Monday, October 31, 2011

Slow Economy Is Tough on Young Adults

Many of the stories about present economic difficulties focus of retirees or on mid-career Americans who lost their jobs in the recession of 2008-9. Other stories ponder whether baby boomers will find Social Security and Medicare reliable. An addition topic involves homeowners and families caught up in the mortgage mess.

But young adult just starting their careers is also profoundly affected by the economic troubles. Noreen Malone of New York magazine has written a long, incisive article about their plight. This featured article has been summarized by Daniel Gross, editor of Yahoo! Finance:

  • The average worker gets 70 percent of total raises in the first decade as a worker – so stagnant or non-existent wages during that period means many of today’s young workers are likely to suffer prolonged economic under-performance.
  • Students today have huge, stupendous college loans, far more than in earlier years
  • The tough times mean young adults are much more likely to be living at home in their twenties. "Thirty-nine percent of us in a 2010 National Journal poll were getting financial help from relatives, including a full quarter of those with full-time jobs," Malone writes.
  • The slow formation of new households and independent living is depressing the housing industry. The average age of getting married has increased by a full year since 2006, and young couples are having fewer children.
  • The number of women between ages 20 and 34 rose by a million from 2008 to 2010, but the number of babies dropped by 200,000.
  • A college degree used to be insurance against unemployment. For those over 25, about 4.5% are unemployed. But for recent college graduates, the unemployment rate is close to 14%.

Summarized from:

http://finance.yahoo.com/blogs/daniel-gross/economic-agony-today-twenty-somethings-143010262.html

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The full article by Noreen Malone is in New York magazine and on line at:

http://nymag.com/news/features/my-generation-2011-10/

Sunday, October 30, 2011

From Germany -- A Much More Powerful Battery

KIT Researchers Develop

New Concept for

Rechargeable Batteries

 
Setup of the fluoride-ion battery: A fluoride-containing electrolyte
separates the metal anode from the metal fluoride cathode. (Figure: KIT)

KIT researchers have developed a new concept for rechargeable batteries. Based on a fluoride shuttle - the transfer of fluoride anions between the electrodes – it promises to enhance the storage capacity reached by lithium-ion batteries by several factors. Operational safety is also increased, as it can be done without lithium. The fluoride-ion battery is presented for the first time in the "Journal of Materials Chemistry" by Dr. Maximilian Fichtner and Dr. Munnangi Anji Reddy.

Lithium-ion batteries are applied widely, but their storage capacity is limited. In the future, battery systems of enhanced energy density will be needed for mobile applications in particular. Such batteries can store more energy at reduced weight. For this reason, KIT researchers are also conducting research into alternative systems. A completely new concept for secondary batteries based on metal fluorides was developed by Dr. Maximilian Fichtner, Head of the Energy Storage Systems Group, and Dr. Munnangi Anji Reddy at the KIT Institute of Nanotechnology (INT).

Metal fluorides may be applied as conversion materials in lithium-ion batteries. They also allow for lithium-free batteries with a fluoride-containing electrolyte, a metal anode, and metal fluoride cathode, which reach a much better storage capacity and possess improved safety properties. Instead of the lithium cation, the fluoride anion takes over charge transfer. At the cathode and anode, a metal fluoride is formed or reduced. "As several electrons per metal atom can be transferred, this concept allows to reach extraordinarily high energy densities – up to ten times as high as those of conventional lithium-ion batteries," explains Dr. Maximilian Fichtner.

The KIT researchers are now working on the further development of material design and battery architecture in order to improve the initial capacity and cyclic stability of the fluoride-ion battery. Another challenge lies in the further development of the electrolyte: The solid electrolyte applied so far is suited for applications at elevated temperatures only. It is therefore aimed at finding a liquid electrolyte that is suited for use at room temperature.

M. Anji Reddy and M. Fichtner: Batteries based on fluoride shuttle. Journal of Materials Chemistry. 2011, Advance Article. DOI: 10.1039/C1JM13535J.

Karlsruhe Institute of Technology (KIT) is a public corporation according to the legislation of the state of Baden-W├╝rttemberg. It fulfills the mission of a university and the mission of a national research center of the Helmholtz Association. KIT focuses on a knowledge triangle that links the tasks of research, teaching, and innovation.

-- from KIT at: http://www.kit.edu/visit/pi_2011_8281.php

Saturday, October 29, 2011

Is Technology Swallowing Middle-Class Jobs?

Are advances in technology taking away American jobs? Studies appear to show that, in the past, technology outdated some jobs but created more employment overall.  Yet there’s a new book that seems to argue that this time it is different – that in the present economic difficulties and long term unemployment, the technological changes are indeed reducing jobs – specifically – middle-class jobs.

The book is Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, by Erik Brynjolfsson and Andrew McAfee. The two authors argue that technological changes are decreasing the ability of the economy to create new jobs, and they argue that the impact is likely to get stronger, such that when the economy fully recovers, employment levels will not themselves completely recover. A busboy might face less worries about his job than a lawyer.

McAfee, a research scientist at the Center for Digital Business at MIT’s Sloan School of Management, recently conducted an interview with Zachary Roth of The Lookout to explain the conclusions of the book he co-authored. McAfee noted that jobs involving "customer interfaces" are particularly at risk – clerks, cashiers, salespeople. We can purchase many things online with no human conversation nor interaction. We can check into our flights at the airport without speaking to a human being, check out at Home Depot, and conduct many routine interactions using a computer or cash machine or robot. McAfee warns that computers are rapidly increasing in the ability to handle transactions. Watson (the computer that won at Jeopardy), Google Car and Siri are just the beginning. This is a vital change to the employment picture because retail is a huge industry in the U.S., containing many middle-class jobs. McAfee says that those involved in this sector are justified in feeling nervous about the encroachment of computers.

McAfee noted that in the past, there was a huge amount of automation, but, looking at the skills for which a human worker was hired, the automation barely encroached on those skills – especially mental and cognitive skills. What galvanized the authors into writing the book, he points out, is that suddenly digital technologies are invading areas were computers never got involved before, where humans had a monopoly on the skills of complex communication – understanding and responding to human speech, translating human languages. Now we have Siri and powerful translation tools. "They're not perfect--none of these is perfect--but they're pretty good," he noted.

The book also discovers the skill of "pattern recognition," looking at large numbers of documents and finding common threads in them – or finding a pattern of deceit or malpractice. This is a skill computers have been terrible at until recently. The "Watson" computer that plays Jeopardy is an example of a computer that can go through hundreds of millions of documents and extract patterns and meaning from them. McAfee said, "So there's this large-scale, recent rapid encroachment into stuff that computers have never been good at before, and where humans were the only game in town. And when we look at what a lot of the middle class, even more educated white-collar workers do, we see them doing complex communication and patterns."

The book also discusses three ways in which automation is likely to increase inequality: skilled workers, especially in STEM fields, will mesh with computers well and salaries will go up. But for mid-skilled workers, which are the middle class, computers are encroaching on what they do. Secondly, technology rewards superstars, since they can suddenly replicate their work and sell it to millions of people. Thirdly, an area like financial services can’t keep up with the competition without having a lot of technology at its disposal.
Asked about job polarization – the trend of shrinking middle-wage and middle-skill job while both high and low skill jobs increase, McAfee referred to David Autor, who has written about this a great deal. It’s not as simple as high skill wins and low skill loses. If the work can’t be automated – walking dogs or serving as a busboy – then job security will remain. This is also true for home health aides and food service workers, "at least partly because technology’s not available to automate those kinds of jobs away."

He adds, "Our point in the book--and we want to stress it over and over again--is that technology is not bad. Technology is not the culprit here. Technology is growing the economic pie and it's improving our standard of living. We think that's fantastic. The last thing we're advocating, is, stop the innovation, shut off the machines, or do anything like that." For those average workers left behind, the book has several recommendations.
Shift education and change the skills taught to young people as well as adults in the workforce; clear the thicket of regulatory red tape; invest in infrastructure –because it is needed and because computers can’t
repair roads and bridges.

McAfee is concerned that America’s social contract is changing. The American standard was that, if you are willing to work, there is a job for you; the deck is not stacked against workers in this land of opportunity. "But," he says, "I believe that we're heading into the next chapter of our economic history, where for a lot of people who don't have exactly the right skills or have been left behind in this race against the machine, there might not be a job waiting for you, at least in the classic sense that we're used to thinking about a job. And we had better start thinking long and hard about how we react to that as a society and an economy."

Summarized by the blog author from the Zachary Roth interview at this link:


-- http://news.yahoo.com/blogs/lookout/american-workers-race-against-machine-165318939.html;_ylt=As3ScoOqjAhwnPBQ9_kg9uWdysp_;_ylu=X3oDMTRpNjFyMmI4BG1pdANGZWF0dXJlZCBCbG9nIFRoZSBVcHNob3QgTmV0d29yawRwa2cDYzQxODU5NzQtM2U4NC0zMzE4LTkwOTEtZmI4YjM3YmRkNWNkBHBvcwMzBHNlYwNNZWRpYUZlYXR1cmVkTGlzdAR2ZXIDMzNiMzg0NDAtMDBiYy0xMWUxLWJmN2YtM2NkMmZhMThjZDZi;_ylg=X3oDMTM1YWlrb2l1BGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDYjQ1MDE0ZWQtMjA0OC0zZWNkLWI0ODMtOThmZWE4ZTc0NTFlBHBzdGNhdANvcmlnaW5hbHN8dGhlZW52b3kEcHQDc3RvcnlwYWdl;_ylv=3
 

Friday, October 28, 2011

Governments Demand Google User Information

The federal government is requesting more and more user information from Google, as can be seen from a statistical summary released by the firm. Google provided a list of each country with which has information disputes regarding information in the first six months of 2011.

This is the fourth six-month summary that Google has released. Previous summaries highlight a major confrontation with the communist government of China over online censorship. The current summary, released October 25, 2011, listed the total number of user accounts targeted. Previous summaries simply listed the number of requests from police, prosecutors, courts and other government agencies worldwide.

Google received at least 15,600 user data requests from January through June of 2011, involving at least 25,400 Google accounts. Such requests are up by ten percent over the last half of 2010. There are over 1 billion users of Google.

Google is an important caretaker of sensitive personal data since it supplies a dominant search engine that processes approximately two of every three online queries in the U.S. and an ever larger share of queries for parts of Europe. More information is garnered through its YouTube video service and its Gmail service. A social networking service has been launched by Google called "Plus," which already has 40 million accounts since its June launch as a competitor to Facebook.

Therefore Google is an important source of information for those fighting crime, terrorism and other activities.
 
Google also listed how many times governments sought to censor video on the company's widely watched YouTube video site or demanded some other piece of content be removed for reasons ranging from privacy concerns to laws prohibiting hate speech.

The volume of worldwide censorship demands from governments remained at roughly the same level it reached in the previous six months, although there were sharp spikes in some countries. In Britain, for instance, the government asked Google to remove 220 videos from YouTube during the first six months of this year, compared with 40 videos during the previous six months. The British government wanted most of the videos taken down for "national security" reasons.

Google declined to provide more details on the videos that the British government saw as
national security risks. Britain's Home Office would only say, "the government takes the threat of online extremism or hate content very seriously."

There were 5950 information requests from the U.S. (up 29% in six months), 1,739 from India (up 2%), 1,300 from France (up 27%), 1,273 requests from Britain (up 10%) and 1060 requests from Germany (up 38%).

The Google report also lists the number of times governments sought to censor YouTube videos. Overall such requests were flat, but Britain’s requests spiked to 220 video requests which were made for "national security" reasons.

The Google report shows that the company agreed to 82 percent f the British government’s requests for censorship. Google usually agrees to at least part of government demands. Google has stated that it must obey laws I the countries where it operates; on the other hand, Google shifted its Chinese search engine to Hong Kong last year to avoid mainland China’s censorship requirements.

Google honored 93% of U.S. requests and 70% of India’s requests but denied 68% of Argentina’s requests and denied more than 50% of requests from Canada, Chile, France, Hong Kong, Mexico, the Netherlands, Russia, Turkey and South Korea.

The report is online at http://www.google.com/transparencyreport/ . Google hopes that by disclosing these government requests every six months it will encourage passage of new laws allowing the company more leverage to deny government access to users’ online communications and activities.

-- summarized from http://news.yahoo.com/google-faces-more-government-demands-user-224729741.html

Thursday, October 27, 2011

Are Social Sciences Necessary? At Government Expense?

Florida Governor Rick Scott has suggested that universities focus on science, technology, engineering and mathematics (STEM) [defined at http://en.wikipedia.org/wiki/STEM_fields ]

rather than on social sciences like anthropology

[link:  http://johnhawks.net/weblog/topics/metascience/florida-hates-anthropology-2011.html .
Here, [from http://www.ice.gov/sevis/stemlist.htm ] is a list commonly regarded as STEM fields outside of medicine:

PhysicsAccountingActuary Chemistry 
Computer ScienceBiochemistryRobotics Mathematics 
Computer EngineeringElectrical EngineeringMechanical Engineering   
Civil EngineeringAerospace engineeringChemical Engineering   
AstrophysicsAstronomyNanotechnology   
Nuclear PhysicsMathematical BiologyOperations Research   
NeurobiologyBiomechanicsBioinformatics   
Acoustical EngineeringGeographic Information SystemsAtmospheric Sciences   

Slate on-line magazine has published a recent article, "America Needs Broadly Educated Citizens, even Anthropologists" at this link:

http://www.slate.com/articles/news_and_politics/politics/2011/10/michael_m_crow_president_of_arizona_state_university_explains_wh.html


In it, Michael M. Crow, president of Arizona State University, argues with Rick Scott, saying:

"As a university president, I can assure Gov. Scott that his approach to both higher education and economic development is misguided and counterproductive. The notion that we must strip away academic programs not seemingly relevant to workforce development reflects a simplistic and retrograde view of the role of higher education in the American economy."

This gets even more quarrelsome and arguementative. Razib Khan, an Unz Foundation Junior Fellow, has a blog on Discover magazine in which he links to all the links above as well as a telling additional source of information, some ratios by Dan Klein, professor of economics at George Mason University (link at:

http://econfaculty.gmu.edu/klein/survey.htm ) :


"As you can see, the ratio of Democrats to Republicans in anthropology is about 30:1. This obviously has an effect in the orientation of the discipline in terms of the values which they impart to their students. A substantial number of anthropologists don’t consider themselves scientists. Quite often they’re clearly activists, and you know very well what direction their activism is going to go. As one of five non-progressive people involved in science communication I have seen firsthand how narrow-minded and partisan people who come out of the social sciences aside from economics can be."
     --Razib Khan


And there is more:

"In a straightened fiscal environment I think it’s reasonable to suppose that public education should be focused on fields which have a practical import. Honestly I think that an elaborated land-grant attitude should suffuse more public universities. I emphasize public, because private universities can continue to cherish the idea of a liberal education. And the reality is that the wealthy and upper middle class who tend to attend these private colleges (only 25% of American college students are at private universities, many at relatively non-selective religious institutions) can afford a liberal education because their connections will guarantee them a good job after graduation. In contrast, working class students are unlikely to be approached by any investment banks after getting a degree in history at a public university. The American elite is highly stratified, and the chances are going to be that the top echelons will come from private universities. No surprise that Harvard, Stanford, and Yale are the top three feeder universities for Congress. There shouldn’t be a worry that the American elite is not sufficiently liberally educated, that elite is drawn from a set of top-tier universities where the student body is elite in class and intellectual aptitudes. Social capital and prestige of their institution are such that a degree in English or or history can still go a long way."

     -Razib Khan


After giving some examples of liberal arts graduates from fine universities whose understanding of their own specialty is superficial and biased, Khan draws four conclusions:

1 – The professoriate seems inordinately hostile to half the political spectrum. That’s fine if you’re drawing from private resources, but this is not usually the case.

2 – Those without social capital derived from family connections need to accrue specialized technical skills to compensate for their deficit. Upper class and upper middle class individuals with an entree into white collar jobs by virtue of their class status can afford to focus on becoming more polished. Everyone should not be given the same advice, because not everyone starts from the same life circumstances.

3 – The average American college student doesn’t learn much, because they aren’t that bright or intellectually oriented. They don’t do their reading until the last second, and have only marginal passion for the books which they purchase. Your mind can’t be broadened if you barely use it.

4 – Those liberal arts graduates who are very bright are too often enamored of the latest intellectual fashion, and are keener upon signalling their ideological purity and intellectual superiority than actually understanding anything.
     --Razib Khan

Khan’s blog of October 24, 2011 is at:
http://blogs.discovermagazine.com/gnxp/2011/10/think-right-not-deep/

Wednesday, October 26, 2011

Negative Quiddity: "A Poisoned Chalice"

The Senate is considering legislation that would authorize the government to detain people indefinitely without trial for a potentially unlimited period of time. The same legislation would also make permanent provisions that inhibit efforts to close the prison at Guantanamo Bay.

We know the importance of respecting the dignity of all human beings. As Americans, we know the importance of the rule of law and due process. Let's not override the values we cherish. These values are under current attack.

The provisions are part of S. 1253, the National Defense Authorization Act for Fiscal Year 2012. Please consider writing to your Senators today to tell them to remove these sections (sections 1031 ["Authority to detain unprivileged enemy belligerents captured persuant to the Authorization to use Military Force"] , 1033 ["Permanent requirements for certifications relating to the transfer of detainees at United States Naval Station, Guantanamo Bay, Cuba, to foreign countries and other foreign entities"] , and 1034 ["Prohibition on use of funds to construct or modify facilities in the United States to house detainees transferred from United States Naval Station, Guantanamo Bay, Cuba"]) from the bill.

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 Indefinite detention without trial
is the
definition of a police state


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A reminder from our own history about "a poisoned chalice":
"If certain acts of violation of treaties are crimes, they are crimes whether the United States does them or whether [then just defeated Nazi] Germany does them, and we are not prepared to lay down a rule of criminal conduct against others which we would not be willing to have invoked against us...We must never forget that the record on which we judge these defendants is the record on which history will judge us tomorrow. To pass these defendants a poisoned chalice is to put it to our own lips as well."

  --Justice Robert H. Jackson, while prosecuting the Nuremberg trials after the defeat of Nazi Germany

Robert Houghwout Jackson
(February 13, 1892 – October 9, 1954) was United States Attorney General (1940–1941) and an Associate Justice of the United States Supreme Court (1941–1954). He was also the chief United States prosecutor at the Nuremberg Trials. A "county-seat lawyer", he remains the last Supreme Court justice appointed who did not graduate from any law school
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Today’s posting is based on Wikipedia research as well as an email from the National Religious Campaign Against Torture.

Tuesday, October 25, 2011

Negative Quiddity: SEC and Hedge Funds

Securities and Exchange regulators may ease a proposed rule tomorrow. If that action takes place, fewer hedge fund advisers would file troves of confidential data with the government. The SEC is scheduled to vote on a final rule for the threshold, which would trigger extensive reporting requirements from large hedge funds as well as other private funds.

The rule is required as a result of the Dodd-Frank oversight law requirements that financial institutions must comply with. As passed into law, the data reporting gives the SEC an inside look into large funds’ concentrations of investments and the proprietary trading strategies.

An anonymous source notes that the suggested easing would take two forms – a raising of the dollar threshold that requires the invasive reporting rules and a relief measure for large private equity fund advisors through merely requiring annual SEC filings instead of the quarterly frequency previously proposed.

Though large hedge fund advisers would still be required to submit more extensive information about the exposure of such funds to various asset classes, those large funds would not have to report detailed position-level data. Private funds do not want their exact holding or trading strategies divulged. Additionally, some lawmakers as well as former SEC commissioners have expressed concern about the cost of preparing such extensive filings.

In the original January, 2011 plan, a tiered regulatory approach was suggested in which funds with over $1 billion in regulatory assets under management would be required to submit the extensive and detailed reports each quarter. Smaller funds would be subject t the rule if registered with the SEC and managing at least $150 million in regulatory assets. The revised rule expected Wednesday requires smaller funds to report to the SEC annually with basic data (fund strategy, leverage and credit risk).

Critics of the hedge fund requirements accused the SEC of not adequately balancing the costs and benefits of the rule, a criticism that caused an SEC rule to be overturned regarding how shareholders can nominate candidates to company boards. Congressman Darrell Issa has been critical of the simplified approach the SEC is pursuing.


Summarized from: http://news.yahoo.com/exclusive-sec-weighs-easing-hedge-fund-data-rule-214637375.html

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What the SEC, Congressman and
Reporter Are Not Telling You

By the blog author

How the SEC itself describes its mission in 2011:

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

-- http://www.sec.gov/about/whatwedo.shtml

Original reason for the SEC as of 1934:
  • Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
  • People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors' interests first.
Originally the SEC sought to protect investors from unfair actions of brokers, dealers and exchanges as well as insure that companies offering securities were telling the truth about their businesses, their securities being sold and the risks of investing in them.

The modern mission of the SEC is to maintain fair, orderly, and efficient markets, facilitate capital formation, and, by the way, appear to protect investors.

-- http://www.sec.gov/about/whatwedo.shtml [emphasis and "by the way, appear to" added]

Investors are secondary to the modern SEC. Maintaining orderly markets and facilitating capital formation are the primary functions. This was demonstrated clearly in the fall of 2008 during the financial crisis and collapse of the stock markets. The SEC, on September 28, 2008, forbade corporations with listed stocks from complying with a new accounting rule, FAS #157. This new rule would have required corporations to mark their derivative contracts to market, which would have revealed the genuine precariousness of their financial positions, as of November 15, 2008.

The SEC did not have the authority to tell the accounting governing body of rules, the Financial Accounting Standards Board, to retract a pronouncement, let alone a complex and well-studied new rule that would have clarified the risks of derivatives for investors.

So the SEC violated its original mission a well as asserted power which it did not have for the political purpose of "calming" the roiled markets, especially the securities of the largest banks (all of them huge holders of derivatives) and the largest insurance company (A.I.G., about to go broke for its exposure to derivatives as an underwriter, legally termed a counterparty).

The actual financial bailout legislation of 2008 granted the SEC supervisory and veto power over all formal accounting rules – making the SEC the czar of financial accounting rules, a power that until that crisis was exclusively the prerogative of certified public accountants, academic (Ph.D.) accountants, and senior bankers serving on the Financial Accounting Standards Board.  FAS #157 went through four iterations before finally becoming a final, weakened version that surely does not adequately inform investors about the risks of securities issued or underwritten by counterparties. The flimsy final version is what the SEC wanted. A key danger here is that the SEC has legislated for itself supervisory authority over a profession (public auditing) which it demonstrably does not understand at a professional level.

 
So in accordance with these actions, the investor is not "served" by the SEC. Politicians, desperately wanting the appearance of market stability and the securities industry (especially the issuers of stocks, bonds, new issues and derivatives themselves) are the primary focus of the SEC.

Derivatives are legal contracts that present a bet, payable by one party (or its underwriting counterparty) in the unlikely event that specific facts and event present themselves. Thus derivatives offer a corporation the opportunity to, in effect, take out insurance. And this insurance is taken without any requirement for reserves (such reserves being required, state-by-state, in the home state of the insurance organization). Derivatives also allow the underwriters, which are the counterparties, usually large banks, to collect remunerative fees while performing no work whatsoever, unless unusual and unpredictable events occur.

Derivatives also allow hedge funds to make large profits unless unusual and unpredictable events occur.  There are 
computerized mathematical models for these unusual and unpredictable events. All a bank or hedge fund needs to do is "balance" these risks to achieve stability – and – substitute for that archaic insurance industry need for "reserves."

There are two problems here: the computerized method of balancing derivatives is, itself, flawed and cannot be absolutely relied upon to minimize risk (see Robert Bookstaber, A Demon of Our Own Design, 2007).
The second problem is that, in the logical processes of an experienced auditor, there is no substitute for reserves when one underwrites betting or risk sharing. The European Union nations have reserves set aside of 1:61 (and underwent a more serious crisis in 2008 than the US). The USA banks set aside reserves of about 1:26, and many were quasi-acquired by the federal government during the 2008-2009 financial crisis. Canadian banks are required to have reserves of 1:18 and that nation’s financial sector was essentially unaffected by the meltdown of 2008-9.

The SEC is setting the bar low for banks and hedge funds over transactions (derivative) for which there are no reserves. The SEC has no authority to require banks (acting as counterparties) to increase their reserves. Yet it presumes for itself under Dodd-Frank the authority to protect the public through a review of large hedge fund transactions and trading strategies.

The SEC lacks the expertise to perform this function. A key element they are reviewing are those computerized derivatives balancing formulae – which are inherently flawed.


Worldwide, there are over one quadrillion dollars in derivatives’ "notational value" (the sum of all the bets if those bets had to be paid off).  One quadrillion dollars is a thousand trillion dollars, or, if you will, a million billion dollars. The GDP of the world is about $70 trillion. The world economy is therefore leveraged through these derivative bets at a ratio of at least 14:1.

Real estate derivatives account for only 30% to 35% of these instruments, but that was enough to cause an economic crash in 2008 from which the USA has yet to recover after three years of struggle.

In early 2009, the current administration came into power.  They were told of these dangers, specifically by former Federal Reserve Chairman Paul Volker and by former Chair of the Commodities Futures Trading Commission, Brooksley Born [see http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html ] .

Obama and Geithner could have pushed through a new Glass-Steagall Act (forcing the separation of banks from brokerages and both from insurance activity), raised bank reserves, allowed the Financial Accounting Standards Board its full independence (including implementation of FAS #157 in its original form with respect to derivatives) and legislatively sunsetted all derivatives that are not traded on an exchange (most of the $1 quadrillion plus in derivatives are traded off-market on Bloomberg machines, thus a bubble can build and burst without warning and without reserves). The president’s political party controlled the White House and both houses of Congress in 2009.

Instead, Tim Geithner recommended that the derivative situation be "managed" rather than solved. This was the approach that was approved.

The can was kicked down the road. And the instrument that kicked the can was the Dodd-Frank legislation which the SEC is frantically trying to simplify for itself to avoid an avalanche of impossible-to-analyze reports.

The SEC is going to be way, way, way too busy to perform its trivialized, secondary modern responsibility of protecting investors.
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Conjecture: those secret agreements that the Federal Reserve doesn’t want audited almost certainly contain the agreement to supply money to major banks in lieu of the reserves those banks should have been maintaining as counterparties -- and those USA major banks had (and still have) hundreds of trillions of dollars of notational value in derivative contracts.

Post Script: Too bad "Occupy Wall Street" hasn’t done its homework on who did what to create the situation they are protesting about. The other bank protesters, the Tea Party, have done a significantly better job of looking into the origins of the problem, though their suggested solutions do not manage risk competently, nor do the Tea Party reforms prevent a future repeat of derivatives-based manufactured crises.

Monday, October 24, 2011

Positive Quiddity: Dick Clark

Richard Wagstaff "Dick" Clark was the most famous and important disc jockey of the twentieth century, particularly important in advancing and propagating rock and roll as a serious and vital form of modern music. He hosted the televised American Bandstand, first as a substitute for Bob Horn, and then alone from 1956 until 1988. American Bandstand was broadcast nationally beginning on August 5, 1957.

Dick Clark also served as a television character actor in the early 1960s, including the final episode of the original Perry Mason series, where his character was the villain. Clark also became an important television producer. He produced and hosted various game shows and collections of filmed highlights, especially bloopers.  There is a patent rose named for him in his honor!

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Radio and Television

After graduating high school in 1947, Dick Clark started as an office worker at WRUN-AM in Rome, NY.

Almost immediately he was asked to fill in for the vacationing weatherman, and within a few months he was announcing station breaks. His quick rise may have been helped by the fact that his uncle owned the station and his father managed it.

Dick Clark received a degree from Syracuse University where he worked at WOLF, a  country music station.  He returned to WRUN for a short time where he used the name Dick Clay.

He went back to his given name and went to work for WFIL, a radio and affiliated television station in Philadelphia. The station decided to follow the trend of announcers playing records over the airwaves. The television station aired a show called Bandstand, an afternoon teen dance show. Clark was given the job as host and replaced Bob Horn.

Clark began his television career at station WKTV in Utica and was also subsequently a disc jockey on radio station WOLF in Syracuse. His first television-hosting job was on Cactus Dick and the Santa Fe Riders, a country-music program. He would later replace Robert Earle (who would later host the GE College Bowl) as a newscaster.


Clark was principal in radio 1440 KPRO in Riverside, California from 1962 to 1982. In the 1960s, he was owner of KGUD AM/FM (later KTYD AM/FM) in Santa Barbara, California.
 
American Bandstand

In 1952 Clark moved to Philadelphia, Pennsylvania, more specifically to Drexel Hill, Pennsylvania, and resided within the Drexelbrook Community where he was a neighbor with Ed McMahon. There he took a job as a disc jockey at radio station WFIL. WFIL had an affiliated television station (now WPVI) with the same call sign which began broadcasting a show called Bob Horn's Bandstand in 1952. Clark was a regular substitute host on the show and when Horn left, Clark became the full-time host on July 9, 1956. The show was picked up by the ABC television network, renamed American Bandstand, and was first aired nationally
on August 5, 1957. On that day, Clark interviewed Elvis Presley.

Clark also began investing in the music publishing and recording business in the 1950s. In 1959, the United States Senate opened investigations into payola, the practice of music-producing companies paying broadcasting companies to favor their product. Clark was a shareholder in the Jamie-Guyden Distributing Corporation, which nationally distributed Jamie and other non-owned labels. Clark sold his shares back to the corporation when ABC suggested that his participation might be considered as creating a conflict of interest. In 1960, when charges were levied against Clark by the Congressional Payola Investigations, he quietly divested himself of interests and signed an affidavit denying involvement. Clark was not charged with any illegal activities.

Unaffected by the investigation, American Bandstand was a major success, running daily Monday through Friday until 1963, then weekly on Saturdays until 1987. In 1964, the show moved from Philadelphia to Hollywood, California. Charlie O’Donnell, a close friend of Clark's and an up-and-coming fellow Philadelphia disc jockey, was chosen to be the announcer, a position he held for ten years. O'Donnell also announced on many 1980s versions of Clark's Pyramid game show; he continued to work with Clark on various specials and award shows until his death in November 2010.

Clark produced American Bandstand for syndicated television and later the USA Network, a cable-and-satellite-television channel, until 1989. Clark also hosted the program in 1987 and 1988; David Hirsch hosted in 1989, its final year. American Bandstand and Dick Clark himself were honored at the 2010 Daytime Emmy Awards.

Youthful appearance references

Before his stroke, Clark's perennial youthful appearance, despite his advancing years, was a subject of jokes and commentary in the popular culture, most notably his nickname of "America's Oldest Living Teenager".

One of Gary Larson’s The Far Side cartoons has the caption, "Suddenly, on a national talk show in front of millions of viewers, Dick Clark ages 200 years in 30 seconds."

In Episode 320 of Mystery Science Theater 3000, John Carradine - playing a mad scientist in the movie The Unearthly - is trying to get another character to consider eternal life when he says, "Suppose you could wake up every morning and see your face untouched by time." Crow replies, "Like Dick Clark?"

In the Police Squad! episode "Testimony of Evil (Dead Men Don’t Laugh)," Dick Clark, appearing as himself, purchases Secret Formula Youth Cream from street snitch Johnny the Shoeshine Boy.

In the film Peggy Sue Got Married (1986), Kathleen Turner, who has time-traveled back to circa 1960, is watching Dick Clark on American Bandstand with her sister and says "That man never ages." Her sister doesn't seem
to understand what she means.

In The Simpsons 1999 Y2K episode, at midnight a computer glitch causes Dick Clark to melt and he is revealed to be a robot.

In an episode of The Fresh Prince of Bel-Air, Clark appears as himself. Carlton jokingly says "How come I got older and you stayed the same age."

Notable Awards

[There is a patent rose named for him -- the Dick Clark Grandiflora -- a 2011 All American Rose Selection winner (AARS -- a very prestigious designation) -- see http://www.weeksroses.com/rose_dick_clark.htm ]


                                               Dick Clark rose

Clark has received the following awards:
  • Emmy Awards (1979, 1983, 1985, and 1986)
  • Daytime Emmy Lifetime Achievement Award (1994)
  • Peabody Award (1999)
He is also an inductee at several Hall of Fame locations:
  • Hollywood Walk of Fame (1976)
  • National Radio Hall of Fame (1990)
  • Broadcasting Magazine Hall of Fame (1992)
  • Rock and Roll Hall of Fame (1993)
  • Academy of Television Arts & Sciences Hall of Fame (1993)
  
                                                 Dick Clark, 1961


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                      Positive Quiddity and Dick Clark

In Clive Barker’s The Great and Secret Show, Quiddity represents the greatest moments of life, a quick trip to the shore of creativity that occurs at birth, death and the first night with one’s true love. "Positive Quiddity" represents the highest level of human achievement as defined in this blog.

So why is a disc jockey turned game show producer and bloopers host like Dick Clark listed as an exemplar of positive quiddity?

It isn’t because of his hosting of the New Year’s Eve show for decades. It has to do with the first three years of the national television version of American Bandstand at the same time (1957 to 1960) as the payola scandal.

There’s an on-going heated argument about the origins of rock and roll. But if you know and grew up with boogie woogie (as I did) it is obvious that rock is boogie woogie with lyrics. The original boogie woogie lyrics were instructions to the dancers as can be heard in "Pinetop" Smith’s "Pine Top’s Boogie Woogie" [recorded in 1929 just before Smith died and still available as a cut on the Boogie Woogie Giants CD, ASIN B00004VMA6]. Boogie Woogie languished in the early 30s but this very song was picked up by the big bands in the late thirties. Boogie Woogie flourished, and Albert Ammons became the definitive boogie woogie piano player of the 1940s.

In 1949, a teenager with a perfect, smooth tenor voice and a boogie piano technique almost as good as Ammons, recorded a song, "The Fat Man," for an R&B label. The artist was Fats Domino, and his song was a hit on R&B stations. There were more hits. By 1954, some white bands were writing this kind of music, especially Bill Haley and the Comets with "Rock Around the Clock," a hit that was used a year later in the motion picture The Asphalt Jungle.  This classic rock and roll of the 1950s was a combination of vocal singing with a boogie woogie beat was demonstrated by the appearances of Fats Domino on the program and by Doo Wop performers singing over a boogie woogie beat (not necessarily on the piano) as exemplified by The Platters, also a popular group that appeared on American Bandstand.


 With R&B hits and motion picture inclusion, white teenagers were paying attention to rock and roll!

Mitch Miller, a trained classical oboist and executive with Columbia Records, hated rock and roll. He turned down Elvis Presley for a contract! Other industry heavyweights were on his side in stunting and killing off this new, snotty, fast growing form of jazz, which had a peculiar ability to attract and hypnotize young Americans.

And that wasn’t all. Southern evangelical and fundamentalist churches ranted about rock and roll from the pulpit. It was too sensual and too erotic. It caused young people to go out of control. Rock and roll was catching on with white teenagers! This satanic music must be stamped out. Public bonfires were lit into which congregations threw rock and roll vinyl records into the fire!

The music business was not a profoundly honest enterprise in those days. One way to promote a particular band was to pay a disc jockey to play it – "payola" -- and there was a lot of that going on in the mid-1950s.

Into this increasingly organized effort to mute or kill rock and roll at the beginning of a national scandal over crooked disc jockeys began, in August of 1957, a daily, nationwide, afternoon rock and roll television broadcast, American Bandstand with Dick Clark.

Dick Clark was young, handsome, great with a microphone and genuinely enthusiastic about rock and roll. He was more than peppy; he was respectful and impressed with the rhythm and blues artists that came on the program to lip-synch their hits.

Smear Dick Clark, knock him off the air, and rock and roll would have taken an enormous and potentially fatal hit. So that’s exactly what was done. He was accused of payola himself and dragged into a national scandal that included Congressional hearings and indictments.

The campaign against Dick Clark didn’t stick. Clark took over American Bandstand because the original host, Bob Horn, was picked up for drunk driving. Horn was also involved in a prostitution ring. The station couldn’t have someone with this record on television every afternoon with teenagers. Dick Clark was offered the job. All this happened a year before American Bandstand went national. By personal experience, Dick must have known that it was poison to develop a bad reputation and to cheat or engage in vice. Furthermore, he knew the business. He grew up with radio – his father was in the radio business since the 1920s.


On the air, Dick Clark’s respect and admiration for Fats Domino and the Doo Wop groups that came on American Bandstand were obvious to the television viewers. Clark steadily told interviewers that rock and roll was great art and a splendid way to bring music to the teenagers of America. He was calmly and consistently on the side of America’s young people.

Payola charges against Dick Clark weren’t any good and were dropped. American Bandstand stayed on the air. This made Clark, justifiably, a hero to teenagers and to young children like me. Here was a man who was "on our side" and stood by what he stubbornly and unconventionally regarded as high quality music.

Clark was never a musician himself. He was a great disc jockey – he knew what would catch on and what was a dud. He wanted his audience to have the best, the most interesting, the most memorable. And he couldn’t be pushed around about it.

Nor did he whine about being framed. Nor did he gloat when the false charges were dropped. So he had a future with the television industry. And he used his talent for spotting what the audience would like to bring to them the music they liked, the play they liked (game shows!) and some boisterous laughter (bloopers!).


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                      Footnote about the Theme Song

Charles Albertine, Les Elgart, Larry Elgart and Bob Horn (original host of the show in Philadelphia) wrote the American Bandstand theme, Bandstand Boogie. Albertine himself was the main arranger for Les and Larry Elgart (note the competition and hand-offs back and forth between the trumpet and saxophone in this instrumental). Dick Clark wisely retained this theme when he took over the program in 1956. Clark also frequently featured rock and roll instrumental music on American Bandstand.

Bandstand Boogie,which closed American Bandstand as the credits rolled, was an impossibly avante garde and modern piece of music for the early 1950s. It surely influenced Henry Mancini in writing the Peter Gunn theme and Pink Panther theme as well as Monty Norman’s James Bond Theme as arranged and conducted by John Barry.

Rock and roll still outsells the punk and hip-hop subgenera today. Rock is the most successful and universal form of jazz.

Sunday, October 23, 2011

China Cuts Off World's Rare Earth Metal Supply

The Hand Giveth, the Hand Taketh Away
by Jason Mick, blog, October 21, 2011

China only has about 30 percent of the world's rare earth metal deposits, but thanks to clever planning it today controls 97 percent of the world’s production of rhese scarce resoureces. Deposits of this family of 17 elements – vital to power electronics found in televisions, smart phones, electric vehicles, and a variety of other devices -- are found in California, Canada, Australia, and Russia, but it will take years to bring them online.

In short the world is at China’s mercy for now when it comes to rare earth supply. And China's biggest rare earth metal producer -- the Inner Mongolia Baotou Steel Rare-Earth (Group) has announced that it is severing shipments to the U.S., Japan, and Europe for one month in an attempt to artificially inflate prices.

Inner Mongolia Baotou Steel Rare-Earth also plans to buy rare earth metals in an attempt to further move prices upward. The company already controls 60 percent of China's rare earth production, thanks to the Chinese government's decision to merge 35 other local companies into the Inner Mongolia business, or fade them out.

[the rare earth metals being discussed include: scandium,. lanthanum, cerium, thulium, praseodimium, neodimium, europium, gadolinium, terbium,. dysprosium, holmium, erbium, ytterbium, lutetium]

While the Sichuan province in the southwest and Shandong in the east produce significant amounts of rare earth as well, the Inner Mongolia Baotou Steel Rare-Earth Group's decision should be enough to move prices significantly.

Doing so will benefit China in a couple ways. First, prices will almost certainly go up, reverse a downward slide. Lynas Corp., an Australian rare earth producer reveals that since June the price of neodymium oxide has declined 34 percent to $157 per kilogram, while europium oxide is down 35 percent at $2,904 per kilogram.

Sun Fan, a rare earth analyst for Goldstate Securities in the southern city of Shenzhen comments in a Associated Press interview, "The impact on the market supply will be substantial. The dual measures of suspension and purchase will offer support for the rare earth prices and make the prices gradually pick up in the future."

Aside from raising prices higher, the pause in production will allow China to try to kick start its efforts to produce locally produce magnets. When it comes to the production of the magnets used in the electric motors of hybrid and electric vehicles, typically the biggest profit is not realized at a commodity level, but at a magnet producer level. Thus in the past foreign nations like the U.S. and Japan have pocketed the biggest profits. China hopes to change that.

China's Ministry of Land and Resources in September bragged that rare earth metals were the nation's "21st century treasure trove of new materials." It argued that exports should be tightened, choking foreign supply and favoring Chinese manufacturers.

http://www.dailytech.com/China+Cuts+Off+Worlds+Rare+Earth+Metal+Supply/article23069.htm

American Manufacturing: Engineers not M.B.A.s

Bob Lutz had a career in Detroit as an executive with Ford, BMW, Chrysler and GM, where he rose to Vice Chairman of the organization. He has written a book, Car Guys vs. Bean Counters; The Battle for the Soul of American Business which was reviewed by Rana Foroohar in the July 18, 2011 Time magazine.

The central target of the book is the "bean counters," the M.B.A.s who have come to play a large role in American corporations. Foroohar notes that FedEx routing of packages through logistical hubs and the consulting industry came out of this revolution, but the growth of the financial industry has contributed to the tendency for management driven by balance sheets.

In his book, Lutz says M.B.A.s should be fired and engineers should manufacture the product. For the first half of the twentieth century, giants like Ford, General Electric and AT&T, as well as many others, used technology to develop the best possible products in the belief that if you build it better, the customers will come. This attitude has been replaced by a mindset aimed a short-term profitability.

For the foreseeable future, there will be a lot more M.B.A.s churned out of graduate schools than engineers.

The same may be true in China, where 40 new graduate schools of business are planned within a few years. Lutz responded to this trend this way: "That’s the best news I’ve heard in years."

http://www.time.com/time/magazine/article/0,9171,2081930,00.html

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The blog author agrees with this reasoning, in spite of possessing an MBA and working for years as a CPA.

Friday, October 21, 2011

Certain Gadgets Are Going to Die Soon

Seven Gadgets that Won’t Be Around in 2020

     Stand-alone GPS Systems
     E-Readers
     Feature Phones
     Low-end digital Cameras
     DVD players (Blu-ray players will hang on for a while longer)
     Recordable CDs and DVDs (portable hard drives and
          USB drives will take over)
     Video Game Consoles
  

  -- http://shopping.yahoo.com/articles/yshoppingarticles/717/7-gadgets-that-wont-be-around-in-2020


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Time marches on!  Death and taxes spring eternal, but formats don't last as long as the merchandise.   Some of this is planned obsolescence, but much of it derives from slightly better solutions to existing problems as well as advances in technology, especially denser and denser computer memory.

Other new products are coming to market -- plain-sight, glasses-free, home three-dimensional television, for example.  That will make live sports more exciting, and may spell the end of live theatre in the USA.  There are less than 100 major plays watched on a few stages in the United States, most of them surviving off government money and tourism.  If there are excellent productions available in 3D, electronically, why bother to spend an evening at the theatre?

Thursday, October 20, 2011

The Internet Pushes Retailers to Change

E-commerce changes browsing shoppers to
"surgical" or "mission" retail shoppers

A central rule of retail business is: Get the shoppers to come in to the store, then sell them stuff they didn’t plan on buying. These are impulse purchases from buyers browsing the aisles.

Browsers are less and less common at retailers today. The "surgical" or "mission" shopper has arrived. The mission shopper only visits three stores on a shopping trip, not the five stores the typical shopper visited on each trip before the recession. Foot traffic in retail stores is falling. This represents a distinct shift in buying behavior.

Electronics shoppers are particularly shrewd and likely to research gadgets online before shopping for them. Apparel stores have some breathing room because shoppers have to try on the garments.

The National Retail Federation estimates that holiday shopping sales will increase 2.8 percent this year, but the sales could be higher if mission shoppers browsed.
 
"Most retailers are geared for people to come buy," said Maddocks, a former chief marketing officer at Nike Inc. (NKE)’s Converse. "Retail has to start gearing itself to sell, to get more out of every person that walks through the door."

The NRF numbers show that shopping traffic and sales used to rise and fall together. But last year, retail sales grew 3.5 percent although traffic declined by half a percent. The trend has continued in 2011 as "surgical" shopping continues. Men, who adapted to electronic commerce earliest, were the first mission shoppers. Now women are drawn in, and this is critical since women outspend men in retail shopping. Many women go to a store and zoom right in on what they need, as a man would do. So the art of retail shopping has changed, though most retailers have not adopted procedures to deal with this situation.

Retails are always concerned with the "conversion rates," which is the percentage of people that actually buy something after walking in the door. Americans are making fewer trips to the store, so each shopper is more valuable. Persuading them to buy more than before is vital to retailers.
 
The recession caused many retailers to stop refurbishing stores and to cut the sales staff. The effect was to make the web even more appealing! Now retailers are refurbishing their stores and using new technology, services and merchandizing to engage these mission shoppers. The retailer has let the consumer get ahead of the store. Now retailers are playing catch-up.

Retailers are
     Teaching employees to read body language to assess browsers/mission shoppers
     Bringing back greeters to improve the shopper’s mood
     Changing "How may I help you" to "What kind of shoe are you looking for?"
     Placing shoes and apparel together hoping shoppers will buy outfits
     Using in-store entertainment
     Using scents and aroma to create an atmosphere conducive to buying
     Some are adding wi-fi, I-pads and portable checkout devices to add convenience
          to shoppers used to buying on-line.

Catching up may prove difficult, since e-commerce itself is changing rapidly.

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Summarized from an article by Matt Townsend of Bloomberg at:

http://www.businessweek.com/news/2011-10-17/best-buy-sales-at-risk-as-surgical-shoppers-lose-impulse-retail.html

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Footnote:  The blog author has been a "surgical" shopper for several years.

Wednesday, October 19, 2011

Found: Youngest Planet Ever

The Associated Press reports that Adam Kraus, of the University of Hawaii’s Institute for Astronomy, has discovered the first dust ring around a star forming itself into a planet. The star itself is two million years old and 450 light-years from earth. It is estimated that the dust ring has been forming over the last 50,000 to 100,000 years.

Titled LkCa 15b, this is the youngest planet ever observed, breaking the record of a planet about five times older. This planet was located by Kraus and his colleague Michael Ireland from the Macquarie University and the Australian Astronomical Observatory. They employed the Keck telescopes on Mauna Key.

The light of the star that is forming a planet by gravity is so relatively bright that it has prohibited astronomers from observing any new planets. Kraus and Ireland changed the shape of the mirror to avoid distortions from the earth’s atmosphere. They also put masks over most of the telescope’s mirror. These two techniques together allowed them to observe the faint ring around the star. They had been studying 150 young, dusty stars, which led to a more concentrated study of a dozen of them. The second of those dozen revealed the dust ring of a forming planet.

Summarized from: http://news.yahoo.com/hawaii-astronomer-captures-image-forming-planet-230958310.html

Tuesday, October 18, 2011

Negative Quiddity: Bank of America Derivatives

The Bank of America was downgraded by the Moody’s credit agency last month. It has transferred derivatives from its brokerage subsidiary (Merrill Lynch) to another subsidiary full of insured deposits. The Federal Reserve appears to approve of these derivatives transfers, which would give relief to the parent Bank of America holding company. The Federal Deposit Insurance Corporation appears to disagree, since FDIC would be obligated to pay depositors in the event of bank failure, indirectly using FDIC money for derivatives.  Bank of America itself, according to knowlegeable observers, doesn’t believe regulatory approval is needed for the transfer.

http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html

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The stock market had been down sharply on Monday’s trading. The major indexes rebounded nearly completely today, Tuesday, though these Bank of America transfers were not mentioned in the headlines as involved in the day’s optimism. The derivatives transfers between the Bank of America subsidiaries were reviewed very shrewdly and negatively at this link:
http://www.zerohedge.com/contributed/federal-reserve-and-bank-america-initiate-coup-dump-hundreds-billions-dollars-losses-ame?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29

Monday, October 17, 2011

Very Negative Quiddity: M R S A

There is a dangerous group of infectious bacteria called MRSA (for methicillin-resistant Staphylooccus aureus).  It’s hard to treat, in some cases impossible.  There is a new superbug strain 398 of this bacteria. How this new and powerful strain is transmitted to others remains unknown. The disease infects skin and soft tissues, causes pneumonia-like lung infections, can cause infection within the bloodstream itself, and can inflame the inner lining of the heart.
A current summary of this threat has been posted on the Scientific American blog at:
-- http://blogs.scientificamerican.com/observations/2011/10/16/drug-resistant-staph-infections-in-europe-could-mark-start-of-a-new-epidemic/

Sunday, October 16, 2011

What "Occupy Wall Street" Needs to Know

At present, there is a protest movement against banks, often called "Occupy Wall Street." It has staged growing demonstrations in New York that have spread to other cities and, for that matter, to other countries.
There is something you need to know about banks and financial regulation if you are a demonstrator or are sympathetic with those demonstrations. Simply put: "The train has left the station." By this I mean, the time to stand up for "the 99%," rather than the rich bankers, was the Spring of 2009. It didn’t happen then, so it can’t happen now. This devil is in the details.

Harper has published a book, Confidence Men, written by Ron Suskind. This book has received shrill, antagonistic reviews by Jacob Weisberg, the chairman of Slate, and by Steven Rattner, a former investment banker. John B. Judis, a senior editor at The New Republic, published his own, mostly positive review, printed in the October 13, 2011 edition of the magazine. Judis begins his review by muting or cancelling much of the criticism of Confidence Men; then he begins an analysis of his own.

Judis’ review contains a very succinct and intelligent summary of Suskind’s coverage of the Obama administration early in 2009, when the new administration faced the critical issue of large, insolvent banks. Below is a summary of Judis’ review of Suskind’s coverage of this banking issue.
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In early 2009, at the beginning of the Obama administration, Lawrence Summers (Director of the United States Economic Council) and Christina Romer (Chair of the Council of Economic Advisers) wanted the big banks taken over, shut down and re-opened under new management.

Treasury Secretary Tim Geithner had been head of the New York Federal Reserve in September, 2008, when Lehman Brothers failed and ignited a worldwide financial panic. Geithner’s answer was to relieve the big banks of their bad loans and institute "stress tests" on them, only taking them over, temporarily, if they failed.

Obama sided with Summers and Romer at first, figuring it would "strike a blow for prudence" and "begin to change the reckless behavior of Wall Street and show millions of unemployed Americans that accountability flows in both directions." But, after long talks, the decision was to take over only Citibank – which was especially wobbly – thereby frightening the other banks into compliance with a reform agenda. But Geithner balked and the President wound up following his Treasury Secretary’s suggestions.

Financial reforms: Geithner and Summers preferred to delay reform to avoid rattling confidence in the financial sector. On the other hand, former Federal Reserve chairman Paul Volcker as well as White House Chief of Staff Rahm Emanuel wanted to propose reforms that would restrains the banks from repeating mistakes that led to the 2008 crash. Volker told the book author, Suskind, "Well, right now, when you have your chance, and their breasts are bared, you need to put a spear through the heart of all these guys on Wall Street that for years have been mostly debt merchants." Emanuel said that bank reform would be "political gold."

Obama agreed with Summers and Geithner; then he met with bankers. One of these bankers told Suskind,

"The president had us at a moment of real vulnerability. At that point, he could have ordered us to do just about anything, and we would have rolled over. But he didn’t. He mostly wanted to help us out, to quell the mob." But voters began complaining about the administration’s ties to Wall Street and, in Massachusetts, Scott Brown was leading a race for the late Ted Kennedy’s U.S. Senate seat. So Obama got tougher, announcing support for a "Volker Rule" which would forbid banks from using depositor’s saving to engage in proprietary trading.

Congressional Democrats introduced legislation to detach rating agencies from banks whose offerings they rated as well as proposals to subject derivatives to open trading on exchanges*.  But as the year wore on, Obama did not fight as these proposals were gutted or watered down. The Consumer Finance Protection Bureau was part of the final bill as signed.
 
Geithner’s theory of investor confidence suggests the administration had no alternative to coddling the big banks. Though other nations, including Great Britain, selectively took over banks, Obama was wary of a public fight with American banks.

Suskind posits that failing to regulate the banks opened the US economy to repeating the abuses that led to the financial crash of 2007-8. The reviewer doesn’t agree, but thinks the lack of control over proprietary trading and the weaknesses in the Dodd-Frank legislation could lead to "speculative enthusiasms" in the bill. Both the author and the reviewer at the New Republic find Obama ineffective in dealing with these critical causes of America’s on-going sour economy.

The entire review is online at: http://www.tnr.com/book/review/confidence-men-ron-suskind?page=0,0

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* derivatives are legal contracts that constitute bets on future events. In a manner of speaking, they are often used as a unique substitute for insurance, an alternative which does not require that any reserves be set aside. Nor is there the insurance protection against over-coverage (you cannot be reimbursed for 200% or 300% of home insurance no matter how many policies you take out – but you can buy 300% of derivatives for a catastrophe and be reimbursed for more than the gross amount of the catastrophe).

Derivatives were critical to the 2008 crash. They also magnify the current Greek situation of insolvency into a global currency crisis. They remain effectively unregulated, since most are not traded on exchanges; the majority of derivative contracts are sitting in file cabinets and are traded over Bloomberg machines. The "notational value" (which is the amount of payment required if an unlikely event happens as described in the contract) of all derivatives worldwide is over one quadrillion dollars, which is a thousand trillion, in other words, a million billion. Large banks – including all of America’s large banks – use derivatives by offering their own underwriting services as a "counterparty." This means that banks agree to step in if an unlikely event bankrupts the losing end of a derivative bet. In normal times, this is a money machine for banks, as they get paid fees for acting as a counterparty without ever having to do anything or pay out to anyone.

To please its customers and attract business, the nation’s largest insurance company, AIG, then a Dow 30 component, offered its services as underwriting counterparty for the derivatives of its clients free! Because the risks were balanced and therefore unlikely to carry any risk to AIG overall. AIG swallowed over $181 billion in federal money to stay afloat from 2008-9. Thanks to that, it still exists as a tiny shadow of its former self.

Got it? Banks are still counterparties for hundreds of trillions of dollars worth of derivative contracts. Compare this amount with the U.S.A. gross domestic produce of roughly $14.5 trillion. When there is a sharp, unexpected major market move, the banks themselves can go underwater. It happened in 2008 and the public provided the reserves that should have been set aside by the counterparties. Nothing effective has been done to prevent a recurrence of that crash, including the gutless, toothless Dodd-Frank legislation.

Proof that this is correct: The G7 nation with the highest bank reserve requirements, Canada, was unaffected by the crash of 2008.

It is likely that history will regard Obama’s failure to regulate derivatives in 2009 as his worst mistake as President.  A crash that sparks derivatives to the point of bankrupting the (banking) counterparties has the potential to be unstoppable, worldwide.

How likely is it that the "Occupy Wall Street" demonstrators are going to demand derivatives reform? I have low confidence in their sophistication in this area.

--the blog author

Saturday, October 15, 2011

European Debt Crisis

Lurching Toward Recapitalization and
a Subsequent Default by Spain and Italy

US Treasury Secretary Tim Geithner said today that the plan the European Union presented to the G20 partners contains the "right elements" for dealing with the European debt crisis. His statement said it provided "encouraging news" and a "much more substantial firewall" as well as "sustainable interest rates," and "a broad recapitalization of banks" and "further support for a sustainable program in Greece."

Geithner said adamantly that the International Monetary Fund has adequate resources without expansion. This is important as previous news stories have discussed additional funds be added to the IMF from the United States, Germany, China and Australia. Geithner has also suggested that western economies stimulate growth and China loosens controls on its currency.

More at: http://economictimes.indiatimes.com/news/international-business/european-debt-crisis-plans-contain-right-elements-us-treasury-secretary-tim-geithner/articleshow/10369083.cms


Spain’s credit rating has been downgraded from AAA to AA. The Eurocrats and the European Financial Stability Facility (EFSF) do not have the resources to combat the default of a major economy like Spain or Italy, let alone both.

A small upcoming default from Greece is not being met with vigor and wisdom by the German and French financial sectors. They need to tell the Greeks to go back to the basis of their own soft currency, the drachma, or show the financial stability of their government by carrying through with tough decisions about the financial irresponsibility of that government. This tough talk is not being made forcefully. Greece is unable to tighten its belt enough to meet the standards because of political unrest.

Therefore the crisis is only beginning, and with further guarantees provided to Greece, Spanish and Italian defaults will be more probable. Should those happen, the IMF would be unable to assist without great additional funding, especially from Germany, the United States and China. Geithner is saying the IMF has enough resources to resolve the problem – what he meant by that is that the IMF has enough resources to resolve the current problem, assuming there is no escalation from a bank default by a larger Euro member.

Geithner is effectively bluffing. The United States has its own financial problems, and these are in the hands of a "supercomittee" of extremely partisan hacks, selected for their stubbornness and lack of ability to compromise. It’s unlikely that there will be any agreement on US federal cost cutting, and when that happens later this fall, so the alternative will be percentage cuts department-by-department. It will be interesting to see how these cuts affect Social "Security" and Medicare. The United States will undergo a financial tempest in a teapot that will continue through 2012 and the presidential election. No American money will flow to the IMF or to the irresponsible Euro nations along the Mediterranean. Geithner is covering for this by asserting that the IMF has enough resources as it stands.

He’s not being very candid.  Although America is in a box, Geithner wants to look strong and calm.

The Europeans who are in the driver's seat -- France and Germany -- aren't winning any awards for financial wisdom, either.  By kicking the can down the road, they invite a Spanish or Italian default, or both, which invite a continental banking and currency crisis.
Comments by the Blog Author

Friday, October 14, 2011

China, US, Australia and Canada Fight the IMF

China, the United States, Australia and Canada together oppose the expansion of the International Monetary fund (IMF) to a larger size capable of dealing with the problems of the Euro centered on Portugal, Italy, Ireland, Greece and Spain.  the countries that oppose IMF expansion want European banking organizations and mechanisms to deal with a Euro debt issue, leaving the IMF to continue with its original mission. 
The idea of an increase of $350 billion to the IMF’s assets was openly and successfully opposed by the United States, Canada and Australia. The dominant sources in the IMF – Germany, Japan, the United States and China, appear to feel the current $380 billion in assets is sufficient.

"G20" finance ministers are meeting in Paris and the block to a wider IMF capable of aiding the European nations was effective. There will be more talks tomorrow (Saturday).

Reuters reported, "The United States is among countries keen to keep pressure on the Europeans to act more decisively to end the two-year-old debt crisis that began in Greece but has since spread to Ireland and Portugal and is lapping at Spain and Italy." The article then quotes the Australian Finance Minister, Wayne Swan: "The first priority here is for Europeans to put their own house in order."

Standard and Poor’s cut Spain’s credit rating, making it clear that a larger country than Greece is currently in trouble.

Fears of a Greek default have been rattling world stock markets all summer. France and Germany are likely to ask banks to accept bigger losses on the Greek debt that they carry. The first bailout, asking for writing off up to 21 percent of the loans, appears to be insufficient. Reuters quotes French Finance Minister Francois Barin stating, "It will be more, that's more or less certain."

Greece, Portugal and Ireland are being helped by an entity called the European Financial Stability Facility or EFSF. The problem is that EFSF would be overwhelmed if it were needed to assist the larger economies of
Italy and Spain. The IMF is closing its teller window in this situation. One plan is to turn EFSF into a bank.

A G20 summit is scheduled November 3-4 in Cannes, France. In addition to the European debt crisis, China is preparing to commit for a growth in domestic consumption over the next five years. China has not committed to floating its currency, the yuan, preferring to offer growth in domestic spending as an alternative.

BLOG AUTHOR’S COMMENTS
Over the past week, an eerie calm and peppy confidence have been evident in the U.S. stock markets, almost as if the debt crisis of Greece and possible defaults of larger Spain and Italy had been solved and were no longer a factor.

But the news is that the largest Pacific economies – the United States, Canada, China, and Australia, do not want those monies they have committed to the IMF to be utilized in a European debt problem which has grown continuously, without coming under the control of the large European economies of France and Germany.

With the IMF essentially off-limits are a solution or palliative for the European debtors, it is likely that the US stock market will revert to the rolling volatility experienced in July, August and September.

There is an on-going question here: Why haven’t the French and Germans told the Greeks and other debtors to tighten their belts further or face dismissal from the European Union and the Euro? The lack of commitment by the European debtors invites a return to their soft individual currencies rather than continued participation in a Euro they don’t fully qualify to use.