Steve Earle -- Without Comment

More on the Honduran Coup

Andrew Sullivan provides a sampling of opinion across the spectrum. It appears that this coup is in many ways similar to the Venezuelan situation in 2002. Societal elites are pushing back, through the military, on an increasingly populist and left-leaning government that is attempting to directly engage social movements in government.

It also captures the tragedy that dogs revolutionary movements. The changes themselves are a legitimate expression of a yearning for justice by oppressed people. And not surprisingly, they are bitterly opposed by those who benefit from the status quo. Yet overcoming oppression almost inevitably results not in justice but in new and often worse abuses. In Latin America, Cuba is the paradigm example of this, but it also plagued the Sandanistas in Nicaragua, and Chavez in Venezuela. And despite the high hopes for the Morales presidency in Bolivia, it is likely a danger there as well.

Democracy Now's take on this

Not Sure What To Make of This

The U.S. Congressional Budget Office is reporting (pdf) today that the current estimate for the actual cost of the TARP program, originally budgeted at $700 billion will in fact cost taxpayers about $159 billion. And about a third of this will be accounted for by the GM and Chrysler loan/bailout program.

At the same time, it is clear that large banks, eager to forestall or avoid increased regulation, have begun paying back TARP funds before effectively cleaning up their balance sheets, an effort aided by changed accounting rules that ease fair value requirements. In other words, the much lower cost of TARP quite likely does not reflect the much higher higher level of toxic assets remaining on bank balance sheets.

Indeed, Bank of Canada Governor Mark Carney remains bearish, reminding us that the health of the financial sector is largely the result of public sector largesse (and accounting smoke and mirrors). So where are we? I for one am not quite ready to commit to the market again. I may miss the initial gains, and am happy to do so. But I remain a skeptic.

Madoff is a Fool -- The Smart Criminals Get Bonuses

So Bernie Madoff was sentenced today to 150 years in prison. He will undoubtedly spend the remainder of his days in a cell, albeit a comfortable one. Yet the ending is almost biblical -- by sending Bernie away we expiate the guilt of a whole class of fraud artists who are once again receiving record bonuses.

Madoff swindled about $60 billion in an unabashed ponzi scheme that used incoming "investment" to pay returns to earlier contributors. Like all such schemes, it seemed, according to Madoff's testimony, to arise incrementally rather than by some grand design as these things so often do.

I guess it is sort of like selling CDS's that are inadequately funded, securing short term gain (and massive bonuses) at the cost of longer term consequences that must have been understood as potentially catastrophic. A more sophisticated scam, in other words, but a more morally defensible one? Probably not.

Honduras Coup

The news of a coup in Honduras has been widely reported. What has not been as carefully covered is the reason for the coup, which appears to be an upcoming non-binding referendum on a Constitutional Assembly which would re-draft the country's constitution. It would also open the way for re-nationalization of several industries and cement a progressive turn in the countries politics.

Not surprisingly, Venezuela, Cuba, Brazil and Bolivia voiced strong protests, while U.S. concern was much more muted. You can follow events on the coup at the Narco News blog.

John Gray on the New Atheism

John Gray, who describes himself as a skeptic, has another take on the "new atheism" which he sees as simply a variation on the theme he described in his book Black Mass: Apocalyptic Religion and the Death of Utopia.

The lecture can be found here

Rent vs. Buy?

Some fun from Dilbert (ht Calculated Risk)

They Shout Jump and We Ask "How High?"

On Tuesday, Canada's key IT security providers announced a joint security task force:

A group of five Canadian IT associations have joined forces to launch a national security research group in an effort to advance the country’s cyber security strategies.

The Canada Advanced Security Initiative will develop a study, survey and workshop program to develop a new strategic vision for the security industry in Canada and its ability to support users at home and abroad.

This is on the heels of Security Minister Peter van Loan's announcement of a cyber security initiative for Canada in which he compared security concerns to "a new arms race." For a government that seems unable to comprehend economic threat, these folks verge on paranoia regarding crime and terrorism. And of course the security industry is ready to belly up to this new trough.

For those who want a more balanced and less breathless evaluation of the cyberterrorism and cybercrime threats might wish to read Evgeny Morozov,s article in the current Boston Review. Morozov, a fellow at George Soros' Open Society Institute, writes on the role of the internet in authoritarian societies. His concern in this article is that governments, encouraged by providers who would profit, are insisting that

[t]he age of cyber-warfare has arrived. That, at any rate, is the message we are now hearing from a broad range of journalists, policy analysts, and government officials. Introducing a comprehensive White House report on cyber-security released at the end of May, President Obama called cyber-security “one of the most serious economic and national security challenges we face as a nation.” His words echo a flurry of gloomy think-tank reports. The Defense Science Board, a federal advisory group, recently warned that “cyber-warfare is here to stay,” and that it will “encompass not only military attacks but also civilian commercial systems.” And “Securing Cyberspace for the 44th President,” prepared by the Center for Strategic and International Studies, suggests that cyber-security is as great a concern as “weapons of mass destruction or global jihad.”

Unfortunately, these reports are usually richer in vivid metaphor—with fears of “digital Pearl Harbors” and “cyber-Katrinas”—than in factual foundation.

But of course, whether true or false, they represent opportunity. Thus

Cyber-security fears have had, it should be said, one unambiguous effect: they have fueled a growing cyber-security market, which, according to some projections, will¬†grow twice as fast as the rest of the IT industry. Boeing, Raytheon, and Lockheed Martin, among others, have formed new business units to tap increased spending to protect U.S. government computers from cyber-attacks. Moreover, many former government officials have made smooth transitions from national cyber-security policy to the lucrative worlds of consulting and punditry. Speaking at a recent conference in Washington, D.C., Amit Yoran—a former cyber-security czar in the Bush administration and currently the C.E.O. of NetWitness, a cyber-security start-up—has called hacking a national security threat, adding that “cyber-9/11 has happened over the last ten years, but it’s happened slowly, so we don’t see it.” One way for the government to protect itself from this cyber-9/11 may be to purchase NetWitness’s numerous software applications, aimed at addressing both “state and non-state sponsored cyber threats.”

So much of the so-called war on terror has been about the erosion of freedoms. Yes freedom involves risk, but it is worth recalling the dictum that those who would trade freedom for security inevitably end up with neither.

A New Watchdog for CSIS?

In an op-ed piece in today's Globe & Mail, Maher Arar calls for more effective oversight of CSIS in the wake of yet another case of Abusfian Abdelrazik. It is worth noting that the Globe was force to close of comments on its site regarding Arars piece because of the abusive nature of comments being made

Abdelrazik, a dual Sudanese-Canadian citizen has been held in a Sudanese jail for years as a suspected terrorist despite being cleared by both Sudan and Canada and despite a judges order to return him here. Arar argues that what this and many other similar cases indicate is a need for vastly more effective oversight of the activities of CSIS as well as the RCMP. It is telling that a judicial inquiry into his own case made such recommendations in 2006 that have yet to be acted upon.

As Arar argues

Canadians deserve to know why so many of this country's citizens, all of Muslim background, have been imprisoned and tortured abroad. Human-rights organizations, activists and national-security experts have been calling for the current government to establish the credible oversight agency that was recommended by Judge O'Connor several years ago. Their calls have landed on deaf ears.

How many more victims will it take before our government realizes that it needs to act? If the government had established this agency, Mr. Abdelrazik could launch a complaint upon his return. The time required for him to get answers and justice would be much shorter. For taxpayers, it would be a much cheaper alternative than a full-blown federal inquiry.

The Harper government has repeatedly demonstrated its willingness to score cheap political points and acquiesce to every American demand rather than protect the rights of the citizens it represents. It is one more reason that it is time for this government to go.

And Speaking of Paternalism . . .

In an example of breathtaking bureaucratic paternalism, Health Canada apparently withheld supplies of hand for remote native reserves during the recent swine flu outbreak because it feared the abuse of the alcohol based compound. As a report in yesterday's Globe & Mail notes

Kim Barker, public health adviser for the Assembly of First Nations, told the Senate committee on aboriginal peoples she was “devastated” when she first heard that health officials were spending precious time debating the wisdom of sending hand sanitizer – which can contain up to 70-per-cent alcohol – to the communities.

“We heard that ... people were spending days discussing the pros and cons of a non-alcohol-based hand sanitizer versus an alcohol-based one because of the concerns about addictions in communities,” she said. “It was absolutely outrageous.”

A senior health official confirmed to the committee that chiefs and public-health officials debated the sanitizer issue at length in the nascent stages of the outbreak last month. “The discussion was with the best interests of our clients in mind,” said Anne-Marie Robinson, assistant deputy minister of Health Canada's First Nations and Inuit Health Branch. “We have had some rare experiences in our communities where we have had theft of hand sanitizers. … We do have communities where we have large proportions of people who suffer from addiction. … We have had a number of people come forward, and some evidence, where this could potentially put people at risk.”

During late May and early June, the mild flu outbreak erupted into a full-blown crisis on several of Manitoba's remote fly-in reserves. Dozens of flu-stricken aboriginals had to be flown from a collection of towns in the Island Lake region, 600 kilometres northeast of Winnipeg, and several were hooked up to respirators. At one point, two-thirds of all flu victims on respirators in the province were aboriginal.

What can I say?

More Paternalism from Harper & Co.

Apparently the Harper government thinks that the spending of our tax dollars is none of our business. While DND has routinely released figures on the cost of the Afghanistan deployment in the past, they are unwilling to for the coming two years, until the end of the mission in 2011. Could this be because we are deferring to the Americans, who have increased their presence in Kandahar? Thus

When the NDP asked for the identical figures last year, the military made them public. [It] was able to disclose in April 2008 that the yearly incremental cost of the Afghan war would top $1-billion for the first time since Canada’s military became involved in Afghanistan in 2002.

But this year, military censors cited Section 15 of the act in blocking out the figure.

In a June 3 letter to an NDP researcher, Julie Jansen, the director of the military’s access branch, cited “the defence of Canada or any state allied” (italics mine) with it in justifying the withholding of the figures for the three next fiscal years.

Section 15 of the act allows the withholding of any “information the disclosure of which could reasonably be expected to be injurious to the conduct of international affairs, the defence of Canada or any state allied or associated with Canada or the detection, prevention or suppression of subversive or hostile activities.”

Ms. Jansen also invoked a Section 21 exemption, which gives a government department the discretionary power to disclose records that include negotiationplans, deliberations or consultations, or “administrative plans that have not yet been put into operation.”

In an identical request last year, the Defence Department released the estimates for the fiscal years leading up to 2011, the year that Parliament and the government has said Canada’s current military mission in Afghanistan must end.

“In the face of more public interest in the ongoing cost of the war, it is surprising the DND would now take the attitude that now is the time that we will start pulling back on information and not be as transparent as before,” NDP defence critic Jack Harris said.

So does this government just not care about accountability to Parliament, or is it letting the U.S. dictate the parameters of our democracy?

Scam Potential of Credit Default Swaps

On Monday, Floyd Norris of the NYT posted a comment on the perverse incentives arising from credit default swaps, as

[they] could be used to leave a creditor hoping that a company would go into bankruptcy, or allow someone to control a shareholder vote even though his financial interests are contrary to those of shareholders.

He noted however, that the Securities Exchange Commission was moving toward closer regulation of CDSs that would, among other things, limit or remove these incentives.

Not so in Canada, were these instruments are largely unregulated, as a brief from McCarthy Tetrault recently described:

Ontario is still considering its proposed Rule 91-504 dealing with OTC derivatives. However, none of the Canadian provinces have rules in place, nor has any province publicly announced that it is considering rules, which require centralized clearing of OTC derivatives. Furthermore, none of those rules or legislation deals with the extensive recordkeeping and reporting requirements that are being proposed by the US Treasury Department. . . .

Many commentators point to the largely unregulated OTC derivatives market, in particular, credit default swaps, as being the catalyst for the current global credit problems. Whether one agrees or disagrees with that view, it appears that all interested parties would welcome the regulation of OTC derivatives on some level. . . .

However, the ‘devil is in the details,’ and it remains to be seen whether the proposed framework will be effective in minimizing systemic risk, and whether Canadian provinces will use the US regulatory framework as a model for OTC derivatives regulation in Canada. One can expect additional proposals and discussion in the weeks ahead.

When our finance minister is finished patting himself on the back for his handling of the recession, he might turn his attention to this. It would be refreshing if the opposition parties did as well.

Food as Drugs

Most of us, I hope, wouldn't serve up our kids a few lines of coke or a tumbler of Jack Daniels, but it turns out that giving them a few chocolate chip cookies is, biochemically speaking, roughly the same thing.

Former U.S. Food and Drug Administration chief David Kessler, quoted in a New York Times article entitled How the Food Makers Captured Our Brains, argues that, just as tobacco companies manipulated nicotine content to attain maximum addictive potential, so to have food producers engineered fat, salt and sugar content to create foods that maximize the desire for more. As the article notes

. . . food companies certainly understand human behavior, taste preferences and desire. In fact, he offers descriptions of how restaurants and food makers manipulate ingredients to reach the aptly named “bliss point.” Foods that contain too little or too much sugar, fat or salt are either bland or overwhelming. But food scientists work hard to reach the precise point at which we derive the greatest pleasure from fat, sugar and salt.

The result is that chain restaurants like Chili’s cook up “hyper-palatable food that requires little chewing and goes down easily,” he notes. And Dr. Kessler reports that the Snickers bar, for instance, is “extraordinarily well engineered.” As we chew it, the sugar dissolves, the fat melts and the caramel traps the peanuts so the entire combination of flavors is blissfully experienced in the mouth at the same time.

Foods rich in sugar and fat are relatively recent arrivals on the food landscape, Dr. Kessler noted. But today, foods are more than just a combination of ingredients. They are highly complex creations, loaded up with layer upon layer of stimulating tastes that result in a multisensory experience for the brain. Food companies “design food for irresistibility,” Dr. Kessler noted. “It’s been part of their business plans.”

And in case you think that you can simply follow Michael Pollen's advice to "eat food" and avoid the centre aisles of grocery stores, the Globe & Mail reported yesterday that food companies Monsanto and Dole have launched a project to "improve the nutrition, flavour, colour and aroma" of fresh vegetables, presumably through genetic modification. It will surely be tempting to modify salt, sugar and fat content of produce to capture market share.

We're In This Too

With election fever in the air, it is unlikely that a sitting government, particularly one with the Machiavellian instincts of this one, would be forthcoming about the state of the economy. So it appears that the task of delivering bad news falls to Bank of Canada Governor Mark Carney.

Bloomberg is reporting today that in a speech at the Woodrow Wilson Centre, Carney noted that Canada's economy is currently shrinking at a 5.4% rate, and that the total decline expected this year is 3%, the largest single year decline since 1933. Carney's sentiments, the report notes, were echoed by BMO economist Doug Porter.

While the housing market remains buoyant on historically low mortgage rates, unemployment continues to climb, and is now at 8.4%, with Ontario's manufacturing heartland continuing its rapid decline. And as mortgage rates continue to rise in tandem with unemployment, it would seem likely that the real estate decline will resume as will foreclosure rates.

So Minister Flaherty`s claims that we are likely to sail through this downturn relatively unscathed ring increasingly hollow. Tellingly, there was no comment on Carney`s remarks on either the Liberal or NDP websites.

Reading the Tea Leaves?

In the spring it was green shoots -- how springlike. But now that summer is here, it seems that those shoots are withering a bit. Markets are trending downward again and other indicators such as employment continue to decline.

On his blog today, Paul Krugman noted that looking at global indicators, the decline since last April tracks the rate of decline in late 1229 and early 1930 at the outset of the great depression. He offers this chart:



He also draws on 1929/30 material from the Wall Street Journal to show that the same optimistic arguments were being made then about impending recovery, offering this example

What’s striking is the optimism: story after story says, in effect, that the worst is over and recovery is just around the corner:

Col. Ayres, VP Cleveland Trust, predicts an abrupt recovery in stock and commodity prices by Labor Day due to current consumption exceeding production. Distinguishes between two types of depression, “V”-shaped and “U”-shaped.

Obviously, we are not repeating the mistakes of the 1930s (yet). But what we don't know is whether the measures taken will work. Much remains to be seen, and while hope is always desirable, optimism is still probably misplaced.

Looting the Public Purse with Goldman Sachs

Yesterday's Democracy Now live segment included an interview with former Goldman Sachs managing director Nomi Prins. The subject of the interview and of her article in the current Mother Jones is the record bonuses her former employer is set to pay out -- the largest in the company's history, shortly after and contingent on repayment of a portion of TARP funds received late last year. Here is a video of that interview:

An Interesting Idea

From the Financial Times comes an idea for negative interest rates as a policy tool in the fight against deflation. Monetary policy reaches a zero percent interest rate boundary beyond which traditional interventions are no longer feasible as negative interest rates are not possible. Yet some Japanese parliamentarians are suggesting a way that such interest rates might be feasible.

In Japan’s case, the theory would suggest that nominal rates of -4 per cent might be closer to what is required to rescue the economy from another deflationary spiral. Having agreed that this might be necessary, the next question is how it could be imposed.

Several MPs in the ruling Liberal Democratic Party believe the abolition of cash, though politically radioactive, might be technically feasible. Richard Jerram, a senior economist with Macquarie bank, told investors that “the proposal has become practical with the broad penetration of electronic money and credit cards in Japan”.

He said that all the proposals were radical but worth consideration for Japan. Without physical cash, a central bank can set rates exactly where it likes, runs the argument. Mr Jerram said: “At the heart of the problem of achieving negative nominal interest rates is the idea that physical currency is an anonymous bearer bond with a nominal interest rate of zero.” While a central bank can impose positive or negative rates on non-physical assets, transmitting those rates to physical currency is a huge challenge. By permanently removing cash from a system, he added, policymakers are robbed of the excuse that zero is the lowest that nominal rates can go as a deflation-fighting tool.

In theory, many Japanese could easily make the leap into a cashless world. The country has six main competing cashless payment systems, many of them embedded into mobile phones. Including Oyster-type cards issued by public transport companies, industry sources estimate that there are about 120 million cashless payment chips sitting in Japan’s wallets and handbags, waiting to be swiped.

Nevertheless, the country remains a wholeheartedly cash-based consumer society. Currency in circulation is about 16 per cent of its GDP, compared with the levels of 2 to 3 per cent in most developed countries. Reducing that 16 per cent to zero would be a wrench but would come with considerable benefits, Mr Jerram said.

But just as Japan’s cultural attachment to cash may prove hard to dislodge, some economists believe that the same may be true of deflation. The country’s growing population of elderly people mainly hold cash or cash equivalents and, compared with its US and European counterparts, the Bank of Japan has come under virtually no political pressure to be more belligerent in its war on deflation. It is unlikely, added Mr Jerram, to brook anything as radical as abolishing cash.

This would seem to suggest that in Canada, where currency in circulation is slightly more than 3%, there is further room for traditional monetary policy through the application of negative interest rates -- an interesting idea.

Why Didn't We Think of This

From the Onion, an easy solution to our deficit woes


US To Trade Gold Reserves For Cash Through Cash4Gold.com

The Streetcar Saga Continues

Toronto's plans for more than 200 new streetcars, to be built by Bombardier in their Thunder Bay facilit, is looking increasingly doubtful. While the McGuinty government has thrown its weight behind the purchase, it appears that the necessary federal contribution will not be forthcoming. In yesterday's Globe, columnist Marcus Gee argued that the ten year project does not qualify for short-term stimulus funding, and this indeed is the position minister Baird is taking.

But Conservative Senator Elaine McCoy has another take. She suggests that this is a question of patronage, as the Thunder Bay ridings that would see the greatest benefit are held by the NDP. And she links to a Halifax Chronicle-Herald article which describes a record of Tory patronage as follows

On April 30, the two levels of government announced $55.8 million in projects. Mr. Donham, a former journalist, used the province’s freedom of information law to get the list of projects that the province submitted for federal approval.

He found that the province had proposed 39 paving projects, but only 20 were approved. Of those, 10 were in Tory ridings and seven others were in Cumberland-Colchester-Musquodoboit Valley, which was represented by Independent Bill Casey until recently. A byelection in the traditionally Tory riding must be scheduled for the months ahead.

"Projects in ridings held by Conservative MPs were almost four times as likely to receive federal approval as those in Liberal-held ridings," wrote Mr. Donham on his blog, http://contrarian.ca.

Nova Scotia has a long tradition of winning rural votes with the judicious application of pavement.

Mr. Donham’s research shows that six of seven projects proposed for Defence Minister Peter MacKay’s Central Nova riding were approved, while only one of seven was approved for Kings-Hants, the riding of Mr. MacKay’s longtime rival, Liberal Scott Brison.

Only three of 10 projects proposed for the two Liberal Cape Breton ridings were approved, while four of five projects in the Conservative ridings of South Shore-St. Margarets and West Nova got federal funding.

Halifax-area ridings, without extensive highway systems, were mostly ineligible.

There is ample evidence that this is a government for whom the political trumps all. It is also one that is increasingly desperate as the Liberal opposition, with a growing lead in the polls, is simply waiting for an opportune time to pull the plug. Of course, the Miller government has played this one with incredible ineptitude as well.

Toronto deserves better than this.

Canadian News from Iran

I have not commented on news from Iran as it is being well covered, in fact incredibly so on Andrew Sullivan's Daily Dish. There are, however, two Canadian stories worth noting.

The first, reported by Andrew Sullivan, is that unlike many western embassies, the Canadian is not taking in injured protesters. I will email External Affairs and post their reply, if any, when I receive it.

The second is that Globe & Mail reporter George McLeod was detained and beaten by Iranian authorities. McLeod gives this account of his ordeal

I was walking by a checkpoint and an officer grabbed me and forced me onto a motorcycle. As soon as we stopped, I was grabbed from the bike by another officer and slapped me across the head. Seven officers ran up to join in the slapping, and one punched me in the head. A large officer, about 6 foot 4 and dressed in camouflage, grabbed me by the neck, pinching my jugular but not my wind pipe. His leather gloves cut through my skin and I was pinned against a van, my arm bent high behind my back.

I was then thrown onto a second motorcycle with one police officer in front of me and another behind, slapping me more and cursing during the quick ride around the corner.

When we stopped, an officer grabbed me, pinned my arm behind my back and led me into the bowels of the Interior Ministry headquarters – where so many Iranian dissidents “disappear.”

We went down several flights of dark concrete stairs to a large basement room, where I was grabbed by the shirt and pinned against the wall, as more questions were shouted at me in Farsi – and as I caught glimpses of the others being treated far worse. I was separated from the protesters, and officers gathered around me, attracted by the spectacle of a foreigner.

Some pushed me, and I was worried I would be held and beaten for days. But two of the officers fended the others off. They took my camera to see whether I had photographed the riots, but I had already erased the images. I was questioned in broken English for about 20 minutes – sometimes held against the wall, sometimes allowed to stand while officers smiled and chatted.

“There has been a terrible misunderstanding,” I was told. “There is a bad situation in Tehran, and sometimes the officers get confused,” he said with a smile, while a plainclothes officer offered me water and tea.

Again, I can find no indication of comment by the Minister of External Affairs or his officials, though the story is now a week old.

Inflation is Not the Problem

Last week, I linked to Paul Krugman's Robbins Lectures from LSE. In the three talks, Krugman gave a detailed analysis of why inflation will not be a problem in the near term. His argument, and it is a powerful one, is that we are in a liquidity trap in which neither zero interest rates or the type of quantitative easing that most governments are engaging in is likely to lead to price increases. In brief, inflation is not the problem.

Indeed, in a reversal of the argument in the U.S., our central bank governor, Mark Carney was warning the Harper government last week not to ease up on stimulus out of fear of inflation. And in fact, this was reflected in news that our banks are piling up excess reserves as they are reluctant to loan and consumers are reluctant to borrow.

Much of this fear arises because long term rates and mortgage interest are rising, as this chart from economics blogger Ajay Shaw shows



This morning, former Fed vice-chair Alan Binder, writing in the New York Times, presents his argument. He notes first, that deflation will remain the far greater danger for at least the next two years, second, that the Fed and other central banks are well aware of inflationary dangers and will take action before the economy returns to full capacity and finally that rising long term interest rates (and mortgage rates) are merely a return to normal following historic lows.

What few are commenting on (Krugman is the exception here) is the ideological nature of this debate. Our Conservative government and Republican opposition in the U.S. are eager to return to their fiscally conservative roots. And as Krugman constantly reminds us, and as Bernanke as an historian of the Great Depression should know, the return to balanced budgets and tight money in 1937 led to a second depression that was only ended by war.

Back Again

Between a grade eight graduation and getting ready for summer at the cottage and work around the house, writing was sparse and then stopped. But all that is done, so back to work on this again.

Iran and the Broader Middle East

As so many are already commenting on the situation in Iran, there is nothing much I can add here. What is not being recognized to the same extent is how this might signal, along with the election of a moderate government in Lebanon and the increasingly likely death of a two-state solution for the Palestinians, signal a profound re-alignment in the middle east.

It seems apparent that the reign of the Mullah's in Iran may be doomed. And it was this regime's seizing of power in 1979 ushered in thirty years thus far of radical Islam. It is difficult, I think, to overestimate the effect the collapse of this regime would have on the region.

In this month's Atlantic, Jeffrey Goldberg sees a possibility, though a slim one, of a future alliance between a liberalized but still irrevocably shia Iran and Israel against the threat of Sunni Arab hegemony. Yet even a much less cataclysmic realignment might offer real signs of hope in the middle-east in general, and Israel/Palestine in particular.

As Gershom Gorenberg notes, a perestroika like mellowing of the regime in tandem with a moderate regime in Lebanon is likely to do much to lessen the influence of radical groups such as Hamas and Hezbollah which have had such a destabilizing influence. So to the extent that this is a revolution and that it succeeds, it may offer real hope for the region.

And Now This

To hear the minions of the mainstream media tell it, our choice as news consumers is between Edward R. Murrow or Walter Kronkite and the vast swamp of ignorance and mis- or disinformation that is the web. Yet as many are recognizing, events in Iran are being reported by those on the ground and a blogging community that is tapping into and reporting this information. Main stream media in general, and cable news outlets have until the past day or so not been real players.

As one blogger so aptly describes it

Today, as global geopolitics is shaken to its core by events in Iran, I turned on cable news this morning, and saw endless ads for a Larry King Jonas Brothers “interview”, Morning Joe yukking it up discussing Kuwaiti massage therapists, a video of a tomato throwing contest on CNN, talk radio blowhard Bill Bennett…and occasionally a phone call from Christiane Amanpour in Tehran. I can’t even bring myself to turn on the network morning programs, I might vomit.

All the while, I have been hitting refresh like a crazy person on this thread at Huffington Post, which reports on news organizations banned, reporters arrested, crowds building for a Mousavi rally as I post this, etc. etc. Huffington Post has no reporter on the ground, no international bureau, no satellite phones in Tehran, and yet, that is the most thorough news source on this story you can find.

As I am writing this, I am listening to PBS report on the Netanyahu speech on the limits to any future Palestinean state. This was all over the net two days before the speech, with details that have proved to be accurate. I commented on this on Saturday, a day after the information was available.

Ask yourself this: Where do you look when you want timely accurate information on a breaking story? If you are like me, it is to the collection of blogs and news sites that you follow regularly. Where is your 'go to' for a quick initial take on any subject? Wikipedia.

So news is becoming open source. And it requires a certain amount of sophistication to use. Isn't this a good thing? For those of us who are willing to learn and explore, we need not rely on unaccountable and unresponsive institutions to spoon feed us the news.

Wall Streets Revisionist History

In an attempt at revisionist history reminiscent of the Soviet politburo, several large U.S. banks are not only moving to repay public money they received at the depth of the crisis and declining to accept further help through the sale of toxic assets, but are floating the idea that they never needed the money in the first place and participated only because government compelled them to. As an article on The Economist's website notes,

. . . a worryingly revisionist history of the credit crunch is being penned. It says that some banks did not really need government help and were bullied into accepting it last year as part of a wider bail-out of their flakier peers.

It was only a few short months ago, of course, that the banking system was in a state of collapse, with share prices in free-fall and borrowing costs skyrocketing for all. One result of intervention was that all banks benefited from an implicit state guarantee. And even those who did not benefit from government largess were saved by the fact that weaker firms to whom they were exposed were protected.

As the Economist article notes, banks continue to benefit from very low interest rates, central bank asset purchases and guarantees on their debt. Thus their claim of a return to financial health is demonstrably false. All of which is true in Canada as elsewhere.

And to the extent that this revisionism is also accepted, it is also dangerous. It suggests that regulation need only focus on the truly troubled banks and not on all. Yet as is clearly obvious, this crisis has been systemic in nature. All involved acted in ways that brought it about. And while some may have fared better than others, all need to be regulated more closely in the future.

Yet More Pirates -- CDS's

In today's Financial Times, Willem Buiter has an entertaining and disturbing description of how credit default swaps can be manipulated to effectively defraud investors and how one U.S. company has succeeded in doing this.

The obvious problem with CDS's, as Buiter recognizes, is that the purchaser need not have an insurable interest in what is being insured. The result is that

the CDS market is first and foremost a betting shop. You can buy CDS written on a given class of bonds, in amounts well in excess of the total face value of the bonds you own in that class. Indeed you may not own any bonds in that class and still buy CDS that pay off in the event a default occurs on bonds in that class. That is, CDS can be used not to hedge risk you already are exposed to, but to take on additional risk.

Unlike a pure game of chance, however, with a CDS, as with any type of insurance, information asymmetries are present, and as a result moral hazard, is a constant possibility. Moral hazard occurs when one party to the insurance contract -- traditionally the purchaser -- has information that the other partner -- traditionally the seller -- does not or is able to influence the likelihood of the insured event occurring. In other words, one individual may purchase life insurance on another knowing the other is gravely ill, or knowing that she or he plans to bring about the insured's demise.

Thus CDS's are unique instances in which moral hazard and lack of insurable interest can coexist. And as Buitner points out, this means that

[i]n the CDS world, the most common reported abuse of the instrument involved a party that owned both CDS and the underlying security, but had a net short position in the security. To be precise, assume I own $X worth of bonds of type j (at face value) and have purchased CDS on bond j that will pay out $Z if default occurs. If X < j: I am better off if default occurs.

Now assume that, as a bond holder, I can influence the likelihood of a default occurring. A possible scenario is where the company that issued the bond is in dire straits, but has a good enough chance of recovery and survival, that, from a social or economic efficiency perspective, it is undesirable to incur the real resource costs associated with a default. Assume the issuer of the bond has asked the holders of the bond to roll over the bonds, or to voluntarily extend their maturity. All bondholders but me have agreed. I am the holdout and the veto player. By refusing to go along with the voluntary restructuring (which, by assumption, would not be an act of default), I now can trigger a default, making a gain of $(Z-X). It’s socially inefficient; it may cause unnecessary human misery, but it is profitable and so, as homo economicus, I do it. Because of my hold-out position, I can drive the probability of default to unity, or 100 percent. This is the mother of moral hazard.

But now comes the mother-in-law of moral hazard. This time it is not the purchaser of the CDS (the insured party) who is afflicted by extreme moral hazard, but the writer of the CDS, the insurer. There is asymmetric information, but the informational advantage is with the insurer. Assume there is an amount $X of some bond of type j outstanding. Assume that the issuer of the bond is generally considered to be at significant risk of default. I now write (sell) CDS on that bond. Because there is no limit to the amount of CDS I can issue as long as there are willing takers, I can sell CDS to anyone who wants to have a flutter on the default of that bond. If I price my CDS aggressively (accept a low insurance premium per $ of bond j insured), I may be able to have a revenue from the sale of these CDS, $R, say, that exceeds the face value of the total stock of bond j outstanding. This would only happen if the total notional value of the CDS I sell (the total value they would pay out in the event of a default on bond j) is a multiple of the face value of bond j outstanding.

Having received revenue from the sale of CDS written on bond j well in excess of the face value of the entire stock of bond j outstanding, I then buy up, at a price above the prevailing market price (if necessary at face value or even above it!), the entire outstanding stock of bond j. As long as I can be sure I have the entire stock of bond j in my possession, I can be sure than no event of default will ever be declared for that bond. I, the writer of the CDS on bond j , and now also the owner of the entire outstanding stock of bond j , could simply forgive the debt I just acquired. The insurer has, ex-post, reduced the probability of default to zero. Those who bought the insurance (bought the CDS), wasted their money (their insurance premia).

Instead of buying up the entire outstanding stock of the bond directly and holding the bonds to maturity without calling a default, or forgiving the debt, I could instead, if the bond were some asset-backed security, purchase enough of the assets underlying the bond at prices in excess of their fair value to ensure that the issuer of the bond would have sufficient funds to pay off all the bond holders, should the bond be ‘called’, that is, retired prematurely. If in addition, I could make sure that the bond would indeed be called, I would again, through this financial manipulation, have reduced the probability of default on the bond to zero.

And indeed, a small U.S. brokerage, Amherst Holdings, has succeed in doing just this. It has

. . . sold CDS (default protection insurance) on mortgage bonds, then purchased the property loans underlying these bonds at above-market prices to prevent a default that would trigger payments to buyers of the contracts.

Some mortgage bonds can be “called,” or retired early, when the amount of loans backing the debt is reduced to certain levels by refinancing, loan repayments or defaults. The mortgage bonds targeted by Amherst fell into that category. So the mechanism through which Amherst made sure enough money would be available to the issuer of the mortgage bonds to pay the obligations due on these bonds, also caused the bonds to be called. The bonds were paid off in full, and the CDS Amherst had sold on these mortgage bonds became worthless.

As Buitner recognizes, the solution to this is obvious -- it is to require that the purchasers of CDS's have an insurable interest. After all, I cannot buy insurance on any future car accidents or house fires you might have. The potential for manipulation and abuse is just too great.

A Marxism We Can Believe In

You know times have changed when Canada's preimenent marxist political scientist is publishing articles in Foreign Policy magazine -- a bastion of establishment commentary. Yet there is our very own Leo Panitch in this month's edition, with a thoughtful and even convincing piece on the relevance of marxian analysis (if not prescription) to today's economic events.

Like Hitchens a couple of months back in the Atlantic, Panitch is suggesting the obvious, that Marx's work provides some genuine insight to the current crisis. Says Panitch

Penning his most famous works in an era when the French and American revolutions were less than a hundred years old, Marx had premonitions of AIG and Bear Stearns trembling a century and a half later. He was singularly cognizant of what he called the “most revolutionary part” played in human history by the bourgeoisie—those forerunners of today’s Wall Street bankers and corporate executives. As Marx put it in The Communist Manifesto, “The bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and thereby relations of production, and with them the whole relations of society. . . . In one word, it creates a world after its own image.”

But Marx was no booster of capitalist globalization in his time or ours. Instead, he understood that “the need for a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe,” foreseeing that the development of capitalism would inevitably be “paving the way for more extensive and exhaustive crises.” Marx identified how disastrous speculation could trigger and exacerbate crises in the whole economy. And he saw through the political illusions of those who would argue that such crises could be permanently prevented through incremental reform.

Like every revolutionary, Marx wanted to see the old order overthrown in his lifetime. But capitalism had plenty of life left in it, and he could only glimpse, however perceptively, the mistakes and wrong turns that future generations would commit. Those of us now cracking open Marx will find he had much to say that is relevant today, at least for those looking to “recover the spirit of the revolution,” not merely to “set its ghost walking again.”

If he were observing the current downturn, Marx would certainly relish pointing out how flaws inherent in capitalism led to the current crisis. He would see how modern developments in finance, such as securitization and derivatives, have allowed markets to spread the risks of global economic integration. Without these innovations, capital accumulation over the previous decades would have been significantly lower. And so would it have been if finance had not penetrated more and more deeply into society. The result has been that consumer demand (and hence, prosperity) in recent years has depended more and more on credit cards and mortgage debt at the same time that the weakened power of trade unions and cutbacks in social welfare have made people more vulnerable to market shocks.

This leveraged, volatile global financial system contributed to overall economic growth in recent decades. But it also produced a series of inevitable financial bubbles, the most dangerous of which emerged in the U.S. housing sector. That bubble’s subsequent bursting had such a profound impact around the globe precisely because of its centrality to sustaining both U.S. consumer demand and international financial markets. Marx would no doubt point to this crisis as a perfect instance of when capitalism looks like “the sorcerer who is no longer able to control the powers of the netherworld whom he has called up by his spells.”

Despite the depth of our current predicament, Marx would have no illusions that economic catastrophe would itself bring about change. He knew very well that capitalism, by its nature, breeds and fosters social isolation. Such a system, he wrote, “leaves no other nexus between man and man than naked self-interest, than callous ‘cash payment.’” Indeed, capitalism leaves societies mired “in the icy water of egotistical calculation.” The resulting social isolation creates passivity in the face of personal crises, from factory layoffs to home foreclosures. So, too, does this isolation impede communities of active, informed citizens from coming together to take up radical alternatives to capitalism.

Marx would ask first and foremost how to overcome this all-consuming social passivity. He thought that unions and workers’ parties developing in his time were a step forward. Thus in Das Kapital he wrote that the “immediate aim” was “the organization of the proletarians into a class” whose “first task” would be “to win the battle for democracy.” Today, he would encourage the formation of new collective identities, associations, and institutions within which people could resist the capitalist status quo and begin deciding how to better fulfill their needs.

No such ambitious vision for enacting change has arisen from the crisis so far, and it is this void that Marx would find most troubling of all. In the United States, some recent attention-getting proposals have been derided as “socialist,” but only appear to be radical because they go beyond what the left of the Democratic Party is now prepared to advocate. Dean Baker, codirector of the Center for Economic and Policy Research, for example, has called for a $2 million cap on certain Wall Street salaries and the enactment of a financial transactions tax, which would impose an incremental fee on the sale or transfer of stocks, bonds, and other financial assets. Marx would view this proposal as a perfect case of thinking inside the box, because it explicitly endorses (even while limiting) the very thing that is now popularly identified as the problem: a culture of risk disassociated from consequence. Marx would be no less derisive toward those who think that bank nationalizations—such as those that took place in Sweden and Japan during their financial crises in the 1990s—would amount to real change.

And there is even a video interview with the same title

How the Third World Views Us Now

In this week's Vanity Fair, Nobel laureate and former World Bank chief Joseph Stiglitz outlines the effects our policy responses to the current crisis are likely to have on developing countries, particularly given how greatly they differ from what the west has prescribed when many of them faced similar crises.

Stiglitz recognizes that

. . . among [the] legacies will be a worldwide battle over ideas—over what kind of economic system is likely to deliver the greatest benefit to the most people. Nowhere is that battle raging more hotly than in the Third World, among the 80 percent of the world’s population that lives in Asia, Latin America, and Africa, 1.4 billion of whom subsist on less than $1.25 a day. In America, calling someone a socialist may be nothing more than a cheap shot. In much of the world, however, the battle between capitalism and socialism—or at least something that many Americans would label as socialism—still rages. While there may be no winners in the current economic crisis, there are losers, and among the big losers is support for American-style capitalism. This has consequences we’ll be living with for a long time to come.

For Stiglitz, the most important consequence is the death of the "Washington Concensus" and the idea of the primacy of markets. Thus

For a while, it seemed that the defeat of Communism meant the sure victory of capitalism, particularly in its American form. Francis Fukuyama went as far as to proclaim “the end of history,” defining democratic market capitalism as the final stage of social development, and declaring that all humanity was now heading in this direction. In truth, historians will mark the 20 years since 1989 as the short period of American triumphalism. With the collapse of great banks and financial houses, and the ensuing economic turmoil and chaotic attempts at rescue, that period is over. So, too, is the debate over “market fundamentalism,” the notion that unfettered markets, all by themselves, can ensure economic prosperity and growth. Today only the deluded would argue that markets are self-correcting or that we can rely on the self-interested behavior of market participants to guarantee that everything works honestly and properly. . . .

In many parts of the world, global institutions such as the International Monetary Fund and the World Bank came to be seen as instruments of post-colonial control. These institutions pushed market fundamentalism (“neoliberalism,” it was often called), a notion idealized by Americans as “free and unfettered markets.” They pressed for financial-sector deregulation, privatization, and trade liberalization.

The World Bank and the I.M.F. said they were doing all this for the benefit of the developing world. They were backed up by teams of free-market economists, many from that cathedral of free-market economics, the University of Chicago. In the end, the programs of “the Chicago boys” didn’t bring the promised results. Incomes stagnated. Where there was growth, the wealth went to those at the top. Economic crises in individual countries became ever more frequent—there have been more than a hundred severe ones in the past 30 years alone.

Free-market ideology turned out to be an excuse for new forms of exploitation. “Privatization” meant that foreigners could buy mines and oil fields in developing countries at low prices. It meant they could reap large profits from monopolies and quasi-monopolies, such as in telecommunications. “Liberalization” meant that they could get high returns on their loans—and when loans went bad, the I.M.F. forced the socialization of the losses, meaning that the screws were put on entire populations to pay the banks back.

The result, of course, has been a profound loss of legitmacyfor both markets and trade. For many on the left, and not a few on the far right, this might be welcome. Disengagement from the world economy might be viewed as a politial good. But for Stiglitz, this may have two unintended and disastrous consequences. First

The former Communist countries generally turned, after the dismal failure of their postwar system, to market capitalism, replacing Karl Marx with Milton Friedman as their god. The new religion has not served them well. Many countries may conclude not simply that unfettered capitalism, American-style, has failed but that the very concept of a market economy has failed, and is indeed unworkable under any circumstances. Old-style Communism won’t be back, but a variety of forms of excessive market intervention will return. And these will fail. The poor suffered under market fundamentalism—we had trickle-up economics, not trickle-down economics. But the poor will suffer again under these new regimes, which will not deliver growth.

And potentially much more ominous

Faith in democracy is another victim. In the developing world, people look at Washington and see a system of government that allowed Wall Street to write self-serving rules which put at risk the entire global economy—and then, when the day of reckoning came, turned to Wall Street to manage the recovery. They see continued re-distributions of wealth to the top of the pyramid, transparently at the expense of ordinary citizens. They see, in short, a fundamental problem of political accountability in the American system of democracy. After they have seen all this, it is but a short step to conclude that something is fatally wrong, and inevitably so, with democracy itself.

Finally, Stiglitz's conclusion serves as a timely warning not to see this as a victory. Using Fukuyama's idea of "the end of history" as a foil, he suggests that

He was wrong to think that the forces of liberal democracy and the market economy would inevitably triumph, and that there could be no turning back. But he was not wrong to believe that democracy and market forces are essential to a just and prosperous world.

A Whiff of Desperation from a Bankrupt Government

Recent policies from the Harper government seem to indicate an increasingly desperate government pandering both to its base and to the baser motives of Canadians more generally. And while this is to be expected, what is sad is that this minority government is doing so with solid Liberal support.

The first, passed last Monday, provides for mandatory minimum sentences both for serious drug trafficking offenses as well as petty ones. Even minor marijuana growth and trafficking offenses will now require a six-month minimum. In other words, someone growing a few plants in their basement and sharing it with friends would, if caught, face prison.

To their credit, the NDP strongly opposed the bill, and once this failed, tried to alter some of its worst features in the committee process. Libby Davies, party spokesperson on this issue, is quoted by the Canadian Press as saying

This bill is clearly targeted at the low-level dealers. It is simply really bad public policy. It is going to increase the prison population, particularly the provincial prison population, because most of these mandatory sentences that are two years or less will be under the provincial jurisdiction."

In committee, the NDP put forward 21 amendments that tried to remove some of the worst aspects of the bill, by changing the regime of mandatory minimums, for example, and getting an exemption for medical marijuana for compassion clubs."

I am so disappointed that those amendments did not go through. The Liberal members on the committee failed to respond to those amendments and failed to support them, which really surprises me.

While the Liberals, to their shame, supported this, their are indications that some in the party talked of breaking ranks. But as the Canadian Press describes it

A number of prominent Liberals are challenging their party's support for this bill. Dozens of bloggers, riding association presidents and other party members have publicly complained about Liberal Leader Michael Ignatieff pressuring the party to back the new law.

Yet when it came to the vote, every Liberal present voted for the bill, except for Liberal MP Keith Martin, who supports decriminalization. Martin abstained from the vote. The NDP and Bloc all voted against it.

So 'brave Liberal' safely remains an oxymoron.

The second piece of retrograde legislation planned by the Tories is a repeal of the "faint-hope" clause that provides for the unlikely possibility of parole for those serving life sentences after fifteen years. As this provision has so seldom been used, it cannot be seen as anything but pandering. Yet both the NDP and Liberals have given tacit approval for the process to move forward.

Both of these moves should probably be seen as the Harper government shoring up its base in anticipation of an election in which their prospects are quickly fading. Given its Reform roots, this should scarcely be surprising. What is surprising and troubling is the opposition support these measures have received. The Liberals, eager to avoid an election until victory is assured, are willing to tolerate almost anything. And even the NDP appears always willing to score a few cheap points.

God of the Weak and Unlikely

In the midst of recession and war it is easy to be despondent. A short homily from the Ekklesia Project on Friday offers hope and reminds us that an authentic discipleship need not be, and in fact is anything but triumphalist.

It is worth repeating in full:

He was just a kid, so young and apparently insignificant that his own father didn’t consider him worthy even to attend the sacrifice offered by the traveling prophet Samuel. Sure, he was good looking, and he was tough, and he had some talent, but by and large everyone who knew him assumed he’d spend his days as an adult the same way he’d spent those of his adolescence: tending sheep, playing with his sling, writing poetry, and playing music. He was hardly a suitable replacement for a great warrior like Saul. Yet David, the least of Jesse’s sons and the unlikeliest of leaders, was chosen by God and anointed by Samuel to be King over God’s people Israel.

It was just like the God of Israel to do something so totally unanticipated. He had, after all, chosen to redeem the world through the as yet unborn descendants of a pair of skeptical senior citizens named Abram and Sara. When those descendants were enslaved and oppressed by the mightiest political, economic, and military power the world had known, He called upon a hot-headed, inarticulate fugitive named Moses to take up their cause and lead them to freedom. More than once He responded to their recurring disobedience and loss of faith with reassurance and forgiveness. Why should it surprise us to discover that when Israel demanded a king (so they could be like the other nations), God responded (after an initial false start) by choosing so improbable a candidate as David? It is, quite simply, the way the God of Israel and of Jesus works: divine power manifest in human weakness, divine purpose made present in the midst of human folly. As the Psalmist says, “Some take pride in chariots / and some in horses / but our pride is in the name of the Lord.” David, whom no one expected to be God’s anointed – His mashiah – was filled with God’s Spirit and became the greatest of Israel’s kings, a “man after God’s own heart” who was destined to be the ancestor of the One through whom God would bring salvation to all creation.

The story of David serves as a nice example of the lesson Jesus taught when he told the parables in today’s Gospel reading. The reign of God, when it came, would appear first of all not as an overwhelming counter-presence to Roman or any other imperial power; rather it would come quietly, unassumingly, underwhelmingly. The Kingdom of God, Jesus explained, is like a mustard seed.

The basic lesson of this parable is easy enough to grasp. In Jewish tradition the mustard seed was proverbially known as the smallest of seeds; its diminutive size made it a favorite image of the teachers of the faith, encouraging them, as the prophet Zechariah said, not to despise the “day of small things.” God’s reign was like this most miniscule of seeds because God’s reign began with insignificance. What could be a less likely indication that the creator of heaven and earth could be at work changing the world than the anointing of a teenage shepherd as king. And what could be a better sign of that unlikely work than something as small as a mustard seed? What could be a less likely beginning for the establishment of God’s reign than a peasant teacher from Galilee and his rag-tag group of disciples? This was God’s Messiah? These were the people through whom God was going to change the world? Not likely. Not likely at all. They were practically nothing. They were like, well, like a mustard seed.

But seeds do not remain seeds, and the mustard seed, when sown in fertile soil, eventually sprouts and grows and becomes the largest plant in the garden, a shrub that can grow up to 15 feet high, big enough, Jesus tells us, to offer shelter to birds.

Big enough to offer shelter to birds. Hmmm. There’s an irony here that we dare not overlook. God’s reign begins in insignificance, like a little tiny seed, and then it develops, and it grows, and it matures, and it becomes … a shrub. Just a shrub. Not a mighty oak, nor one of the famed Cedars of Lebanon, but a modest, unassuming, and most of all still insignificant shrub. What’s that about?

What it’s about is a metaphor for the way God works in the world. God begins with weakness and impotence and insignificance, and God works through those things, and they become God’s salvation, even though the world is likely to continue to regard them as weak, impotent, and insignificant. God’s work in the world is the life together of God’s people, and in Scripture God’s people are seldom impressive by any standards except God’s. God enters the world as a peasant from an obscure Middle Eastern tribe, as an infant born to a poor unwed teenager. When that infant grows to become a great teacher with many followers, he suffers the most ignoble death imaginable – at the hands of the government. When God breaks into history and raises him from the dead, he leaves his work in the hands of the very people who abandoned him at the end of his life. When God sends the Holy Spirit to empower them to preach and demonstrate the reality of God’s reign, they gather followers who turn out to+ be every bit as weak and ambivalent as the people Israel had ever been. And still, God continues to work, and the Kingdom is planted, and it grows, and birds take shelter in its branches.

David was just a kid. The mustard seed grows into just a shrub. And I am part of a little church: a small, mostly unremarkable group of people who live together in rural Northeast Pennsylvania, doing the best we can to raise our families and pay our bills. On Sundays we gather to worship God, and we stumble along as best we can. We hold Vacation Bible School and we host Vision and we baptize children and we gather, warts and all, around Jesus’ table.

You know what that sounds like to me? It sounds to me like God has us right where he wants us. It sounds to me like our weakness is the very soil for the seeds of God’s Kingdom. It sounds to me like we better be careful, for before we know it we might find birds taking shelter in our branches.

When that happens, thanks be to God.

We are not called as a Church to power and wealth, or to serve an all-conquering God. We are called to a Kingdom where the poor in spirit really are blessed and where the meek really will inherit the earth.

Netnayahu and a Two-State Solution?

The Washington Times was reporting yesterday that Israeli prime-minister Benjamin Netanyahu will deliver a major speech on Sunday in which he will support a two-state solution and the negotiation of "final status" issues. But there is a catch. As the Times notes

The policy reversal, which is expected to go public this weekend, could help restart negotiations between Israel and the Palestinians and allow the Israeli leader to steer a course between Mr. Obama's view and those of his own hawkish base.

The Israeli and American officials, who spoke on the condition of anonymity, told The Washington Times on Thursday that Mr. Netanyahu, in a major speech Sunday, will, however, set Israeli parameters for recognizing Palestinian sovereignty.

And what are these "parameters"? They are that

• Palestinians may not sign treaties with powers hostile to Israel.

• A Palestinian state must allow Israeli civilian and military aircraft unfettered access to Palestinian airspace, allow Israel to retain control of the airwaves and to station Israeli troops on a future state's eastern and southern borders.

• Palestinians must accept Israel as a Jewish state, a nod to the hawkish side of Mr. Netanyahu's governing coalition that has raised concerns that the Palestinian Authority, which nominally governs the West Bank, does not recognize Israel as a Jewish state.

Netanyahu will apparently also reiterate Israel's right to expand existing settlements based on "natural growth" despite the Obama administrations rejection of this. In other words, this would be a semi-autonomous Palestinian homeland, carved up by expanding Israeli settlements and with a continued Israeli military presence.

So this just kicks the can up the road. It offers a veneer of compromise over an Israeli position that has not changed. And of course when the Palestinians reject it they will be painted as the real obstacle to peace.

After the Recession, What?

Canada had the good fortune to enter this economic downturn not only with a balanced budget, but a decade long record of substantial surpluses. Not so our dominant trading partner. There, the Bush government used regressive tax cuts during good times to place the American economy at huge risk when bad times came.

The result is that when the rescue of the financial system and the creation of fiscal stimulus necessary to allay a deep recession are tallied up, public debt in the U.S. will be at historic highs. As Paul Krugman among others has noted, this is currently offset by a precipitous decline in private borrowing, so that overall debt levels remain relatively constant.

But as Willem Buitner suggested in a recent Financial Times op-ed, beyond the short term, the outlook becomes a good deal more troubling for two reasons. First, at some point the recession will end, and when it does, private borrowing will increase. And when it does, levels of total debt may become unmanageable. More important for Buitner is the additional burdens that will be placed on public finance over the next decade or so, first by the ambitious programs envisioned by the Obama administration, but also by unfunded liabilities for Social Security and Medicaid.

This, of course, is an argument that has been going on between left and right in the U.S. at least since the Clinton adminstration, and each side has well-rehearsed if very tired talking points. For Buitner, however, it is this seemingly eternal politcal impasse that is at the heart of the problem. As he describes it

My fears about the sustainability of the US public finances is based on my belief that the US public believes there is a Santa Claus: that you can have the higher benefit levels and higher-quality provision of public goods and services without paying the price in the form of higher taxes or user charges. The US polity is so polarised, that it is not likely that a compromise will be achieved in the years and decades to come, on how to raise the additional revenues or how to cut public spending by enough to restore public debt sustainability. Exaggerating slightly, the Democrats will veto any future public spending cuts and the Republicans will veto any future tax increases.

Faced with this impasse, he believes, an administration of whatever stripe will choose what it views as the only way out: inflation. Thus

The markets are slowly waking up to the threat of inflation as a solution to fiscal unsustainability in the US. The fact that, in the short run (say for the next 3 years or so) deflation is much more likely than inflation does not help, as markets are hopelessly myopic. But once we get more than 3 years into the future, and certainly more than 5 years, the risk of high inflation (between 5 and 15 percent, say) is a material one. Only if Obama manages to put together a new coalition, based on a new national consensus, about the level of public spending and the distribution of its funding burden, will there be a non-inflationary way out of the debt dilemma. Such a major political realignment is possible, but not likely.

So Buitner is not counseling a retreat from expansionary policies now. But he is warning that problems post-recession may be even more difficult than those we face now.

Krugman's Robbins Lectures

This week, the 2008 Nobel laureate, Paul Krugman, has been delivering the Lionel Robbins Memorial Lecture at the London School of Economics. The title of the lectures is The Return of Depression Economics, the same as his classic 1999 work. It is essentially an application of the ideas developed in that work applied to the current crisis, but with many new and updated insights.

Though quite lengthy (the three lectures are about four hours in total), these lectures present an exceptionally clear view of where we are and what we need to do to move forward. Whether or not you agree with Krugman, the lectures are an excellent starting point for an examination of our economic predicament.

Videos can be found here and audio here.

American Style Cap and Trade Comes to Canada

Last Saturday I reviewed an editorial by William Buitner of the Financial Times, in which he argued that cap and trade bill moving through the U.S. Congress was largely a sham. The bill, he argued, allowed for the purchase of carbon offsets that would in effect skirt the limits on emissions for the foreseeable future. In that posting, I suggested that, given the close integration of our economies, Canada would likely follow suit. Well, it has.

In a speech yesterday, Environment Minister Jim Prentice announced a program of carbon offsets for Canada that would allow those who cannot or do not wish to meet targets to instead buy carbon offsets developed by third parties whose carbon value will be determined by criteria yet to be developed. The accompanying document was short on details, to say the least, but the one firm statement was that

[t]he offset system will pursue a fast-track approach to the development of protocols, in which protocols that have been developed for use in other offset or project-based crediting systems will be the first ones reviewed for possible adaptation for use in Canada's Offset System.

Translating from the bureacratise, I believe this means that we will follow the U.S. lead and will do so without debate or consultation.

In a statement disingenuous even by Tory standards, Minister Prentiss said

The offset system, like all elements of our climate-change plan, is aimed first and foremost at reducing emissions in Canada. And we will be rigorous in ensuring the credits will only be issued for projects that actually reduce the amount of greenhouse gas emissions in this country.

Leaving aside the methodological difficulties of measuring such outcomes, there will surely be a temptation to lean toward optimistic projections of offset results. And it means that the various Alberta oilsands projects, for instance, will in effect be able to plant some trees rather than clean up their act.

John Ibbotson's Provocative New Book

If you want a provocative view of the diverging directions in which Canada and the U.S. are headed, you can't do much better than John Ibbotson's just released "political pamphlet" entitled Open & Shut: Why America has Barack Obama and Canada has Stephen Harper.

The premise of this tract is that following the failed presidency of George Bush, Canadians have become even more complacent about their superiority vis-a-vis the United States just at a time when our own institutions are in precipitous decline. It is a timely argument. Rather than review the entire book, however, I want to focus on the last section, where, Ibbotson argues, we have much to learn from our southern neighbors.

The first is cities. As Ibbotson notes, our perception of American cities is often one of post-apolalyptic chaos and advanced decay. And certainly this is true of some: Detroit and Buffalo spring to mind. But this fails to take two things into account. One, there has been an unprecedented reaissance in many large cities in the U.S.. New York, Boston, Denver, Pittsburgh and Philadelphia are but a few of the many that have sharply reduced crime, rebuilt infrastructure and improved cityscapes in ways that have brought the affluent back downtown.
Two, Canada's cities have at the same time endured a prolonged decline. My own observation from travelling to some of this American cities and living in Toronto is that our self-congratulation is getting pretty stale.

Ibbotson's second example is education. Here, he notes, Canada enjoys a large lead. Our education system is ranked among the best in the world while the American languishes with such stellar performers as Croatia and Poland. Yet, Ibbotson suggests, we are in a place similar to where we were with cities a generation ago. The advantage is ours, but the direction favors the Americans.&

The U.S. has, beginning with the Clinton administration, embarked on a great experiment in education, creating charter schools, encouraging bright young college graduates to teach for a few years before embarking on more lucrative careers and generously rewarding accomplished teachers. The results, Ibbotson correctly notes, speak for themselves. Once again, we are resting on our laurels -- the hares in this race -- while the U.S. toroise catches up and possibly overtakes us.

The book is not an argument for U.S. superiority; it is one against Canadian complacency. It is time, Ibbotson notes, for Canadians to talk about these issues in a serious and informed way, rather than relying on tired and self-defeating comparisons with an America that in many ways no longer exists. To that end, he has set up a website at the Globe & Mail. I would encourage readers to visit it.

U.S. Household Wealth and Canadian Exports

Two sets of numbers published yesterday show that while Canada has not seen the precipitous drop experienced by the U.S. we may yet trail our largest trading partner into a prolonged recession.

First, as reported by Calculated Risk, a report by the Federal Reserve showed that household net worth has fallen by more than $14 trillion since the peak of 2007, roughly the equivalent of U.S. GDP. The negative wealth effect of such a number cannot be overstated.

Not surprisingly, as the effect of this takes hold, Canada's trade numbers are rapidly deteriorating. Indeed, our long run of trade surpluses has now slipped into deficit. Almost 90% of declining exports are reflected in reduced exports to the U.S. which now accounts for 72% of total exports vs. 77% less than a year ago, according to the Globe and Mail.

These problems, according to the same Globe article, are compounded by a rising Canadian dollar. Indeed, they say, a study by Export Development Canada chief economist Peter Hall indicates that if the current exchange rate persists, economic growth through 2010 is likely to be about zero. And what remains unspoken is that Ontario's manufacturing sector is unlikely to begin recovering anytime soon.

Purchase of Mortgages from Canadian Banks Winding Down

It has been become increasingly clear that the uptake by banks of Ottawa's $125 billion Insured Mortgage Purchase Program (IMPP), the primary component of the $200 billion Extraordinary Financing Framework (EFF), is winding down. To date, the banks have only accessed about $58 billion -- less than half of what was available and the rate of purchase has slowed to a trickle.

While most Canadians are completely unaware of this initiative, it has borne a striking resemblance to the original TARP program in the U.S., designed to remove troubled assets from bank balance sheets. This is despite the fact that we have been repeatedly told that our banks did not have this exposure. Thus the reasons for a program like IMPP might not seem obvious.

We too, however, had our fling with dicey mortgages. In his first budget as Finance Minister in 2006, Jim Flaherty announced measures to open up the mortgage insurance market to providers other than CMHC and GE subsidiary Genworth, which together controlled the market in Canada. The Globe and Mail provided this history in a March special feature:

For nearly 40 years after CMHC was founded in 1954, the business of mortgage insurance was about as exciting as an actuarial table. The agency was set up by the federal government as a kind of financial cushion to encourage the country's conservative financial institutions to open their vaults and lend more money to homeowners.

If a home buyer couldn't pony up a 25-per-cent down payment on a house purchase, CMHC shouldered the risk of default by insuring the mortgage and charging the buyer an insurance premium. Backing CMHC's insurance policies was a 100-per-cent federal guarantee. In bad years, Ottawa piped money into CMHC; in good years, the agency added to the federal treasury by paying taxes.

The smooth working system hit a pothole in late 1988 when Canada's only other mortgage insurer at the time, Toronto-based MICC, was nearly wiped out by new international bank capital rules. The rules threatened to shutter MICC because they effectively made it cheaper for banks to use CMHC's government-guaranteed mortgage insurance.

Faced with the imminent collapse of Canada's only private-sector mortgage insurer, the then Conservative government went to a place that few other industrialized countries have gone by agreeing to guarantee the policies of a non-government mortgage insurer. According to people involved in the crisis, Ottawa “hesitantly” agreed to “taking on an enormous liability” of guaranteeing 90 per cent of MICC's insurance policies.

The government's worst fears about a massive liability materialized in 1995, when MICC's risky insurance bets in the construction sector threatened to torpedo the company. As Ottawa wrestled with the grim prospect of losing the insurer for millions of dollars in mortgages, the world's largest non-bank financial company came knocking with a rescue proposal.

The company was General Electric. The U.S. conglomerate was offering to take over MICC's mortgage insurance portfolio provided Ottawa met one condition: It would bless GE's planned new Canadian mortgage insurance subsidiary with a federal guarantee.

“It was a bit of a slam dunk,” recalls one former Ottawa official. “GE was one of the strongest companies in the world.”

Ottawa agreed to GE's offer, thereby shifting the federal government's 90-per- cent guarantee from a small Canadian mortgage insurer to a unit of a global giant with aggressive Canadian ambitions. GE's mortgage subsidiary, later spun off and renamed Genworth Mortgage Insurance Co., rapidly carved out a major presence in Canada, capturing about 30 per cent of the market and reporting $205-million of profits in 2005.

Other U.S. insurers took notice. . . .

The days of a CMHC-Genworth duopoly were numbered. In the fall of 2005, a tiny paragraph buried in a 280-page federal government estimate of expenditures signalled a new era of competition in the industry.

The Finance Department's provision was considered so insignificant at the time that many staffers of the minister, Liberal MP Ralph Goodale, didn't recall it when contacted by The Globe. A current spokesman for the Saskatchewan MP insisted that the provision was not designed to open the market to riskier products.

Another federal official who declined to be identified said the wording of the provision was eased because Genworth's name had changed and the government wanted to leave room for additional switches.

Despite these explanations, executives and advisers to a number of U.S. insurers and Canadian players said the paragraph was widely interpreted as a signal that Ottawa was opening the country's mortgage insurance sector to outside competitors.

Intended or not, the shift followed years of mobilizing by U.S. insurance companies, all hungry for a piece of what is regarded as one of the most lucrative and the second-largest mortgage insurance market in the world. At the forefront of this movement was mammoth AIG, now in near ruins as a result of its role in the U.S. subprime crisis.

U.S. competitors had envied premium rates on Canadian mortgage insurance policies for years. With only two players competing in the space, Triad's Mr. Tonnesen said CMHC and Genworth were so profitable that they were “basically printing money.”

Eyeing the rich northern market, representatives from at least three U.S. insurers made regular trips to Ottawa for meetings with the Finance Department and Office of the Superintendent of Financial Institutions, the insurance regulator. But AIG created a strategic advantage by hiring Bill Mulvihill, a Canadian mortgage expert who had spent years as the chief financial officer at CMHC. Mr. Mulvihill, who is still a director of AIG's Canadian operation, declined to comment.

“The difference that Bill Mulvihill made was that he was able to connect into the policy folks with OSFI and at Finance and convince them that we were for real,” said a former AIG executive who asked not to be identified. Following in AIG's footsteps were such U.S. insurers as PMI Group Inc., Triad and the Milwaukee-based Mortgage Guaranty Insurance Company.

Ultimately, Parliament did not vote on the Finance Department's proposal, thanks to the 2006 federal election and the Conservatives' rise to office. But the U.S. insurers' efforts weren't for naught; the new Harper government quickly embraced the idea of them coming north.

On May 2, 2006, in his first budget, Mr. Flaherty announced that not only would Ottawa guarantee the business of U.S. insurers, it was doubling the guarantee to $200-billion.

In a scenario that has now become depressingly common, we had large financial institutions prepared to take excessive risks knowing that losses could be passed along to government. The results were of course predictable.

New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time, according to banking and insurance sources. Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down.

The mushrooming of a Canadian version of subprime mortgages has gone largely unnoticed. The Conservative government finally banned the practice last summer, after repeated warnings from frustrated senior officials and bankers that the country's financial system was being exposed to far too much risk as the housing market weakened.

Just yesterday, Finance Minister Jim Flaherty repeated the mantra that the government acted early to get rid of risky mortgages. What he and Prime Minister Stephen Harper do not explain, however, is that the expansion of zero-down, 40-year mortgages began with measures contained in the first Conservative budget in May of 2006.

At the time, Mr. Flaherty announced that the government was opening up the market to more private insurers.

“These changes will result in greater choice and innovation in the market for mortgage insurance, benefiting consumers and promoting home ownership,” Mr. Flaherty said.

The result, by the time regulatory changes closed off these mortgages, was about $60 billion in high risk mortgages for which the Government of Canada was on the hook. So when Minister Flaherty announced a $25 billion IMPP program last fall, and when the program was eventually expanded to $125 billion in the January budget, its aim was clearly to provide banks with increased liquidity by taking these obviously risky assets off of their books.

What wasn't said at the time, either by the government (hardly surprising) but by the opposition parties as well, was that this was a problem of the Tories' own design. By encouraging new entrants and providing guarantees, they had assured tha all providers would have to insure risky mortgages if they were to remain competitive. It is not surprising then that the uptake on CMHC purchases roughly equals the total of high-risk mortgages that were made.

And the Harper government has been appallingly dishonest about this. Because it purchased these assets through a reverse auction process, it can claim that these discounted instruments will provide an excellent rate of return to the federal coffers. But this is only if the assets continue to perform, and presumably the banks sold them at a discount because of concerns that they would not do so. Moreover, the claim that this initiative was "revenue neutral" was used by the Conservatives to keep the program off the books and the government unaccountable to Parliament for this money.

What is even more disturbing is that none of the opposition parties have called the Harper government to task for this. Though it is a reasonably complex issue, it is nonetheless something Canadians need to understand and to hold their government to account for, both in Parliament, and soon, it can be hoped, at the ballot box.