Philip Greenspun’s Weblog

This interesting New York Times op-ed covers the bailout of Long-Term Capital Management, organized by the Federal Reserve Bank, back in 1998. Who were the creditors? “The major creditors of the fund included Bear Stearns, Merrill Lynch and Lehman Brothers, all of which went on to lend and invest recklessly.” Other highlights…

“The ad hoc aspect of the bailout created a precedent for what has come to be called “regulation by deal” — now the government’s modus operandi. Rather than publicizing definite standards and expectations for bailouts in advance, the Fed and the Treasury confront each particular crisis anew.”

“It has become increasingly apparent that the market doesn’t know what to expect and that many financial institutions are sitting on the sidelines, waiting to see what regulators will do next. Regulatory uncertainty is stifling the ability of financial markets to engineer at least a partial recovery.”

[The Wikipedia page on LTCM is interesting. It clarifies that the bailout, though it involved the Fed as a matchmaker, did not end up costing taxpayers. The Ivy League’s best and brightest collected some of America’s highest salaries for their sophisticated financial engineering at LTCM. Their hard work is reduced to one phrase: “picking up nickels in front of a bulldozer”.]

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On a recent Delta Airlines flight, I was enjoying the individual seatback video/music/games player when a public address interrupted my button pushing. The little display went blank and then displayed line after line of text indicating that Linux was booting. It reminded me that American society has earned a greater return on open-source software than on any other investment. Imagine if the airline had to pay Microsoft or Apple $100 per seat to license an operating system. They probably wouldn’t have installed the little monitors, which generated jobs for engineers, mechanics, plastic molders, etc. The fact that the monitors are in the airliners has generated a lot of jobs for programmers as well as jobs in Hollywood when people buy movies while flying.

About ten years ago, in http://philip.greenspun.com/humor/bill-gates , I proposed that the Federal government invest in open-source software for its own use and let others benefit from the raft of new solutions. The idea seems to have fallen on deaf ears and, even now that the government is paying more attention to stimulating the economy, there is still no money for open-source. The Feds keep spending on Windows and other Microsoft products, which buoys Redmond, Washington, but it doesn’t seem likely to generate sustainable growth.

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I just finished Three Cups of Tea, a book by and about Greg Mortenson, a heroic guy who has spent twenty years building schools in Pakistan. The book is interesting for its descriptions of life and culture in the high mountains of Pakistan. It starts as a chronicle of a climber’s simple desire to repay the hospitality of a small village by building a $12,000 school building. The author and subject’s goals eventually morph into the book’s subtitle: “One Man’s Mission to Promote Peace, One School at a Time”.

It is supposed to be inspiring. We don’t need a big military to keep angry Muslims from killing us. All we need to do is build a school and fund a mostly secular education for every Muslim child on the planet and this would be easier and cheaper than running our war machine.

One problem with accepting Mortenson’s conclusion is that he spends no ink trying to show that a good secular education makes a Muslim friendlier to the U.S. The September 11th attackers had above-average secular educations (example 1 and example 2). Bilal Abdullah, recently sentenced for an attack on an airport in Scotland, had an M.D. His main accomplice was studying for a Ph.D. in computational fluid dynamics. Perhaps it is possible to use a public school to distract someone from the Koranic instructions to wage jihad, but Mortenson doesn’t provide any evidence to suggest that this is effective. (In fact, he provides evidence to the contrary, chronicling the celebrations at Pakistan’s leading universities on September 11, 2001; the Pakistanis who had the best secular educations might not have had the courage to kill Americans, but quite a few of them thought that it was a great idea.)

The book more or less disproves its thesis that building schools for poor Muslims worldwide would be straightforward. Our hero is a guy who was willing to endure twenty years of dangerous bus and truck rides, kidnapping, personal poverty, and frustrating delays. He had a strong enough stomach to eat rancid yak butter, raw Ibex flesh, and the various bacteria living on the fingers of his hosts. He essentially converted to Islam, at least while over in Pakistan, praying in mosques with his hosts. He comes into a lot of conflict with local Muslim clerics, all of whom want bribes and some of whom are concerned that his schools will lead Pakistani children into secular ways. How many other Westerners would have the patience, stamina, and physical constitution to do this?

Towards the end of the book we learn that Mortenson is not the only person building schools in Pakistan. Every time Mortenson builds a spartan school for 50 kids, the Saudi Arabians build a splendid school for 5000. Where Mortenson pays his teachers $1 per day, the Saudis give their teachers briefcases stuffed with cash, enough that each teacher is able to purchase four wives and breed a tremendous number of children who are passionate about Islam. The Saudi-funded schools don’t teach secular subjects, according to Mortenson, but only Arabic and Islam, with a special emphasis on the parts of the Koran that compel Muslims to kill infidels.

You might ask what the government of Pakistan does. At least according to Mortenson, they don’t bother to build schools or hire teachers for any children living outside of a major city. The Pakistani government appears in the book only when antagonizing India with military mobilizations, supporting angry Muslims inside Kashmir, building nuclear weapons, etc.

Finally there is a question of fairness. There are many children on this planet who live in countries whose governments are either too poor, too incompetent, or too indifferent to provide them with an education. The U.S. does not have enough money to build and run schools for all of these children (actually given the way that we run school systems, we don’t even have enough money to run schools for our own children in the long run). Should we favor children in Muslim countries because they are predisposed to want to kill us? Why does a kid in a high mountain village in Peru or Ecuador not get a school? Merely because he or she is very unlikely to become a suicide bomber?

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If you didn’t get what you thought you wanted for Christmas, remember that “Jesus is the Gift” (seen on a storefront church in Fallbrook, California).

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This BBC News article on going through security in Birmingham, England should be helpful for U.S. holiday travelers as well.

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This AP news story talks about how no bank is willing to discuss how it spent its share of the $350 billion in federal funds paid out so far under the TARP program. It seems that no restrictions were put on the money and that there is no accounting mechanism in place. The fear is that most of this money was paid out as executive bonuses. How could the executives of banks pay themselves all of this money? I would think that a better question is “How could the executives of banks NOT pay themselves all of this money?”

Suppose that you are running a bank and it gets $1 billion from the Feds, no strings attached. You could use this to improve the long-term health of the bank. Given the poor economic conditions in the U.S. right now, we would have to assume that $1 billion invested in a bank would yield a long-term return of less than $1 billion, let’s say it is $900 million. Under the best possible assumptions, an executive would keep his job at the bank for 10-20 years and be in a position to collect a share of that $900 million. But the executive might be approaching retirement age or be looking to change jobs. Wouldn’t it be smarter to pocket his or her share of the $1 billion right here and right now?

Why did anyone ever think that any of that TARP money would be used for any purpose other than higher bonuses for employees of banks?

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Now that we have recovered a bit from the shock of having wrecked our economy, our journalists are going to be treating us to a constant stream of articles reminding us of how dumb we were, notably by comparing us to smarter people in other countries. http://www.nytimes.com/2008/12/20/business/20nocera.html is a painful example of what is surely going to be a flood of similar articles. While the U.S. was pouring most of its cash into real estate speculation, India was discouraging the application of its precious capital to this non-productive use. Indian banks financed factories and business expansion. Americans not only financed unproductive construction here in the U.S. but also financed real estate deals in India that the banks there were prevented from touching. Now India is on the verge of making a $2500 car while the average American is looking at paying $2500 in extra federal income tax every few years for the privilege of bragging that GM and Chrysler never had to go through Chapter 11.

[We cannot soften the pain by arguing that India impeded economy growth by forcing banks to be conservative. The CIA Factbook says that India had real GDP growth of 9% last year; the number for the U.S. was 2% (much of that absorbed by our population growth rate of 0.9%, so per-capita GDP growth was minimal).]

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We’re having a second Great Depression. Why not a second Civil War?

Consider the typical Southerner, working at a backbreaking job for $10 per hour. If business slows down or his company goes out of business, he is immediately laid off. What does he read in the newspaper? Wall Street executives have taken most of the $350 billion that they got from the Federales and paid it to themselves as bonuses. Why are they getting bonuses? For a job well done in the past? These guys did their level best to turn the U.S. into Argentina circa 2001. As an incentive for them to stay in their posts? Where else could they work? Who would hire them? You don’t hear about banks in China desperate to bring in a staff of experts from Citigroup, Merrill, or Bear Stearns. You don’t hear about successful companies like GE or Google saying “What we need to do is bring in some of those great minds set free after they bankrupt Lehman Brothers.”

He turns to the next page of the newspaper. The Federal government has been indifferent to all of his friends in the Carolinas who’ve lost their jobs in various mid-sized manufacturing concerns. The potential of GM and Chrysler employees losing some pay, however, attracts the full-time efforts of the U.S. Congress for weeks. Now he reads that George W. is sending a $17.4 billion Christmas present to Detroit. Our Southerner works hard for a $10/hour paycheck with minimal benefits and he is now paying extra taxes to support guys in Michigan who get millions every year to work a desk job (incompetently) or UAW members getting over $40 per hour in cash, health care, and pension benefits.

Incompetence in the South leads to the management getting fired, the workers being laid off, and everyone in the community suffering lower wages going forward. Incompetence in the Northeast and Midwest leads to the rest of the U.S. being taxed so that employees continue to get paid the same, oftentimes regardless of whether or not they show up to work. Now would seem to be a great time for the South to secede.

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Waiting until the last minute to shop for Christmas, hoping that deflation will make gifts more affordable? Short of cash after the market crash?

Idea #1 (if unemployed): Visit Project Gutenberg, download a plain text copy of your favorite book, and email it to a friend as an attachment with “Merry Christmas” in the subject. Authors of today are but literary midgets compared to the giants of American Literature, such as Edith Wharton (start with House of Mirth), so why pay $20 for a book whose merits will be scant next to the works of Henry James, Thoreau, Hawthorne, and others who inhabited this continent before we decided that public school teachers should be certified and unionized. For a foreign author whose work is timely once more, try Knut Hamsun’s Hunger.

Idea #2 (if employed): Use your company’s laser printer to print out a copy of your favorite book from Project Gutenberg. Collect some pine needles from the nearest tree and tape them to a cover sheet. Take bus over to friend’s house and give to friend.

Anyone else have a good idea for a last-minute Christmas gift that won’t cost big bucks?

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One of the proposals we hear for stimulating our economy is extending unemployment benefits. If a worker has been out of a job for 26 weeks, the benefits typically stop. Extending payments for a full calendar year will supposedly improve the economy.

Why does it make the U.S. more competitive and vibrant if we tax working Americans to give money to non-working Americans? In a cyclical recession, an unemployed guy in Michigan could reasonably wait around for a year until things picked up and he could find a job again. Those extra 26 weeks of unemployment benefits enabled the guy to stay in the same house and be available when his skills were needed, oftentimes by his former employer.

Whatever we’re in right now, however, doesn’t seem to be part of a business cycle. We handed over most of society’s wealth to our least productive citizens (realtors, mortgage brokers, Wall Street mediocrities). We raised taxes until business moved offshore. We dumbed down our schools until companies could find better educated workers in countries where people live very comfortably on $5,000 per year. Do we seriously believe that Michigan is going to bounce back within our lifetimes, much less within the proposed 52 weeks of extended unemployment payments?

An unemployed worker in Michigan needs to move somewhere with a lot of new jobs being created and not too many highly skilled unemployed people competing for those jobs (state-by-state statistics). Certainly he is going to have to move to another state. Possibly he may need to move to another country. Handing out 52 weeks of cash instead of 26 weeks seems likely only to delay the inevitable. The guy will be a bit better rested when he finally does move, but he will also be out of practice from not having worked for a year.

Could it be that extending unemployment benefits is a sensible practice that worked in cyclical recessions, but we’re now trying to apply it after a major structural shift in the U.S. economy?

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