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Journal Journal: Opinion: Domestic drilling 4

.. why is there no shortage of oil-based products?

Plastics, rubbers, gasoline, petroleum jelly... do you have any trouble finding any of these things? Do you have to shop around at multiple garages to find the right size of tire? Do you have to wait in line to buy gasoline, or hunt a station that has any at all? Does your grocery store give you paper bags because it already used its ration of plastic?

No. Because there's no shortage of any of the components that go into these things, least of all, oil.

The problem with the drilling argument is that everybody just assumes that the reason oil is expensive is because of some sort of shortage, but there's no evidence that this is the case. Rather, demand is increasing, and speculation is increasing, which is driving the price of oil higher on the mistaken assumption that the demand will remain "inelastic" - the concept that people will have no option but to buy a commodity regardless of its cost.

If there were a supply shortage, you'd have lines for gasoline, lack of plastics, trouble finding rubber products, etc. But we don't have any of those things. No matter how much gasoline, rubber, oil, and plastic we use, there's plenty more, and other economies are in the same position. India has a problem with so many plastic bags littering the street that they're balling up in cows' stomachs and killing them, and their automotive industry is ramping up production as even lower castes are able to switch from bicycle traffic to automobiles.

There's another hitch beyond that, though. The oil industry already has millions of acres of leased land that has already been explored and deemed likely to hold substantial (for America anyway) oil reserves, but they don't drill it because the oil is harder to get at than in existing fields. If there really were a supply problem, only the most difficult reserves might remain untapped, because even if it costs 25% more to extract the oil from the untapped reserves, they could just force the price 25% higher to compensate. If less than 100% of customers are receiving oil they bid on, then there's room to raise the price and increase the supply at the same time.

You could make some sort of case for domestic drilling as a security measure, however. We currently import much of our oil from friendly nations like Canada, but substantial portions of it continue to come from regimes that have legal, social, military, or justice systems antithetical to our interests. However, the fact is, America simply does not have that much oil. We have trees, we have coal, we have natural gas, but we just haven't been blessed with major oil reserves. ANWR accounts for such a tiny portion of the world's oil that it would dent maybe 3% to 5% of our demand, barely affecting the money we send overseas in exchange for oil imports, and even that assumes that restrictions are placed on oil companies (such restrictions already exist to a great extent, actually) to keep them from selling the oil to anyone but Americans!

The fact is, domestic drilling is a pointless pipe dream that's being used as an election year wedge issue. The costs are so high monetarily and environmentally, and the risk of failure so great, that it's nearly pointless to even consider right now. It may be wise to put the infrastructure in place in case of future emergencies such as another oil embargo, but to try and argue that domestic oil drilling will have a substantial impact on consumer prices is, simply put, ridiculous. Instead, I would argue that conservation should be the most pressing near-term activity, and that rebuilding our crumbling infrastructure on newer, more resilient and renewable technology is an effective long term strategy.

Unfortunately, opponents of domestic oil drilling too often focus on the wrong things. While I'm a fan of nuclear power, we also lack significant reserves of fissionable material. The majority of nuclear fuel is currently locked up in mines in Africa, and many of those mines are being shut down due to the extensive damage they've caused local tribes and the exploitation of communities they've brought. It ultimately does us little good to shift from non-renewable oil in foreign nations to non-renewable nuclear fuel in foreign countries.

Furthermore, while wind and solar power are excellent supplemental power sources, they are simply inadequate, alone, to be primary power sources. While this may change in the future with new technologies, we should not count on them to be able to supplement any increase in electric car production that would further tax our already limited grid. Additional clean coal-fired power plants, combined with solar and wind supplements, may be an answer to the problem, but it's risky and requires a substantial investment in new infrastructure, as well as a shift in consumer mindset.

In the end, all I've done is criticize other people's ideas without offering any substantial ideas of my own, and I realize that. However, I don't think that the offshore / ANWR drilling spectacle currently playing itself out in public debate is an honest one. I believe it was introduced as a wedge issue against Obama (and an effective one at that) because the republicans know the typical voter is woefully under-informed when it comes to the details of complex issues like this. I think that instead of playing politics, the two parties should be investigating ways to actually resolve our dependency problems, and remove oil from the equation altogether.

Unfortunately, I'm not willing to hold my breath. The Republicans have an effective tactic to use against Obama now, and the Democrats will focus on defending him rather than researching real solutions.

Politics as usual, at the expense of everyone else.

The Almighty Buck

Journal Journal: That sucking sound you hear from your wallet... the Fed, President, and Congress acting in tandem to utterly and completely screw over every honest, hard-working American citizen.

The House, today, rejected proposed rules to limit speculative oil trading. Originally an attempt to curb the extraordinary increase in oil prices - and increase that is in no way tied to supply or demand issues - the proposal itself immediately realized a $20/bbl+ drop in light crude on the NYMEX as jittery speculators pulled out of the market. With the announcement today that the House was backing away from the new rules, light crude saw nearly a $5 gain in one day as people with no business bidding on oil dived back in. It's nice to know that critical things like oil and food can be manipulated by the wealthy using a few well-placed press releases and some good old-fashioned word-of-mouth fear-mongering.

So much for all the demand lunatics. If you ever wanted any evidence that the American Dream is entombed in a cement pillar in some ballpark somewhere, this is probably it.

On the same day, the Fed announced it was expanding loans through its "emergency liquidity program" to 84 days, from 28 days. Basically, they're admitting in a round-a-bout way that an awful lot of big banks are standing on the brink gazing fearfully into the gaping maw of oblivion, and that they'd rather devalue your money than let wealthy businessmen suffer the consequences of their own reckless decision-making.

It's so nice to know we have a free market in this country. I'd hate to live in a place like, I don't know, Venezuela, where the government is constantly mucking about in the markets.... I'd hate to live in a world where rich people could suffer for their irresponsibility the same way poor people can.

Finally, we have word that the housing bill is finally being made into law. Captain Flightsuit, today, signed the "Give Bank of America a big handout because Christopher Dodd is a corrupt pinhead" bill, effectively allowing banks to shift the burden of their poor lending practices onto you and your children, if not your grandchildren.

I wish government would at least be consistent in its negligent criminality. It wouldn't irk me so much if they did corrupt things to blatantly screw honest Americans if that didn't describe every single thing they do that isn't creating a pointless holiday or naming a post office.

The Almighty Buck

Journal Journal: The Asian markets are...

... in sharp decline.

Topix - the TOkyo stock Price IndeX - is off 2.75%, the Nikkei 225 is off over 2%. Apparently, they're reacting to news that the IMF doesn't believe the housing problems currently dogging us are going to end any time soon.

I'm generally reticent about government getting involved in market matters, but I think our recent troubles, and the accompanying problems around the globe, are pretty strong evidence that if you're going to have government manipulation in the markets, it ought to be aimed at prevention rather than at reaction.

Government bailouts and additional deficit spending won't solve our current problems, mostly brought on by deficit spending from other sectors. Governments should set the rules ahead of time so that honest businesses can evaluate the risk of setting up shop in-country and choose to either operate within the parameters given, or go somewhere else.

It's unfortunate, really, that most people's "knowledge" of government intervention and regulation only extends as far as screaming socialism at everything that moves.

User Journal

Journal Journal: Found on Fark: Wal-Mart sucks because...

... well, I don't honestly know, in this case. I mean, I know why Wal-Mart sucks: their prices are lousy, their stores are heinously designed, and half their clientele represents about the first 5% of the bell curve when you're plotting IQs.

But, in this case, I really don't get what the problem is. Yes, I understand that a bike is far less intrusive than, say, a shopping cart, and that Wal-Mart wouldn't mind you pushing one of their carts around the aisles. Yes, I understand the justification for the denial was flimsy, at best. Yes, I understand the horribly stunted "logic" the woman is using in stripping.

What I don't understand is how anybody could have so little going on in their life that going to these extremes and then writing about it to the Consumerist makes it anywhere near the "to-do" list, much less reaches the top slot. I mean, seriously, how easy must your life be if you have the spare time to not only stand in front of a Wal-Mart arguing with a minimum wage burger-joint dropout, but then follow it up with a strip show in the parking lot AND write about it on the internet for a prominent blog?

I don't like Wal-Mart. I rarely find their prices to be better than, say, the supermarket - save loss-leaders - and they sell flimsy crap anyway. Their parking situation is atrocious at every store I've been to, the layout is terrible, and they all smell like McDonald's and cat pee.

Plus, Wal-Mart just seems to attract the lowest of low-brow clientele (and even just plain idiots who never make it in the store). Every Wal-Mart in this area has had substantial problems with moronic children in junker imports congregating to show off their latest yellow decals or poorly-implemented upgrades, and the people who make it into the store seem to not so much wear spandex as they cram themselves into it. I don't know how it's possible, but I'm pretty sure that if you counted the total number of teeth that have entered through the sliding doors of my local Wal-Mart, you'd have a negative number. I'm not sure where these people would go if Wal-Mart weren't around to provide sustenance for them, but I'm not ruling out the source of slop for our local pig feedlots*.

Still, I can't come away from this story without a deep sense of resentment for the time spent thinking - and now writing - about it, and a sinister desire to slap a couple of teeth out of the cycle-jockey who spawned it...

* In all honesty, I don't have that big a problem with Wal-Mart, it's just more amusing to a melodramatic route in its descriptions. Their pricing is generally not very good, their stores are poorly laid out, and they really do attract some unpleasant people, but I'm not above going there if I have to or if I notice they have an enticing loss leader I'm interested in.

Generally, though, I shop at Target. Same cheap, Chinese crap; same price; fewer people; and much easier negotiations through the parking lot.

User Journal

Journal Journal: Let's get philosophical... 1

.. hell, why not? It's a Friday night. Everything that requires actual thought is closed until Monday, anyway.

Here, run with this:

Humans are in the unique position to fully comprehend the implications of freedom from an objective perspective, and this understanding leads them to attempt to create an order that would deny that freedom.

For example, "animals" are not afraid to kill. If killing is deemed necessary, it is done without joy, remorse, or regret. However, humans will go to great lengths to create arbitrary barriers to this ultimate response to aggression or wrong.

If you're wondering what triggered this oddity of an entry, it was ("it's" will not suffice here, as "it's" is a contraction of only "it is" or "it has", not "it was") Watchmen. I saw the new trailer at The Dark Knight and chose to re-read the trade paperback which I've had stored away for a few years now.

Also, I think Alan Moore is a bit.... unhinged.... however, it's (it is) his opus, so it is (it's), ultimately, his decision as to how his name is attached to interpretations of its (possessive) re-imagining.

User Journal

Journal Journal: The new direction of oil

I want to make something very clear up front: I think oil is way overpriced.

To some extent, the price of oil is inflated due to the weak dollar, but that alone doesn't account for the massive runup in recent months. Some people will tell you it's a matter of supply and demand, but they're either ignorant or liars. Demand has proven to be quite elastic as the price increases. Obviously, it's not infinitely elastic, but it's much more elastic than wealthy speculators would like you to believe.

I'm not a soothsayer, but I'll say this: I think that a lot of very manipulative, crooked people are going to pull the rug out from under a whole bunch of suckers. If someone held a gun to my head and made me try to peg the real value of oil, I'd put it, right now, at around $95 a bbl, mostly accounted for by the weak dollar. Most of the runup in price happened after the magical $100 barrier was broken, and I think a lot of wealthy speculators with a lot of media access bought in before that psychological tipping point and bumped the fool's gold rush over the edge. Eventually, they'll want to take their ill-gotten profit and run with it, leaving a lot of greedy idiots holding a lot of futures contracts that are worth less than what they cost to buy.

Welcome to Wall Street. Sensibly regulated free markets are a wonderful thing. Too bad we have neither sensible regulations nor a free market.

You might wonder why I have nothing to say about the "big" loss in the markets today. It's quite simple, really: the markets are just riding a false rebound. Until the DOW stops fluctuating randomly on complete non-news and dips below 11k again, there's really nothing to talk about. Right now the markets are just in another period of false hope and I wouldn't be surprised to see them "correct" up to around 12k before they start another slow, dismal slide to new lows. The next wave of writedowns is inevitable, and the impact of Congress's idiotic socialist fiddling with taxpayer dollars is yet to be measured (I apologize for being crude, but if Congress gave half a dirty dog shit about the impact of failing banks, they'd explore sensible tax reform and significant budget cuts to help lessen the blow of failing banks on consumers, let the banks that made foolish business decisions fail, and let the other banks cannibalize the assets. Propping up proven failed business models with money unwillingly invested by sucker-punched taxpayers is an unforgivable act of robbery and nothing more).

Expect things to get much worse before they get better for good.


Journal Journal: Politics... 2

... is the realm of idiots and charlatans, of this I'm convinced.

I don't generally like to be involved too much in it. Politics is a sticky morass of lies, ass-kissing, and intellectual dishonesty so thick and layered with empty dogma that spending more than a few spare moments of time in it might well be less healthy for your brain than drinking concentrated window cleaner. Nightly. For fifty years.

How anybody takes mainstream American politics seriously enough to consider it any more worthy of discussion than Hulk Hogan is beyond me. In fact, I apologize to pro-wrestling fans and gossip hounds for the comparison.

You deserve better.

Consider, for a moment, the sheer level of outright stupidity involved in a typical pop-poli diatribe on network TV. Bill O'Reilly's show recently included a mental breakdown that devolved into him calling a perfectly peaceful meeting of left-leaning individuals no different than a backyard Klan barbecue.

Really, Bill? A bunch of internet political junkies getting together in their plastic shoes and discussing their latest hypermiling accomplishments is the same thing as a bunch of white-hooded maniacs getting together to discuss their latest acts of murder and intimidation against innocent people?

Oh, I'm sure there are intelligent political pundits and analysts, but nobody watches PBS, much less McNiel-Lehrer (and I'm only guessing that's intelligent because it's an hour of coma-inducing doldrums). I'm sure that there are politicians who are unimpeachable and constantly strive to do what they believe is best for their constituents.

But, you know what? They're the minority. Most politicans are money-grubbing, power-hungry maniacs. They shouldn't be allowed to own dogs and we put them in charge of committees that steer the manufacture and deployment of devices that could end all life as we know it in a matter of a few hours. Most pundits are so ridiculously clownish, so utterly unapproachable in their unbalanced and narcissistic sophistry that attempting to dissect and refute their increasingly irrational mental spew can only result in a complete breakdown of any rational and intelligent human being. There is, ultimately, no reasoning with the likes of O'Reilly or Limbaugh or Savage or Coulter (and I apologize for not making a silly attempt at appearing fair just for the sake of it, but when a liberal pundit attacks autistic children, victims of child rape, or the widows of 9/11 victims and is rewarded with substantial book sales, advertising revenue, or major media exposure for their opinions we can start playing the scorecard game).

Ultimately, most political pundits aren't really trying to be smart, though. Smart is boring. Smart is "elite". What sells is confrontation, no matter how hard you have to work to coax it out of the most trivial or non-controversial the issue is.

I guess, in the end, what saddens me most is not so much that these fools manage to keep food on their tables, it's that there are enough weak-minded individuals around to do it for them by listening. Why is it that being outrageous - no matter how stupid you are when you do it - pays so well?

I'd answer that, but people don't generally take it very well when you feed them their bitter medicine with a baseball bat.

User Journal

Journal Journal: The Dark Knight

I just saw it, and, I must say, I loved it. I'm no movie critic, though, so I'll just write out a few of my own impressions.

First of all, two complaints: the gruff, forced vocal that Bale uses for the Batman persona is downright awful. I realize he's supposed to be doing it on purpose as the character of Batman to help hide his identity when he speaks, but I'd, personally, rather just suspend disbelief on that particular detail and hear a reasonable voice used for Batman. I have less of an issue with Wayne's voice being undisguised in the Batman persona than I do with, say, Clark Kent's disguise being just his glasses.

Second of all, the movie is just a bit too long. It's not so much that the last segment of the movie isn't good, or doesn't add to the film, it's just that Nolan and Ledger craft such a relentlessly vicious Joker that the tour de force that comprises the central part of the film simply cannot be topped. Joker's relentless assault on the city comprises the center portion of the film, and the remainder simply cannot live up to the standards set by the ever-twisting screws that precede the ending.

And that brings us to Ledger, the Joker. I think the best way to describe Ledger's interpretation of the Joker is: "relentlessly vicious". Joker is violent, cruel, callous, reckless, and utterly, completely, downright vicious. I get the feeling most people in the theater missed the most telling part of Joker's horrific cruelty, the hopeless dash he sends Batman on halfway through the film.

The audience in the theater I was in genuinely didn't seem to know what to make of Ledger's Joker, in fact. There are numerous points where Joker acts or speaks in ways that are subtly humorous, but even those moments are tainted by deep cruelty, and you can tell the audience is only laughing at them to try and add some levity in a film that stolidly refuses to provide much of anything to lighten the tone.

Which brings me around to Michale Caine. I think Mr. Caine is one of the most important aspects of the new Batman reality because he just pours himself into the role of Alfred Pennyworth in a way that I don't think anybody else could have. His dry British humor is almost the only source of levity to lighten the crushing despair that The Dark Knight exudes.

In the end, the movie is an effective crime drama, action film, superhero movie, and psychological thriller. Bale is effective in his portrayal of the bone-crushing and brilliant detective, Ledger is masterful as a vicious, anarchic butcher, and the supporting cast - Caine, Eckhart, Oldman, Gyllenhall, and Freeman - round out a perfect picture of a Gotham City that goes from teetering on the brink to plunging into the deepest depths of Hell.

I would recommend this movie to just about anybody who enjoys Batman, crime dramas, or psychological thrillers, but you may want to think twice about bringing smaller children, especially sensitive children. While there is little in the way of explicit violence, the tension that builds around Joker during scenes that precede implied violence is intense and may be a bit too much.

Otherwise, The Dark Knight is a bone-crunching, psychotic dive into Hell that refuses, even in its last minutes, to apologize for or reverse its tone. Batman's life is dark and lonely, and his enemies are warped, wicked, and sinister.

And, boy, that makes for one hell of a movie.

User Journal

Journal Journal: Oh, man, did you hear about that car that runs partly on... 4



This car tends to confuse the hell out of people. Half the people think it's some fantastic breakthrough, the other half think it's a scam for reasons ranging from the supposed impossibility of splitting the water up to violating the fiercely-misunderstood Second Law of ThermoDynamics.

The car works, thusly: you fire up the engine, which is internal combustion, like any other motor. However, this car has a trick up its sleeve: a fourth grade science project.

Supposedly, this Ronn Motors car will use this simple little trick to split the hydrogen atoms off from oxygen, then ship the hydrogen to the combustion chamber where it will mix with regular petrol.

The claim is that you get better MPGs because you're using less fuel. Where they came up with their ridiculous BHP claim, I don't know.

So, what's the deal, can you really do this? Is this the green car of the future?

Well, yes, you can do it, no, it's certainly not the green car of the future.

The confusing part is the smokescreen about the hydrogen mix. There's no technical reason you can't mix hydrogen and petrol and blow it up in an appropriate chamber with an appropriate spark to produce useful power. In fact, it's not fundamentally different from how a combustion chamber works now.

Gasoline isn't nearly as volatile as people think. It takes a substantial amount of energy to light it on fire, it takes some ridiculously specific conditions to make it explode. Those ridiculous conditions are exactly what the combustion chamber of an engine produce: a high energy spark sets off a combustible mix of oxygen and gasoline to cause an explosion that propels a piston which is then transferred through a series of rods and gears and a little bit of magic to make your wheels turn.

However, before that energy gets through your transmission to your wheels, it has to get out of the motor through the flywheel (or through the torque converter in an automatic), and before it gets there, a few things get dibs on it: your AC, your alternator, your water pump, etc.

That's where the hydrogen splitting comes in. This car basically just has an extra accessory, just like any other accessory already on your car, that takes some of the power produced from the combustion and uses it to split up the hydrogen and oxygen to prepare more hydrogen for the next cycle.

And, there's the kicker.

First of all, let's think about it. Say we produce 100HP in our motor. The A/C saps 3, the alternator 1, and the water pump 1... then our hydrogen splitter saps 1 to split the next round of hydrogen atoms off... wait a minute... which is better, take our useful power from 95 to 94 so we can make more hydrogen, or just let the 95 through in the first place?

In other words, what it comes down to is this: you have to sap some amount of energy from the motor to power the hydrogen splitter, and a portion of that is going to be lost. Even if the splitter were somehow 100% efficient, it would just mean no net gain in power - you'd put 1 HP into the splitting and get 1 HP back so you'd lose out because of the weight of the accessory*.

Yes, the claims are probably bogus (short of a scientific breakthrough or some sort of exotic power source for the splitter.. and if that's the case, why not just power the vehicle with the exotic power source?), but not for the reasons most people think. The car's design is technically sound - simplistic even.

It's just pointless.

* One other thing you have to understand is that hydrogen only carries about a quarter of the energy of a same volume of gasoline (but is a very high energy fuel by weight). Since we're mixing the two fuels together, they're at the same pressure, and at a pressure that is meaningful enough to cause gasoline to explode, so the gasoline is far more efficient (otherwise, they'd be using a high-pressure chamber for the hydrogen, and if they could do that, they could just run the whole car on hydrogen).

User Journal

Journal Journal: Found on Fark: A bailout for a homeowner 3

The government says that Fannie Mae and Freddie Mac can have a bailout because of the mortgage mess, so why not cut evicted homeowners a little slack too?

Normally, I'd be all over the whole "personal responsibility" aspect of this, but why bother? The government has already decreed that we'll be paying for the poor lending and investing practices of multiple companies either directly, through our taxes, or indirectly through devaluation of the currency we all receive our paychecks in.

I have, as a result, no sympathy for Countrywide here.

Although the homeowner obviously bears ultimate responsibility for her own finances, and I would never support taxation or lending practices to bail out individuals who signed bad contracts, this highlights a very real disconnect between how we treat businesses which act irresponsibly and consumers who act irresponsibly.

The message from the Treasury, the Fed chairman, and Congress has, from the start of the collapses, been "Don't worry about it. If you take unjustifiably large risks with your business and fail, we'll just make the taxpayers pick up the tab!" It's nice to see, for once, some taxpayers standing firm and fighting back against this graft (for your Brits, that would also be known as "sleaze"). This is great because, not only will we have to pay for the stupid things these business already did, the message is clear to them: keep on doing it. When your high risk behavior pays off with high yield returns, you get to keep it, and when you lose your entire investment, we'll just take you off the hook for it and put someone else on.

Privatize the profits, socialize the losses.

Countrywide's Simon said yesterday that it was unlikely the company would let Taylor remain in the condo longer than 30 days. He said the company's first priority is to its investors who want to see the property sold.

And I say to Countrywide's Simon: too bad. If your interest had ever really been your investors, you wouldn't have originated and packaged so many loans for people you either knew couldn't afford them, or you had no reason to believe would be able to. The consequences of irresponsibility need to go both ways in any two-way transaction, it's about time someone started stuffing all the ooze back up the pipe at you.

The Almighty Buck

Journal Journal: National City trades halted mid-session, WaMu down over 26% 1

M&T is off over 15% too.

Nothing wrong here, though. The economy has been "provided ... with a booster shot" which will have an "impact over the coming months" so that growth will be "weak but still positive".

And don't worry. Hank himself isn't too concerned about recession. He's just "not focused right now on what you call it".

I always liked flapper girls anyway...

Just as a fun number, it looks like the last time National City (National City is a super regional bank, incidentally, if you've never heard of it) traded this low was almost 25 years ago.

User Journal

Journal Journal: Stocks are up on news that you...

... will soon by buying shares of a company that's only going to survive because the rest of your money is quickly becoming worthless.


So, Fannie and Freddie now have more credit and, maybe, you as an investor.

What's that? You think FNM and FRE are too risky, so you didn't buy shares? Well, the Treasury thinks that's just a darn shame and you should have some, whether you like it or not. They're going to ask Congress for the ability to purchase shares of Fannie and Freddie - with your money - if their "pay one credit card with another" style bailout doesn't get other investors on board the Titanic.

Don't get me wrong, I realize that an outright failure of Fannie and Freddie could spell disaster for the banking industry, and that would effect all of us, but there's still that feeling I can't shake... that feeling as if someone is jingling around the change in my pocket and it's not me...

For decades now the fed has been very vocal about the fact that they're not obligated to bail out the GSEs, but everyone has known for a long time now that if something like the current crisis ever came (actually, Freddie and Fannie have been in trouble before when housing values contracted, and they took a nasty hit in the S&L scandals too) the government would step in with our money and make sure they stayed solvent.

So, drink up, friends. If the fed's almost-free money handout - which devalues the currency already in your bank account and makes things harder for you indirectly - doesn't save these behemoths, they're ready to make the ultimate sacrifice in one last ditch attempt to rescue them: your money, your wallet, your future.

If nothing else, there's a lesson here: just spend all your money as you get it, because you're going to be penalized for other people's bad behavior if you don't.

User Journal

Journal Journal: Wanna know what the lead-up to the depression... 1

.... looked like? Look no further than the IndyMac collapse.

IndyMac Bank was taken over by federal regulators yesterday after a week that saw Charles Schumer (D-NY) publicly announce, in effect, that IndyMac was collapsing. This triggered a run on the bank that withdrew nearly $1.5 billion dollars in liquidity (cash) from the bank's coffers.


It's hard to feel bad for the collapse. When the mortgage crisis is discussed, it's often pointed out that figuring out who is responsible for originating any particularly bad loan is difficult. IndyMac originators, however, made it their job to give out "bad" loans (in theory, they were for the repair of single family homes or first time purchasers with less than excellent credit histories).

If the managers who ran IndyMac, and the originators who worked there, all wind up on the street selling apples off a cart and eating out of garbage cans, I won't feel bad in the least.

If you've been getting your financial news from major media outlets - especially Murdoch-owned media - you don't have a full appreciation for just how dangerously unstable our whole economy is right now. People have been arguing on the networks about whether or not we're going into or are already in recession, but if they told the truth, they'd be warning people to prepare the very real possibility of depression.

At this point, the only string holding us back from one is the little bit of yarn that's managed to relegate most of the destruction wrought by the mortgage crisis to the financial sector. If that poison seeps into our already-weak manufacturing, retail or tech sectors, we'll be in for a loooooong ride down and an even longer stay at the bottom.

The Almighty Buck

Journal Journal: Freddie macs taxpayers, whips them on the Fannie? 3

At this very moment, Freddie Mac is down more than 48% on the week, and Fannie May is down over 46%.

If you're an American taxpayer, and that doesn't scare the ever-loving hell out of you, you have no idea where your money goes each April.

The ostensible purpose of these two behemoths is to allow a government-sponsored private entity to absorb some risk in the mortgage market by allowing that entity to pick up the risk of losses on mortgage securities by guaranteeing certain types of "conforming" loans. In short, if a bank picks up a loan and sells it, the bank gets the profit, Mac or May collect a guarantee fee to assume the risks, and those risks are transferred to ignorant taxpayers (Bernanke and Paulson will say otherwise, and it technically true that they're not government-backed, but we'll get to that later).

I've seen it put, thusly: the profits of the transaction are privatized, while the risks are socialized.

We may be on the verge of seeing just how much of a catastrophe this twisted little shell game can cause once the game goes tits up on the casino floor. Fannie and Freddie hold enormous portfolios that they've built up by purchasing and packaging mortage-backed securities. These portfolios are so weighted down by these sorts of securities, in fact, that they have become ridiculously more leveraged than any investment bank out there. Basically, if those mortgages turn sour, Fannie and Freddie are history.

And that's just what has people spooked this week. As values of homes have plummeted in some areas and stagnated in others, and as the results of corrupt lending have crept through the industry and exposed on the surface like some sort of horrible disease, Fannie and Freddie's solvency has come into question. If they're too heavily leveraged, they may well be insolvent already, and that means nobody wants to touch their stock with a ten foot pole.

Which brings us around to Hank Paulson. The Treasury has been taking a lot of care in tip-toeing around the issue recently, partly trying to downplay the notion that FNM or FRE are insolvent and partly trying to remind everyone, ever so gently, that the government is not obligated to bail either company out.

He's right, they're not obligated, but there's little reason to believe that the government would be stupid enough to let them fail.

Here's the problem: MAC and May hold such obscenely large debts now that if they fail, they could bring the entire market down with them. They have become one of those businesses that are derisively called "too big to fail".

Basically, if Mac or May fail, they'll bring mortgage lending to a screeching halt. Few banks are willing to assume the full risk of a loan up front and prefer to transfer "conforming" loans to one of the GSEs. Without being able to do that, they can't purchase a guarantee, and they're FAR less likely to make as many loans. If that happens, entire banks may fail (some banks, like the old Bear Stearns, foolishly leveraged themselves heavily in real estate), and other institutions will see massive losses in revenue. The entire financial sector would be blighted and investors would see their investments in public financials almost completely erased in a matter of days, crushing the value of the banks and leading to a chain reaction of multiple bank failures.

In a worst case scenario, these two companies failing could pitch the U.S. deep into a full-blown depression and that could even spark a worldwide depression.

But, here's the problem: if the government bails out Mac or May, or both, who do you think eats the bad loans that are weighing the companies down?

Yep: you.

You effectively wind up taking on the risks associated with the loans that two large, private enterprises accepted, but if those risks turn out to be overinflated, you won't see any of the profit:

Socialize the risk, privatize the profit.

It's unfortunate that this sort of thing never becomes common knowledge until it's too late, but people are so wrapped up in their own lives that they don't pay attention to the minutia of everyday governance.

It's funny, however, how all sorts of little "not-so-bad" rule changes and legislative matters can add up to a sudden, screaming catastrophe.

Update: "Helicopter" Ben Bernanke says that Mac and May can use the discount window to stave off insolvency.

What this means is that the Fed will happily print billions in currency for Mac and May to borrow so they can meet their financial obligations. While not a direct bailout in the sense of taking taxpayer money, printing money like this to "solve" problems devalues all the existing currency, pushing up inflation, and causing other problems.

I don't know if this is better or worse than an outright bailout, but it's not good.

The Almighty Buck

Journal Journal: It's 6:03 in the morning... 1

.. do you know where your 401k is going today?

As I type this, all the major indexes' futures are off by at least 1% and oil futures are up, nearly at $147 a barrel (so much for that "big" $9 selloff earlier this week), with less than half an hour before the U.S. markets open. To top it all off, European indexes are all down more than 1% so far.

If some good news (good can be conveniently redefined as "bad news that meets expectations" when it comes to the markets, though) doesn't come out today about earnings or M&As, we could be facing a pretty steep decline by the end of the trading session. Take my predictions with a grain of salt, but, barring some surprise good news, we could see a 2% or more plunge today. We may even see a testing below 11,000 on the DOW. If that happens, we've broken a major psychological barrier to further selling, and it could plunge even lower.

The one "bright spot" might be the dollar: it's still holding steady compared to the Euro, down a good deal from its peak earlier in the year.

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"Dump the condiments. If we are to be eaten, we don't need to taste good." -- "Visionaries" cartoon