I Still Support Obama

In the WSJ, Peggy Noonan says Democratic congress-persons should abandon Obama because he is serious about being a one term President. I think that Obama is putting the United States ahead of his political ambitions, which is very rare in Washington. Peggy Noonan does not understand that, nor do the Republicans in Congress, who see "success" as totally blocking the legislative process.

I should like Peggy Noonan. She seems like a very nice lady. She may be a polite WASP, a rarity in the political world today. But I don't agree with her.

On health care, I think the situation is like the following: Problems with private health care, Medicare, and Social Security are like long-term, chronic diseases. They are not going to kill you now, but they might in a few years. So, the Republicans during the Bush Administration took the United States and ran it into a wall, like a catastrophic auto accident. With two wars and tax cuts bleeding the national treasury, the Republicans now cry, "You can't do anything about those chronic diseases, we have people lying the street bleeding to death." The Republicans did wreck the US economy by tax cuts and failed regulation of Wall Street. But the question is: Can we continue to ignore the long term problems. To do so would be irresponsible. Obama knows this and says so. The Republicans would destroy the United States in a few years in order to win an election next year. They scream that Obama is breaking the budget, but that's because they cut taxes during prosperous times under Bush, and then created a financial disaster requiring deficit spending to survive.

One of the most hypocritical Republicans is John McCain, who used to be a responsible maverick, but is now a right-wing hack. He has become a bitter old man. Unfortunately, he showed he does not intellectually understand economics, when during the campaign he cancelled the Letterman show to focus on the economy and then had no clue when he went to the White House meeting on the economy. Does he get a pass for being stupid? No, the situation is too perilous to allow him to muck it up just because we feel sorry for him.

Unlike McCain, Obama has America's best interests at heart, whether he gets a second term or not. He may not be doing everything right, but he's trying, and he's not getting much help. I can't help him, but I can support him for having his heart in the right place, which is unusual in Washington these days.

Republican Cowards

Newt Gingrich's recent appearance on Jon Stewart's "Daily Show" illustrated the cowardice of Republicans in dealing with national security issues. The Republicans are afraid to grant civil trials and constitutional protections to anyone they suspect of having terrorist leanings, most recently demonstrated by their fear of having terrorist trials in New York. Jon's reply to Gingrich that he was not afraid to hold such trials was a lone voice in the media, but one that reverberated with me. How can we trust cowards like Gingrich, or George W. Bush and Cheney (who dodged the Vietnam draft), to defend the US? Somehow Republicans have the reputation of being strong on defense, which maybe they are, because they are so scared. They fear everybody, strange lights, noises in the dark, anything that might potentially threaten their ill-gotten wealth. These are the people who defend their "private property" by shooting trespassers on sight, even children, and asking questions later. I am ashamed for America. But the good news is that they don't represent all of America. Even if they make big gains in the next election, there are a lot of people who won't vote for them.

I suspect that a lot of the military is Republican, but I don't know for sure. It makes some sense, because Republicans support the troops in general, because they are so fearful that they want somebody to go out and fight for them. But Republicans are also in favor of low taxes that may leave the troops without the support they need. Bush and Rumsfeld sent troops to Afghanistan and Iraq without the best body armor or Humvees, the army you have, not the army you would like to have. Then rather than raising taxes to support the wars, they said just to go out and shop. They certainly made no effort to increase the size of the military to fight two wars; that might inconvenience some of their wealthy friends, whose children might have had to go.

Iran's Nuclear Program Continued

Iran threatens to expand its nuclear program, with yet another reasonable justification, if we could believe them. We've found some significant discrepancies, but we haven't really found a smoking gun that would warrant military action. Economic sanctions are pretty ineffectual; so, it doesn't really matter whether we get some imposed despite China's resistance, or not.

Nobody is talking about the real problem, which is that Israel has many atomic bombs, and we have basically turned a blind eye to bombs developed by India and Pakistan. Arguably, the Pakistani bomb offsets the Israeli bomb, but Pakistan is fast becoming a failed state; so who know what will happen to the Pakistani bombs. They could fall to al-Qaeda, or the US military could take them over to prevent al-Qaeda from getting them. So, Iran is working working on a Muslim bomb that it can count on to counter to the Jewish bombs.

Unless the US does something about Israel, it's unlikely that it can do anything about the Iranian bomb. It's not clear that the Iranians really want to build a bomb; they may just want to be able to build a bomb if they feel the need for one. But they are a lot more likely to feel the need for one as long as Israel has many.

Great Article on Holocaust Remembrance

The Israeli newspaper Haaretz has a great article on Holocaust remembrance day. It says that all the talk Israelis do about the Holocaust will not help Israel, unless it conducts itself in a more moral manner. It says the big Holocaust publicity push is to offset the UN Goldstone report condemning Israel for its conduct of the last war. It says that Netanyahu and his "racist" interior minister ranted against "migrants" in Israel. The article says:

No remembrance speech will obliterate the xenophobia that has reared its head in Israel, not only on the extreme right, as in Europe, but throughout government.

It concludes:

A thousand speeches against anti-Semitism will not extinguish the flames ignited by Operation Cast Lead, flames that threaten not only Israel but the entire Jewish world. As long as Gaza is under blockade and Israel sinks into its institutionalized xenophobia, Holocaust speeches will remain hollow. As long as evil is rampant here at home, neither the world nor we will be able to accept our preaching to others, even if they deserve it.

If only more American Jews were as perceptive as some Jews in Israel are.

Bernanke's Problems Due to Bankers

The main people responsible for Bernanke's problems with approval for another term at the Fed are the Wall Street bankers. They were so arrogant and disdainful of the the US Government, the Congress, President Obama, and the American people that there is a strong reaction against Bernanke's decision to bail them out. People ask, why should be have bailed out such ungrateful people, who brought themselves to the brink of disaster, and who probably did as much economic damage to the US as Osama bin Laden did when he destroyed the twin towers?

Bernanke deserves some credit for saving us from another depression, but he's sullied by the company he keeps. Wall Street bankers come across as some of the most morally despicable people in the US or even the world.

On Bernanke's behalf, he could go to work for these sleazeballs in New York and probably increase his income by 10 to 100 times. He could easily be making over $10 million on Wall Street. We should be grateful that he's willing to stay on as Fed Chairman.

We Need Some Financial Pain

This op-ed in the Financial Times by the Polish finance minister, "Intolerance of small crises led to this big one," makes a point that I have been thinking about and strongly agree with. We need some pain to shake out the aftereffects of the financial crises that we have been through. Fed chairmen, particularly Greenspan and Bernanke, have tried to keep their political masters happy by avoiding any economic pain, except that which blindsided them, like that accompanying the popping of the tech bubble and the housing bubble. This op-ed makes the correct point that they were blindsided by these crises precisely because they trying so hard to smooth out the smaller bubbles preceding them. There is no free lunch. If you pummel the economy, as the bankers did in the housing crisis, you hurt it, and it can't pop back up like nothing happened. If it appears to (as it has recently), it probably means that you've done something bad to it that will come back to haunt you sometime, in a few months or maybe if you're lucky, in a few years. The obvious possibility is that you will sow the seeds of inflation, and that when those seeds sprout, you're going to have a big mess on your hands, made worse by postponing it for years. On the other hand, you might get deflation, like that which produced the "lost decade" in Japan, about to become two lost decades.

What we need is an economy on a sound footing, which means among other things that there is moral hazard for messing up your business. Momma (the Fed and Congress) shouldn't always bail you out. So, should we have let a few more banks follow Lehman down the drain. I don't know, but I don't think so. I think it was probably right to save the banks, but we should have made them pay a higher price for being saved. And we should impose significantly stronger regulations, in particular limiting both their business size (Glass-Steagel) and geographic size.

Brits & US Share Problem

This op-ed in the Financial Times on how to reform the British Foreign Office could have been written about the US State Department. The US Foreign Service almost always suffers from budgetary problems, like their British colleagues. There are exceptions. Colin Powell was personally concerned about the Foreign Service, and Hillary Clinton may try to demonstration her political clout by helping increase State's budget, but most Secretaries of State are more interested in policy issues than personnel issues.

One big problem of both organizations is that they have no domestic constituency. Citizens often see the job of diplomats as representing the foreign countries they work with, rather than pushing the agenda of their home country. Yet, that is seldom the case. They may often argue for going slow in going to war on slapping on sanctions in trade disputes, but that is because they understand that such actions are likely to be futile or counterproductive, although they may make Americans (or Brits) feel better for a while, until the chickens come home to roost.

In any case, those unfortunate perceptions often mean that budgets for diplomacy are among the first to get cut in bad times and among the last to be increased in good times. American lawmakers should take these British arguments to heart in considering their appropriations for the State Department.

Howard Dean Is Right On Healthcare

I have been been a fan of Howard Dean since he ran for President in the 2004 race. He would have been a better candidate than John Kerry. He had good ideas. Unlike Kerry, he spoke his mind, which may have been what killed his campaign. Since he's a doctor, he's seen he's seen this country's healthcare system close up.

When he says the lobbyists and special interests, working through the last must-have votes in the Senate like Joe Lieberman, have made this bill worthless, or even making the healthcare system worse rather than better, I believe him.

It's time to put a public option or Medicare expansion option back in. If the bill won't get 60 votes, get 60 votes to bring cloture and cut off a Republican filibuster. Then go for a vote that only requires a majority of 51 Senators.

If such a plan fails, and the Senate passes something that it total garbage like the present bill, hopefully, they will be forced to revisit the issue and clean up healthcare in the coming years. But the Medicare Part D legislation, creating the doughnut hole that funnels money to the pharmaceutical industry while benefiting few people who can figure out the arcane rules, is not a good precedent. It is speeding the bankruptcy of the US, providing nothing like the benefits that it should for such huge costs.

Give Obama a Chance on Afghanistan

The fact that Obama is taking flack from both the Left and the Right indicates that his policy on Afghanistan is probably about right. The Democrats are complaining that he is the tool of the generals. If he were a Republican, I would worry more about this argument, but I believe that Obama's natural tendency would be to not to go with the generals' recommendations. That means that they must have some good arguments and that they will have to produce results or he will turn against them. Furthermore, I have more confidence in Bob Gates and Hillary Clinton than in most politicians or bureaucrats and am encouraged that they are on board.

I am not personally convinced that we currently need to be fighting in Afghanistan. I think that Bush, Cheney, and Rumsfeld gave the Afghan war short shrift. They didn't really care about it; they cared about Iraq. The troops who died there were not appreciated, starting with Pat Tillman. Bush, Cheney and company were cowards; they were draft dodgers during the Vietnam War, and they hid during the 9/11 attacks. They felt they had to do something in response to 9/11; so, they sent troops to Afghanistan, but their heart was not really in the war, which is why all the troops, equipment and money went to Iraq.

Now that Obama is in office, Afghanistan if getting the attention it deserves for the first time. It deserves attention because Americans are dying there and we are spending billions there. Basically, I think Obama is saying to the military, "Okay, you've been in Afghanistan for eight years, but you've never had the manpower and resources to do the job. And you've never really been told was your mission was. Now, we are going to give you the men and resources to carry out a limited mission. You have 18 months. At the end of that time, if you've succeeded, or if it looks like success is impossible, we'll pull out. If something unexpected happens, we'll reevaluate then." So, the military has a chance to prove itself, after being given just the back of Bush's hand for eight years. We owe it to those who have died over the last eight years, and perhaps to the 3,000 who died on 9/11.

Time To Change Recession Strategy

It's time for the US to spend its money where it's needed, for the common people. The NYT article on debt repayment points out the problems facing the US if it borrows a ton more money for another stimulus or further bailouts. The main beneficiary so far of the taxpayer largess has been Wall Street, which got us into this fix in the first place. It was initially necessary to save the banks and the financial system, but now the idea seems to be that if we make the Wall Street financiers insanely, obscenely rich, some of that wealth will trickle down to ordinary people. It's not happening, as the 10% unemployment rate demonstrates.

Everybody says we need more jobs. So, why doesn't the government create jobs, rather than throw money at the banks and the Wall Street fat cats? It could do this more or less the way FDR did, just create make-work jobs. Construction projects only go so far, since we now have a lot of women and older men in the work force. One office version of make-work would be data entry. The government must have tons of data that it would like to have, or it could get started on computerizing medical records.

Another helpful step would be to impose a year or two of compulsory public service on all young people when they finish their studies, or when they are 18. We wouldn't need to impose a military draft, but military service would be one way to fill the compulsory service requirement. We need more soldiers, and we need fewer people entering the labor market. The compulsory service could be in the US, working in slums, or doing menial work in hospitals, or doing environmental conservation work, or many other things. They could also serve in the Peace Corps, or in the military. The military claims they prefer the all-volunteer Army, but these people could be cooks, or clean latrines, or do other menial work that the military now contracts out for much higher fees that the young people would get. They could get something like $10 per hour, and if they are married and have children, one spouse could be paid the same amount to stay home and take care of the children, thus doubling their income. They would generally live in barracks or group housing and eat in group cafeterias or mess halls, but in some cases could get food stamps or other subsidies as needed for a family living alone. Some young people would opt to serve in the military, thus easing the recruiting strain created by fighting two wars.

We needed Geithner and the bailout when we were on the verge of going over the financial cliff at the end of 2008. But that's over according to the economists. We're growing again. So, let's break up the banks that are too big to fail, raise taxes on the rich, give jobs to people who need them, and prevent young people from entering the labor market immediately by requiring a yar of two of public service.

One other thing -- raise interest rates. Everybody says that raising taxes and interest rates will kill the recovery. Okay, but save the ordinary people by giving them government jobs. Then let the rich fend for themselves if the recovery stumbles. They might have to sell one of their four houses. Good!

The perverse effect of keeping the recovery going is that it is creating the same asset bubbles that got us into this mess in the first place. Low interest rates are a primary culprit. We at least need some minimal interest. It's ridiculous that banks can borrow from the Fed at zero percent and then charge 25% or 30% to their credit card holders. There should be some cost of money to discourage the creation of new bubbles by the greedy barons of Wall Street. Ask Paul Volker!

Wall Street Salaries Are Too High

Everybody is talking about Wall Street salaries being too high, but this article in the Washington Post by the organization that runs the Rhodes scholarship program is what put me over the top. He says that the huge differential between business salaries and public service or academic pursuits is pushing more and more Rhodes scholars into the business and financial world, which means that a big percentage of the America's best talent is going to one place, and areas that need the best people -- to keep us out of war for example -- don't get any.

Something needs to be done. I don't see how you can regulate salaries in general to get at the huge salaries in business and finance, although a very few are being regulated under the bailout program. The problem is really the huge gap between them and everybody else, even including doctors and lawyers, according to the article. So, I propose a huge tax on huge incomes. It could start at say $1 million annual income. Increase the marginal tax on income over $1 million at something like 50%. Then maybe tax income over $10 million at 70%. Annual income over $100 million at 90%. These rich people will have so many loopholes, deductions, credits, etc., that the actual net tax on them will be much lower.

In addition, to level the income gap, there should be less preference for income generated from financial transactions and activities. Capital gains and dividends should be taxed at a higher rate. One old justification for lower capital gains taxes was inflation, but there is no inflation anymore. Another argument is that low capital gains taxes encourage innovation and entrepeneurship. Okay, but limit that advantage to income that actually comes from innovation. Give the break only to those who fund startups. There shouldn't be a lower tax for people who buy IBM or Walmart today and sell it for a profit in a week or even many years later; they didn't create IBM or Walmart.

Similarly, an argument for dividends is that corporations already pay income tax, and thus dividend income is taxed twice. But like rich individuals, few corporations pay anything like the full corporate tax (35%?) on their full gross income. They have many credits, deductions, writeoffs, etc. You could also tax the first relatively small amount of dividends at a lower rate, to encourage investment by individuals, but tax dividends at a higher rate for individuals who receive more than $10,000 or $20,000 annually in dividends.

It's easy to tax people who earn a salary, but difficult to tax people's income from business and financial activities. Thus, you can be pretty sure what an average worker's gross income is, but it's much more difficult to know for someone involved in business and finance. That argues for even higher taxes on the rich, because they will evade taxes anyway.

The recent dust-up about people who were hiding money in secret bank accounts overseas and not paying taxes on the income is just one example of the problem.

More Steve Simon on Terror

Steve Simon now has an op-ed in the New York Times, following up on his op-ed in the Financial Times. He cranks out stuff for major papers faster than I can blog. Once again I basically agree with him that having the terror trials for Khalid Sheik Mohammad and others in New York is a good thing.

I am outraged that the Republicans are so opposed to these trials. Their opposition is based on fear, a poor starting point for a serious country. They have no confidence in the US military, the FBI, the CIA, and the New York police to protect the city during the trial. It's true that Bush and the Republicans failed to protect New York on 9/11. I don't think the Democrats will be as lazy as Bush and Cheney were pre-9/11.

Of course, the civil trials in New York are also a political rebuke to the Republicans, who wanted to hold some kind of kangaroo court in Cuba. The Republicans are now the leaders of what is basically a lynch mob, saying no trial, just shoot 'em. Of course, they'd say that the want military trials before they shoot 'em, but to the world those military trials would look a lot like kangaroo courts or Communist show trials.

So why are we still having military trials for some of the Guantanamo prisoners? I don't really know, but I'm happy that some of them will get real, legal trials.

The old Bush approach to combating terrorism reminds me of Argentina's way of handling its discontents, by "disappearing" them. The government picked them up and they were never seen again. KSM was snatched in Pakistan, and we've just had a number of CIA agents convicted of kidnapping a suspected terrorist in Milan. We grab 'em and stick 'em in Guantanamo or send them by extraordinary rendition some friendly country that will torture them for us. Not a very high class act! Thank goodness the Obama administration has more morals and character. The US should adhere to a higher standard than Argentina did.

Meanwhile the Republican Party displays absolute fear and panic. How can former Presidential candidate John McCain lead such a band of cowards?

Almost Time for Geithner to Go

It was a good decision to name Timothy Geithner as Treasury Secretary when Obama came in at the height of the banking crisis. He needed someone who knew what had happened, where the bodies were buried on Wall Street. Now the crisis has moved on. We need someone who is more an outsider, someone who is not an executive or director of Goldman Sachs. The Geithner move can wait until the health care debate is over, but should come as soon as the system can bear it. He's not the best man for the job.

I don't have a recommendation. The two financial people I trust at the moment are Elizabeth Warren and Paul Volker. People say Obama is ignoring Volker; he does so at his peril. It's understandable, because people say that Larry Summers is so in-your-face that it's hard to oppose him, but the time is coming to do that. Summers needs to be moved away from the center of power. He should continue to be an advisor, but not the advisor. Between Rahm Emanuel and Larry Summers, Obama has his hands full of loud, brash, aggressive, pushy Jews. Volker, of course, is Jewish, but seems to be much nicer personally than his competitors; the same goes for Bernanke. Obama should recognize that and draw on Volker (and Bernanke) despite the tantrums of his other Jewish advisors.

Ideally, a new Treasury Secretary should come from outside of Wall Street, perhaps someone from Obama's old home of Chicago. An academic might be a possibility. Bernanke has done a good job at the Fed, despite coming from an academic background. A businessman or banker is not out of the question, as long as he is not a Wall Street insider.

Gambling on Wall Street

CNBC, which is on in the other room, is doing a story on some poker player in a Las Vegas tournament, who came from a very simply background and is winning tons of cash. First, why is this a financial network story? Because Wall Street is basically a big poker game; it's not about the economy or jobs or any of that stuff that they talk about.

As an example, John Paulson made billions betting against sub-prime mortgage paper, speculating that the housing market would self-destruct. He was right and made billions, but did that have a positive effect on the market? No. His insight, which arguably was important to help the US manage the biggest financial crisis is 80 years, had no effect, except to make him rich. If Wall Street really worked as the commentators want us to believe, his insight into the housing market should have helped avoid the crisis, but it didn't. It's just gambling, unrelated to the real world, except to the extent that if the Wall Street gamblers lose too many billions, the taxpayers will bail them out. Ironically, the WSJ article about Paulson says that he he has hired Alan Greenspan, who aided Paulson's strategy by keeping interest rates abnormally low for too long. That's more a criticism of Greenspan than Paulson. But they are clearly too cozy.

Buying Patriotism

Tom Friedman's Wednesday NYT column on government contractors was once again right on the money. The US government no longer performs the functions that it is charged with and used to do itself, such as fighting wars and negotiating with other countries. It now contracts those and other essential functions out to private business. Of course the main impetus is to avoid re instituting the draft to maintain armed force levels in Iraq and Afghanistan, but secondarily is the Republican (and Democratic) impetus to give money to their campaign contributors.

To me, this represents a failure to support the American government. The government should perform essential functions such as war fighting and diplomacy. The Republicans claim that they love America but hate the government. They go back to Reagan's old claim that government is not the solution, it's the problem. I think that's wrong. In many cases government is not only the solution, it's the only solution. Private sector contractors are not subject to the same constraints that government employees are. Republicans like this because it means that they can resort to nepotism and other forms of favoritism. Democrats, too; look at John Murtha. But I think that if you dislike or hate the US government, you dislike or hate the United States. The government is the country, particularly when you're talking about the military or diplomacy.

As a former soldier and diplomat, I take strong exception to the Republican rejection of government. Granted, government may need a lot of reform, but it should be improved, not destroyed.

Kudos to Tom Friedman for pointing out the failures of government outsourcing and contracting. One of the ironic things is that the government is actually outsourcing a lot of functions to foreigners. It's doing what it criticizes American business for doing: taking American domestic jobs and outsourcing them to foreigners, such as the foreign mercenaries who do a lot of guard duty in Iraq and Afghanistan, in many cases working for American paymasters like Blackwater (or whatever their new name is), who just take the Congressional appropriation and pass it on to the foreigners who work for them, scraping a good chunk off the top for the Blackwater executives. Even when they employ Americans, they tend to take the cream of the crop of Army and Marine veterans by paying them much more than the government can afford to pay them as servicemen. It's a mess, created by people who are destroying America for their personal profit.

Steve Simon Against Afghan Buildup

Steve Simon, with whom I worked in State's old Politico-Military Bureau, has an op-ed in yesterday's Financial Times, "Pull the Plug on the Afghan Surge." I agree with most of his reasons to oppose a surge, except the last one: that if we withdraw troops from Afghanistan's border with Pakistan, the bad guys in Pakistan will probably return to Afghanistan and ease the situation in Pakistan, which is more serious. I don't think that making Afghanistan more attractive to the bad guys, whether Taliban or al-Qaeda, is a good argument for a military strategy. We should not offer them an unfettered base of operations in either country. But I don't think we need huge forces in Afghanistan to interdict the bad guys, but we should attack them whenever we are able to, and we should maintain enough forces to make their life unpleasant, if not impossible.

Corruption on Wall Street

This article from the Wall Street Journal is an apology or explanation of the claims of insider trading at Galleon and other hedge funds, but I don't buy it. On top of the sub-prime, over-leveraging bank debacle, the Madoff ponzi scheme, and other misdeeds by Wall Street, the claims of insider trading ring true. The commentators all say that there is a "fine line" between legitimate information and illegal, insider information. Wall Streeters cross this line every day. They all get information that is not available to people who are not professional, insider stock traders. The editorial says that insider tips are no sure thing for long-term profits. That may be true, but if you can get rich in the short term, who cares about the long term? Nobody on Wall Street. The whole crisis was created by bankers and traders who just wanted to make a buck on their trade, get the asset off of their books, and move on to the next, short-term, insider deal. They're all crooked. They're smart like Al Capone was smart, like Adolph Hitler was smart. They may be masters of the universe, but it's not a universe that anybody else would choose to live in.

Letter on Too-Big-To-Fail Banks

While federal government retiree and Social Security payments will be frozen this year, Wall Street is granting huge bonuses to its workers, who drove the US to the brink of a second great depression. Secondly, there has been little progress on improving financial regulation to prevent what happened a year ago from happening again. In particular the federal government still puts the full faith and credit of the United States behind half a dozen banks that are “too big to fail,” as Fannie Mae, Freddie Mac, and AIG were, while the rest of the US is left to its fend for itself. That policy encourages the big banks to take too many risks, and it gives them an unfair competitive advantage over smaller, local banks.

Government retirement benefits are frozen this year primarily because Wall Street almost bankrupted the country, which meant that there was no economic growth. Wall Street was responsible for throwing millions of people out of work. I believe they are pleased with that. The financial elites -- the one percent who make 95% of America’s income, the CEOs who make 400 times the salary of average workers, or whatever huge statistic you accept -- want a new paradigm where most labor is done overseas by workers in China or Bangladesh who are paid a pittance compared to American workers. In the future 10% or 15% percent unemployment may be the new normal, if Congress does not act.

“Too big to fail” is the primary problem that financial regulation must address. I am a big fan of Elizabeth Warren, the chair of the Congressional bailout oversight program. In one of her recent interviews, she warned that local banks likely face a crisis as commercial mortgages come due and need to be rolled over. There may be huge defaults, and she said that unlike the half dozen banks that are too big to fail, the FDIC would probably shut down the local banks. This creates unfair competition, because the FDIC only insures deposits up to $250,000, chicken feed for the financial elite. Meanwhile the too-big-to-fail banks (Chase, CitiBank, Bank of America, Wells Fargo, etc.) will never need to depend on the FDIC, because the federal government will never let them fail. They will be bailed out by billions of taxpayer dollars, as they were last year, rather than by the insurance fees paid by member banks of the FDIC. It means that the elite billionaires will bank primarily with the big banks, where they don’t have to worry about FDIC limits for the millions they have on deposit. They would be more reluctant to put those millions in a smaller bank that depends on the FDIC, rather than on the full resources of the US Treasury and the Federal Reserve currently pledged to the big six.

It’s important to regulate derivatives, as Congress has proposed, but I believe that it is more important to deal with “too big to fail.” If some banks had not been too big to fail, they would have failed because of their flawed derivatives dealing. It looks like some banks, Goldman Sachs for example, were smart in their derivatives trading. Even there, however, when the US bailed out AIG, about $12 billion of the AIG bailout went to Goldman to pay off their derivative bets. Goldman should have had to absorb that $12 billion bad bet with AIG. There should be a “moral hazard” to bad management, but the government has eliminated the moral hazard penalty for the big banks by making them failure proof.

A particularly terrible thing was the elimination of the Glass-Steagall Act provision preventing bank holding companies from owning other types of financial institutions, a revision done under the Clinton administration. This is part of the too-big-to-fail problem.

The bottom line for me is that the American government is abandoning the middle class, of which I am (or used to be) a member. It’s not unusual. The problem for many failing, developing countries is that they have no middle class. I saw this first-hand in Latin America and Asia. One reason China is making such huge strides in overtaking the US financially is that it is creating a vibrant middle class. Throughout history, societies have deteriorated as corrupt elites have gained more and more power; the Roman Empire is just one big example.

Israel Needs To Man-Up

Israel is pressing back against the UN Goldstone report finding Israel probably guilty of war crimes in its attack on Gaza. According to the AP, the report is having a number of perhaps unanticipated effects, including undermining Fatah leader Abbas, delaying Israel's participation in US peace plans, and putting Israel on the hotseat in the UN. Israel is outraged, but Goldstone, a Jew, has said that he calls them like he sees them and only wants the best for Israel.

The bottom line is that Israel needs to face the fact that morally it is falling short. It needs to man-up and behave in a manner acceptable to the world community of nations.

One of the main criticisms is Israel's use of white phosphorous artillery against people, including civilians. White phosphorous should not be fired on the ground; it should be used in air bursts as a marking round to see where artillery going. If it hits you, it burns until the phosphorous is consumed, because you can't put it out. But it makes a visible puff of white smoke during the day and a fireworks-light bright flash at night. It used to be fun to watch other artillery batteries shoot in delta tangos (defensive targets) for our fire base at night, so that they would know where high explosive rounds would land if they had to be called for during the night. They weren't intended to be used against enemy personnel in a fire fight.

I Still Like Elizabeth Warren

Elizabeth Warren was on Bloomberg TV this morning, and I was again struck by her ability to discuss the banking crisis in plain, straightforward terms that don't appear to be spin. It's very unusual in today's media world. Unfortunately, I thought her interlocutors asked very softball questions (not the link above); I suspect that's because they don't want to offend their patrons on Wall Street, who are often villains in Warren's explanations.

The most interesting thing she had to say in this interview was that the small, local banks are in trouble because they hold so many commercial mortgage loans. The terms of these loans are changing on a longer time frame than the sub-prime mortgages that have already begun to turn bad. The smaller banks may get into trouble as these commercial mortgages come due. She said that they would probably not be bailed out like the big banks, but would just be allowed to fail.