as long as that action does not harm other people.

I am not comfortable with either of these value judgements. If you want to spend all (or most or some) of your money on expensive garments, fine. Just don't judge me because I choose to allocate my scarce resources in a different manner. Don't hurl the epithet "slob" at me because I look like a pile of laundry with shoes under it. Just know that I make different decisions about opportunity cost. Don't make the call that, because I don't fit some certain mold of looking "put-together," that I am somehow defective in other ways.

The fundamental issue here is, therefore, that when value judgements enter decisions of resource allocation, problems arise.

What I am driving at, in the end, is that people should dress however the hell they damned well please. If that is a suit that costs what I make in a month, fine. If it is cut-off sweat pants and a BBQ sauce stained NASCAR shirt, fine. Anywhere in-between these gross stereotypes, fine.

But Will, you protest, what about decorum and dress in certain situations. I do realize that certain situations seem to call for certain modes of dress. Employers, schools, restaurants, cultural attractions and others have dress codes that must be followed or punishments can be meted out.

We must ask ourselves, though, why does it "seem" that these situations "call" for certain modes of covering one's nakedness? Why, furthermore, do dress codes exist? My short answer to both would be enforced conformity. My long answer? Perhaps for another day, that.

So, what say you, dear readers?

While you think that over, I am going to work on that "tear-off roll of shirts idea." I might be on to something there...

Tuesday, November 25, 2008

Quick And Dirty (Or Not)

Just a few news items and other things of interest:

  • More bad news from a Nobel Economics laureate. I wonder, though, if Thomas Sowell has a point here (he usually does).
  • My take on bailing out the Big Three automakers? Too bad, so sad. You had your chances to change and you blew it. Apparently, Mitt Romney and Gary Becker agree.
  • Want a good explanation of the roots of the Great Depression? Click here. Want to get it pretty much all wrong? Click here.
  • My take on Hillary Clinton as Secretary of State? Bad move, Mr. President-Elect. You will live to regret this one. Let's hope she won't make it through the Senate. Apparently, Christopher Hitchens agrees.
  • I am rapidly coming to the conclusion that this is the civil rights issue of my generation.
  • I am not sure what to make of psychology sometimes. On one hand, psychological research occasionally produces interesting conclusions based on good research. On the other, psychologists say stuff like this that make me think it is a pseudoscience.

Enjoy and have a Happy Thanksgiving.

Friday, November 21, 2008

My Eternal Gratitude

I would like to extend my sincerest, heartfelt thanks to all of you who have sent your kind thoughts and words to me and my family in this tough time.

I am still trying to come to terms with all of this. Something tells me that I never really will.

COTL will return to its regularly scheduled whining about (fill in the blank) next week. Do expect, however, that I will reflect a lot on my mom and what she meant to me and my family. I am not sure I have the words, but I sure will try. My mom always liked reading things that I wrote, and I will contiune on with all of that.

In closing, it is interesting what helps you through grief and sadness. It can be the kind words of friends, a song or the comforting feeling of familiar things. For me, this song has been much in my mind as of late. Click here to listen.

Thanks for your continued support. Goodness knows I need it right now.

Thursday, November 06, 2008

Live Blog? D.O.A., I'm Afraid.

I know, I know, I know.

I know what I said I would do. There is no need to remind me (why do people feel the need to do this, anyway)?

Yes, folks, there was no live blogging here on election night. Allow me to explain...

My reasons are twofold: practical/logistical and, well, something less practical or logistical.

Practical and logistical problems first. I shuttled between two locales on election night and was caught up in the public transit system for about a half an hour. This half an hour was at a crucial juncture in the evening, when the returns were coming in and (as it turns out) the election was being decided. I also, through no fault of my gracious hosts, didn't have access to the requisite technology to make it happen.

Other problems second. The unfolding of events on election night were, how shall I put this, rather dull. The whole thing was over and done with by around 9:30PM CST. The winner was declared, the victory seemed pretty decisive and (no surprise here) the talking heads kept on talking.

So, Will, how DID you spend the rest of the evening. Here are some sketches:
  • Red AND blue Jell-o shots.
  • Waiting for either Chris Matthews or Keith Olbermann to openly weep on air.
  • Listening to a fatter guy than myself (oh, they exist) ramble on about bingo, how cheap his fried chicken dinner was, the bus ride to bingo and how everyone from Texas is insane (I think).
  • Waiting for anyone to openly weep on television and trying to place money on this proposition. For this, I was called an asshole.
  • Missing Dan Rather and his penchant for, well, made-up idioms. I had to settle for Paul Begala saying "lights out, Cub Scout."
  • Hamm's, The Beer Born In The Land Of Sky-Blue Waters...and still represented by Norm Coleman, apparently.
  • Cheering when people DID openly weep on television. For this, I was called a heartless asshole.
  • Conjecturing that the Dow would drop at least 400 points the next day. I was pretty damned close.
  • Evan Williams Bourbon, It's What Clint Eastwood's Sweat Probably Tastes Like.
  • Listening to two of the finest political speeches that I have heard in some time. John McCain - why didn't you talk like this the whole time? It was the reason people (including myself) liked you at some point.
  • Having that feeling that I was all dressed up and had nowhere to go. In other words, I was blue-balled by the news media. Thanks for that, dickweeds.

Well, I did enjoy my evening immensely. For political hacks like myself, it is like four Super Bowls rolled into one.

What reflection on this presidential election that I will do will be short and will be soon so that we may move onto other topics including economics, Studs Terkel, Russia, UW Badgers Football (or lack thereof and others.

I leave you with a thought to ponder and a piece of advice for all of those candidates who won on Tuesday:

The state is not the society.

Monday, November 03, 2008

Shannon Makes The Call: The Presidential Race

Click here for my map of the final electoral vote count.

If you don't want to do that, here is the summary of my prognostications:


Total Electoral Vote Counts (270 Needed To Elect)

Obama/Biden = 338 McCain/Palin = 200


Margin of victory in Ohio = 3%.

UPDATE: Eric Andersson has pointed out that my Electoral College map is identical to that of one of the supreme political operatives, image makers and glorious dirtbags of our time. Who, you ask? Click here to find out.

I am not sure how to take this news.

Shannon Makes The Call: Senate Races

Here are my picks for what I and the aforementioned Andrew "Eric Andersson" Erickson thought were the more competitive/interesting Senate races.

NB: The winner's name appears in capital letters. The incumbent (if there is one) is marked with an "*" The party designations should be self-explanatory, as should the abbreviations for the states.


  • VA: WARNER (D) def. Gilmore (R)
  • NM: T. UDALL (D) def. Pearce (R)
  • AK: BEGICH (D) def. Stevens (R)*
  • CO: M. UDALL (D) def. Schaffer (R)
  • NH: SHAHEEN (D) def. Sununu (R)*
  • NC: HAGAN (D) def. Dole (R)*
  • OR: MERKELEY (D) def. Smith (R)*
  • MN: FRANKEN (D) def. Coleman (R)* and Barkley (I)
  • GA: CHAMBLISS (R)* def. Martin (D)
  • KY: MCCONNELL (R)* def. Lunsford (D)
  • MS: WICKER (R)* def. Musgrove (D)
  • LA: LANDRIEU (D)* def. Kennedy (R)
  • ME: COLLINS (R)* def. Allen (D)
  • TX: CORNYN (R)* def. Noriega (D)
  • NE: JOHANNS (R) def. Kleeb (D)


Margin of victory in GA Senate race = 1.5%

Shannon Makes The Call: House Races

Here are my picks for what myself and an equally astute political hack (hat tip to Andrew "Eric Andersson" Erickson) thought were interesting races in the House.

NB: The winnners' names are capitalized. The incumbent (if there is one) is marked with an "*" The party designation should be self-explanatory. In each case, the state abbreviation is followed by the particular congressional district in question.


  • AL-02: LOVE (R) def. Bright (D)
  • AL-05: GRIFFITH (D) def. Parker (R)
  • AK-AL: BERKOWITZ (D) def. Young (R)*
  • AZ-03: SHADEGG (R)* def. Lord (D)
  • AZ-05: MITCHELL (D)* def. Schweikert (R)
  • AZ-08: GIFFORDS (D)* def. Bee (R)
  • CO-04: MARKEY (D) def. Musgrave (R)*
  • CT-04: HIMES (D) def. Shays (R)*
  • FL-21: MARTINEZ (D) def. L. Diaz-Balart (R)*
  • FL-25: M. DIAZ-BALART (R)* def. Garcia (D)
  • GA-08: MARSHALL (D)* def. Goddard (R)
  • IL-10: SEALS (D) def. Kirk (R)*
  • IN-03: SOUDER (R)* def. Montagano (D)
  • KS-02: BOYDA (D)* def. Jenkins (R)
  • LA-06: CAZAYOUX (D)* def. Cassidy (R)
  • MI-09: PETERS (D) def. Knollenberg (R)*
  • MN-03: MADIA (D) def. Paulsen (R)
  • MN-06: TINKLENBERG (D) def. Bachmann (R)*
  • NV-03: TITUS (D) def. Porter (R)*
  • NJ-03: ADLER (D) def. Meyers (R)
  • NM-01: HEINRICH (D) def. White (R)
  • NM-02: TEAGUE (D) def. Tinsley (R)
  • NY-29: MASSA (D) def. Kuhl (R)*
  • OH-01: DRIEHAUS (D) def. Chabot (R)*
  • WA-08: BURNER (D) def. Reichert (R)*
  • WI-08: KAGEN (D)* def. Gard (R)
  • WY-AL: Lummis (R) def. Trauner (D)


New Dem/GOP split in House = 267/168.

Shannon Makes The Call: Governors

Here are my picks for all of the governor's races to go off tomorrow.

NB: The winner's name is in capital letters. The incumbent (if there is one) is marked with an "*" The party designations should be self-explanatory, as should the abbreviations for the states.

  • DE: MARKELL (D) def. Lee (R)
  • IN: DANIELS (R)* def. Long-Thompson (D)
  • MO: NIXON (D) def. Hulshof (R)
  • MT: SCHWEITZER (D)* def. Brown (R)
  • NH: LYNCH (D)* def. Kenney (R)
  • NC: PERDUE (D) def. McCrory (R)
  • ND: HOEVEN (R)* def. Mathern (D)
  • UT: HUNTSMAN (R)* def. Springmeyer (D)
  • VT: DOUGLAS (R)* def. Symington (D) and Mollina (I)
  • WA: GREGOIRE (D)* def. Rossi (R)
  • WV: MANCHIN (D)* def. Weeks (R)


Margin of victory in NC contest = 2%.

Thursday, October 30, 2008

Watch This Space

We will get back to our regularly scheduled (boring, long-winded) programming soon.

I wanted to let all of the readers of this space know that I have things in the works for election night.

Yes, I may be delving into the realm of live, real-time blogging.

It all depends on the computer hook-up wherever I am watching the election results.

If we go live, great. If not, I will let you know. I may set up a separate blog and link to it for election night purposes.

As you all know, however, I have expressed my opinions about voting and elections before. Why all the fuss on election night?

Think of the combination: I will be all boozed up, full of opinions and ichor and I will have an electronic mouthpiece.

Frankly, I don't see how you could miss it.

Stay tuned...

Friday, October 24, 2008

How Did We Get Here, Part 2

After a little break, we can get back to our consideration of the very volatile financial situation that has recently developed. Today, we will bring the story up to the point of the crisis. Next time, we will see how it all unravelled and assign blame. I will close this series with considerations for the future.

(NOTE: I realize that this series is going on a bit long. Well, what can I say? The situation is complex. Given all of the bluster and spewing of the twenty-four hour news cycle, though, I think I am doing pretty fair, no? If no, let me know and I will change directions)

When we last left our story, there were loads of people clamoring for cheap credit in the form of residential mortgages. As with any resource, when it is cheap, people use more of it and the demand skyrockets. No problem...just supply the credit to the people who want it, all while making sure that they are a good risk and that you will get your money back, right?

Well, that's not exactly how it happened. Remember the stringent process for issuing home loans described last time? That didn't exactly hold up too well. Because all of the people who were qualified to get mortgages already had them, mortgage companies had to look for new customers. They found these new customers, all right, but to do so, they had to change the general profile of who they considered "mortgage-worthy."

This definition went from "person with good credit, assets and a job" to "pretty much fucking anybody." Why? The lenders, for their part, had to deal in volume because the margin of profits on their loans were so low in the interest rate regime that was in place between 2001 and 2007 (more on this later, in the blame section).

The borrowers, on the other hand, were motivated either by the potential for profit on their investment or the desire (NOT right...this will be important later) to own a home. This desire, it seems, outpaced the realistic expectation that these people would ever be able to pay the debt back. Already, I'm sure, you can see where problems might arise.

So, where are we? We have lots of unworthy people with loads of debt lent to them by people who were eager to lend to anybody who could reasonably operate a pen to sign the promissory note. How, you ask, did this situation lead to a financial crisis with global implications?

Well, the mortgage companies were not the only ones looking for a way to make a profit in a bad environment. The investment banks were out there as well, so to speak. They, too, had been hit by the bursting of the tech bubble in 2000-2001 and were searching around for somewhere to put the money they had (for themselves and their clients). They decided that residential mortgages were the way to go.

Now, this was not the first time that investment banks dabbled in mortgages. Far from it. Investment banks and their fixed-income (read=not stocks or commodities) trading departments had dabbled in mortgage debt since at least the 1970's. This is where mortgage-backed securities (MBS) come into the picture.

MBS are basically an investment vehicle that are composed of many individual mortages bundled together and traded as one unit. Like other forms of debt securities (bonds, mostly), they bore a period of maturity and an interest rate. When an MBS is sold, the buyer becomes the holder of the mortgage or, in other words, the receiver of the payments from the borrower. MBS's are attractive because they allow investment banks and financial institutions access to another credit market.

This form of debt, like all forms today, are rated by the major rating agencies (Standard and Poor's, Moody's and Fitch). These agencies assess the structure and composition of assets and issue ratings that tell anyone interested how "good" a particular debt is. Here, "good" is defined as "likely to be paid back with interest."

Sounds fine, right? The investment banks, paying attention to the rating agencies, would not take on bad debts and the rating agencies would not recommend unsound investments to their clients (that being the investing public as a whole).

Well, there was a problem. A big problem. The MBS that were being sold were more complex than anyone was willing to admit. Put simply, there were wolves among the sheep. Not all of the MBS were composed of the same classes of debt. They were, in large part, composed of some good debt, some moderate-risk debt and a lot of bad debt.

The problem came when the rating agencies rated these individual MBS highly, as all good debt, when they were anything but. These MBS, or a lot of them, contained ticking time bombs, thousands of mortgages that were risky (at best) and downright suicidal (at worst).

What's more, to further complicate the situation, the MBS were themselves pooled into collateralized debt obligations (CDO) and these were traded just like the MBS were. These CDO's are divided into "tranches," which is just the French word for slice. Each tranche is supposed to be made up of a certain class of debt, which makes managing the risk easier because the relative "goodness" of the debt is a known thing. But here, this was not necessarily so.

Risk has been mentioned before, but it is at this stage (right before we get to the meltdown...don't worry, it is coming) when the idea of risk management comes into the picture. Investment banks (and smart investors in general) never expose themselves to more risk than they feel they can handle.

To do this, they try and offset the risk with other financial instruments. In options trading (what I used to do for a living), for example, there are many spreading strategies to offset the risk of any one contract and insure a profit or at least limit a loss. Those of you who are familiar with the world of sports betting (which I am not...officially) will see some similarities here. In our present case, the buyers of MBS's and CDO's used credit-default swaps (CDS) to manage risk.

Here again, what was usually done does not apply here. CDS's, basically guarantees against another party defaulting on a loan, help to manage risk by passing it along, so to speak, to other parties until many people hold small parts of the risk and no one body is fully exposed. What was different with our persent case is that the investment banks and other entities bought these MBS's and CDO's on leverage (read=credit). So, basically, they were buying huge pools of debt by taking on huge amounts of debt themselves. This is what is called leverage.

With all of this complex debt, leverage, credit and the attempt to manage risk, it is not hard to imagine that something could happen that would destabilize this arrangement. This is so because so much of the arrangement was based on credit and promises, not on real assets and complete assessments of the risks involved.

This brings us to the so-called tipping point. Next time: the tipping, falling and blaming.

Tuesday, October 14, 2008

Gordon Brown, A Savior? Will Shannon, A Deadhead?

A few short (perhaps) shocking revelations for you on this lovely Tuesday. By the way, we will be all ready to go with the financial meltdown blame game later in the week The rogue's gallery thus far includes: Alan Greenspan, the Clinton Administration, sleazy mortgage brokers, Alan Greenspan, pie-in-the-sky consumers who should know better, Alan Greenspan, questionable ideas about risk management and a widely held assumption that (wait for it) turned out to be completely wrong (and was promoted by Alan Greenspan).

Now, the shocking news:

  • Is British Prime Minister Gordon Brown the Allmighty, The Savior of World Finance? Recent Nobel Laureate Economist Paul Krugman seems to think so. I personally think this is a case of Krugman, swollen with victory and the notion that his view of the world is coming to pass, throwing kudos to Brown for something that, well, I guess he did. I actually think (along with this really smart guy) that the Irish Government strong-armed Europe into intervention and they, in turn, strong-armed the USA into following suit. Sort of a "play by the new rules or don't play at all" sort of thing. Will this help Brown's generally sinking political fortunes? For a time, maybe. Long-term? No.
  • Is Will Shannon a Deadhead? Well, yes, I am. I does not seem to fit with my business casual dress or my generally sour demeanor about the world or my on-and-off hatred of mirth, whimsy, wonder and that sort of rot. The fact remains, however, that I have been a fan of San Fransisco's eternal house band for some years. Maybe it is their lyrical intricacy (piloted mainly by Robert Hunter/Jerry Garcia and John Perry Barlow/Bob Weir). Maybe it is their jazz-like devotion to improvisation. Or maybe, just maybe, it is because they were not really political, prefering to leave the politics and shouting out and concentrate on the music. Well, the upshot of this revelation was a great piece in Reason from a few years back. Read it here. It brings together, in the form of a review of this book, a lot of what makes the Dead attractive to me. Boy, if anyone could make something like "hippie capitalism" work, it was them.

Actually, in closing and in considering the state of finance today, perhaps a quote from the Dead is apropos:

"The wheel is turning and you can't slow down,

You can't let go and you can't hold on,

You can't go back and you can't stand still,

If the thunder don't get you, then the lightning will."

Wednesday, October 08, 2008

If You Hate It, Send It Money

We will return to our in-depth consideration of the current economic situation later in the week (I hope). Just as a preview, the next post will be the "finger-pointing-and-fist-waving" post where I lay blame where it is due (read = Greenspan, your ass is grass).

I wanted to post about and expound upon a fascinating idea in Tyler Cowen's great book Discover Your Inner Economist.

In this season of campaign donations and with the charitable onslaught of the holidays just around the corner, I got to thinking about the effect of charitable giving and what giving to charity means to people.

In a certain sense, charity is like any other sort of spending: resources are allocated to a particular purpose and in doing so, people show their preferences. There is more at work, it seems, when it comes to charity.

There is a moral dimension in giving to charity that is not present in other forms of exchange. When you buy (fill in your favorite good here), you are showing that you have a preference for that item at the price you paid for it and in the quantity you bought it in.

When you give to charity, you also do this, but you are trying to show that you are a certain sort of person...namely, the sort of person who gives to charity. It would seem that these sorts of people are good (or at least do one good thing) and that this is the sort of behavior that we all should engage in.

While I am not sure about making these moral judgements (I think that it is a strictly personal matter), I was curious about one assumption of everything said above. That is the assertion that all charity and donations should be given to someone or something that one supports.

Let's play the contrarian, I thought, and see where this goes...

Could there be value to giving to a cause or a person with whom you disagree? It seems at first blush to be, well, a really stupid idea. If I support gun control (which for the record, I don't; this is just an example), it would not seem to follow that I would donate money to the NRA.

Or does it?

Think about what happens when you send a donation to a charity or a political candidate. That entity takes your money, puts your name on a mailing list and proceeds to barrage you with direct mail solicitations. You showed your preference, all right. You let people who are asking for money know that you are the sort of person who gives it away.

The mail keeps pouring in and you begin to wonder about the prudence of your donation. Yeah, you are keen on nature, but c'mon Sierra Club...when does it end?

Have you figured it out yet? Has it dawned on you why "reverse charity" might be a good thing for you?

You gave a cause or person an amount of money. This action caused that party to send you, at their expense, more entreaties for cash. They put your name on a mailing list which may be exchanged with other groups, incurring more expense. It only seems when you have ignored them for a good long time that they finally get the hint.

Do you realize what you have just done? You have, though out of your best intentinos, made a cause that you wanted to support spend perhaps more than you gave. In other words, your donation made your charity of choice lose money.

You should realize what the next step is (and therefore the meaning of the title of this post).

Hate Barack Obama? Donate money to his campaign.

Think Greeenpeace nods at environmental terrorism? Cut them a check.

Think a particular charity/church/aid drive is particularly unseemly? Pass the plate and dig deep, brothers and sisters.

Your one-time donation, though it goes against your preferences (and thus could be called "strategic charity"), could end up helping you by weakening a cause or person with whom you disagree. Yes, it may feel off-putting holding these two contradictory ideas at once, but trust me: every time you get another piece of mail from your "target," consider it a small victory.

Have I ever actually done this? Yes, but it was without knowing the full implications of the situation. In college, we put one of our friends on this guy's mailing list and he got deliveries and calls for donations for years afterwards.

So go out there, think like a contrarian and show your enemies your contempt by showing your "support." While you are doing it, think about all the little interactions, exchanges and incentives that we respond to everyday and in turn show our preferences and, really, little pieces of ourselves.

It is fascinating ideas like these that make people (me included) think deeper and desire to know more about the world around them. I hope they make you think, too.

Tuesday, September 30, 2008

How Did We Get Here? Part 1

Last week, we tackled the rather convoluted history of financial speculation, recessions, depressions, the business cycle and other background information.

Now, let's move on to the roots of the present financial situation.

Actually, if you want a great primer and clear explanation of these complex economic interactions, I found one at a somewhat unlikely source. On a May, 2008 episode of the usually gut-wrenchingly smug NPR program This American Life with Ira Glass entitled "Giant Pools of Money," an excellent summary and explanation of the roots of the crisis was given. Maybe it was so easy to understand and accessable because Glass had nothing to do with it. NPR's business and economic correspondent Adam Davidson and NPR producer Alex Blumberg teamed up for this piece. While there are a few liberal jabs at evil capitalists, it is no more than one would expect for NPR; furthermore, these do not detract from the sound analysis offered in the piece.

Listen to "Giant Pools of Money" here.

If you listen to that, you could probably skip everything that I say below and still have a good picture of the situation. If you desire some more detail, links to relevant information and my perspective, read on...

The current "subprime mortgage crisis" and subsequent "credit crunch" has its immediate roots about eight years ago. In 2000, the sexy investment of the day, high tech and Internet stocks, began to falter. Falter is perhaps too light a word. The train came off the fucking rails.

With nothing cool like pets.com to invest in, the investing community (which encompasses everyone from ordinary individuals to global investment banks to governments) executed a classic "flight-to-safety." They were all looking for a place to put their money that gave reliable returns and had some assurances all while sacrificing sexiness. In other words, people were looking for nice, boring investment vehicles.

The nicest and most boring of all investment vehicles are U.S Treasury Securities. These securities, which are basically loans to the U.S. Government, are not risky, have low rates of return and are backed by the full faith and credit of good ol' Uncle Sam. Sounds pretty good, right?

Well, for a short time, it was.

Then the events of September 11, 2001 happened.

The economic nosedive after 9/11 coupled with the then still unravelling tech bubble made these boring investments even more boring. They became downright dreadful.

Why? Well, basically, it was because of what happened to that low rate of return...it got even lower. So low that treasury securities were not an attractive investment for anyone. You see, the rate of return on treasury securities is tied directly to the interest rate at the time the bond is issued. The people who control the interest rate in the United States (the Chairman of the Federal Reserve and the Federal Open Market Committee) decided that with the attacks of 9/11 and the bad stock market, the economy needed a little boost.

So the Federal Reserve, led then by Alan Greenspan, lowered the interest rates (which are several different numbers actually, but we needn't discuss this here) and kept them low for quite a long time. In fact, the Fed kept the rates so low that, in effect, the boring treasury securities became even too boring for people who wanted something that was pretty boring.

What happened next? Well, investors are not a crowd to sit around and let their money sit idle (hell, that goes against the very idea of investment itself). They then began the search for something that would pay a decent return and they were beginning to run short of options. These investors will return later. Now, another part of the story...

Another effect of lower interest rates is cheap credit. If the interest rates are low, this also means that the cost of borrowing money is also low. This means that anything that people usually buy on credit was now available at almost-giving-it-away prices. In other words, people could almost borrow money for free.

If people can borrow money for free, the natural inclination (which would prove unnaturally disasterous later) is to borrow more. For most people, what is not only the most expensive thing that they will ever buy but also a thing (more likely than not) that is bought on credit?

That's right: a house (or real estate, more generally).

The type of legal/financial arrangement in the US that involves real estate is called a mortgage (I won't explain this here, but click the link for definitions). So, with cheap credit, anyone could get a mortgage, right?

Well, sort of...

You see, once upon a time (until quite recently, actually) getting a mortgage was not as ruinously easy as it became in the years after 2001. If you wanted a bank to lend you money to buy a house, you had to prove all sorts of things to them. You had to prove that you had a job, that you had some liquid assets, that you didn't have a really horrible credit history...generally, you had to prove that you were a good risk and that you would eventually pay the loan back in full.

In the early days of low interest rates in 2001 and into early 2002, these policies were still pretty standard fare. Yes, the credit was cheap, but you needed to show your financial responsibility before the bank would let you at all the lovely money.

This went on apace until we reached a point, most say sometime in 2002, that everyone who qualified for a mortgage and wanted one could get one. Fine, you say, responsible people should be able to have access to such arrangements.

Well, it turns out that lots of irresponsible people wanted access to this cheap credit and there were other irresponsible people who were all to ready to let them have at it...

For Next Time

We will contiue to follow this story and try to draw the connections that eventually led to the state we are in today. We will see how cheap credit, irresponsible borrowing and lending, possible fraud, financial ingenuity, government stubbornness and some really mistaken assumptions began to lead to real trouble.

Stay tuned...it only gets more interesting from here.

Tuesday, September 23, 2008

Have We Been Here Before?

(Before we begin, I wanted to just make a few things clear. I will try and explain this extraordinarily complex financial situation as simply as possible. I will provide plentiful links to definitions of perhaps unfamiliar words and concepts. I will strive to be as simple but as thorough as I can be. Any topic that will be raised in these next few posts could be a topic of volumes of writing and hours of discussion. Please leave your comments/questions/disagreements. I would be very interested to hear what you think).

Have we been here before? "Here," naturally, meaning in a financial situation that started out bad and seems to keep getting worse by the day?

Well, the answer is the ever-unsatisfying "yes and no."

Let's start with the "yes" part first.

Panics, Recessions and Depressions of Yesteryear

There have been ups and downs in general economic performance and the fortunes of the financial system ever since people started trading what they had for what they needed. That is when the ideas of supply, demand and prices first hoved into the human economic conscious. We will not go back that far, though, as the roots of today's problems are much closer to our own time.

Recessions and depressions, while subject to some semantic wrangling, are fairly well-defined concepts and have happened at various times in the past. Their occurrence is usually seen as part of the business cycle, the normal expansion and contraction that is typical of any modern market economy.

These peaks and troughs in the overall performance of the economy have happened in somewhat predictable patterns beginning in roughly the middle of the nineteenth century when the integrated, global economy that we live in today had its birth. As you can see from looking at historical patterns of the business cycle in the US, recessions happen fairly frequently. Depressions, which are recessions that last longer, happen less frequently.

These expansions and contractions have happened throughout our history, and the reason for their onset is always a little different. The Panic of 1873, for example, was caused by the failure of the largest bank in the US, coupled with the collapse of the Vienna Stock Exchange, both of which burst the post American Civil War speculative bubble (more on these later). This panic led to a long, worldwide depression, lasting from 1873 to around 1896. The hardest hit was Great Britain, who lost much of the edge in industrial production that they had held since the end of the 18th Century.

This is not, however, the historical case that people have been bringing up over the last week. That case is, of course, the Great Depression of the 1930's. While a full discussion of the causes of the Great Depression (and why it lasted so long in the US) is beyond the scope of this post, let us consider some of the large factors at play. It seems that the following were at least, in part, responsible:
  • The decision of several European countries to return to the gold standard at pre-WWI rates of exchange.
  • The expansion of the money supply in the 1920's which led to a credit-fueled economic boom.
  • The mismanagement of the aforementioned money supply by the Federal Reserve Bank.
  • Policy blunders on the part of both the Hoover and Roosevelt administrations that contributed to the contraction.
  • Wage rates that were not allowed to rise and fall with inflation, unemployment and prices.

As I said, there are others, but the above mentioned causes should serve our purposes.

We will deal with the meaning of all of this to us today at the end of the post. Now, on to...

Manias, Speculation, Bubbles and the Aftermath

Just like depressions and recessions, there has been financial speculation as long as anyone has invested in anything. Speculation is basically the buying and selling of an asset to make a quick profit. Speculators play a key role in any asset market as they provide liquidity and price discovery for all other players in that market.

The history of speculation comes replete with many speculative "manias" for certain assets and their boom and bust is somewhat similar to the above mentioned business cycle. People have speculated on everything from tulip bulbs in 17th Century Holland, shares in the South Sea Company in 18th Century Britain, railroad stocks in 19th Century America (and Britain too), and all of the stock crazes of more recent years (biotech stocks in the 1980's and Internet stocks in the 1990's).

What happens when these speculative bubbles "burst?" Do they cause depressions and recessions? In my opinion, they do not. It seems that they are a necessary, but not sufficient condition for a recession. Did the stock market "crash" of 1929 cause the Great Depression? No, because it was one of many conditions that interacted to cause the economic contraction (and was preceded by conditions that helped to make its effect even worse).

Did the dot.com crash of 2000-2001 cause the current financial problems. Here again, no, but it was one of the factors at play in making today's situation what it is and what it will be.

What happens if these disruptions in the market economy are so bad that the whole complex web of economic interactions faces either partial or total failure? Well, usually the answer is that nothing is "so bad" that it cannot be eventually dealt with through the normal operation of the marketplace.

There have been times, though, where markets have turned outside themselves (or were set upon by outside forces) who felt that their failure was too dangerous to risk. In the last, oh, 100 years this has happened a few times.

The Panic of 1907, which saw declines in the stock market, contraction of credit and a profound loss of liquidity for banks was eventually dealt with when J.P. Morgan and a consortium of bankers backed losses, provided capital and saved the system from collapse.

The bail-out came in a different form during the Savings and Loan crisis of the 1980's. While not exactly a speculative bubble, the case of the bail-out is instructive. This time, it was the Federal Government who spearheaded the bailout of the S&L industry, primarily with the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. Here, Uncle Sam created new deposit insurance, took on and disposed of the assets of failed S&L's and created greater oversight for thrifts and their lending procedures.

The case of Long-Term Capital Management is as complex as the trading algorithyms that they used. Read about it here. Basically, it was a case of highly-leveraged traders and mathematical whiz-kids who had a system that should have worked perfectly, but it didn't, they threw good money after bad and it all fell down. I may have more to say about this case later on.

Why We Haven't Been Here Before

I said a little earlier that while some of the instances of these financial collapses, panics and manias of the past may seem eerily like what is up these days, one should be careful before thinking that it is a case of history repeating itself.

The fact is that history never really does this. Oh yes, things that happen today may be similar to the past, but the conditions are different, the people involved are different and the world that they inhabit is different.

History is a great tool for understanding how factors interacted with each other in the past, how people reacted and how these broad developments helped to shape their world and (in time) ours. History is a poor tool for forcasting the future or trying to transfer occurrences of the past in whole cloth to the present day. History, in other words, is a good teacher but a bad prognosticator.

For Next Time

Now that we have a little historical perspective and some basic terminology down, we can proceed to picking apart the current financial situation (the Panic of 2008?) Much that we discussed today will be instructive in understanding our current woes. Many of the outcomes of the past helped to shape the financial system that gave birth to these problems. Actually, one of the key starting points for this came in the "bursting" of the aforementioned dot.com bubble in 2000-2001.

It is there that we will begin next time.

In the meantime, please do check out some of the links provided above. Additionally, I can recommend a few great sources on the history of bubbles and speculation. On bubbles, crazes and manias, there is still no better book than Charles Mackay's 1841 classic Extraordinary Popular Delusions and the Madness of Crowds. You can actually read the whole book here.

On the history of speculation in general, there is the very good and readable Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor. Also good here is Charles Kindleberger's 1978 (modern) classic Manias, Panics and Crashes.

Friday, September 19, 2008

Let's All Calm Down And Talk This Out

I have some big pieces in the works on the current financial situation for next week (I wanted to let things settle a bit before addressing the situation), so I figured I would warn you of this. If this interests you, then you will be in for a (hopefully) thorough discussion and perhaps some lively argument. If not, well, I told you so.

In anticipation of this, you may want to read up on exactly what has been going on. For the background, or the "how-did-we-get-here," there are several good sources. This post by economist Arnold Kling lays out a thumbnail of the basics. The guys over at Marginal Revolution have also done many good background posts on the situation; just scroll down and read what sounds useful. Another great source is Real Clear Markets. There, you will find the gleaning of a lot of the best reportage and comment on finance and economics in general and the happenings of the last week (and its roots) in particular.

I would also especially invite Kevin (Molly, if you read this, nudge your husband and get him over to the computer) to comment, as he is a financial professional (while I am more of a former professional and amateur economist) and one really smart guy.

As you do this reading, keep in mind one of the favorite sayings of the old-timers on the trading floor where I used to work:
  • "The world only ends once, and this ain't it."

Wednesday, September 10, 2008

A Remembrance. A Tribute. An Honor, Really.

Yesterday was my birthday and I extend my heartfelt thanks to all who helped me celebrate and who send their well-wishes.

I would like to point to one person in particular who did me the great honor of dedicating a blog post to me. That person is the inimitable M. Gordon Jenks. Read the post here.

What a joy to walk down those (booze-dimmed) paths of memory! If you read the post (and I hope you do), you get a pretty good picture of my college years and my relationship to a person who is the best of friends.

Oh, all that you read there is true. Absolutely true.

We had a lot of fun, ingested a lot of beverages, did a lot of really strange stuff and had a hell of a time. It was nigh on the perfect college experience and I wouldn't trade it for the world.

So, thanks, Jenksie. You brought a tear of joy to these thirty-one year-old bloodshot Irish eyes.

(Oh, if you need anything in Jenks's post explained, ask and we will do our best).

(Also, read the post below about remembrances of the past of a different nature).

Jolly Boating Weather, Or So They Thought

In wading through the murky waters of days gone by, one sometimes hits upon a few words that really say much more than the obvious.

I recently ran across a quotation from George Orwell's autobiographical essay "Such, Such Were the Joys." Orwell wrote it in the 1940's about his childhood and his years at St. Cyprian's School and at Eton College. While I suspect these places were not the Home Counties gulag that Orwell describes, his reminiscences have a lot to say about coming of age for the middle classes in Edwardian Britain.

The one line that really stuck out for me was his description of the mood of the times in the years between the death of Queen Victoria (1901) and the outbreak of the Great War (1914).

Orwell wrote:

  • "From the whole decade before 1914 there seems to breathe forth a smell of the more vulgar, un-grown-up kind of luxury, a smell of brilliantine and crème-de-menthe and soft-centred chocolates — an atmosphere, as it were, of eating everlasting strawberry ices on green lawns to the tune of the Eton Boating Song."
In this time, Britain had passed her time at the height of world power. She was still one of the "great powers," but by no means dominant. Settling into the fading sunlight of her imperial afternoon, the Sceptered Isle was about to be irreversibly changed. For a brief moment, though, people either didn't know or didn't wish to acknowledge this fact.

Orwell's words give us an engaging portal into one of those days gone by.

It is for little reasons like this that I am a historian.