Sunday, September 30, 2018

The Month That Was - September 2018

Sydney M. Williams

The Month That Was – September 2018
September 30, 2018

For it’s a long, long time
From May to September,
But the days grow short
When you reach September.”
                                                                                                      “September Song”
Kurt Weill & Maxwell Anderson
                                                                                                       Sung by Walter Huston
                                                                                                       “Knickerbocker Holiday,” 1938

Joseph Goebbels, Hitler’s Minister for Propaganda, once said, if a lie is repeated often enough it becomes truth. The anti-Trump crowd has mastered Goebbels’ advice. We have been told repeatedly, in increasingly shrill voices, that Mr. Trump is incompetent, self-obsessed, destructive, toxic, impulsive, petty, adversarial, ineffective. One U.S. Senator, Elizabeth Warren (D-MA), a woman who lied about her heritage, has urged Congress to remove him by invoking the 25thAmendment. Another, Senator Richard Blumenthal (D-CT), a man who lied about his experience in the Marine Corps in Vietnam, called him “an unindicted co-conspirator,” questioning the legitimacy of his presidency. Two reporters from the Financial Times, in an article on Brazil, compared Mr. Trump to Philippine strongman Rodrigo Duterte, claiming him to be anti-gay, anti-women and anti-Black. So, the question is:given his successes:the 2017 tax bill, reducing regulation, lowering unemployment, returning the capital of Israel to Jerusalem, rendering ISIS less dangerous, bringing North Korea to the table, and getting European nations to up their payments for NATO. What would his achievements have been if he had been thoughtful, constructive and competent?

Increasingly, Democrats rely on hate. Hate needs a menace, as Shelby Steele noted in a recent Wall Street Journalop-ed. What started out by Democrats sixty years ago as a fight against injustice – especially racism and segregation – has morphed into fictional enemies, ones necessary for the Left to obtain and retain power. Like Machiavelli, means, no matter how insidious or dishonest, are justified because of the “noble” end sought. Mr. Steele suggests (optimistically?)that “the source of its angst and hatefulness is its own encroaching obsolescence.” I hope so. The use of personal smears to gain political advantage has become endemic to the Left, making imperative the need for at least one prominent Democrat to stand up, using words like those uttered  by Joseph Welch in 1954, in response to Senator Joseph McCarthy (R-WI) attacking Army Secretary Robert T. Stevens: “Have you no sense of decency, sir, at long last?Have you left no sense of decency?” Democrats are not alone in the willful destruction of people’s character, but they have taken the practice to new levels. Character assassination comes directly from the playbook of Joseph Goebbels.   

Partisanship grows deeper. Every time Senator Chuck Schumer (D-NY) opens his mouth, the gulf widens. In his farewell address to the nation, George Washington warned against what he called the “…baneful effects of the spirit of party…” rooted in “the strongest passions of the human mind.” But, could he have envisioned the priggish hyperbole of those like Senators Cory Booker (D-NJ) and Kamala Harris (D-NY), as they interviewed Judge Brett Kavanaugh for a seat on the Supreme Court, or the sullying of his character by Senator Diane Feinstein (D-CA) who withheld until the last minute a letter from a woman alleging Judge Kavanaugh assaulted her as a teenager? Could President Washington have predicted the publication of a letter published in The New York Timesby “Anonymous,” disparaging the White House as an out-of-control fraternity house and the President as an impetuous, tempestuous idiot? Could the man who spoke the words, “Of all the dispositions and habits which lead to political prosperity, religion and morality are indispensable supports” have predicted a society where religion is disparaged, morality considered relative and students instructed to find their “own” truths? Could the Father of our Country have envisioned a time when his descendants would create a dystopian world where concepts of dignity and respect have become subordinated to victimization and identity politics? Have we fallen so far that rising again is not possible? Has partisanship made our legislative bodies dysfunctional? Do we no longer elect individuals who can think and act independently of party? Have we reached the end of civilization? I don’t think so, but it is easy to become discouraged. 

Now, that I’ve got that off my chest, let’s move on, or, rather, at first, backward, as the Kavanaugh plight has me thinking back more than a hundred years. In 1889, Emile Zola wrote a letter to a French newspaper accusing the government of false charges, charges based on discrimination because the accused was Jewish. This was the conviction of Alfred Dreyfus, an Army staff officer, for espionage. Zola titled his letter “J’Accuse,” as Dreyfus had no opportunity to rebut. The court’s decision was abetted in the kangaroo court of public opinion. Have we returned to that even earlier pre-Enlightenment time when Salem witch trials sent the accused, with no corroborating evidence, to the gallows? A core tenet of Anglo-American law says that an accused is presumed innocent until guilt is proven, that the burden of proof must be made by the one making the accusation, and that the credibility of the victim and accuser should not be influenced by race, religion, ethnicity or gender and that evidence must be gathered and substantiated. I worry about my granddaughters, but with allegations alone enough to permanently scar one’s reputation, what happens in thirty years to my teenage grandsons? Will they live in fear of any female acquaintance they once had? Men can be victims as well as women. It is principles of fairness, respect, civility and decency that should be in the forefront of our thinking. We live under the rule of law and within a code of rules. A civil society cannot be otherwise. It is what prevents chaos. In any event, as we well know, the political Left’s argument against Judge Kavanaugh is not about sexual harassment, it is for the soul of the Constitution. (The media, doing the Left’s bidding, is focused on the red herring of sexual assault.) The Founders believed in the separation of powers, that the role of the Court was to interpret the law and to ensure that laws passed met criteria embedded in the Constitution. The making of laws is reserved for the legislature, composed of those who are accountable to the electorate. This is what Judge Kavanaugh believes. The Left, in contrast, finds Courts convenient to make laws where and when legislatures choose not to do so.

In what amounted to a circus, a “sham” in the words of Senator Lindsay Graham (R-SC), the Senate Judiciary Committee met last Thursday to hear the testimony of a lawyered-up Dr. Ford and to listen to the rebuttal by a passionate Judge Kavanaugh. On an emotional level, both were deemed credible, but Dr. Ford, the accuser, had no corroborating witnesses. For Democrats, the goal all along has been delay, no matter the despicable means. Both individuals and their families have been through an unnecessary and emotionally stressful wringer, none of which was necessary, as the allegations by Dr. Ford were uncovered by Senator Diane Feinstein (D-CA) in early July. The Judiciary Committee whose mission is to offer advise and consent to the President on judicial nominations has become, in the words of Judge Kavanaugh, a committee whose purpose is “to search and destroy.” However, the Committee, on a Party-line basis, did vote to send the nomination to the full Senate, where Senator Jeff Flake (R-AZ), after being accosted by two women in an elevator, managed to convince Senate majority leader Mitch McConnell (R-KY) to delay a full Senate vote for a week, to give the FBI time to conduct its seventh investigation into Judge Kavanaugh’s past. Democrats are simply more ruthless than their Republican counterparts. Give them an inch and they take a mile. Should the FBI return in a week with no new information, Democrats will demand more time. The whole sorry episode could have been scripted by the Marx brothers. 

Setting aside the rude, supercilious snickering at the start of the President’s speech, Mr. Trump spoke of America’s “policy of principled realism,” which means “we will not be held hostage to old dogmas, discredited ideologies, and so-called experts who have been proven wrong over the years, time and again.” He addressed myriad topics, from North Korea, Iran (the Iran deal was a windfall for Iran’s leaders”), Syria, ISIS, trade ( “fair and reciprocal”), energy ( “reliance on a single foreign supplier can leave a nation vulnerable to extortion and intimidation”) and Venezuela (“where socialism has bankrupted the oil-rich country and driven its people into abject poverty”). In explaining why the U.S. left the U.N. Human Rights Council, why the U. S. will not recognize the International Criminal Court and why the United States would not participate in the new Global Compact on Migration, he said: “We reject the ideology of globalism, and we embrace the doctrine of patriotism.” But it is wrong to conclude Mr. Trump is an isolationist: “We are standing up for America and for the American people. And we are also standing up for the world.” He added: “Sovereign and independent nations are the only vehicle where freedom has ever survived, democracy has ever endured, or peace has ever prospered.” The speech should be read it in its entirety, not left to interpretation by biased reporters and commentators.

Far-left candidates in at least three northeast states did not do well. Governor Gina Raimondo defeated challenger Matt Brown in Rhode Island’s Democrat primary. She will face Republican Allen Fung. In New York, despite multiple corruption charges, Governor Andrew Cuomo easily beat Cynthia Nixon in the Democrat primary. In Delaware, incumbent Senator Tom Carper, a moderate Democrat beat progressive newcomer Kerri Evelyn Harris for the U.S. Senate nomination. He will face Kevin Wade. However, Progressive Boston city councilwoman, Ayanna Pressley, did defeat incumbent Representative Michael Capuano, in the Democrat primary for a Congressional seat in that State’s Seventh Congressional District. Barring a fluke (there is no Republican challenger), Ms. Pressley will become the first Black individual to represent Massachusetts in the U.S. House of Representatives. Hurricane Florence, downgraded to a category 1 when it hit the North Carolina shore, killed 47 and did at least $50 billion in damage, mostly in North and South Carolina. Additionally, it was responsible for the deaths of an estimated 5,500 hogs and between 3 and 4 million chickens and turkeys. Most of the damage was caused by flooding, due to heavy rainfall and the slow-moving nature of the storm. Some rivers, like Cape Fear River, did not crest until a week or more after the hurricane made landfall. In Micronesia, an Air Niugini flight on its approach into Weno’s airport crash-landed in a lagoon. All 47 passengers and crew were safely evacuated. 

Theresa May showed backbone after being humiliated by smug and insincere European elites, including Council President Donald Tusk and French President Emmanuel Macron, in Salzburg where she presented her Chequers plan for Brexit. It was rejected forthwith. “We are at an impasse,” said Mrs. May, upon returning to London where she stood ready to leave the EU without a deal. While Tory Eurosceptic MPs endorsed her, the Left claimed she was pandering to the Right. In a rebuke to Viktor Orban, Europe’s parliament voted to censure Hungary, warning against growing nationalism (by definition, a threat to the EU), but in fact reflective of immigration policies that have overwhelmed Europe. Sweden Democrats, a right-wing party, continued to gain ground, winning 17% of the vote, making it difficult for the Social Democrats to form a government. Viktor Orban and Italy’s Interior Minister Matteo Salvini pledged to obstruct Europe’s agenda on migration. (European elites, not being personally affected, have been impervious to the consequences of their immigration policies.) 

The world’s largest Muslim country, Indonesia, a country run by secularists, may be moving toward extremism. A radical cleric, 75-year-old Ma’ruf Amin, was chosen by President Joko Widodo to be his running mate in next year’s election. Syria, according to reports, has approved the use of Chlorine gas to cleanse the last rebel stronghold in Idlib, the northwest province that contains three million people, including 70,000 opposition fighters. If used, President Trump has promised retaliation. In Xinjiang Province, China’s gateway to Central Asia and a key part of its BRI initiative, over a million Uighur Muslims have been moved to re-education camps – a euphemism for jails. On the other end of the political spectrum, in the Maldives, democracy prevailed. Opposition candidate Ibrahim Mohamed defeated President Abdulla Yameen Abdul Gayoom, who had been moving his country closer to China. Denuclearization of the Korean Peninsula moved closer to reality, with Kim Jong-un’s offer to decommission a plant that makes fissile material for nuclear weapons, an offer contingent on unspecified concessions on the part of the U.S. The United States is defunding UN programs that aid Palestinian terrorists, closing the PLO office in Washington and threatening to impose sanctions against the International Criminal Court, as “ineffective and unaccountable,” a jurisdiction the U.S. does not recognize. 

The United States Census Bureau issued its annual report on the U. S. economy. It showed that real medium household income increased 1.8% to $61,372 between 2016 and 2017, while the poverty rate dropped 0.4% to 12.3%, with improvements across all sectors, including among Hispanics and Blacks. The share of people earning less than $15,000 fell to 10.7%, the lowest level since 2007. Households making more than $150,000 rose by 0.7% to 14.7%. Higher incomes lifted a million people out of poverty in 2017. Consumer confidence rose to a 17-year high. In contrast, between 2009 and 2014 median household incomes stagnated and poverty increased, as the expansion of welfare programs reduced the incentive to work. Unshackling regulation and a reduction in corporate and personal taxes have lifted animal spirits. On the negative side, an immediate effect has been an increase in the federal deficit. On the positive side, a one percent increase in GDP growth will increase annual GDP by about $190 billion and create about 1.5 million jobs. Faster GDP growth will, in time, increase federal tax revenues. The deficit is a spending problem, made worse by the fact that about 85% of all spending falls into three categories difficult to reduce: mandatory (61%), which includes Social Security, Medicare, Medicaid and other entitlement programs; defense (16%), and interest (8%). Higher interest costs are a given. A dangerous world means we cannot cut back on defense. Unless and until Congress tackles mandatory spending, the deficit will continue to grow. It is expected to rise from $665 billion in FY 2017 to $833 billion in FY 2018 and $985 billion in FY 2019 – a frightening prospect in a time of prosperity. The Federal Reserve raised the Fed Funds rate for the third time this year, to 2.25%. Concerns over Iran caused the spread between Brent and West Texas Intermediate crude prices to widen. For the month, the DJIA rose 1.9 percent. Volatility remained subdued. Yield spreads narrowed.

The European Central Bank announced plans to wind down its €2.5 trillion quantitative easing program, by halving its monthly bond purchases to €15 billion a month and phasing them out entirely by year-end. In his last State of the Union speech, Jean-Claude Juncker, president of the European Commission, said he vowed to turn the Euro into a reserve currency to rival the U.S. Dollar. He was referring, particularly, to energy purchases, which are denominated in Dollars, on imports from Russia and the Middle East. A report from the U.S. Energy Information Agency on September 12 noted that the United States is now the largest producer of crude oil in the world, surpassing Russia and Saudi Arabia. NAFTA’s fate was unknown as this essay was published, but it appears that the U.S. and Mexico are close to a deal.

Typhoon Mangkhut killed sixty-nine people in the Philippines and Hong Kong. A 6.7 magnitude earthquake hit the northern Japanese island of Hokkaido, killing thirty-nine. A Tsunami hit Indonesia, killing over 400. Seven were injured, including two British tourists in a knife attack in Paris. Youssef Najah was arrested, terrorism was not cited as a motive. Brazil’s Natural History Museum was destroyed by fire. The HMS Endeavor was discovered off the coast of Rhode Island. Captained by James Cook, the ship was the first European vessel to sail into Botany Bay, in what is now Sydney, Australia, in 1770. North Korea’s 70th Anniversary parade was noticeable for the absence of any intercontinental ballistic missiles. Of the 2.3 million Venezuelans who have fled their country, one million have arrived in Colombia, a country of 50 million. President Trump is considering further sanctions against the illiberal regime of Nicolas Maduro. Liberia is investigating the disappearance of more than one million newly printed bank notes, worth $104 million, or about five percent of the country’s GDP. According to a report in The New York Times, ISIS, which carried out fourteen successful attacks in North America and Europe in 2015, twenty-two in 2016 and twenty-seven in 2017, has only managed four in the first eight months of this year. The scale, in terms of deaths, has also fallen. An agreement between the Vatican and the Chinese government gives Beijing the authority to name Catholic Bishops in China. After an eighty-year run, Volkswagen AG said it was halting production of the Beetle. 

With politics hanging heavy, Senator Corey Booker (D-NJ) provided an unintended humorous interlude with his “Spartacus moment.” Atlanta’s Mayor Keisha Lance Bottoms signed an executive order requiring all Immigration and Custom Enforcement (ICE) detainees be transferred out of city custody immediately. California’s electric power prices have risen 25% since 2013, to a level 41% higher than the national average. Senator Elizabeth (Pocahontas) Warren (D-MA) proposed an Accountable Capitalism Act, which would mandate that every new and existing public corporation with over $1 billion in revenues be required to obtain a federal charter. (There are about 400 qualifying companies in the U.S.) Representatives of employees would have to fill forty percent of all board seats. And most of us thought shareholders elected directors to represent their ownership interests! Upsetting Beijing, the U.S. approved the sale of $330 million worth of military goods to Taiwan. Bill Cosby was sentenced to three to ten years in a Pennsylvania state penitentiary. Bob Woodward’s new book, “Fear: Trump in the White House,” was published. It prompted a one-word response from White House Chief of Staff John Kelly, as regards comments he is alleged to have made: “Bullshit.”

Two shootings in Alabama left one dead and eleven wounded. Two shootings in Bakersfield, California left seven dead and four wounded. Breaking with tradition, ex-President Obama re-entered the political arena, with a speech to students at the University of Illinois at Urbana-Champaign. He cast his net wide: “The politics of division and resentment and paranoia has unfortunately found a home in the Republican party…in an appeal to racial nationalism that’s barely veiled.” Really? Representative Chris Collins (R-NY), indicted on insider trading charges, decided to stay on the ballot, reversing an earlier decision. Fifty million Facebook accounts were hacked. Following a controversial penalty against her, Serena Williams lost to Naomi Osaka in the U.S. Open. In the men’s finals, Novak Djokovic defeated Juan Martin del Potro. Tiger Woods won his first major tournament in five years. In the movie “The First Man,” a story of Neil Armstrong and the first moon landing, Ryan Gosling, a Canadian, omits him carrying the American flag, which caused Chuck Yeager to say: “That’s not the Neil Armstrong I knew.” Rewriting history is fine for writers of fiction but does a disservice to those who are interested in the past, warts and all. At a memorial service for the victims of 9/11 in Shanksville, Pennsylvania, President Trump spoke movingly of the forty crew and passengers aboard that doomed flight: “They boarded the plane as strangers and they entered eternity linked forever as heroes.”

Death made its appearance. Vietnam President Tran Dai Quang died at 61 after a serious illness. Actor Burt Reynolds died at 82. Richard DeVos, founder of Amway and father-in-law of Education Secretary Betsy DeVos died at 92. Also dying at 92 was Freddie Oversteegen, who as a brave, teenage Dutch resistant fighter lured Nazis into secluded wooded areas where she dispatched them. And I lost a good friend in Bob Wood, a gentle, gentleman who died at 89.

To return to my opening paragraphsThe Left wallows in hypocrisy. In a little over half a century, they have gone from advocates for sexual liberation to a preference for nunnery-like behavior The New York Timeshad an article in which they wrote that Trump had galvanized women to action, that “…the battle over his [Judge Kavanaugh’s] confirmation has swelled into an event of titanic consequences in the nation’s evolution on matters of gender and women’s equality.”Nothing was said about discovery of truth, or of the need for mutual respect between genders in civil society. They did not explain why women are more credible than men, nor did they wonder at the lack of corroborating evidence. They never asked why the more repugnant President Bill Clinton (in matters sexual)did not elicit similar responses from women twenty years ago. The answers lie in false narratives, perpetrated by Democrats who tell us that Republicans don’t support women’s rights. It is a lie repeated ad nauseum by those who believe words speak louder than actions. A lie becomes truth, as Goebbels noted. As President Trump would say, sad.”

We move on to October, a time when nature prepares for months of hibernation. Let’s hope it also gives birth to peace and civility. But I fear that is more a wish than a hope.

Monday, September 17, 2018

"The Credit Crisis - Ten Years Later"

Sydney M. Williams

Thought of the Day
“The Credit Crisis – Ten Years Later”
September 17, 2018

Capitalism without bankruptcy is like Christianity without Hell.”
                                                                                                            Frank Borman (1928-)

A year ago, it felt like we were on a river raft.  The sound of white water was clearly audible,
 yet the river under our craft was flowing gently, inducing a care-free sense. Today, we are
 in the midst of rapids and the din is all about us.  We do not know how far the rapids
 will extend or what the descent will be, but at least the anticipation is behind us.”
                                                                                                Sydney Williams
                                                                                                               “Market Note – Year End 2007”

What we know about the global financial crisis is that we don’t know very much.”
                                                                                                            Paul Samuelson (1915-2009)
                                                                                                            American economist

While it is embarrassing to include one of my own quotes, I wanted to show that the credit crisis did not just appear. There was, during the years preceding it, a culture of fiscal permissiveness, embedded in vague but enticing political promises, the greed of bankers and housing developers, and a willful naivete on the part of individual and institutional investors. Warning signals abounded, including equity and high-yield bond markets that had been in decline for eleven months, and Treasuries that had risen. No one, though, had any idea how perilous the situation would become. September 15 marked the 10thanniversary of the Lehman bankruptcy, the pivotal moment of the crisis. That Monday the DJIA closed down 4.42%. The market then rallied, faltered and continued to decline. By the end of the year 2008, the Averages were 23% lower than they had been on the Friday before the Lehman collapse. They continued to decline through March 9thof 2009. For a sense of perspective, though, it is important to recall that the market was already down 19% on September 12thfrom where it had been a year earlier. The “canary in the coal mine” had been singing for eleven monthsNevertheless, the shock of that day – and what it portended – was palpable. 

The financial system came close to unfurling that September day. Looking back, what is remarkable is that it held together. Financial markets and our system of collections and payments rely on confidence – that borrower A will be able to repay lender B, at a specified rate within an allotted time, that a dollar earned will hold its value, at least until it is spent or invested. Confidence is both whimsical and critical. People still debate the rightness in letting Lehman go. After all Bear Stearns had been saved – sold to J.P. Morgan in March for a price just over tangible book value – and funds were subsequently provided other investment banks and financial institutions, including Goldman Sachs, Morgan Stanley and AIG. Fannie Mae and Freddie Mac had been placed into conservatorship. Why Lehman? Would the system have been better off if Lehman had been allowed to continue? The answer to the second question is known only to Mr. Paulson. No one knows the answer to the third

It may have been that officials wanted to test the resilience of markets, and Lehman was served up as the sacrificial lamb? I don’t know. But, that its bankruptcy did not precipitate an unwinding of the credit system was due to quick action on the part of the Bush Administration, especially Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. That it was not prelude to a global depression was due to policy decisions by the outgoing Bush Administration and the incoming Obama Administration. Second-guessing and Monday-morning-quarterbacking cannot replace the urgency of that moment. Might-have-been questions cannot be answered with assurance. As JP Morgan Chase Chairman Jamie Dimon said in 2010, “You would still have had terrible things happen,” if Lehman had been bailed out.

Nevertheless, if the financial system – a U.S. Dollar based one – had been on the verge of total collapse one would have though gold would have rallied, but it did not. Even though New York was ground zero, it was the Dollar that rallied. Investors moved into the safety of U.S. Treasury Bills. The yield on Three-month Treasuries declined from about 1.6% before the Lehman collapse to 0.11% at the end of 2008, with a steepening yield curve. (Interestingly, Three-month Bills remained at that level – and even lower – through the third quarter of 2015, suggesting confidence in risk assets, despite a rising stock market, were slow in re-building. In reality, however, those rates reflected a Federal Reserve that kept rates subdued through active purchases of Treasury Bills, Notes and Bonds. It has only been in the past year and a half that the rate on the Three-month exceeded one percent.) However, in the fall of 2008 one measure of perceived credit risk began to recover: the TED spread – the difference between Three-month U.S. Treasuries and Three-month LIBOR (London Interbank Offered Rate). LIBOR is the benchmark for global interest rates and is used for most short-term commercial loans. It widened from 107 basis points on June 30, 2008 to 314 basis points on September 30, and then declined to 131 basis points by the end of the year. (Normal would be between 25 and 50 basis points.) While stocks continued to fall into early March 2009, High-yield bonds, whose rates exceeded 20% at the end of November 2008, had rallied to offer yields of 17.4% by the end of 2008. The economy was still in recession and stocks had another 20% decline ahead, but it seemed clear that the worst of the crisis had passed. 

The allowing of Lehman to go bust and the cause of the collapse remain under debate. There are those who claim that Lehman was disliked, as an outlier on the Street and that Henry Paulson, a Goldman alumnus, had no love for Dick Fuld, then chairman of Lehman. I don’t know, but I suspect they may have wanted to test the system and Lehman was handy. Keep in mind, they were operating in unchartered waters. Fear of the unknown, I suspect, prevented the Fed and the Treasury from earlier letting Bear Stearns go under, a mistake I thought at the time, and still do. As for the other major banks, because of their size and the domino-like interlocking assets and liabilities on their balance sheets, letting them go most assuredly would have condemned financial markets to a meltdown that would have destroyed economies for a generation. 

As for responsibility, Congress and the media placed the largest portion of the blame (and still do) on greedy and unscrupulous bankers, men and women who had devised new and unregulated financial instruments, leveraged balance sheets to absurd levels, skirted rules and took advantage of innocent, ignorant and naïve wannabes. But the truth is we all got sucked into the belief that home ownership was a right, not a reward for thrift and hard work – that home prices would move ever higher. We all bear some responsibility for what happened. Banks may bear the brunt of the blame, but they were aided by politicians and abetted by millions of willing victims. Thinking back on that date ten years ago, should remind us that there are consequences for actions taken and caution signs ignored, that we must take responsibility for the decisions we make, that if a salesman promises something that sounds too good to be true, it probably is too good to be true, that any investment that offers a return in excess of the Three-month Treasury involves risk. In the aftermath of the failed Bay of Pigs operation, President Kennedy said, “Victory has a thousand fathers; defeat is an orphan.” The crisis that cumulated with the failure of Lehman on September 15, 2008 had millions of fathers, though most shunned responsibility, preferring to place all the blame on Wall Street. But greed infected us all. To ignore the role played by home builders, developers, mortgage companies, GSEs (government sponsored enterprises, like FNM and FRE), politicians, investment funds seeking the highest returns, and the roles we individually played, as well as investment and commercial banks, is to condemn us to play the role of Sisyphus, to endlessly repeat the tragedy.

Politicians have always wanted to improve the lives of their constituents. Following a pattern initially set during the Carter Administration (The Community Reinvestment Act of 1977), George W. Bush, in 2003, set a goal of increasing minority home ownership by 5.5 million by the end of the decade. It was a policy adopted by both political parties. Who would not wish that every American who wanted to own a home be able to have one? Banks were penalized for discriminatory lending practices – “red-lining” – against minorities and the poor. Mortgages with no down payments on inflated home prices became common, including “Ninja” mortgages (no income, no job, no problem), adjustable rate mortgages (ARMs), balloon mortgages. Financial derivatives came into their own during the 1980s. By the late 1990s and early 2000s they were being used in creatively destructive ways. CDOs (collateralized debt obligations) allowed lenders and borrowers to mitigate changes in interest rates. By 2006 the percent of all mortgages that were subprime were 20%, versus 8% two years earlier. According to Wikipedia, by 2008 90% of all subprime mortgages were ARMs. The ratio of household debt to disposable personal income rose from 77% in 1990 to 127% in 2007. And, by 2007, the total value of all CDOs exceeded the value of all underlying bonds.

Looking ahead as to what might cause the next crises, JP Morgan Chase’s chief risk management strategist Ashley Bacon was quoted in a recent article in the Financial Times. It is likely to be “some form of operational failure, from within or without, like a cyber-attack or a conduct issue.” In a 16-page spread in last Sunday’s New York Times, cyber threats were also cited, along with student loan debt and an increase in mortgage originations by nonbanks, like private equity, hedge funds and mortgage companies. The truth is, we don’t know through which door the devil will enter. We only know the system is not immune to bad people, poor decisions and greed. Glenn Hubbard, Dean of Columbia Business School and former chairman of the Council of Economic Advisors under President George W. Bush, noted in a recent op-ed in The Wall Street Journal that the post-Lehman debate centered on crisis prevention, instead of crisis response. The crisis has made banks stronger. They are better capitalized, with more equity. They are less leveraged. Their assets bear less risk and are less dependent on short-term liabilities, like commercial paper and re-purchase agreements. But, Mr. Hubbard is right. We should debate the merits of various responses: limits on leverage, capitalization ratios that vary with size, the Volcker Rule, the composition of assets and liabilities, regulation of non-bank lenders and reinstitution of Glass-Steagall. And we must be alert to all things that might go wrong. But the likelihood is that a future crisis will come from a different direction.

Capitalism is under threat today, from socialists on the left and populists on the right. What they ignore is that capitalism has been a force for good for two hundred years. In conjunction with political freedom, it has raised living standards and reduced poverty for millions of people. Reformers should be careful not to kill the goose that lay the golden egg, which is why we should be worried by the lurch toward Socialism by left-leaning extremists. The protection of an institution, or an individual, against poor decisions precipitates moral hazard and only delays the inevitable. Innate to capitalism is risk and reward. The governor that controls excess speculation is the threat of bankruptcy. It should not be removed. The concept of “banks too big to fail” is oxymoronic. If a bank is too big to fail, it is too big. Yet, since the Lehman collapse, the three largest banks in the U.S. have become bigger, controlling $6.8 trillion in assets today versus $4.2 trillion in 2007. According to an analysis of regulatory data by The Wall Street Journal, those three banks controlled 20% of all checking deposits in 2007. Today, they have 32%.  

Nevertheless, as we look back on that September morning, we should be thankful the system held, and especially so to those in charge. While millions suffered, and dozens of perpetrators went unpunished, the worst did not happen. We got a chance to play another dayFinancial crises and economic recessions have not gone the way of the Dodo bird. My advice: Ignore promises of wealth without effort and beware of excesses wherever they appear.

Tuesday, September 11, 2018

Burrowing into Books - "Lord of the Flies"

Sydney M. Williams

Burrowing into Books
Reviews of Selective Readings

                                                                                                                        September 11, 2018

“Lord of the Flies”
William Golding

Evening was come, not with calm beauty but with the threat of violence.”
                                                                                                            Lord of the Flies, 1954
                                                                                                            William Golding (1911-1993)

It behooves us all, from time to time, to re-read those books we read when young, to see if they still hold our attention as they once did, to discover if their words still have their power, if lessons garnered today are different from ones learned as adolescents. An additional benefit, for those with children and grandchildren, is that doing so allows a connection with youth, for many of these books are included on summer reading lists.  Over the past five years I have read, or rather re-read, Moby DickHuckleberry FinnThe Lord of the Ringstrilogy and two of the Narnia Novels, along with half a dozen Dickens’ and other classics, like Lewis Carroll and A.A. Milne. Golding’s 1954 novel is another such example.

The story is disturbing, but apt at a time when bullying has become, if not more frequent, at least more discussed and when children are coddled, delaying the rigors and rules of adulthood. “Safe places” protect youths from uncomfortable words, but they leave them ill-prepared for the harshness and reality of adulthood. And we have all known children like Piggy who are teased without remorse; the quiet and illusive Simon; Ralph, who commands respect, and bullies like Jack. We have all been witness – adult and adolescent alike – to emotions that devolve into mass hatred. It is a sense of “there, but for the grace of God, go I” that makes this story so personally compelling.

William Golding – born in England in 1911 and Oxford educated – is the anti Jean-Jacques Rousseau, the 18thCentury French philosopher who believed that a child was born with an immaculate spirit, untouched by culture and society. He wasmankind before tempted in the Garden of Eden. Golding wanted to correct that image – to show how young boys would behave when alone, without the influence of adults or any societal guidance. He based the story on an unsentimental understanding of what he had been like at the age of twelve or thirteen – that he could be kind and decent, but that he could also be monstrous: That evil is not learned, it is inherent – that devilish traits remain hidden behind a façade of rules necessary to live in civilized company. In his book, 12 Rules for Life, Jordan Peterson wrote: “Bullying at the sheer and often terrible intensity of the schoolyard rarely manifests itself in grown-up society. William Golding’s dark and anachronistic Lord of the Fliesis a classic for a reason.”

Lord of the Fliesis the story of boys surviving alone, amidst chaos, division and friendship, for a few weeks on an uninhabited island in the south Pacific. The plane, which had carried the boys, crashed. No adults survived, only a few dozen boys aged six to about thirteen. Ralph and Jack became leaders, reflecting opposing and conflicting traits: “Ralph,” as Stephen King wrote in the introduction of my copy, “embodied the values of civilization and Jack’s embrace of savagery and sacrifice represented the ease with which those values could be swept away.” Jack asks: “Who cares about rules?” Ralph responds he does: “Because rules are the only thing we’ve got.” A conch shell is used to assemble the boys. But a conch cannot substitute for the discipline of adults. While most young readers identify with Ralph, Piggy is the most memorable. Perhaps, because his character is more fully developed. Perhaps because the reader understands his physical vulnerability, despite his intelligence, condemns him to a tragic end.

The boys are eventually found. Smoke from an out-of-control fire alerts a passing British naval cruiser. Golding leaves us with these words: “Ralph wept for the end of innocence, the darkness of man’s heart, and the fall through the air of the true, wise friend called Piggy.” 

World War II, which had concluded less than a decade earlier, had shown the brutality of totalitarianism. Its opposite, anarchy, is also barbaric, which is what Golding wanted readers to understand. Civilization depends upon navigating the straits between the Scylla of the former and the Charybdis of the latter. What is wanted is a society that relies on common-sensical rules (laws), ones that reflect the will of the people, are binding and judiciously enforced, so that liberty is ensured and chaos avoided. What the boys learned (and hopefully what readers will as well)was what James Madison wrote inFederalist 51”: “If men were angels, no government would be necessary.” But they are not, so it is


Saturday, September 1, 2018

"The Month That Was - August 2018"

Sydney M. Williams

The Month That Was – August 2018
September 1, 2018

August rain: the best of summer gone,
And the new fall not yet born.
The odd uneven time.
                                                                                                      Sylvia Plath (1932-1963)
                                                                                                      The Unabridged Journals of Sylvia Plath, 1952

As we consider the news, it is worth a reminder that bias, arrogance and hypocrisy are natural adjuncts of the media. Too often, in recent times, they have become rent-seekers, compromising integrity for collusion with those they are supposed to cover. Politicians have many of the same attributes, but for them it is primarily about power. Control of the federal bureaucracy wields enormous influence and, as we have seen, can be self-sustaining across succeeding Administrations. In 2016, the Presidential elections was not about finding the angel hidden among heathens, but deciding which candidate was the least Beelzebub-like, in terms of character and values. But also, which espoused policies most like one’s own. No matter whether one is conservative or liberal, we should all be able to agree that freedom, progress and well-being hinge on economic growth. Elections determine which policies allow for the greatest growth that does the most good for the most people, in terms of providing opportunity, encouraging self-reliance and lifting people from poverty, while doing the least harm in terms of safety and the environment. Admittedly, that is a judgement call and people can and will disagree. Nevertheless, Mr. Trump was my choice in November 2016. Nothing I have heard or read since causes me to re-think that decision.

Apart from primaries in a number of states, the conviction of Paul Manafort and the guilty plea by Michael Cohen, real news, as is typical in August, was sparse – a lot of chaff but little wheat. (The midterm elections will begin in earnest after Labor Day.) Europe continues to struggle over Brexit, Greece, Poland, Turkey and illegal immigration, all of which manifest the coercive and undemocratic tendencies of Brussels-quartered bureaucrats. China continues to chase its Belt and Road Initiative, while bullying its neighbors. Terrorism and war in the Middle East are unending. The domestic economy is strong. The bull market in stocks persisted. A trade deal between the U.S. and Mexico was announced. Wildfires in California burned tens of thousands of acres, destroying hundreds of homes. The Angel of Death appeared and bore away some good people, including the heroic John McCain. And Mr. Trump remained a lightning rod – a willing one – for harried Democrats who struggle to find a coherent message, apart from disparaging Mr. Trump with hate-filled messages. It is ironic that the party that bears the name “democrat” refuses to accept the outcome of a democratic election almost two years ago. They claim Mr. Trump is a fascist, yet he has curtailed regulations, reduced taxes and dismantled a federal bureaucracy that had been built stronger by Mr. Obama. Abnegation of power is not the way of tyrants. As well, the Left accuses the President of obstructing free speech, while newspapers, TV, cable news shows, and social media are afire in opposition, and their comrades on college campuses shut out conservative speakers. While real news was light, the air was thick with irony and hypocrisy.


However, the world did not stand still. Both political parties in the U.S. geared up for tough campaigns, ones in which Democrats have a slight, but not conclusive, edge. What Republicans should do is run on domestic and foreign policy accomplishments of the Trump Administration – deregulation, the tax cut, a strong economy, judicial appointments, and a rekindling of a grudging, if unaffectionate, respect from abroad – while Democrats can only run on an anti-Trump and pro-impeachment agenda. Michael Barone recently wrote that Mr. Trump “is getting the kind of economy he promised, with growth targeted at the downscale (including Blacks and Hispanics) rather than the upscale…with growth spreading to regions that have seen little of it for decades. If Democrats do take the House in November, they will most certainly vote to impeach Mr. Trump. But, as The Wall Street Journal editorialized on August 24th: “They simply don’t want to admit this before the election lest they rile up too many deplorables and independents who thought they elected a President for four years.”  A special election was held in Ohio to fill the Congressional seat vacated by Republican Pat Tiberi. The race was won by Republican Troy Balderson, with less than a one percent margin, over Democrat Danny O’Connor. The two will face off again in November. Primaries were held in a dozen or more states. In outspending their opponents by 5-1, right-to-work laws in Missouri were defeated. In Connecticut, the November election will pit self-made, political outsider Republican Bob Stefanowski against Democrat Ned Lamont, the Greenwich-based, political insider and great-grandson of J.P. Morgan’s senior partner Thomas Lamont. (Sixty years ago, Stefanowski would have been a Democrat and Lamont a Republican!) In Kansas, in another close race, Kris Kobach, a Trump supporter, defeated current Governor Jeff Colyer for the Republican nomination. He will take on Democrat Laura Kelly in November. Democrat Andrew Gillum, progressive and underdog, will become the first African-American to run for governor in Florida. Mr. Gillum will face Republican Ron DeSantis.

The Mueller investigation received plaudits when a court convicted Paul Manafort on eight felony charges, when Michael Cohen pleaded guilty to eight violations of banking, tax and campaign laws, and with the granting of immunity to executives at the National Enquirer regarding the Cohen probe. But it is the partisan manner in which the investigation is being conducted and the inequitable way in which the law is being enforced that bothers Americans. Kimberly Strassel put it well in The Wall Street Journal: “Mr. Mueller seems blind to the national need for – the basic expectation of – a thorough look into all parties. That omission is fundamentally undermining any legitimacy in his findings. Lady Justice does not wear a blindfold over only one eye.” In an essay titled “The Double Standards of Postmodern Justice,” Victor Davis Hanson wrote: “What bothers them [the American people] is that our guardians of morality do not offer any principles to explain why some people’s lives are harmed or destroyed and others’ lives are not.” It is this misuse of power and the lack of fair and disinterested methods that concern and divide Americans. That there was collusion in 2016 is clear to all but the willfully blind. But the collusion that took place was not between the Trump campaign and the Russians; it was between the Clinton campaign and agencies of the federal government – the FBI, the NSC and the CIA – something far more damaging to the principle of democracy.


In foreign affairs, it was not the storms encountered – hurricanes hitting Hawaii or earthquakes in Indonesia – but shifts in tectonic plates that should command our attention. Saudi Arabia and Canada are embroiled in a tantrum over human rights. After overthrowing long-time dictator Robert Mugabe in an election last year, Zimbabwe’s new PM Emmerson Mnangagwa has adopted the old dictator’s ways. His security forces killed at least six opposition protesters. The Trump Administration used economic warfare to further America’s interests. Further sanctions against Iran were announced: The barring of Iran purchasing US and European aircraft and the barring of imports of Iranian oil and gas by Western states. In the meantime, the Rial, has fallen 50% against the U.S. Dollar this year. Additional tariffs and sanctions were imposed on Turkey. Their currency, the Lira, has declined 45% since the end of 2017. An article in the Financial Times highlighted the concern over the social welfare state of Sweden. Social Democrats, who have been in power since the fall of 1914, are “almost certain to receive their lowest share of the vote in more than a century,” in an election to be held in September. The reason: immigration policies. They support a “salad bowl” approach, a policy that encourages state-enabled segregation. Sweden’s problems should serve as a warning to those in the U.S. who favor open borders. Immigration policies should serve the interests of the nation. “They should not be viewed,” as Professor Edward Erler of California State University said last April at Hillsdale College, “as acts of charity to the world.” Indicative of the wondrous ways of Socialism, Venezuela, the country with the greatest proven oil reserves in the world, is expected to see their economy shrink by 18% (the third year in a row of double-digit declines) and inflation is expected to reach 1,000,000% according to the IMF. Exodus and starvation are constant companions of the Venezuelans.

But the tectonic shift during the month continued to be China, with their Belt & Road Initiative, which will lead them, they hope, toward global hegemony. Mahathir Mohamad, Prime Minister of Malaysia warned against “a new version of colonialism,” as he expressed Asian unease toward China’s increasing economic and political influence. In August, China vied for a role in the reconstruction of Syria, a country whose civil war has made it the nexus for possible global confrontation. Keep in mind, Syria was the western terminus of the old silk road. From the coastal city of Latakia to the Lebanese deep-water port city of Tripoli is only about 100 miles. Russia is also involved in Syria, as are two other China allies, Turkey and Iran. As Syria recovers, what will be the role of the West? Will Syria become the 21st Century’s Serbia? China, a country of 1.4 billion people and an economy second only to ours, offers emerging nations an alternative to liberty and free-market capitalism. It is not only vigilance that is wanted on the part of the West, but strength. For example, ensuring that the Malacca Straits and the South China Sea remain open for global trade.


In August the current U.S. bull market became the longest on record. Contributing factors include an acceleration in GDP, which reached 4.2% in the second quarter and second quarter S&P 500 earnings that rose 23.5%. (Indicative of the economy’s strength, GDP has risen in 35 of the past 36 quarters.) Consensus estimates (which are almost always wrong) for 2018 and 2019 put the current price/earnings multiple for the S&P 500 at 20X and 18X respectively. Stocks, as measured by the DJIA, closed up 2.2%. Yield spreads narrowed, with the Two-year and the Ten-year closing at yields of 2.63% and 2.85% respectively. (A year ago, 85 basis points separated them.) Relatively high equity valuations and narrowing yield spreads are like cautionary yellow flags at the Jersey beaches. On August 2nd Apple became the first trillion-dollar company, roughly the value of all U.S. publicly traded stocks in 1984. The price of Bitcoin continued to decline, falling 7.8% during the month. Central bankers held their annual conference in Jackson Hole, where Fed Chairman Jay Powell compared the challenges of U.S. monetary policy to “navigating by the stars.” (I trust he did not mean that literally.) The Fed will continue to nudge rates higher but said they would “err on the side of caution. Among the questions they cited: Why have wages and inflation failed to ignite? (Wage growth is good. Inflation is bad.) Regardless, rates remain historically low, providing little or no cushion should the economy again slip into recession, which at some point it will.


In other news, The New York Times reported about the effect of the tax bill on high-income New Yorkers. They wrote of the harm to high earners in limiting deductions for state and local income taxes – a combined rate of 12.74% for the city’s highest earners – against federal income taxes. The article noted that New Yorkers, especially the wealthy, were moving to Florida. Yet the Times article included the ironic phrase: “While the legislation [the tax bill] largely benefits the wealthy and corporations…” Brooks Koepka became the first golfer since Tiger Woods in 2000 to win both the United States Open and the PGA Championship in the same year. The Mueller investigation etched deeper and more partisan when Michael Cohen hired Lanny Davis. Mr. Cohen once said he “would take a bullet for Mr. Trump.” Now he has hired a former consigliere for the Clinton family, a scenario only Mel Brooks could have dreamt up. Archbishop Carlo Maria Vigano, former Vatican official and diplomat, accused Pope Francis of covering up sexual allegations against former Archbishop Theodore McCarrick of Washington, D.C., and said he (the Pope) should resign. Peter Strozk was fired. John Brennan had his security clearance revoked. And Google said they would refuse to help Mr. Trump’s military but are willing to accede to China’s demands. In the theater of the absurd, PETA said they want Maine officials to erect a five-foot memorial to honor lobsters killed in a truck crash on Route1 in Brunswick.

A bridge collapsed in Genoa, killing 39. An earthquake on the Indonesian island of Lombok killed 91. Venezuela President Nicolas Maduro, a man who would lie to his mother, claimed to have been the target of an assassination attempt by Drone. Scott Morrison was named Australia’s Prime Minister, the sixth to hold that position in eleven years! A 90,000-year-old bone fragment, discovered in the Atlai Mountains by researchers from the Max Planck Institute for Evolutionary Anthropology in Leipzig, was that of a daughter to a Neanderthal mother and a Denisovan man. Opioid-related deaths in the U.S. reached 72,000 last year, almost 25% more than the number of Americans who died in ten years of fighting in Vietnam. (In one 24-hour period this past month, 49 people overdosed in New Haven, a city of 130,000! Fortunately, no deaths were reported.) In a demonstration as to which side has the most extremists, a White Nationalist rally in Washington drew about 20 people, according to The New York Times, but thousands of Antifa protesters. It was disclosed this past month, five years after the incident, that Senator Diane Feinstein employed a Chinese spy on her staff. Two weekends of shootings in Chicago, a city with gun laws that are among the toughest in the nation, killed a dozen people and wounded almost a hundred. A disenchanted video game player at a tournament in Jacksonville Florida – unhappy because he lost – killed two and wounded nine before shooting himself. Cristhian Bahena Rivera, an illegal immigrant, was charged with stabbing to death 20-year-old Mollie Tibbets in Iowa. San Francisco, whose Mayor and City Council have never met a regulation they didn’t like, introduced an ordinance that would forbid employee cafeterias in new corporate construction. A leftist production of “The Diary of Anne Frank” trivialized the death of six million Jews and treated law enforcement agents as the Gestapo. It has ICE agents tracking down Latino illegal aliens. And, in what had to have been devastating news for the President, the West Hollywood City Council, in an act of shame, voted unanimously to remove Mr. Trump’s star from the Walk of Fame.


The Angel of Death was busy: Restauranteur Joel Robuchon died at 73. Aretha Franklin, whose rendition of “Amazing Grace” has no parallel, died at 76. Kofi Annan succumbed at age 80. John McCain, who was accorded a state funeral, died at 81. Senator McCain was a patriot whose five and a half years in a North Vietnamese prison camp showed a man of extraordinary courage and character, but whose campaign for President in 2008 showed flawed judgment in at least two regards: his choice of Sarah Palin as a running mate and his temporary suspension of his campaign in September following the Lehman bankruptcy. Senator McCain convened the non-partisan meeting, which was held at the White House, but at which he offered no advice.  (Fortunately, Henry Paulson was then Secretary of Treasury and Ben Bernanke was Chairman of the Federal Reserve. By December of that year, while the economy was still in recession and the stock market continued to fall, credit markets stabilized, and high-yield bond prices began to recover.) Mr. McCain was a maverick, a man with friends across the aisle, but his lack of judgement would have hurt him in the Presidency. V.S. Naipaul, winner of the Nobel Prize for Literature, died at 85. Playwright Neil Simon died at 91. Atal Bihari Vajpayee, former Prime Minister of India, died at 93. And I lost two friends: Dave Birkic, who died far too young at 77, and John Klingenstein, a former colleague, who died at 90.


We move onto September, a month that heralds fall, a time for harvesting what has been sown, but also a month when new school and college years begin, a priceless opportunity for millions of children and young adults. The seeds of learning that will be planted now will germinate over their lifetimes.