Author Archives: ape man

The US Is Paying Pakistan To Kill US Soldiers

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Something is up. It seems that people in the highest levels of the US and Pakistan governments have decided to tell the New York Times what everyone basically already knows. Pakistan is supporting the Taliban militants who are fighting US soldiers and they have no intention of ever stopping that support. A short quote from the article….

Details of the ISI’s continuing ties to militant groups were described by a half-dozen American, Pakistani and other security officials during recent interviews in Washington and the Pakistani capital, Islamabad. All requested anonymity because they were discussing classified and sensitive intelligence information.

The American officials said proof of the ties between the Taliban and Pakistani spies came from electronic surveillance and trusted informants. The Pakistani officials interviewed said that they had firsthand knowledge of the connections, though they denied that the ties were strengthening the insurgency.

And later on in the article, American officials say what everyone knows….

Top American officials speak bluntly about how the situation has changed little since last summer, when evidence showed that ISI operatives helped plan the bombing of the Indian Embassy in Kabul, an attack that killed 54 people.

“They have been very attached to many of these extremist organizations, and it’s my belief that in the long run, they have got to completely cut ties with those in order to really move in the right direction,” Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, said recently on “The Charlie Rose Show” on PBS.

The Taliban has been able to finance a military campaign inside Afghanistan largely through proceeds from the illegal drug trade and wealthy individuals from the Persian Gulf. But American officials said that when fighters needed fuel or ammunition to sustain their attacks against American troops, they would often turn to the ISI.

When the groups needed to replenish their ranks, it would be operatives from the S Wing who often slipped into radical madrasas across Pakistan to drum up recruits, the officials said.

The whole article should really be read by everyone. The most interesting thing about the article is that is was high level Pakistan officials who talked to the New York Times reporters. I wonder what caused them to decide to talk? It seems like this article is designed to set the stage for something but I am not sure what.

Regardless, the article highlights the problem with America’s ruling class. They are so degenerate that they are propping up a regime that they know is complicit in ongoing attacks on American soldiers. They do this not because they want American solders to get killed but because they are afraid of what will happen if they stop the support.

They can’t make hard decisions. They don’t have the guts to do anything that might have real costs. And this can not be blamed solely on Obama. These problems were already clear when Bush was in charge. Nor is it solely a problem with the White House. Everyone who is informed in this country already pretty much knew everything in this article. But no “serious” pundit has been willing to lay out the true choices facing America.

The truth that nobody wants to admit is that we have only two choices. We can swallow our pride and leave Afghanistan with all the catastrophic implications that choice has. Or we can give Pakistan a true “us or them” ultimatum with all the catastrophic implications that such an ultimatum would necessarily entail.

What we are doing right now is not a sane choice no matter what your ideology is. We are sending Americans in who will die trying to create a stable Afghanistan when we know they can never succeed as long as ISI is supporting the other side. We are wasting blood and money simply because our political caste is composed of cowards who want to kick the can down the road until a solution magically appears. In the end, though, we are either going to have to leave or else fight Pakistan. All the money and blood that was spent to try to avoid that choice will have been wasted.

In a way, the New York Times article is almost a good sign. At least the political caste is starting to go on record as admitting to things that everyone already knows to be true. I don’t know what they are trying to set the stage for, but acknowledging the facts is a move in the right direction.

A test of inductive reasoning

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Here is a cool little game that makes an important philosophical point. Sadly the game can only be played once. That is because they never change the underlying rules so each time you play the game will get easier even if you do not read the explanation at the end. Still, I only got 3 errors so all you competitive people can see if you can do better on your first try.

(h/t William M. Briggs)

Words to Remember

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From Macro Man….

Macro Man was admonished last night not to repeat his mantra about 6% rallies. Coming so soon after the last 6% rally, there would appear to be little utility in doing so, so he won’t. Instead, he’ll cue up the Smiths’ “Stop Me If You’ve Hear This One Before”. The 23% rally off the recent lows has been impressive, but let’s remember that it’s the fourth such rally of similar magnitude of the last six months…..many of which have been centered around policy developments.

People keep trying to spot the bottom. But I don’t think you will see a bottom in the markets until people stop thinking that they are saved every time a government program is announced.

I am in shock

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Obama’s bank bailout plan has been announced. And naturally, it is horrible. Felix Salmon has the most understandable explanation of the plan (it is his strong suit). But all you really need to know is this….

This plan is the government’s preferred solution. It decrees the TARP money to be “equity”, and then goes off to the FDIC to provide “debt”. Both of these sources of funds are US government risk capital which will be used to buy up toxic legacy assets. There’s no economic reason to make the debt/equity distinction. But there is a political reason: Congress would have to approve any more equity spending, but FDIC guarantees can be issued to an unlimited degree without Congressional approval.

The problem with this approach is that it’s needlessly expensive. What kind of yields will investors demand on FDIC-insured debt from a Public-Private Investment Fund? My guess is that they’ll be at least 100bp and possibly much more than that more than the yields on Treasury bonds. But because of all the political sillybuggery involved here, the government can’t just issue debt to fund this program, and needs to come up with a way of pretending that it’s in fact Public-Private Investment Fund debt being issued with no more than an FDIC guarantee. (I think that the FDIC will not charge any money for this guarantee, but that’s unclear.)

Mr. Salmon has lot more details that are worth reading. But just from the above you should be able to figure out how messed up the plan is. It is one big shell game. But that is not what has me in shock.

Instead, I am nearly in faint because Paul Krugman is leading the charge against this plan and doing a good job to boot. This is just a sample….

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

And that’s just the start. He has been hammering away with succeeding blog posts.

What is the truth?

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From the Telegraph…

For more than six decades scholars have believed the scrolls originated with a different, ascetic Jewish sect called the Essenes.

The Essenes are said to have lived in the 1st Century, in mountains in Palestine, where they recorded religious practices on parchments.

But Rachel Elior, a professor of Jewish philosophy at the Hebrew University in Jerusalem, claims the 930 scrolls were written by the Sadducees, a group of Jewish priests living in Jerusalem, and that the Essenes did not exist.

The article is mostly worthless because all that it amounts to is a he said/she said type of thing. The evidence for and against is not really gone into. On the other hand, I have always thought that the evidence for the existence of the Essenes was awful thin. So I was interested to see that a scholar got up and said the same thing (except in stronger terms than I would use).

China is not looking for assurances, they are giving a warning

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From The New York Times…

The Chinese prime minister, Wen Jiabao, spoke in unusually blunt terms on Friday about the “safety” of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to offer assurances that the securities would maintain their value.

If that does not worry you, read the Wall Street Journal article…..

The Obama administration rejected China’s concerns that its vast holdings of U.S. assets might be unsafe, in an unusual diplomatic exchange that underscored the global importance and the potential fragility of the Sino-U.S. economic relationship.

In a coordinated response to blunt comments from Chinese Premier Wen Jiabao, White House officials said Friday that Mr. Obama intends to return the country to fiscal prudence once the crisis passes.

“There’s no safer investment in the world than in the United States,” said presidential spokesman Robert Gibbs.

Every time during this current crisis someone has claimed that something was safe, it has run into trouble within six months. But such worries are old hat. If all there was to this story was somebody expressing worry about the ability of the Untied States to handle its debt load I would not even bother posting it. But what is more interesting about this story is how everyone seems to be willfully misinterpreting it.

This story has been all over the news, and yet everywhere I go people are talking about how China is looking for assurances. But that does not come close to passing the smell test. You don’t have a leader of a country seek assurances. You do that through private diplomatic means. When a leader of a country speaks, it is to shape public perception and to warn the world about actions that might be forthcoming.

Yet everyone is bending over backwards to convince themselves that this is nothing more than China looking for assurance. Every article on the subject is filled with experts who assure us that China has not real choice and that it must continue to buy US assets. I think Brad Setser falls into this trap when he says…..

1) China both wants to maintain the RMB’s link to the dollar and avoid adding to its already large dollar exposure. Yet so long as China pegs to the dollar and runs a sizable current account surplus, it is hard to see how China can avoid adding to its dollar holdings.**

2) China is torn between its interest as a creditor and its interests as an exporter. China’s commercial interests would be best served by an even larger US stimulus, one that helped spur US demand for China’s goods. China’s reserve managers though worry that the US won’t be able to finance a large stimulus and thus are worried that a rise in Treasury supply would reduce the value of China’s existing Treasuries.

The problem with Mr. Setser’s analysis is that he assumes that the question of what is best for China’s economy and the question of what is best for the value of China’s reserves are two separate issues in the minds of China’s policy makers. But while this was certainly true is the past, there is no reason to assume that this is true today.

In the past it was clear that China was willing to sacrifice the value of its reserves in order to facilitate economic growth. But that was back when China was exchanging the value of its reserves for a booming trade surplus. Today China’s trade surplus is falling like a rock. In January, China’s trade surplus was $39.1 billion dollars. In febuary, its trade surplus was only $4.84 billion dollars. If China’s trade surplus keeps falling at its current rate, China will swing into a trade deficit next quarter. If that happens, China will need to sell some of its dollars assets to fund its imports.

This scenario is currently regarded as unthinkable by most commentators. But it is the logical result of China trying to stimulate domestic demand. In fact, if China wants to prop up domestic demand (like it has promised to do) without running a huge fiscal deficit (like it has promised not to do) then they have no choice but to engage in a massive sell down of their reserves.

So the reason that China is making it very public that they expect the US to insure the value of China’s investments may have something to do with the fact that China is starting to think that it may need those assets to keep its own economy afloat.

Regardless of whether I am right or not, the idea that that Prime Minster of China is looking for assurance is bunk. The US government has already committed to standing behind the agency debt. The treasuries have it in writing that they are backed by the full faith and credit of the US government. How are more words going to assure the Chinese? There is something more going on here.

A Good Week For The Economist

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In the last couple of weeks it has seemed like the Economist was not worth the time it took to read. But this week I was reminded of why I read the magazine. Some of the highlights…..

The article on Japan called Rebalancing act. The article suffers from the usual Economist foible of trying to spin something as positive what is a total disaster. Take this paragraph, for example. . .

JAPANESE households used to be among the world’s biggest savers and, as a result, the country ran a massive trade surplus. But no longer. They now save less of their income than American households, and Japan’s trade balance moved into deficit last year (see top chart). A long-overdue—and painful—economic rebalancing is under way.

Rebalancing is such stupid word for spending down your savings in the face of economic disaster. For years I have had to suffer through listening to fools arguing that Japan’s problem was that its people saved too much. Now that the savings rate in Japan is practically zero (see the charts in the article) things are going just dandy, right?

But if you can get past the fact that the facts presented in the article are completely at odds with the idea that Japan is going through some kind of positive “rebalancing,” the article is a very interesting read.

Another interesting read is the article entitled The bees are back in town . You can read the article as both refuting some of the wilder fears about the collapse of the honey bee population and as a warning on the dangers of extreme mono cultures. Though it is clear that the writer’s intent is only the former and not the latter.

The article entitled About face was also interesting. It made me wonder how creditworthy I looked. It also made me think of Abraham Lincoln’s famous contention that after a certain age you could blame a man for how he looked (meaning their moral character would start to show through, not that people should all be handsome. He had enough self knowledge to know that nobody could accuse him of being handsome).

Those are only the highlights of this week’s Economist. There were other articles that I found interesting as well. But you can scan what is in this week’s edition for yourself if you are so inclined.

My apologies for anyone who struggled through reading this before I whacked off his worse grammatical errors. Please remember that even the brilliant Albert Einstein occasionally forgot where he lived; just because our Ape Man cannot always remember the difference between “passed” and “past” does not necessarily indicate he is in the habit of drooling. We apologize for the technical difficulties, and we hope that you will find his ideas worth reading in spite of his occasional struggles with coherency.

Sincerly,

The Troll

The Real Problem

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The Belmont Club has a couple of posts up that are critical of Obama. The first examines his “I am so tried” excuse for miss handling the the visit Gordon Brown. The second post examines the signs that his honeymoon may be coming to an end.

Both of these posts are worthwhile if your only object in life is to repay Obama with the same kind of treatment that was given to Bush. But as far as addressing the real issues of the day, these posts miss the mark by a wide margin. The real problem is articulated by Obama himself in a recent interview with The New York Times….

As he pressed forward with ambitious plans at home to rewrite the tax code, expand health care coverage and curb climate change, Mr. Obama dismissed criticism from conservatives that he was driving the country toward socialism. After the interview, which took place as the president was flying home from Ohio, he called reporters from the Oval Office to assert that his actions have been “entirely consistent with free-market principles” and to point out that large-scale government intervention in the markets and expansion of social welfare programs began under President George W. Bush.

No fair minded person could deny that what Obama is doing is largely the continuation of the polices that Bush pursued. To the extent that markets seem to be punishing Obama’s every missteps harder it is because they thought that Bush’s plans were only there to keep everything from collapsing until Obama arrived with a real plan. Now that everyone can see that Obama’s plan is just an expanded version of Bush’s plan, it is harder for the markets to convince themselves that some magic fairy is going to arrive and save us.

But this realization is not likely to do Republicans (or the nation) much good until a credible alternative to Obama/Bush’s economic rescue plan is put forth. Right now, few people really believe that Republicans would behave all that differently then Obama if they still held the presidency. Nothing that either McCain or Bush has said or done offers any kind of real contrast to how Obama is behaving. And in my experiences this is widely realized among the blue collar white males who form a key part of the traditional Republican governing coalition. This post from Rod Dreher talking about a recent conversation he had with a blue collar conservative reflects a lot of conversations that I have heard. Toward the end of the post Rod Dreher says…..

A couple of things were clear to me. One, this working-class conservative voter had bitter contempt for the Republican Party in particular, and the political and financial elites in general. He believes, quite correctly in my view, that they’re looking out only for themselves, that they will avoid a just reckoning for the disaster they’ve caused. And two, there’s no telling what kind of backlash is brewing once people lose faith in the institutions of politics and finance. This is just one repairman in Texas on one day in the spring of 2009. But I am sure he’s not alone.

The key point that a lot of conservatives seem to be avoiding in their critiques of Obama is that the only alternative to what he is trying to do is the complete destruction of the existing system. In fact, many of them go so far as to argue that Obama is trying to remake the existing system and that is why is so dangerous. But the truth of the matter is that failure of the existing system is what is going to happen and that is going to change the American economic/poltical system in ways that are far more radical then anything Obama could dream of accomplishing. Acting as if Obama’s program is an attempt to bring about radical change instead of an attempt to prevent radical change is not really productive.

In the end, I think that the failure of Bush/Obama approach is a forgone conclusion. In fact, I think that by trying to head off the collapse Bush/Obama plan is making things worse. When you factor in the strain on government finances that will be brought about by retirement of the baby boomers and I just don’t see how the current system can keep functioning.

I am not alone in thinking this, of course. In fact, on both the right and left of the political system, you can find people who salivate over the prospect of a collapse because they believe that the forces that would be unleashed could be stage-managed to produce the society that they desire.

But if we are honest with ourselves, both liberals and conservatives would have to admit that there is no guarantee that the system that would arise out of such a collapse would be more to our liking then the current system. The problem with collapses is that they are inherently unpredictable and uncontrollable. A collapse could lead to huge increases in government power. It could lead to a sharp rise in racism and the oppression of minorities as a matter of government policy. It could lead to a rise in prominence of religious groups that are not even on the radar right now (economic problems have historically been good for the creation of new cults). It could lead to war and strife.

That is why everyone wants to attach huge importance Obama’s every little misstep and mistake. People would like to fool themselves into thinking that a trip into the unknown could be postponed if only our political leaders would do things right. Obama himself has this belief. That is why he is working himself into such a state that his aids worry he is not getting enough sleep. He thinks that if he just tries hard enough he might be able to make a difference.

But the truth is that the plane we are on is going to go down over unknown terrain. You can argue about which way would be the best way to crash land if you want. Or can try to fool yourself into thinking you can keep the plane in the air with positive thinking. But in the end, you can’t escape the fact that we are going to crash.

You are being asked to sign a blank check

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From the New York Times…..

Turning to domestic affairs, Mr. Obama indicated that the end was not in sight when it came to the economic crisis and suggested that he expected it could take another $750 billion to address the problem of weak and failing financial institutions beyond the $700 billion already approved. Maintaining support for the additional costs of bailouts is quite likely to be among Mr. Obama’s biggest challenges, given the anger that many Americans feel toward Wall Street executives who they believe are being unduly rewarded with bailout money.

Is this on top of the extra 500 billion that the FDIC wants? Its not clear to me how much more money Obama plans on throwing at this problem in total. The real answer seems to be as much as it takes. But what if it is beyond the resources that are available to save everything and everyone? How long before people start thinking about triage?

Loan originators taking advantage of the FHA

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From the Washington Post…..

This decade’s housing boom rendered the agency irrelevant. Americans raced to aggressive lenders, seduced by easy credit and loans with no upfront costs. But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency’s historic role in backing mortgages is more crucial now than at any time since its founding.

With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.

From the end of the article…..

“Even if the market eventually gets these guys, they shouldn’t have to wait for the market to do it,” said Brian Chappelle, a former FHA official who is now a banking industry consultant. “The most frequent question I get asked by the groups I talk to is: ‘Is FHA going to implode?’ . . . They haven’t seen HUD do anything significant in the past two years to tighten up its lending.”

The entire article ought to put a lie to idea that more regulation would prevent another housing mess like the one we are in. Two years on in hosing crisis that was caused by bad underwriting and a government agency is still being taken to the cleaners by loan originators. You would have thought that if government regulators where any good they would have caught a clue by now.