Is There a Correction in Our Future?

The New York Times and the Financial Times have both warned recently of a possible stock market (and economic?) correction in our future.

The NYT said on March 24, "Investors who fail to take a hard look at the vulnerability of the American economy are courting tremendous risk. The fact that after years of profligacy the federal government is fiscally ill prepared to respond to a destabilizing downturn only increases those risks."

William Rhodes, CEO of Citibank, wrote in the Financial Times on March 29:

The low spreads, the tremendous build-up of liquidity, the reach for yield and the lack of differentiation among borrowers have stimulated both dynamic growth and some real concerns....

As lenders and investors inevitably become more discriminating, liquidity will recede and a number of problems will surface....

I believe that over the next 12 months a market correction will occur and this time it will be a real correction....

Today, hedge funds, private equity and those involved in credit derivatives play important, and as yet largely untested, roles. The primary worry of many who make or regulate the market is not inflation or growth or interest rates, but instead the coming adjustment and the possible destabilising effect these new players could have on the functioning of international markets as liquidity recedes. It is also possible that they could provide relief for markets that face shortages of liquidity.

Either way, this clearly is the time to exercise greater prudence in lending and in investing and to resist any temptation to relax standards.

My own view of what's going on is that interest rates price both inflation and risk. When inflation was higher and interest rates were higher, they more or less incorporated the risk factor, i.e., it was relatively small in comparison to the inflation factor. As inflation fell and interest rates fell with it, the risk portion shrank in tandem. However, if anything the risk has been going up, not down, as hedge funds, private equity, and derivatives have played a more and more important role. In addition, the entry into the world economy of new major players such as China and India, who have kept inflation artificially low by depressing wage costs, has also kept the risk factor artificially low while actually increasing risk.

As Rhodes said, someday investors will begin to notice this underpricing of risk, maybe not until something happens to highlight the risk factor. The sub-prime mortgage sector is probably not big enough in itself to do this, but if some other bump comes along while sub-primes are still a problem, that might do it.

Politically, it should be noted that while interest rates have fallen for big investors, they have risen for small consumers. In addition to the sub-prime mortgage scandal, which came to light because the interest rates on these mortgages increased dramatically, credit card issuers are raising rates far above the prime rates they charge wealthy individuals, as well as adding all kinds of fees and penalties. This doesn't represent risk pricing so much as it does hucksterism and usury. Lenders are taking advantage of people who have gotten themselves in trouble by borrowing too much. This is illustrated by the fact that people in credit trouble often get more offers from lenders ("loan sharks," even if they are big, fancy banks) than people with good credit histories.

George Soros on AIPAC

George Soros has written an excellent article in the New York Review of Books, "On Israel, America and AIPAC." He calls on Israel and the US to deal with Hamas. He says:

AIPAC's mission is to ensure American support for Israel but in recent years it has overreached itself. It became closely allied with the neocons and was an enthusiastic supporter of the invasion of Iraq. It actively lobbied for the confirmation of John Bolton as US ambassador to the United Nations. It continues to oppose any dialogue with a Palestinian government that includes Hamas. More recently, it was among the pressure groups that prevailed upon the Democratic House leadership to drop the requirement that the President obtain congressional approval before taking military action against Iran. AIPAC under its current leadership has clearly exceeded its mission, and far from guaranteeing Israel's existence, has endangered it.

He takes on the American Jewish Committee's attacks on critics of Israel, which were praised by Bill Clinton, as I noted earlier. On behalf of the AJC, Alvin Rosenfeld attacks as anti-Semites Jews such as Tony Judt and Richard Cohen, and gentiles as well. Soros says:

Whether the Democratic Party can liberate itself from AIPAC's influence is highly doubtful. Any politician who dares to expose AIPAC's influence would incur its wrath; so very few can be expected to do so. It is up to the American Jewish community itself to rein in the organization that claims to represent it. But this is not possible without first disposing of the most insidious argument put forward by the defenders of the current policies: that the critics of Israel's policies of occupation, control, and repression on the West Bank and in East Jerusalem and Gaza engender anti-Semitism.

The opposite is the case. One of the myths propagated by the enemies of Israel is that there is an all-powerful Zionist conspiracy. That is a false accusation. Nevertheless, that AIPAC has been so successful in suppressing criticism has lent some credence to such false beliefs. Demolishing the wall of silence that has protected AIPAC would help lay them to rest. A debate within the Jewish community, instead of fomenting anti-Semitism, would only help diminish it.

Hooray for Soros! I don't know that it will have much effect. It's interesting that Bill Clinton is already undermining Soros, who has been one of the main benefactors of the Democratic Party through Move-On.org and other contributions. So, Soros' concern about whether the Democratic Party can liberate itself from AIPAC is well founded.

AIPAC supporters are already returning fire, see for example this article in Forward.

Bill Clinton Attacks Jimmy Carter for Jew Money

The following is from an email from the AJC:

President Clinton Thanks AJC for Efforts on New Carter Book

Former President Bill Clinton, in a handwritten letter to AJC Executive Director David Harris, voiced appreciation for his efforts to expose the inaccuracies in President Jimmy Carter’s book on the Israeli-Palestinian conflict. “Thanks so much for your articles about President Carter’s book. I don’t know where his information (or conclusions) came from …” said Clinton. “I’m grateful.”

Normally, one ex-President does not attack another, but apparently Bill and Hillary need money, and Jews have a lot of it. Bill is a smart guy, but he has the morals of a snake. His successor is stupid and has no morals at all. Poor America!

Jimmy Carter was intelligent and had morals. He would not negotiate for hostages. His undoing was that Ronald Reagan, unlike Carter, was willing to deal with Iran to get the hostages back and win the election. (Remember Iran-Contra?) Carter chose principle over being re-elected. And although he negotiated the Camp David accords, the Jews hate him because he is even-handed. Just like they hate Franklin Roosevelt, who liberated the surviving Jews from the concentration camps, because he was not willing to kill more Christians to save the Jews earlier. No one is likely to call Clinton or Bush even-handed in dealing with Israel and the Jews. Elliot Abrams, who was convicted of a felony for Iran-Contra, is one of Bush's senior national security advisers on the NSC.

Israel's Answer to Kristof

The Jerusalem Post has an op-ed replying to Nicholas Kristof's column on Israel. The bottom line is that Israel wants peace, but nobody else does. Sure, Israel wants peace if you call "peace" unconditional surrender by everybody else in the region. Israel wants peace about as much as Osama bin Laden does. Call a spade a spade! Israel hates all of its neighbors. It's not interested in peace.