Commercials

It has now been 50 years since I arrived on these shores. On July 26, 1959, I was admitted as a legal immigrant at Los Angeles airport. Although I had then no intention of staying permanently, I have spent nearly 35 of the last 50 years here. Yet in all these years one thing has never changed: the psychological shock, disgust, and anger about commercials, this most American and most un-American of institutions.

Commercials, these random interruptions of TV and radio programs to broadcast commercial advertisements, are an American invention, so ubiquitous, and such an integral part of American life that there is no escape. Almost everybody in America grows up surrounded by commercials from the cradle to the grave.

What makes the institution so un-American is the lack of choice, the element of coercion, which it shares with rape. America is supposed to be the embodiment of individual freedom and choice, yet society permits and tolerates the wholesale subjugation of individual preference to commercial interest. Commercials are in principle no different from political propaganda as practiced in dictatorships, a form of brainwashing.

I do not mean this as a tirade against advertising in general, as long as it is directed at consenting adults. But commercial advertising forced on unwilling and non-consenting adults and especially on children and teenagers is un-American.

Nobody seems to like commercials. Often they appeal to the basest human instincts: greed (this will make you rich, we are the cheapest, hurry), fear (take this medication or you may die of a heart attack, buy this DVD for your baby or she may be permanently left behind), and vanity (you deserve it, this will make you younger, you will lose 30 pounds in four weeks). Guilt feelings also work (buy this insurance or your family will be left penniless if you die, give to this charity and you save a child). Often the ads are mendacious, often they are in appallingly bad taste, but mostly they are just extremely boring, a big waste of time. Are there also appealing commercials, clever, funny, self-deprecating, artistically exciting? Of course, there are; but even they lose their charm after you have seen them a few times.

Commercials owe their staying power in large part to the myth that they give us ‘free’ TV. In reality nothing is 'free' and the cost of commercials to society and to the economy is staggering. Conservative statistics tell us that the average American watches three hours of television a day, one quarter of which is filled with commercials. In a week he or she sits through five hours of wasted time, which instead could be devoted to pleasure, play, work, reading, talking with your children, going for a walk, making love. If an hour of wasted time is valued at only $10 this amounts to a loss to the economy of $50x50x300 000 000 = $750 000 000 000 or $750 billion.

Add to this the production cost of all the television programs supported by commercials and also, of course, the production cost of the commercials themselves. We pay for the wasted time with our liberty; we pay for the cost of ‘free’ television with increased prices of the goods and services we buy. Each price contains a hidden ‘commercials’ tax, which acts like a sales tax and falls disproportionately on the poor. The tens of millions of dollars that athletes and other ‘celebrities’ are paid for appearing in commercials come out of your and my pocket.

Finally there is the cost of inappropriate decisions made by consumers as a result of listening to or watching commercials. If they are effective at all they have seduced people to do something they would otherwise not have done. It stands to reason that this is not in their interest. Nobody can forget the enormous damage done to all of us over many years by cigarette advertisements. None of the advertisements appeal to reason or just present facts and information, they all rely on emotional appeal and, more often than not, on sex appeal. Some are simply fraudulent, others just misleading, none tell the whole truth, all represent the interests of the advertiser not yours.

I do not know if they even accomplish the aims of the advertisers, that is, generate more profit. Much advertising is done to counteract advertising by the competition, an advertising arms race. Arms races of any kind are the saddest and most unproductive of human endeavors. Getting people to buy a product or a service for which they have felt no need or desire may contribute to the GDP. It certainly contributes to the destruction of the environment. It does not contribute to human happiness.

If they are so despised, boring, disgusting, and expensive, will commercials ever disappear? Not if political action is required. There are too many commercial interests at stake and our congress remains firmly in the pocket of the industry. A modest reform proposal would be that commercials may only be broadcast at the end of a program and, if it runs more than an hour, at the end of every hour. This would create predictability and largely eliminate the coercive element. But even such a modest reform of the institution is inconceivable; it is too ingrained in the American way of life.

There are some avenues of escape, however. One solution is not to watch TV or listen to the radio. Ever since the only classical music station in San Diego went off the air decades ago I have not listened to the radio. While I lived in Temecula for six years I also did without television. As a result I nearly missed the events of 9/11. I had a TV set to play DVDs and I scrounged up some old rabbit ears, which was good enough for a snowy and shaky picture of the dramatic events. Once a salesman for satellite TV came by. When I told him I did not have TV and did not want it he was visibly disturbed, mumbling ‘No TV, no TV’ as he left.

Some networks, such as PBS (Public Broadcasting Service) and cable channels such as TCM (Turner Classic Movies), are commercial-free. PBS is supported in part by taxes, in part by viewer contributions, and in part by grants and has been a mainstay of my viewing. TCM is a creation of Ted Turner, the founder of CNN. It broadcasts mostly old movies 24 hours a day. I sometimes turn to it just for relief from commercials.

Another solution is to pay for content and eliminate the “commercial’ tax. That would be fairest and most in conformance with the capitalist model. In some contexts the user has a choice: to pay a fee or to put up with advertising. This would be paying ransom: I hold you captive unless you pay me off. Even after paying ransom you would still pay the ‘commercial’ tax.

Ultimately technological change may render the issue moot. In the past, the major networks ABC, NBC, and CBS commanded 90% of the television audience; now it is only 30%. The Internet has become the mayor means of communication. It is filled with advertising, of course, but so far that is not nearly as intrusive or coercive as commercials.

Then there is the DVR (Digital Video Recorder), which allows users to record TV broadcasts for later (or immediate) playback. During playback users can fast-forward through commercials, and some technologies allow users to remove commercials entirely.

Three puzzling questions remain.

Why do people watch infomercials?
As the ugly name implies they are like commercials, but longer - usually 30 minutes long. In general you will find a pitch man or woman, a demonstration of the product or service, and many testimonials. I first encountered an infomercial about 15 years ago. After a long flight from the west to the east coast I had checked late into my motel and wanted to catch the news. Instead I found an infomercial and was so fascinated by its absurdity that I watched it to the end. Since then infomercials have become much more ubiquitous and have taken over more and more broadcast time. On a recent Sunday morning I noticed the same infomercial being shown simultaneously by all three major networks.

As opposed to commercials, where people are ambushed and entrapped, watching an infomercial is entirely voluntary. And people not only watch infomercials, they also buy enough of the stuff being peddled to pay for the broadcast time and the production cost of the infomercial. But why do people do this. Infomercials are just as obnoxious as commercials and, if anything, more boring. It really puts into doubt my thesis that commercials are universally disliked.

Why is there no advertising in books?
Newspapers and magazines contain large amounts of advertisements, but books at most a couple of pages at the end advertising other books. I do not know why books have escaped the tsunami of advertising. As an avid reader I would be confronted with an existential problem if books contained an ad on every second or third page. I can live without TV and radio, I cannot live without books.

However, the future is mortgaged. Amazon has patented technology to insert commercials into its Kindle e-book reader. A good thing I have not bought one yet.

Are commercials civilized?
Can a society be considered civilized that permits such blight on its major communications media and subjects its citizens to so much involuntary servitude?

Paranoia

It is difficult to live in a nation of paranoids. This paranoia was evident when Bush went awol (absent without leave from military duty) on 9/11, which I always considered an act of supreme cowardice. It was evident when Cheney spent most of his time in office in an ‘undisclosed location’.

We have the largest, most heroic, and best equipped military in the world. That is what Republicans have always told us and it is largely true. We certainly are spending more than anybody else on defense. In combating terrorism we have the support of a large number of allies and friends.

In contrast, terrorist groups have perhaps a few thousand members, prepared and actively working to attack the United States. They have no heavy weapons, no air force, no drones. They have no intelligence service or electronic surveillance facilities; for communications they have to rely on cell phones and Skype. They have no money and no state support anywhere. They are amateurs. So where is the sense of proportion? What are we afraid of? What is Cheney afraid of?

Americans have a very disproportionate sense of risk. How many people die in terrorist attacks worldwide on the average per year? At most a few hundred. But 1.2 million die every year in traffic accidents. Yet nobody is afraid to step into a car while many are afraid of terrorists.

Nobody seems to appreciate how lucky the terrorists were on 9/11. They had no right to expect that they could hijack four planes simultaneously. Their pilots had never flown before, they had only trained on simulators in US flight schools. It was a miracle that they could even find their targets without navigation aids. Studies have shown that one of the planes attacking the World Trade Center was flying so fast and so tight a turn that it should have disintegrated under the stress, but didn’t. The terrorists could not expect that the towers would collapse and that we would fail to evacuate them immediately. And they could not expect that large numbers of firefighters and police were trapped inside. It was a shoestring operation, but the symbolic value of bringing the superpower to its knees, if only for a few days, was immense.

The claim by Cheney that torture in Guantanamo saved hundreds of thousands of lives is absurd. (Vice President Cheney, it should be remembered, was one of only four congressmen who voted to keep Nelson Mandela in his South African jail.) In the Middle Ages many women and men were persecuted as witches. Under torture most of them admitted to poisoning wells, sickening their neighbors livestock, and consorting with the devil. Would anybody believe these confessions.

The case against torture is moral as well as practical. Information extracted under duress tends to be unreliable and false. Information obtained with other means of suasion is often of higher quality. The moral case is simply that torture is illegal and incompatible with civilized society. It is even more reprehensible when the victims are indeed innocent, as many of the Guantanamo detainees are.

The degree of paranoia is evident in the story of Hardin, a small Montana town that built a $27 million prison two years ago, which has been standing empty ever since. In a move to provide some income and employment for the town, Hardin’s council passed a resolution to take Guantanamo detainees as the Guantanamo detention center was slated to be closed. This was quickly vetoed by the Montana congressional delegation, which said it would never happen. Montana’s Democratic Gov. Brian Schweitzer also opposed the move as did the people of Hardin. A young woman when interviewed said if that happened she would buy a gun.

Cheney claims that Bush’s policies prevented further attacks and kept America safe. This is not surprising once reasonable airport and border checks were instituted and notwithstanding the hysterical warnings and yellow threat levels. But it must be remembered that the Bush administration permitted this horrendous attack in the first place in spite of ample warnings, including a security briefing for the President that described the possibility of such an attack in detail, but was ignored.

It took Germany, Britain and Spain decades to fight attacks by homegrown terrorists. That did not make their people paranoid and they never felt their democracies endangered or a need for torture.

Could there be other attacks? Yes. There is no lack of opportunity. I live near a university and walk the campus nearly every day. It is wide open and could easily be attacked. In fact, not long ago the campus was closed because of a bomb threat from a group that opposes animal experimentation. On an ocean cruise I shipped my car for the trip. It was not examined and, if packed with explosives, could presumably have sunk the ship.

There is no War on Terror, at least not with arms and armies. The fear mongering Bush administration has exploited the confusion between the literal and metaphorical meanings of the word ‘war’ to sell the war in Iraq. The so-called War on Terror is a war in the same sense as the War on Poverty and the War on Drugs, but not in the literal sense. It can be won only by patient intelligence and police work in concert with our allies worldwide. The unnecessary and bloody war in Iraq has been a terrible distraction and has made America more despised and much less safe.

Gun Violence

I had wanted for some time to write about gun violence in America. Then I discovered the article reproduced below, which is so much better than what I could have done. It was published by the New York Times on 25 April 2009 and was written by Bob Herbert, a regular columnist.

The number of murders and fatal gun accidents per capita is much higher in the United States than in any other industrialized country. For instance, in 2008 there were 55 murders in San Diego and only 4 in Munich, Germany.


New York Times
April 25, 2009

A Culture Soaked in Blood

By BOB HERBERT

Philip Markoff, a medical student, supposedly carried his semiautomatic in a hollowed-out volume of “Gray’s Anatomy.” Police believe he used it in a hotel room in Boston last week to murder Julissa Brisman, a 26-year-old woman who had advertised her services as a masseuse on Craigslist.

In Palm Harbor, Fla., a 12-year-old boy named Jacob Larson came across a gun in the family home that, according to police, his parents had forgotten they had. Jacob shot himself in the head and is in a coma, police said. Authorities believe the shooting was accidental.

There is no way to overstate the horror of gun violence in America. Roughly 16,000 to 17,000 Americans are murdered every year, and more than 12,000 of them, on average, are shot to death. This is an insanely violent society, and the worst of that violence is made insanely easy by the widespread availability of guns.

When the music producer Phil Spector decided, for whatever reason, to kill the actress, Lana Clarkson, all he had to do was reach for his gun — one of the 283 million privately owned firearms that are out there. When John Muhammad and his teenage accomplice, Lee Malvo, went on a killing spree that took 10 lives in the Washington area, the absolute least of their worries was how to get a semiautomatic rifle that fit their deadly mission.

We’re confiscating shampoo from carry-on luggage at airports while at the same time handing out high-powered weaponry to criminals and psychotics at gun shows.
There were ceremonies marking the recent 10th anniversary of the shootings at Columbine High School, but very few people remember a mass murder just five months after Columbine, when a man with a semiautomatic handgun opened fire on congregants praying in a Baptist church in Fort Worth. Eight people died, including the gunman, who shot himself.

A little more than a year before the Columbine killings, two boys with high-powered rifles killed a teacher and four little girls at a school in Jonesboro, Ark. That’s not widely remembered either. When something is as pervasive as gun violence in the U.S., which is as common as baseball in the summertime, it’s very hard for individual cases to remain in the public mind.

Homicides are only a part of the story.

While more than 12,000 people are murdered with guns annually, the Brady Campaign to Prevent Gun Violence (using the latest available data) tells us that more than 30,000 people are killed over the course of one typical year by guns. That includes 17,000 who commit suicide, nearly 800 who are killed in accidental shootings and more than 300 killed by the police. (In many of the law enforcement shootings, the police officers are reacting to people armed with guns).

And then there are the people who are shot but don’t die. Nearly 70,000 fall into that category in a typical year, including 48,000 who are criminally attacked, 4,200 who survive a suicide attempt, more than 15,000 who are shot accidentally, and more than 1,000 — many with a gun in possession — who are shot by the police.
The medical cost of treating gunshot wounds in the U.S. is estimated to be well more than $2 billion annually. And the Violence Policy Center, a gun control advocacy group, has noted that nonfatal gunshot wounds are the leading cause of uninsured hospital stays.

The toll on children and teenagers is particularly heartbreaking. According to the Brady Campaign, more than 3,000 kids are shot to death in a typical year. More than 1,900 are murdered, more than 800 commit suicide, about 170 are killed accidentally and 20 or so are killed by the police.

Another 17,000 are shot but survive.

I remember writing from Chicago two years ago about the nearly three dozen public school youngsters who were shot to death in a variety of circumstances around the city over the course of just one school year. Arne Duncan, who was then the chief of the Chicago schools and is now the U.S. secretary of education, said to me at the time: “That’s more than a kid every two weeks. Think about that.”

Actually, that’s our problem. We don’t really think about it. If the crime is horrible enough, we’ll go through the motions of public anguish but we never really do anything about it. Americans are as blasé as can be about this relentless slaughter that keeps the culture soaked in blood.

This blasé attitude, this willful refusal to acknowledge the scope of the horror, leaves the gun nuts free to press their crazy case for more and more guns in ever more hands. They’re committed to keeping the killing easy, and we should be committed for not stopping them.

Crisis

Some for the Glories of This World; and some
Sigh for the Prophet's Paradise to come;
Ah, take the Cash, and let the Credit go,
Nor heed the rumble of a distant Drum!
Omar Kahyam


Introduction

Ein Gespenst geht um in Europa (a specter is haunting Europe), thus begins the Communist Manifesto. Today a different specter is haunting not only Europe, but the world, the specter of a depression. The current financial and economic crisis, which is still gathering force, is to the largest extent man-made, bearing the unmistakable stamp Made in America.

In fact we know the person responsible for this crisis: Monica Lewinsky. If she had not seduced Bill Clinton by displaying her thong underwear he would not have lied under oath and would not have been impeached. George Bush could not have run on a platform of restoring dignity and respectability to the White House and Al Gore would have been elected president. He would not have reappointed Allen Greenspan as Chairman of the Federal Reserve and there would have been no housing bubble, no subprime mess, and no crisis. So much for the personality theory of history.

Many forces, factors, and people conspired in creating this crisis, but Greenspan was perhaps the only one who could have prevented it. He was repeatedly warned about the developing housing bubble, but maintained that one could never be sure when a bubble was developing and that it would at any rate be better to let it deflate under its own weight and clean up the resulting mess afterwards. He even denied that a national housing bubble was possible, since housing was not a single national market.

Greenspan was an extreme proponent of laissez-faire capitalism and an acolyte of Ayn Rand. Her 1200-page book Atlas Shrugged, published in 1957, became the bible of libertarians, extreme free marketeers, many CEOs, and Allen Greenspan. He met Rand in 1951, became a member of her inner circle, and remained a close friend and supporter until her death in 1982.

In her book Rand espoused a philosophy, termed Objectivism, of complete laissez-faire and complete absence of government interference. The only morality is rational self-interest, altruism is evil. Her protagonist John Galt makes the sign of the dollar instead of the sign of the cross.

Greenspan had an illustrious career and acquired an almost god-like reputation as Chairman of the Federal Reserve Board. He was first appointed by President Reagan in 1987 and reappointed by every president, for the fifth time in 2004 by George W. Bush. His reputation rested in part on his aggressively lowering interest rates in reaction to the stock market crash of October 87 and again in October 2002, when the dot.com bubble burst. In 2001 Greenspan supported Bush’s tax cut for the rich, which caused the deficit to balloon, and in 2005 he endorsed the privatization of Social Security, both in violation of the Fed’s presumed political neutrality.

In 1998, Brooksley Born, chairperson of the CFTC (Commodity Futures Trading Commission) advocated legislation to rein in the huge and growing market for financial derivatives, in particular those known as a credit-default swaps. Her efforts were sabotaged jointly by Greenspan, Robert Rubin, Secretary of the Treasury, and Arthur Levitt, Chairman of the Securities and Exchange Commission until she eventually quit in frustration.

A credit default swap (CDS) is a credit derivative contract between two counterparties in which one party makes periodic payments to another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss.

CDS contracts have been thought of as insurance, because one party, by paying a premium, is entitled to compensation from the other party in the event of a loss. However, these contracts are completely private, the market in CDS contracts is huge - thought to be about 60 trillion dollars - and totally unregulated. As a result the parties at risk had grossly insufficient reserves to cover any losses. Credit-default swaps brought down AIG, the world’s largest insurer, which incurred losses of several hundred billion dollars. It was bailed out by the US Government to the tune so far of about $180 million dollars.

In 2000, Republican Senator Phil Gramm, then the chairman of the Senate banking committee, pushed through Congress the Commodity Futures Modernization Act, which effectively gutted the ability of the CFTC to regulate derivatives, thus keeping credit-default swaps free from federal regulation. The swaps market subsequently exploded, as financial firms bought and sold swaps as insurance to cover their trading in subprime securities and other freewheeling financial products. Greenspan was an ardent supporter of keeping swaps virtually unregulated and he consistently beat back any subsequent attempts by Congress to regulate derivatives, in particular credit-default swaps.

On October 23, 2008, in the House Oversight Committee Hearing on the Role of Federal Regulators Greenspan admitted errors and disavowed his libertarian views of markets and the world of finance and told the legislators: "Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief….You know that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well." He admitted that his faith in the ability of free markets to produce the best outcomes had been shaken: "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."

He called the banking and housing crisis a "once-in-a-century credit tsunami" that led to a breakdown in how the free market system functions. And he warned that things would get worse before they get better, with rising unemployment and no stabilization in housing prices for "many months." He even went so far as to propose tougher government regulation.

Origins

The basic function of banks and other financial institutions such as the stock and bond markets is to aggregate the savings generated by households and businesses and put them to work by making loans and investments. These investments may be in factories, business inventories, family homes, and cars, or intangibles such as a college education. When the financial markets are working properly, allocation of funds to borrowers would be both prudent, that is, risk-aware, and efficient, that is, to the most productive uses.

While in the last 10 years American households and businesses generated almost no savings, there was an enormous influx of foreign savings from developing countries such as China, from mature export-oriented countries such Germany and Japan, and from oil-exporting countries. These countries were in effect underconsuming and oversaving while the US was overconsuming. Furthermore, after the dot.com bubble burst the Greenspan Fed kept interest rates at 1% for a number of years, flooding the economy with cheap money. Thus the financial markets were awash in funds and the fierce competition for borrowers ignited a housing boom, especially pronounced in California, Arizona, Nevada, and Florida.

As the economy improved after the dot.com bust people were quite prepared to buy new and larger homes at very low interest rates and thus diversify from the stock market, which had crashed. Traditionally mortgages were made by banks or savings and loan institutions, which kept them on their books until they were paid off. Banks, most of which have FDIC insurance, had to be risk-aware. But in the last 15 years a large number of non-bank mortgage companies had sprung up. These companies financed their lending by bundling large blocks of mortgages and issuing bonds with these mortgages as collateral (securitization). These so-called collateralized debt obligations (CDOs) were sold to investors worldwide including commercial and investment banks, insurance companies, pension funds, mutual fund companies, and hedge funds.

Thus the risk of default was pushed off onto others and underwriting standards deteriorated or became non-existent. No down payments were required nor was proof of income. Many loans had an adjustable interest rate that started with a very low teaser rate and later escalated to above 10%. Many loans were interest-only, where for a period of time no principal was repaid. Some loans initially required no payments at all and interest was added to the principal owed. Many potential borrowers were pressured or defrauded into signing the loan papers and many had no idea what they were signing. Those that understood and asked questions were told not to worry: You can always refinance the loan, house prices will keep going up.

In the later stages the boom was feeding on itself and speculation entered the market, operators who just bought a property to resell or ‘flip’ it a few months later. This pyramid scheme kept going as long as house prices kept going up. The increases were indeed staggering.

I bought a condominium in La Jolla, CA, in December 1979 for exactly $100 000, at the height of the boom at the time. Immediately afterwards Volker, the chairman of the Federal Reserve increased the federal funds rate to a maximum of 19%, which caused the housing market to contract and values to decrease. It took 20 years, from December 1979 until December 1999, for the value of the condominium to increase from $100000 to $120000, a gain of just 1% per year not considering inflation. From then until December 2005 its valuation increased from $120000 to $450000, an increase of 275% or 46% annually. This was insane.

In February 1999 I bought a house in Temecula, CA, for $173000 and sold it six years later for $420 000, a gain of 143%. Such gains were justified by nothing and clearly unsustainable. The house of cards built on mortgages for vastly overvalued houses was destined to collapse.

We have heard of Popular Delusions & the Madness of Crowds, we know of the tulip mania of 1637, we are familiar with the stock market crash of 1929, which preceded the Great Depression, we recall Black Monday in October 1987 . Yet it is still extraordinary to witness two examples of mass delusions and mass euphoria in our time and within five years of each other: the dot.com bubble and the housing bubble. It is inexplicable how the belief that prices could only keep going up became the firmly held conviction of millions. It was not confined to the naïve; it was shared by professionals, by traders, by bankers, by Wall Street CEOs, and by most economists. This led Business Week to ask in its April 16, 2009, issue "What good are economists anyway?"

There were some cassandras. We mentioned Brooksley Born, chair of the Commodity Futures Trading Commission. Nouriel Roubini of NYU was early in predicting a severe recession. Yale University's Robert J. Shiller predicted the housing bust and the tech-stock bust. These prophets shared the fate of the Cassandra of Greek myth, who was given the gift of prophesy by Apollo. When she spurned his advances, he added the curse to his gift that nobody would believe her dire predictions.

Perhaps the most explicit warnings were contained in the presentation given by Raghuram Rajanat at the 2005 Jackson Hole symposium, arranged by the Kansas City Fed and dedicated to Fed Chairman Alan Greenspan, who was soon to retire. Although most of Rajanat’s predictions would come to pass, his paper was denounced as “misguided” by Lawrence Summers, Secretary of the Treasury under Clinton and now Chairman of the National Economic Council under Obama. Donald Kohn, now Vice Chairman of the Fed, said that for central bankers to enact policies aimed at stemming risk-taking would “be at odds with the tradition of policy excellence of the person whose era we are examining at this conference.”

Not being swept up in the general euphoria would have been very difficult for professionals, real estate agents, traders, mortgage brokers, bankers, CEOs of financial companies, even if they had misgivings. For while the party lasted huge profits were being made. Warren Buffet, the investment guru and Oracle of Omaha, was severely criticized for standing aside during the dot.com boom.

Chuck Prince, then CEO of Citigroup, told the Financial Times in August 2007 “You’ve got to get up and dance” and then added “We’re still dancing.” This was just before the crisis broke and only weeks before he resigned. But a bank of Citi’s size cannot sit out the boom without engendering the wrath of shareholders, analysts, employees, managers, politicians and even customers.

It would also have been difficult for public officials, such as President Bush or Mr. Greenspan, to deflate the developing bubble, even it they had wanted to. They would have faced devastating criticism from those who firmly believed the good times would go on forever and from those who had recently bought a house or shares and would end up with losses. Of course, that damage would have been far less than the trillions we are stuck with now.

During the dot.com bubble it was very clear to me that share prices had reached absurd levels and that I was riding a tiger. I sold two thirds of my stock holdings two weeks before the market peak in March 2002. The timing was accidental, but the conviction was deeply held. Did I escape all punishment. Not quite. For one thing I had sold only two thirds of my holdings and I also got back into the market too early. It is difficult to believe after a stock has lost 50% of its value that it could lose another 40%.

Similarly, it was obvious to me that the rapid appreciation of housing values in the early 2000s was without any foundation. When I became aware that my house in Temecula had so dramatically risen in value, my first reaction was disbelief and then panic. That is why I sold it in February 2005.

The stock market had also recovered spectacularly from the dot.com bust and reached a new peak in October 2007. In 2007 alone my stock portfolio had gained 27% and I considered selling. There were two obstacles, however. Since I had invested in index funds representative of the world economy I had resolved never to sell them and just ride out the ups and downs of the stock market. I also did not want to pay 25% tax on the substantial capital gains. I did not mind the 15% federal tax, but the additional 10% California tax struck me as too much. As a result my portfolio has so far lost about 50% in value. But at least I converted half of Artie’s stock holdings into government bonds.

Meltdown

Default and delinquency rates in the subprime market as well as foreclosures began to rise in 2006, but lending continued on its frenetic pace. The first indication of things to come was the collapse in June 2007 of two hedge funds owned by Bear Stearns that had invested heavily in the subprime market.

As the year went on, more banks found that securities they thought were safe were tainted with defaulted mortgages and were turning into what came to be called toxic assets. At the same time, the rising number of foreclosures helped speed the fall of housing prices, and the number of prime mortgages in default also began to increase. However, the wider economy remained unaffected and stock markets reached historic highs in October 2007.

By March 2008 conditions had deteriorated and the Federal Reserve arranged for the forced sale of Bear Stearns to JP Morgan Chase at $2.00 per share while the Fed assumed $30 billion in liabilities in the process. After protests JP Morgan later raised the price to $10.00.

On July 11, 2008, IndyMac Bank was seized by FDIC regulators. It was the second-largest bank failure in U.S. history. IndyMac had 33 branches and about $32 billion in deposits. Artie and I maintained accounts there. All depositors were fully compensated although the insurance limit at the time was only $100 000 per person. Since then more than 50 other banks have failed.

In August 2009, as more and more borrowers defaulted on their mortgages, Fannie Mae and Freddie Mac threatened to become insolvent. These government-sponsored entities are stockholder-owned corporations chartered by the US Government. Their function is to buy up mortgages and securitize them. The securities they issue are assumed to be backed by the US Government, although no formal guarantee existed. They were sold to financial institution worldwide, among them the Chinese government. On September 7, 2008, Fannie Mae and Freddie Mac were taken over by the US Goverment, which assumed all their losses.

On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection. The filing marked the largest bankruptcy in U.S. history; it was unprepared, disorderly and chaotic. Lehman's failure sent shock waves through the global banking system and nearly caused it to collapse.

That same weekend Merrill Lynch hurriedly sold itself to Bank of America to avoid bankruptcy. Three months later this deal would nearly bring Bank of America down.

On September 16, American International Group, a worldwide insurance giant, was on the verge of failure because its AIG Financial Products Corporation, a subsidiary based in London, had written $447 billion in credit default swaps with insufficient capital reserves. A bankruptcy would have been disastrous for the world economy and the US government decided to seize control of AIG with an initial stake of $85 billion, which later ballooned to $180 billion.

Washington Mutual was seized by the Federal Deposit Insurance Corporation (FDIC) on September 25 in what was by far the biggest bank failure in US History. It was immediately sold to JPMorgan Chase & Co. for $1.9 billion. Its stockholders and bondholders were wiped out. It was and still is my main bank.

In this climate of continuing fear, uncertainty, and rumors of more pending bank failures Treasury Secretary Henry M. Paulson on September 18 introduced a $700 billion proposal that would allow the government to buy toxic assets from the nation's biggest banks in order to shore up their balance sheets and restore confidence.

President Bush pleaded with lawmakers to pass the bill, but on September 29, the House rejected the proposal with Republicans leading the opposition. Stocks plunged nearly 9 percent. A revised version of the bill was finally passed on October 3, but did little to restore confidence.

In the meantime the crisis had gone global. In some countries such as Britain, Ireland, Spain and Australia the crisis was entirely homemade following the American pattern of an overheated housing market, overextended credit, and collapsing banks. In other countries such as Germany, France and Switzerland the contagion spread through banks that had bought too many of the toxic assets sold by American banks. During the weekend following passage of the bail-out bill by Congress the German government moved to guarantee all private savings accounts in the country. Several state-owned banks had to be bailed out as well as the privately owned Hypo Real Estate Bank.

Some countries, such as the Baltic and East-European nations, had taken on far too much foreign credit. Other countries were drawn into the down spiral because their income from exports was drastically reduced, whether they were exporters of high-tech products like Japan and Germany or exporters of oil and other raw materials like the Arab nations, Russia, Venezuela, and Brazil.

As stock markets in the United States, Europe and Asia continued to plunge, the world's leading central banks on October 8 took the drastic step of a coordinated cut in interest rates. After a week in which stocks declined almost 20 percent on Wall Street, European and American officials announced further coordinated actions that included taking equity stakes in major banks, including $250 billion in investments in the United States. The action prompted a worldwide stock rally, with the Dow rising 936 points, or 11 percent, on October 13. Just two days later, when the prospect of a severe global recession became evident, the Dow plunged 733 points.

The volatility in the stock markets and foreign exchange markets continued amid a general downtrend for stocks. The three American automakers Ford, General Motors, and Chrysler, facing bankruptcy, came to Washington to ask for help. The economic uncertainty was compounded by the political uncertainty of a presidential election, alleviated in part when Obama was elected on November 4.

On November 14 and 15 the leaders of G20 countries held an emergency summit meeting in Washington to discuss coordinated action to deal with the financial crisis. General agreement was reached, but specific action postponed until the new administration would be in office.

In late November stock markets tumbled to their lowest levels in a decade. The slide from the their highs, reached in October 2007, had wiped out more than $8 trillion in wealth. Unemployment rose to its highest point in more than 15 years. Trade shrank. Home prices fell further. Prices for oil and other commodities also fell precipitously, bringing inflation to a halt, and economists began to worry about deflation. Retailers suffered the worst holiday season in 30 years as worried consumers cut back. Bankruptcies rose. On December 16, the Federal Reserve cut its benchmark interest rate to nearly 0%.

So far governmental action had averted a collapse of the global banking system. But the steps taken had been ad hoc, on a case-by-case basis, and without a general plan. Meanwhile the recession was deepening. On January 20, 2009, the day of Obama’s inauguration, the stock markets took another dive. His administration would now have to develop a systematic approach to further stabilize the banks and resuscitate the credit markets, to counteract the deepening recession, to revive the housing market, and rescue the auto industry.

Recession

There are several mechanisms that transform a financial crisis into an economic crisis, into a recession. There are even more mechanisms that make a recession self-reinforcing, negative feedback loops that lead to a downward spiral of the economy. And there are mechanisms that transform a local crisis into a worldwide recession.

A recession is a sustained decline in GDP, a nation’s output of goods and services. Four components make up the GDP: consumption, business investment, government purchases, and net exports.

Once borrowers started to default on their mortgages in greater numbers credit for housing started to dry up and building activity, after years of overbuilding, declined, resulting in retrenchment and lay-offs. Foreclosed homes added to the glut on the market and house prices, after years of climbing relentlessly, started to decline

Foreclosures reduce the cash flowing into banks and other holders of mortgage-backed securities (MBS), and their value declines. As banks write them down they incur losses which reduces their capital base. They must then either acquire new capital or reduce lending. If banks are not capitalized sufficiently to lend and must restrict credit, economic activity generally slows and unemployment increases. Unemployment reduces the income available for consumption and further increases foreclosures.

As consumers spend less, businesses sell less and need to reduce costs, usually by laying off staff. Those left jobless have less money to consume or to service their mortgages and thus the vicious circle continues. The unemployed also find it difficult to make payments on their credit cards and other personal debt such as auto loans. Defaults on these loans increase and put even more pressure on the banks.

As business profits decline, stock prices fall, reducing the net worth of households, which negatively affects consumption. Falling house prices also reduce the availability of home equity lines of credit, which would normally bolster consumption.

Mounting business failures leave store premises empty and offices unoccupied. This decreases the value of commercial real estate and leads to even more write-offs by the banks.

In turn, a low stock market, a no-growth business climate, and the unavailability of credit leads business to curtail or postpone investments, thus weakening the second component of the GDP.

Falling real estate values, falling sales and falling incomes of businesses and individuals severely reduce the tax revenues of state and local governments. Since they are, in general, required to balance their budgets this results in more cuts and lay-offs and drives the vicious circle, undermining the third component of GDP, government spending.

As already noted, exports also collapsed and thus the fourth component of GDP was of no help in bolstering demand, unlike during the Asian financial crisis of 1997, when Asian nations could export there way out of recession.

Finally, the unrelenting barrage of bad economic news leads to a general loss of confidence depressing the “animal spirits”, which drive the economy. In this climate of pessimism and uncertainty consumers postpone purchases and businessmen postpone or cancel investments, thus depressing demand and creating a further vicious circle. The economy is after all a confidence game.

There is no reason to believe that the downward spiral in economic activity will be self-correcting. During the Great Depression the economy operated at 25% below capacity for more than 10 years. As a result millions of people were thrown into deep poverty and starvation, ‘ill fed, ill clad, ill housed’ in Roosevelt’s words. The Depression ended only when World War II generated enormous demand for goods and services, which were financed through unprecedented budget deficits.

Actually, we do not really need the majority of the things and services we consume and the generation before us did with half of them. We do not need four cars per family and we do not need to replace them every three years. We do not need those enormous houses and cars. Many medications and medical procedures are ineffective and superfluous. We do not need all these pets, many of whom are abandoned. We do not need all this food, which makes us fat and causes us to go on expensive diets.

Reduced production and consumption certainly would be a boon to the environment. But the problem is that the loss of income in a recession is distributed very unevenly. The poor and the unemployed do not have enough to meet even minimal needs and suffer greatly. Therefore most governments feel the obligation to intervene.

Governments can take fiscal and monetary measures to stimulate the economy. Fiscally the government can hand money directly to consumers either through tax cuts or by handing out checks. This turns out not to be the most effective method since many consumers save the extra funds or use them to pay down debt, as was shown when rebate checks were sent out by the Bush administration a year ago. It is effective if the government aid is directed to the needy by, e. g., increasing unemployment benefits. It is also effective when the aid is given for a specific purpose. The German government will pay a bonus of €2500 to anybody who scraps an old gas guzzler and buys a new car. This policy supports the car industry and helps combat climate change. The US government will give a $8000 tax reduction to any first time home buyer in an effort to prop up the housing market.

A better way than cash payments is for the government to invest in infrastructure, roads and bridges, renewable energy, health care, and perhaps education, which will, over time, pay for themselves.

Most governments have started fiscal stimulus programs; the largest have been initiated by China and the US. To be able to do so a country must either have a surplus, as China does, or the ability to borrow, as the US and most European countries do. Others, such as Ireland and Iceland, as well as many East-European and African countries depend on IMF loans for relief.

Fiscal stimulus measures cannot go on forever. They wreak havoc on public finances and threaten future inflation. The hope is that stimulus measures will ‘prime the pump’, that increased employment will lead to more demand and consumption, which will lead to more employment and business investment, thus setting in motion a virtuous circle that will restore growth to its normal level.

On the monetary side the standard remedy in a recession is interest rate reductions. This has already been done and the federal funds rate is practically zero. However, given the desolate state of the banks and the fact that credit in the non-banking sector has practically ceased the Fed has taken a number of unprecedented additional steps.

The Fed has made a commitment to provide short term loans to sound banks and other financial institutions against collateral as needed, thus acting as lender of last resort and providing the necessary liquidity

A second strategy the Fed has employed is to use targeted lending to help free up critical credit markets outside of the banking system. One example is the commercial paper market. Commercial paper is a form of short-term debt issued by a variety of businesses to finance their operations such as the payroll or payments to suppliers. Among the largest investors in commercial paper are money market mutual funds. When investors in money market funds withdrew their funds the commercial paper market dried up. The Fed intervened directly in this market through a series of lending programs and thus kept credit for businesses available and interest rates low.

The Federal Reserve has also initiated a lending program designed to free up the flow of credit to households and small businesses. Among the forms of credit on which the program is currently focused are auto loans, credit card loans, student loans, and loans guaranteed by the Small Business Administration.

Restoring stability to the market for housing and home mortgages has been another area of concern for the Fed. To this end the Fed has initiated a program of buying securities in the open market. The FOMC has approved purchases of well over $1 trillion of mortgage-related securities guaranteed by the government-sponsored mortgage companies, Fannie Mae and Freddie Mac. This program helps insure the availability of mortgages at lower interest rates.

These measures are intended to remain in place only until normal conditions in the credit markets are restored. This will only happen when the banks operate with sound balance sheets. Although the banks have written down hundreds of billions of toxic assets, even larger amounts remain on their balance sheets. As a result of the deepening recession additional bad debts from credit card defaults, commercial real estate, and business loans are accumulating. Apparently, the government has decided not to nationalize any banks (aside from the several dozen smaller failed banks taken over by the FDIC) , but to go the Japanese way, i. e., to let the banks gradually write down their losses against earnings. This may be politically easier, given the power of the banking lobby, but it will prolong the recession.

A Morality Play

The last three decades witnessed an orgy of expansion in the financial services industry based on greed, mass delusion, and a complete lack of common sense. In America the industry's share of total corporate profits climbed from 10% in the early 1980s to 40% at its peak in 2007. Its share of the stock market's value grew from 6% to 23%. The industry did not, however, create sufficient added value to justify such pre-eminence. At the peak, the industry accounted for only 14% of America's GDP and a mere 5% of private-sector jobs. Nevertheless, the financial rewards for those connected with the industry, from the captains of empires to the lowliest clerks, grew astronomically, whether in the form of overly generous salaries, big year-end bonuses, or stock options . Nobel Prize winner James Tobin foresaw this development in a lecture he gave in 1984:

"We are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity. I suspect that the immense power of the computer is being harnessed to this 'paper economy', not to do the same transactions more economically but to balloon the quantity and variety of financial exchanges."

Although foreseen by few it was inevitable that the bubble would burst and the gigantic house of cards come crashing down. Once somebody shouted "The emperor has no clothes!" the dogma that prices for real estate, stocks, and commodities could only rise was doomed. Loans were not repaid. Credit default swaps, which people thought insured them against defaults, turned out to be worthless. The ratings, which agencies such as Moody's, Standard & Poor's, or Fitch had issued for a fee, were pure fantasy. Trillions of dollars disappeared. Credit markets froze, and the pain spread from Wall Street to Main Street.

The recession began officially in December 2007 and has since mutated into a global crisis. There is enough blame to go around: Greedy and incompetent financiers, regulators too cozy with the industry they were supposed to supervise, politicians who were, and are, in the pocket of the banks, and consumers who went on a credit binge for things they did not need and could not afford.

Since 2007 America has lost 7m jobs. More than 15% of the workforce is jobless or underemployed, about 25 million people. American equities have collapsed in value by 57% from the October 2007 peak to a low in March of this year, although they have recovered somewhat lately. Industrial production fell by 12.8% in the year to March, the worst slide since the second world war. It is expected that the recession will reduce GDP by 3.5% overall. The state of California, mismanaged in the best of times, has a $25 billion budget deficit and will be bankrupt unless the legislature agrees in the next two weeks to the most drastic cuts in education, healthcare, welfare payments and other services. All state parks, including Anza-Borrego, in our backyard and the largest in the nation, have already been closed. The US auto industry is a shadow of its former self; General Motors and Chrysler are in bankruptcy.

The crisis has brought hardship to billions of people, but it has struck the poor hardest. They were already badly hurt by the run-up in food and gas prices before the crisis struck with full force. They are now more likely to lose their jobs, to become homeless, and end up on the street. Those dependent on welfare from states or municipalities suffer because of budget cuts. State programs to support the poor, especially Medicaid, the medical assistance program for the poor, are being cut back. Those dependent on private charity are at increased risk because, just as the need is greatest, donations are declining and help from private charities is drying up. Those who are uninsured and fall ill will have a much more difficult time to obtain treatment.

The developing countries are innocent bystanders in this catastrophe, yet they suffer severely. As capital becomes scarce in the west capital flows into developing countries dry up and investment projects are cut back or cancelled. Likewise official aid, the other type of external capital inflow, is being reduced by as much as 20% this year. Correspondingly infrastructure projects are being slashed.

A second effect of the meltdown is the precipitous fall in the prices of agricultural and industrial commodities, still the mainstay of exports in many developing countries. National budgets, which were in surplus, now show deficits and leave no room for stimulus programs. Only countries with a surplus, like China, or unlimited credit, like the US, can afford stimulus programs.

The export of manufactured goods to rich countries also has been affected, which is another reason for reduced economic activity. Similarly, the remittances of workers, such as Mexicans or Filipinos, who work abroad, are significantly reduced.

Thus the gains of globalization over the last decade are being rolled back with tragic consequences. The World Bank estimates that from 200,000 to 400,000 more children will die every year between now and 2015 than would have died without the crisis.

But not only the poor suffer in this crisis, the well-to-do are losers too. The asset values of equities and real estate have sharply declined. Many who have invested their savings in stocks saw their value decline by more than half, although share prices have recovered some lately. It is estimated that 20% of all homes are ‘under water’, meaning that they are worth less than the mortgage debt owed on them. These assets may recover their value over time, but if your are already retired or shortly before retirement, there may not be enough time. Retirees and savers in general are also hard hit with current interest rates for their savings of around 1%, when they were earning 4% or 5% before.

The greatest loss is the loss of one's job, especially in a country like the US with a thin safety net. The current unemployment rate is nearing 10% and certain to exceed it. In California it is 12%. It is not only the loss of income that makes unemployment so difficult to cope with, but also the descent on the socio-economic ladder. It can lead to depression, alcohol and drug abuse, and violence against wife and children. In an article (March 1, 2009, Forced From Executive Pay to Hourly Wage) the New York Times reports on the experiences of a number of highly paid executives who were reduced to menial work at low wages after they lost their jobs. In this recession also relatively more men are losing their jobs than women, so the wife is often the only breadwinner in the family.

I have seen many interviews with people who have become victims of the recession and I have been touched and impressed by the stoicism, dignity, and resilience they exhibit in the face of such traumatic and life-changing events. Unfortunately, given the nature and depth of this recession many of the jobs destroyed will never come back and the creation of new jobs may take years.

The economic crisis was preceded by a period of unprecedented greed. Symptomatic for this were the outsized salaries, bonuses, and stock option packets lavished on CEOs and other company officials. The new ‘malefactors of great wealth’ are not even the owners of enterprises but hired hands who have arrogated to themselves what belongs to the owners, i. e. the stockholders. The notion that the income of CEOs and other company officials is determined by a competitive market is absurd; it is determined by the incestuous dealings of insiders.

For instance, according to an annual ranking by Institutional Investor's Alpha magazine, published on April 16, 2008, top hedge fund managers made in excess of $3 billion in 2007. One manager, John Paulson, made $3.7 billion. The hedge fund managers James Simons and George Soros each earned almost $3 billion. Combined, the top 50 hedge fund managers last year earned $29 billion. That figure represents the managers' individual pay. Such pay scales are quite beyond the imagination of ordinary Americans and stand in stark contrast to stagnating wages and rising home foreclosures facing most Americans.

In April 2008 Exxon gave its CEO Lee Raymond perhaps the most generous retirement package in history, $400 million, including pension, stock options and other perks. Nearly half a billion dollars was given to one individual just to retire and paid for by the public out of ruinous prices at the gas pump.

Stanley O’Neal, the CEO of Merrill Lynch, in 2005 and 2006 pushed his firm heavily into the mortgage-backed-securities market then at its peak. When he was fired in October 2007, after the firm had suffered heavy losses, he walked away with a severance package worth $162 million.

His successor, John Thain, in the face of mounting losses proceeded to redecorate his office to the tune of $1.2 million, including a $1400 parchment waste paper basket. On the same weekend that saw Lehman go bankrupt he managed to sell Merrill Lynch, also effectively bankrupt, to Bank of America. On the last day of the year, one day before the sale to Bank of America became final, he paid $4 billion in bonus payments to his friends. The Merrill Lynch deal nearly bankrupted Bank of America and necessitated an additional multi-billion dollar bailout by the government.
Angelo R. Mozilo, the CEO of Countrywide Financial Corporation, received a total of $391.88 million compensation in the five years preceding the crisis. Countrywide was by far the largest originator of subprime mortgages and a primary driver of the financial crisis. On January 11, 2008, Bank of America acquired Countrywide Financial, which was teetering on the edge of bankruptcy, for about $4 billion in stock. Mozilo was scheduled to receive over $36 million in cash, a consulting contract with his company worth an estimated $400,000 a year, and such perks as the use of a corporate plane when he retired. On June 4, 2009. Mozilo was charged with securities fraud and insider trading in a civil suit brought by the Securities and Exchange Commission.

Joseph Cassano was the Chief Financial Officer of the Financial Products Division of AIG. As such he originated hundreds of billions of credit-default swaps, which would bring down AIG. Before he was forced to retire in March 2008, Cassano received $315 million: $280 million in cash and an additional $34 million in bonuses. An additional $1 million-a-month consulting fee was canceled only in September 2008. Cassano is now a fugitive.

The enormous redistribution of income from the middle class to the very rich is also evident from tax data published on January 29, 2009. Each year, the IRS releases information on the 400 U.S. taxpayers with the highest adjusted gross income. In 2006 each reported more than $263 million income on average, but paid income taxes at the lowest rate in the 15 years that the Internal Revenue Service has tracked such data. The average income tax rate fell to 17.2%. The high had been 29.9% in 1995.

The unraveling crisis also brought to light a number of securities frauds and scams that would likely have gone undetected in better times. The most spectacular is the Madoff affair, which went on for more than 20 years. It ensnared thousands of victims and $65 billion are unaccounted for. His victims include the rich, famous, and powerful as well as many ordinary people who lost their life savings and are now reduced to penury. Banks in Europe, Asia and South America lost billions to Madoff. So did charitable foundations. He mostly preyed on members of the Jewish community. Even the charitable foundation for holocaust victims, founded by Nobel laureate Elie Wiesel, was wiped out. Madoff occupied a position of high standing in society and was at one time vice chair of the NASDAQ stock exchange.

Fittingly, Madoff was investigated by the SEC (Securities and Exchange Commission) several times and found blameless on each occasion. In 2005 Harry Markopolos, a former money manager, in a letter to the SEC provided detailed information that Madoff was running a Ponzi scheme. Somehow, the SEC managed to bungle the Madoff investigation again. Today (29 June 2009) Madoff was sentenced to 150 years in prison.

This powerfully reminded me of an investment scam that I fell victim to many years ago. A German lawyer had defrauded me of several hundred thousand Deutschmarks. For his fraud on me and others he was jailed for three years. It also reminded me that I once had been defrauded by a Merrill Lynch broker. On the advice of his lawyer he committed perjury in an arbitration hearing.

What have we learned from the crisis. The banks, the root cause of the crisis, have learned nothing. They continue to pay outsized salaries and bonusses, often in the face of big losses and often financed by taxpayer bailout money. They succeeded in eviscerating the foreclosure mitigation legislation by stripping out the ‘cramdown’ provision, which would have allowed the judge in a homeowner bancruptcy to modify the amount of the mortgage. They also actively sabotage other aspects of foreclosure reform by routinely losing applications, refusing applications on the slightest pretense, and putting up bureaucratic obstacles. They have been lobbying heavily against regulatory reform and especially against the proposed new Consumer Protection Agency that would regulate home loans, credit card fees, payday loans and other forms of consumer finance. Banks have recently pushed through very large fee increases as well burdensome credit card fees and terms. They have not sold any of the hundreds of billions of toxic assets for which the taxpayer bailout money was intended in the first place.

For many years banks made enormous phantom profits that were real enough to the recipients of this largesse, the managers, the employees, and the stockholders but have now resulted in trillion dollar losses. These losses are being paid for by the public, by people like you and me, while the crippled banks remain dysfunctional. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy and the government has essentially guaranteed the liabilities of the biggest banks.

Payment for these losses takes the form of very high bank fees, interest on savings that is less than 1% (at my bank 0.01%), and eventually higher taxes and inflation. This does not even take into account the sub par economic performance and the army of unemployed and their diminished lives. It is an enormous transfer of wealth and a great unheralded injustice. It reminds me that the generation of my parents lost all their assets in the German hyperinflation of the 1920s.

How can the banks pull this off? Three reasons. The larger banks use blackmail. They say: If you let me go bankrupt it will irreparably damage the global economy and that will be much worse than paying me off. It always works. Second, the banks maintain the largest lobby in Washington and pay the largest donations to politicians.

US Sentor Dick Durbin, after he lost the battle for bankruptcy reform, declared on 27 April 2009: "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."

The third reason is the revolving door between Wall Street and Washington at the highest and all intermediate levels. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W. Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

While I have been an Obama supporter from the very beginning I am sorely disappointed that he has done nothing to curb the power of the banks. He is saying all the right things, but there is no action. He watered down the stimulus package in a vain attempt to buy Republican bipartisanship. They thanked him with contempt. He gave up on the ‘cramdown’ provision in the Helping Families Save Their Homes Act that would have allowed judges to lower the principal on ‘underwater’ mortgages. He gave up on unifying the regulatory agencies. There is no restraint of outsized compensation. There is no restriction on lobbying. No toxic assets have been sold. Credit is limited and dear. The revolving door is still revolving. Many White House employees are acolytes of Wall Street. And I fear the same fate of evisceration will befall the pending health care and energy legislation.

Did I foresee this clamity? During the dot.com bubble it was abundently clear to me that the prices of equities were in the stratoshere and unmoored from reality. I acted on this conviction and sold two thirds of my holdings just prior to the market high. Likewise during the housing boom it was obvious to me that these prices were unsustainable and had to collapse. Accordingly I sold the house in Temecula in 2005. Even before then I had sold my holdings in Lennar, Thornberg Mortgage, Lehmann, and FreddieMac. Three of these companies went bankrupt, Lennar, which built my house, lost 90% of its value. I had been uneasy, in general, about the level of stock market valuations, but decided – unfortunately - for tax reasons not to sell. At least we sold half of Artie’s equity holdings.

I did not, however, foresee the depth and gravity of the crisis because I was ignorant of the various and self-reinforcing “financial weapons of mass destruction” that Warren Buffett warned against in his Letter to Shareholders in March 2003. They included, as we have seen, fraudulent underwriting, securitization, collateralized debt obligations, credit default swaps, and fantasy agency ratings,

How has the crisis touched us? Our stock portfolios were down by 57% on 9 March 2009, the current market low, although they have recovered steadily since then. Most of my investments are in fixed-interest savings accounts. Since interest rates have been forced down from more then 5% to less then 2%, my income has been drastically reduced. Artie had to forego a planned salary increase. This not only reduces present income, but also her future pension. The University of California, where Artie works as a Director of Business and Fiscal Affairs, has now introduced furloughs, that is unpaid leave, amounting to a salary reduction of 7%. Artie had planned to retire a year from now, but under the pressure of events has now decided to work two more years instead.

This crisis has not only discredited American capitalism but also American democracy, already under siege after the abuses of the Bush administration. Congress is utterly corrupt and incompetent. Year after year, decade after decade it has refused to deal with the problems that matter: finance reform, education reform, healthcare reform, social security reform, dependence on fossil fuels, and climate change. Instead Congress has supported an immoral, destructive, costly, and unnecessary war. Congress, of course, only reflects the will of the American people.

A Tale of a Third Company

I spent the summer of 1970 in Japan as an exchange student, working for the Matsushita company in Osaka. It was and is one of the largest makers of electronics and is known in the west by its brand names Panasonic, Technics, and National. (In recognition of this the company just now announced that on October 1, 2008, it will change its name to Panasonic Corporation.)

The major attraction at the time was Expo '70, the first World's Fair held in Japan. It took place in Osaka and its theme was ‘Progress and Harmony for Mankind’. Seventy-seven countries attended. The US exhibited, among other things, one of the three moon landers and a large moon rock.

Expo ‘70 was intended to "put Japan on the map" just as the 1964 Olympic Summer Games had been, which were the first ever held in a non-western country. They had originally been scheduled for 1940.

By 1970 Japan had made enormous economic strides since its defeat in 1945 and achieved extraordinary rates of growth. It was held up as a model to other countries for its industrial policy, its novel methods of production, and its legendary quality control. There were not only universal admiration, but also stirrings of unease. Not unlike China today Japan was beginning to be seen as a potential economic threat that could outperform the United States.

It was therefore tremendously exciting to spend several months in Japan, working, traveling extensively, and, of course, visiting the Expo almost every night. But that is another tale. This tale is not about Matsushita or IBM or Dell. Compared to these giants the company in this tale is tiny and low tech, but it has, nevertheless, impressed me immensely.

On my way back to Europe I stopped for a few days in Hong Kong, which was then still British. Strolling through Kowloon I discovered a tailor shop called David's Shirts and on the spur of the moment had a number of shirts made. I enjoyed the well-made and nicely tailored shirts, but soon forgot about the transaction.

In 1987 I worked in Jakarta as a United Nations adviser to the Indonesian government and in this capacity was slated to spend a week in Tokyo in meetings with NEC. I would go on from there to California for some home leave. The flight logistics required a layover in Hong Kong and at the hotel I saw a small ad for David's Shirts. With a mixture of nostalgia and curiosity I looked them up. Since I was only staying overnight an order seemed impossible, but they assured me that, no problem, it could be delivered when I stopped again in Hong Kong on my back.

Measurements were taken and I mentioned casually that I had been a customer 17 years ago. They conferred in Chinese and then told me they should still have my measurements. One of the tailors busied himself with drawers and shelves at the back of the store and, indeed, after a few minutes he came back with my record containing all personal details. This seemed an impossible feat. Even in the electronic age, which company can locate a customer’s record after 17 years? All these records were handwritten, stored in a very confined space, and in Chinese, which to a western mind would seem to make storage and retrieval immensely more difficult. Not only did they find my data, the measurements then and the measurements now were still the same, which pleased me no end and must have contributed to my high esteem of David's Shirts.

While I was in flight from Tokyo to Los Angeles on Northwest Airlines on August 16, 1987, another Northwest flight crashed on take-off from Detroit with a loss of 156 lives. My return was delayed by a few days and I sent a post card to David's informing them of the delay. When I finally made it back to my hotel in Hong Kong I found on my bed two neat packages containing ten beautifully tailored shirts.

Judging from its web site (http://www.davidsshirts.com/) the company is still in business. Amazingly, its address: 33, Kimberley Road, Kowloon, is still the same as the one listed on the label in my shirt collar. Yes, I still have a few of these shirts and they still fit - sort of.

A Tale of Two Companies

In the late 1960s I worked for Control Data in South Africa helping to install and run a triple mainframe system at Iscor, the large steel conglomerate. While there, I saw an ad in Datamation about the IBM System/360, which was then quite new. I wrote to IBM for more information, but none came. So, after several weeks, I wrote to Thomas J. Watson Jr., the CEO of IBM.

Very quickly a reply arrived on magnificent stationary signed by Mr. Watson himself, or so it seemed. The letter explained that, unfortunately, no additional information could be sent since I had not provided a return address. The package also contained the asked-for literature and a copy of my original letter. It was hand-written on a one-page aerogram common at the time and it, indeed, lacked a return address. My first reaction was one of deep embarrassment, but that was soon replaced by a feeling of immense admiration for a company that would store, somewhere in the world, what was essentially a worthless piece of paper and have the ability and will to retrieve it and to respond to my unjustified complaint. This was before the age of the Internet, large-scale databases, and even fax. The goodwill thus engendered stayed with me all my life, whether considering IBM products, buying IBM stock, or dealing with IBM people.

Some time ago I bought a PC from Dell. It was only the second PC I bought, the first had been the original IBM PC. In between I had built a number of PCs from scratch, buying parts in computer stores. But this had become uneconomical, even if I valued my time as nothing.

The Dell system worked well until I installed a second hard drive. Curiously, it would transfer data correctly, but take 5-7 times longer than it should. Thus copying a large picture folder would stretch from a few minutes to an hour.

I called Dell support and was told a number of times that this was a third party drive and "we do not troubleshoot third party equipment". I could quickly show that the original Dell drive, as well as my new "third party" drive (which was the same make as the Dell), and another drive I had salvaged all had the same problem of excessive tardiness when connected as a second drive. All three worked flawlessly as the primary drive. I also pointed out that there was no prohibition against adding third party equipment to a Dell system. There is even a section in the official manual on how to install a second hard drive.

Pursuing this turned into a morale-sapping nightmare. There were the endless waits on hold and the many disconnected calls. Once I was given a non-existing number, once I ended up in an endless loop. All the young Indian women - and they were mostly women - were charming and unfailingly polite, but they all insisted on starting with their script from the beginning. After a while I worked my way up to managers. None of them was interested in the problem, all wanted to get rid of me, one was downright rude.

After about three weeks of daily calls the verdict was that Dell does not support second hard drives, whether third party or their own. However, I could return the system, which I did, paying the freight both ways.

Incredibly, a few weeks later I bought another Dell computer. I had been told that they had never before seen my problem, so I figured the chance of ending up with the same problem was infinitesimal. Although I bought a different model, it came with the identical problem. This time I did not even bother to call Dell support. I solved the problem myself and it took only a minute to fix. The BIOS entry for the second hard drive was set up incorrectly. Perhaps I should have thought of this sooner. But none of the Dell "experts" had thought of it, the manual section on how to install a second hard drive did not mention it, and Dell cannot assume that all customers are conversant with the BIOS.

I then wrote a letter to Mr. Dell. It was returned to me unopened, by company policy I assume, and the thought occurred to me that Mr. Dell is not Mr. Watson and that Dell, the company, is not IBM.