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Sunday, August 23, 2009

Hyper-capitalism pushes Earth to edge

[Editors note: I'm going to post this article over at my enviro-blog, which I'm only now introducing here for the first time. My original intent was to separate the political from the environment, but there's simply too much common ground between the subjects, as I hope this article demonstrates.]

What kind of world are we going to leave our children? Even if you think no global warming is happening--a state of denial that must be progressively harder to live with--you can't deny something is afoot. And it's not just heating--it's cooling, flooding, raining, hailing, blowing...one extreme to another.

Rising levels of carbon monoxide, alongside methane escaping from arctic areas, has led to weather intensification. Under the new global warming paradigm, rather than hotter temperatures what we have is increased storm speed, longer and worse droughts, and extensive flash flooding caused by more rain coming down faster or harder.

Our oceans are in big trouble. Mercury levels are rising in fish, a top source of food. As more sulfur oxide enters the ocean from coal-fired emissions, the level of acidity has risen and is actually imperiling phytoplankton, the source of sustenance for krill and other tiny creatures that form the bottom of the food chain in the oceans.

The biggest problem is that we don't know what the future has in store for us. Like some horror film, we might know that something bad will soon happen but somehow can't seem to communicate that to the poor unsuspecting sap playing the role of victim.

We will need to feed more than 8 billion people here on Earth. The challenges associated with achieving that goal grow more dire and urgent with time. Already disruptions in monsoon and tropical airflows have become more pronounced, with dire consequences for those dependent on local agricultural production.

Often, it's the best of intentions that cause unforeseen consequences. In trying to save ourselves, we might end up doing as much harm as good.Recently, in a government-mandated move away from transfats, much tropical forest has been lost to palm oil plantations. Tropical forests compromise only 2% of the earth's surface area but convert more carbon monoxide to oxygen than any other terrain, the source of 50% of the world's natural reduction rising CO2.

As we get more efficient at extracting resources, species risk becoming extinct, like of overfished stocks of tuna. The stress upon nature will at some point be relieved, but with so many people's looking to an American-style hyper-capitalism as the model, we can only imagine the environmental destruction brought about by relentless consumption will continue. Must we wait 'til there's a Walmart on every block before we realize we stand to kill off the environment with our lifestyle?

It's not enough that we let our man-made machines continue to belch their Mordor-like stream of emissions into the atmosphere, gradually poisoning us and our children. And it's not that we haven't improved. But we're simply NOT DOING ENOUGH, FAST ENOUGH.

To make matters worst, our companies practice ruthless exploitation of the world's remaining natural resources. With the favoritism only money can buy, these entities ravage Mother Nature--they have no souls neither any ability to imagine or dream of a future where children run under skies free of chem-trails and mercury from coal-fired coal plants.

Big Agribusinesses, frequently using Genetically Modified Organisms (GMOs), have contaminated the food chain. Monsanto forces impoverished farmers in places like India to sign seed-buying contracts. Rare indigenous varieties of corn in Mexico have been undercut by global conglomerates as Mexican agricultural workers displaced by free but hardly fair, post-NAFTA prices go north to work in Tyson and Smithfield's sweat shops.

A Smithfield facility near Veracruz is suspected as the source of the so-called swine flu. Apparently flies bit a boy who lived near a huge pool of pig waste, made possible by Mexico's lax and bribe-ridden enforcement of environmental standards.

It should come as no surprise Smithfield was good friends with the Bush administration, and received preferential treatment when ICE raided their facility in North Carolina, removing suspected union organizers alongside other undocumented workers, then separating them from children waiting for them to get back from work. Instead they were incarcerated in preparation for deportation.

There's a large degree of social injustice in the way many multinational conglomerates operate. It's as if the operations, particularly in the Third World, are designed to dehumanize the people, and devastate indigenous peoples, who rely on the natural balance to sustain their traditional lifestyles.

Aquifers are systematically being privatized. As a result public access to drinkable water is being limited.

Water could be the next oil. Corporations could seek to cause any amount of environmental damage in the name of securing it, especially as supplies start to dwindle. We are seeing what could be the start of multiple resource wars.

A Russian campaign in Georgia could launched at any moment; through Georgia goes a strategic pipeline from the Caspian Sea (the unofficial holy grail of Central Asian oil.)

The US vies for strategic influence and power in Central Asia in what is called the Great Game. Russia would like to see the Georgian pipeline interrupted, as it is currently the only nation between the oil reserves and Western Europe. The Georgian pipeline would provide an alternate route.

We may be entering a sort of Last Stampede for the world's last, dwindling resources fought between giant corporate entities and the armed forces that represent them.

Resource wars are a popular theme at sites like Alex Jones' prisonplanet. The phrase "resource wars" has a corporate connotation to it. The strategy is corporatism, the modern equivalent of mercantilism as seen during Colonial times. Resource acquisition becomes the primary motivator for foreign policy. Projecting force must be bent around the goal of the investing class and corporations, between whom the ties are strong.

Rather than have government control our policies, corporate needs dictate where we must go to compete strategically with rivals like Russia and especially China. I've heard it said that Iraq may have been as much a war to keep out the Chinese, or the French for that matter.

Can we trust the government to protect us from swine flu? Millions of doses of vaccine have been made without a thorough screening of their potential side effects; if administered in large vials, these doses may contain Thimersol or ethylmercury as a preservative. are thought to contain Squalene--a chemical soup thought to have been responsible for permanent disability granted by the Department of Veteran's Affairs to over half of the veterans from that War.

We know that the last major vaccination program for Swine Flu in 1976--the government is careful to tell us this one is H1N1, so it's different--caused major health problems like Guillain-Barre's syndrome for a substantial number of vaccine recipients. See this article on that fiasco.

The US government can't be expected to know what will happen, but preparations should have been made. We've become a country of whiners who want their lifestyles granted to them in perpetuity, without having to worry about things like bird flu.

It's a political climate that relies on fear. Except it isn't fear about what will happen 10, 20 or 50 years down the line. All this hysteria is borne on the fixation that we, here and now, will not get that to which we are entitled. Deep down inside, most of us look only to our own needs and wants, and look at the environment as a never-ending source of bounty, no matter what we might collectively do to it. The leap in shared human consciousness to a level where we can simply coexist is simply too great a step from the fear-riddled existence we live.

I guess life presents too many challenges for all but a few to see the need to change before it is too late. Then of course resource acquisition becomes an end to itself, assuring ongoing environmental devastation as the have's take from Nature and the have-nots, who are too politically emaciated to protect themselves from the resource exploiters and escape permanent poverty.

The top 1% of American income-producers now constitute almost half of the total income in the US. Social mobility has become completely stagnant. Of course there's a link between the rising disparity of incomes to the congealing of political power in the hands of fewer people. The rich and the corporations they own dictate environmental policy. Meanwhile the ranks of the poor swell, forced to contend with whatever scraps fall from the master's table.

Unrepentant, mankind isn't only changing his ways, he's accelerating the pace of destruction. Probably the worst example is how petroleum producers are bulldozing huge tracts of Alberta to provide dirty oil on a massive tar sands project. The monetary costs of devastation aren't being borne by the destroyers, but rather to everyone who becomes dependent on cheap gas.

The more efficient oil producers are at getting, refining, and producing their product, the less incentive there is for consumers to change. We've become hooked as a drug addict would. If the oil "dealer" were to give us our product too expensively, we might look elsewhere, but as long as it comes plentiful and cheap, we ignore our constant use.

Oil use hasn't been increasing in the US. The recession might not go on forever though. And when the economy does climb out of its doldrums, it might do so too fast, like a scuba diver surfacing too quickly. This overheating could see the economy transition from recession to inflation in just a few months.

The whole boom and bust economic cycle seems to be at the heart of our problem. If cheap, oil and alternative energy development just isn't as high a priority for government. (Obama did manage to fund a major investment in alternative energy research, though.)

We may still be overly sensitive to short-term prices, as the $147 oil peak showed us a few years ago. Just a few miles from me in the Midwest a full-fledged ethanol plants rose up, then closed a short time later as oil prices collapsed.

Do we want a energy policy going from one extreme to another? I thought the whole purpose of government was to help secure the energy future of its citizens. Judging from the aftereffects of a run on natural gas development, where Exxon Mobil was hit with a massive fine for poisoning people with natural gas exploration and drilling chemicals. [I've followed environmental issues in the West on my enviro-blog, following the risks of uranium mine tailings in the Colorado river basin in my article "Nuclear Power Unsafe in Any Dose" and the downside of natural gas exploration, which took off late in the Bush Presidency.]

We--meaning not only the US, but the world--need to move down a path that's unsustainable. That's what sustainability is all about--not destroying the source of our sustenance. Rather than think like animals--individual, greedy, and aware of the group only as a secondary contraction, we must think and move as a group.

We're not there yet. The gap between theory and reality is still too large. Too many people are unaware how the collective sum of our actions is directly affects them. And too little accountability is being foisted on the major sources of pollution, who tend more often than not to be large corporations involved in resource exploitation or energy production.

Our enforcement of environmental laws is too ineffective to keep polluters from polluting. Government can hardly lead if it can't back up what it's saying with action. Yes, support for research into alternative sources of energy can move us in a positive direction. But no, we also need a coherent plan to getting us off the oil and CO2 emissions associated with fossil fuels.

The lack of a coherent conservation strategy also reveals how vested interests shape our government's energy policy. It's like the unsuccessful Drug War: we can't stop the importation if we don't tackle demand. Demand is the source of supply.

In the energy field, no conservation says that more is better, that demand reduction isn't a priority at all, and that we can simply produce more, which seems to be the rote response for every consumer demand since the dawn of the Industrial Age.

On top of the emissions created by combustion, we use huge quantities of energy to extract fossil fuels means the more energy produced, the more carbon dioxide. And even ethanol made from corn requires lots of fossil fuels, a good proportion imported petroleum, as well as natural gas-based fertilizers and fuel for running tractors, etc.

The combustion engine is taking humankind down a path towards its own destruction or to be more accurate, the emissions from oil-burning combustion engines are taking us to envrio-hell.

The gas byproducts don't need to contain as much CO2 as they do. We can simply use fuels that don't contain produce CO2 when they combust. Burning algae and bio-fuels may be the way to go.

Here the environment dictates that we do it right. We can't replace petroleum with cleaner-burning fuels--at some point we will need to eliminate fuels that cause any negative environmental consequences.

Once we've reduced mankind's carbon footprint, we can focus on to the next problem: how to move away from the combustion engine, to newer, lower-emitting, more efficient sources of power. Some might like nuclear, but it's extraction, and waste disposal costs are simply too big as I've explained in the past.

Why not shoot higher--towards something safer, with zero or virtually zero waste? Might not be technologically up to the task...yet. But if we can anticipate something, it is this: if we do nothing, our children will face a nightmarish world very much of our making.

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Sunday, August 09, 2009

Goldman Sachs profits in crisis

Interest in the flash trading scandal has been brewing across the blogosphere. The practice allowed Goldman Sachs execute a fast trade milliseconds after they'd intercepted an order flowing to the exchange. Another strategy would be to follow the flow of orders, aggregate them, than predict the type of orders that would come in.

Frontrunning orders didn't make Goldman much per order, but a high frequency of these kinds of trades provided up to $50 million per day in profits. These strategies can only be executed by members of the stock exchange like Goldman Sachs who have superfast computers linked to those of the exchange. The privilege of peeking in on orders, and executing huge numbers of transactions, led to Goldman's massive profits last quarter, over $3 billion.

The profits alone aren't an issue; the larger burden is proving that the little guy operates on a level playing field. This public sensitivity creates a public relations problem for Goldman Sachs and Wall Street but also problems for the Obama administration.

More or less controlling the financial media, Goldman has been able to deflect much of the criticism. In the corporate media, Goldman Sachs's rebound was framed as a testament to Goldman's trading acumen.

Goldman's profits really come from technical advantages and its position on the exchange.

Competitors like Morgan Stanley had a dismal quarter, and the difference was attributed to a lack of risk-taking by Goldman's competitor. The lack of faithfulness by Goldman Sachs was blamed; other companies didn't conduct trading as "aggressively" as Goldman.

A more truthful reason for the disparity in profits might be the proprietary software that fugitive executive Sergey Aleynikov wanted to sell, in a deal busted by the FBI that started the scandal.

The unprecedented gush of government capital into the big banks, achieved through TARP and Reserve discount windows, amounts to $4 trillion with some $12 trillion made available to loan. This largeness was made available not only to Goldman Sachs but several of its competitors, so why didn't they perform as well?

AIG did just turn in a profitable quarter, but I doubt we can believe that AIG is profitable considering it was on the brink of failure. Plus, the government now owns the company and has every reason to see it make money.

I'm not going to attribute Goldman's outperformance to anything other than its High Frequency Trading and improved access to cheaper capital. These advantages come at the end of a deregulatory campaign which included the repeal of Glass-Steagal, an important Depression-era law that kept banks from entering the stock market.

Regulatory reforms cause crisis

Yes, it was irresponsible bets on mortgage-backed securities that decimated Wall Street. But the crisis would never have occurred had Congress not let the regulatory environment collapse.

Combined with lax enforcement, and changes in the law which enable speculation, the Congress set the stage for the collapse by making changes in the law and regulation that had kept bankers from taking too much risk.

During the height of the crisis, Goldman and other investment houses were converted into bank holding companies, a fact brought up in the NYT article. That status, bestowed on them by Treasury Secretary Paulson, allowed these companies to take advantage of easier access to capital and looser deposit requirements-they were able to leverage speculative investments.

The corporate media downplays the role of lower regulatory standards played in spawning the crisis, as I wrote in several posts and articles like my Op-ednews.com article "Capitalism Kills Itself."

The blowup was blamed on subprime loans, although exotic mortgage-based securities and accompanying Credit Default Swaps compromised a far bigger risk than simple defaults ever could. The CDSs, packaged as insurance policies but unable to handle the risk of systemic default, would only kick in if the mortgage-backed securities they "insured" fell below a pre-set level.

Derivatives are the real market monster. Subprime constitutes only 2% of the entire derivatives market, estimated at $150 trillion in the US alone. Clearly debt on this scale could never be created through traditional lending. Instead a shadow banking system emerged to create profits from selling debt securities. Wall Street companies saw their profits skyrocket. We now know these gains brought with them larger systemic risks which were realized in 2008.

Derivatives are plagued by the fact that the price of the underlying securities can't be determined. So they will likely sit on banks' ledgers for years. We might have another liquidity crunch, a period when banks can't meet their massive obligations under the CDSs--thus triggering their default provisions. That would send the market back to the precipice, the edge of chaos. I guess that would require an even greater intervention by government.

Government and the media

With the economic crisis we are led to believe the myth--9/11 like--that what the government tells us is all we need to know. How dare us little citizens dare question what the government tells us!

Fear-peddling was used to sell the Paulson plan and bailout. It worked at convincing Americans a real economic threat existed, albeit not as effectively as 9/11 turned the nation into bunch of people terrified of impending attack, a fear stroked through the Bush administration reelection.

An approach so dependent on public indifference would fail anywhere but here. For some reason Americans are less likely to disbelieve what they're told, and so are far more gullible than Russians during the Soviet era, or Italians or Germans during their nations' fascist periods.

Sooner or later, the anti-Wall Street sentiments might convert more Americans into "-ers": screamers (disrupting town hall meetings), birthers (doubting Obama's birth credentials), tea-baggers (fiscal conservatives) and Truthers (9/11.) At some point the reasons for bitching won't matter-there will be more anger than any amount of perception management can control. Bye bye second term.

It doesn't help that the Obama confidants Summers and Geithner appear to be groveling to appease Wall Street. This cooperation may be a bigger political problem than a financial one-last time I checked Goldman didn't need to win elections to make money: they'll have their people in the next White House no matter who wins.

Politicians were told to expect the worst if government didn't further relax depository requirements and make more cash available through the Fed, through so called "trash-for-cash" trades of AAA US Treasuries for Mortgage-backed securities of indeterminate value. Congress was swayed by the appeal, in ways only a few years removed from the fear peddling we saw lead to the Iraq War and sustain the War on Terror through a prolong sequence of color-coded threat levels and chatter.

Yes, the threat of crisis was real, thanks to the years of regulatory neglect and massive profits to be had. In his testimony before Congress, Geithner claimed that the market for mortgage-backed securities needed to be kept functioning in order to prevent a system-wide collapse. According to the New York Times article linked below, "federal officials" worried about Goldman and Morgan Stanley failing if AIG did.

The broader political message behind too big too fail is the proclamation that what's good for Goldman Sachs is good for America. That patriotic message was similar to one heard through the 70s, that what was good for Chrysler was good for America. The difference between the auto bailout of the 70s and that of Wall Street is that financial activities count for 40% of our total GDP now, meaning the government has more invested in financial profits than those of the automakers, or manufacturing.

The media seemed to be on the same page as the government in anticipating the worst case scenario, and generally followed the official script that the sky was falling and we'd better open our public checkbook or the economy would collapse.

Odd it is how a similar pattern appears to be emerging with regard to the nascent recovery. Yes, green shoots may be emerging, but huge job losses don't mean things are getting better, only that the rate of decline has eased. In a media world turned upside down through corporate mergers, entertaining pessimistic thoughts might be considered unpatriotic.

So little is said in the corporate media about how the irresponsible bets on mortgage-backed securities, and the destruction of regulatory hurdles had led to the crisis, as I wrote in my Op-ednews.com article "Capitalism Kills Itself." Instead we are led to believe the myth--9/11 like--that what the government tells us is all we need to know. How dare us little citizens dare question what the government tells us!

An approach so dependent on public indifference would fail anywhere but here. For some reason Americans are less likely to disbelieve what they're told, and so are far more gullible than Russians during the Soviet era, or Italians or Germans during their nations' fascist periods.

Going too far: WTC 7

The force that undermined the regulatory paradigm was the same as that which encouraged too much risk taking: greed.

It's no coincidence that the market collapse caused such damage to the banking system, which can be quite fragile if bankers start behaving like speculators, a distinction that can hardly be made after Glass-Steagal was appealed and the floodgates to speculation thrown open.

Being too big to fail creates moral hazard, a concept which states that those who get bailed out out of trouble of their own making are bound to find themselves in trouble. Libertarians in particular assail the FDIC insurance on banking deposits, believing that bank managers will take on far higher risks with lending knowing their deposits will be guarded no matter what.

The best example of banking gone bad came during the S&L crisis in the early 80s. Then, like now, a group of politicians with ties to powerful opportunists in the financial sector weakened oversight. So by the time the crisis hit, the problem was many times greater than had malinvestment in real estate by the S&Ls been halted.

The crisis may have unravelled because of uncontrolled speculation in the energy markets. Allowed to borrow like banks, hedge funds and investment houses poured huge sums leveraged many times over into rapidly rising markets.

If you could borrow as much as you want, why not securitize the market for a physical material in limited supply, then corner it? The model for selling mortgage-backed debt had been set--applying it to commodities seemed to be working well through 2008. Rather than trade derivatives and other promises to pay mortgages, the idea was the same for other types of investment: monetizing future revenue streams to boost profits now.

We saw through 2008 an incredible run-up in commodities prices; I'd blogged about the fact Morgan Stanley was the largest owner of oil in North America! Even now hedge funds and financial firms control huge amounts of commodities, created in transaction like futures, warrants, and swaps whose prices have little to do with the underlying economic demand.

Leveraged twenty or thirty times, profits are indeed mighty when the market heads up. Then of course there's the reality they'll crash and burn should their bets go the other way.

The license to borrow became a method to ride a giant speculative bubble. Agencies like the Commodities Future Exchange Commission were overruled and regulatory enforcement collapsed, often as the result of politicians with ties to hedge funds and Wall Street exerting influence over the regulatory process.

Perception problems

The notion of saving Wall Street, the richest and most politically influential industry in America, from itself, did become fodder for the mass media. Magnifying the distrust of Goldman Sachs is the broader popular image, where Wall Street is seen as an industry favored by Congress and the White House.

A big perception problem for Goldman, and all recipients of government aid in the financial industry like A.I.G., who made over $1 billion last quarter, is the perception that things weren't as bad as they said--meaning Wall Street should never have been given the TARP money.

Added to these huge profits are obscene bonuses. Writing in The New York Times, Frank Rich asserts that:
"...nine of those bailed-out banks — which in total received $175 billion of taxpayers’ money, but as yet have repaid only $50 billion — are awarding a total of $32.6 billion in bonuses for 2009."

Goldman takes the top spot with a $700,000 average bonus for every employee for the year 2009. There are bonuses then there are bonuses. I guess everyone working at Goldman is worth so much more than everyone else, being that the Goldman people work so much harder or something.

Former Secretary Paulson's contacted Goldman Sachs via telephone during the crisis, the New York Times asserts in its article Paulson’s Calls to Goldman Tested Ethics During Crisis.

Of course the Grey Lady stooped by explaining what Paulson did was by any means expected and customary:
"It is common, of course, for regulators to be in contact with market participants to gather valuable industry intelligence, and financial regulators had to scramble very quickly last fall to address an unprecedented crisis. In those circumstances it would have been difficult for anyone to follow routine guidelines."

Paulson's conduct was apparently so customary and aboveboard as to require a stalwart defense be made against the prying inquiries of the Freedom of Information Act.

Why did Paulson contact Goldman CEO Blankfein so often--two dozen times during the week of the AIG bailout, according to the Times? AIG did owe Goldman Sachs a great deal of money, debts which ended up being paid out of TARP funds from AIG that surely would have be unavailable had the company been like Lehman Brothers, which was allowed to fail.

What if Lehman had owed Goldman Sachs billions? Would we have seen so many consultations between Goldman Sachs and the Secretary of the Treasury? Lehman was left to die out on a limb, bankrupt, while AIG was stalwartly preserved from falling off the precipice--why?

A.I.G. was bigger, but much more importantly it owed Goldman Sachs...big. Lehman's failure may have been attributed more to "natural economic forces" but these sames issue--systemic collapse--only became a priority when AIG faced its defining moment. Then and only then was too big to fail made possible, once the vested interest that line the White House walls let loose their full power in shaping the government's reaction to the crisis.

The New York Times article explains:
"Ad hoc actions taken by Mr. Paulson and officials at the Federal Reserve, like letting Lehman fail and compensating A.I.G.’s trading partners, continue to confound some market participants and members of Congress."

The relationship between Goldman and our government is long and friendly. Very friendly as a matter of fact. So friendly as it's not uncommon for top advisers in the White House to freely merge into and out of the top hierarchy at Goldman and vice versa. Even as presidents change, the cadre of Goldman advisers seems to replenish itself automatically.

Sooner or later, the anti-Wall Street sentiments might convert more Americans into "-ers": screamers (disrupting town hall meetings), birthers (doubting Obama's birth credentials), tea-baggers (fiscal conservatives) and Truthers (9/11.) At some point the reasons for bitching won't matter-there will be more anger than any amount of perception management can control. Bye bye second term.

It doesn't help that the Obama advisors Summers and Geithner appear to be groveling to appease Wall Street. This cooperation may be a bigger political problem than a financial one-last time I checked Goldman didn't need to win elections to make money: they'll have their people in the next White House no matter who wins.

More Links

See this youtube video about High Frequency Trading: Trader says markets are manipulated and volumes 'ficticious'.

See the HuffPo article Goldman Sachs: Gambling With Your Money?

I may have posted a link to the following article in my comments both here and at SmirkingChimp after last month's post: Schumer wants to curb traders' flash orders.

I think the trend is towards Congressional intervention. I just wonder if incumbents are more afraid of losing millions in corporate donations from their allies on Wall Street, and might work to water down reforms, so as to minimize the damage posed by tighter margin requirements and what the investor class might call regulatory obstacles that in fact work to stabilize markets.


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