Paul Volcker: ATMs beat Masters of the Universe

Here is a little news item that made its way to the top of my Web pile this morning, Paul Volcker telling like it is ( Ben, are you listening?) at a business conference of financiers in Sussex, England yesterday that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful". By implication, all those wonderful products those financiers dreamt up over the same period were “less than useful.” He than concluded that riskier financial activities should be limited to hedge funds to whom society could say: "If you fail, fail. I'm not going to help you. Your stock is gone, creditors are at risk, but no one else is affected." (Ben, are you listening?)

Pull Up! Pull Up!

Like many people, I feel disillusioned by the first year of Obama’s Presidency. This is probably more my problem as he is a mere mortal and inherited so many crises, long time in the making, deeply ingrained, that he would have to be Superman, flying around the world to turn back the clock of time, to undo faulty foreign policies, reconnect the dollar to some form of the gold standard, change the unrealistic long term promises of Medicare and Social Security, roll back the deregulation of our financial institutions, and I could go on and on, but you get the picture of, perhaps, a society in a spiraling decline. Despite our cries of “Pull up! Pull up!” the ground closes in.

I still think the President could have devoted more of his first year to policies addressing what I called a “new economic morality.” Instead, he had focused more on healthcare, not that that is not also important. But Main Street seems to have been sacrificed at the altar of Wall Street and we are angry. Who truly believes the economic crisis is solved rather than being merely postponed? Let another generation deal with it, the same response of previous administrations. How long can we kick the proverbial can down the road? What kind of healthcare can this nation have if it is bankrupt?

So, I confess, I got caught up in “the dream,” the fantasy that one man, Mr. Obama, could make such a huge difference and in such a short time. I’ve been chastened by disillusion. The extent of my buying into the dream at the time is borne out by an email I had sent to a friend, a mother of a young family, suggesting she read my then recent blog entry. I quote this is below, and I conclude with that entire entry:

“Did you enjoy the inauguration? To me, it was one of those great moments in American history, and I am glad to have been around to witness it and not just read about it. What Obama does with this opportunity, is anyone’s guess but I pray it turns out well for your children’s sake and for those of my grandchildren, if I should be so lucky.

I had an interesting experience the day before the inauguration, Martin Luther King Jr.’s birthday. First, I was plagued by dreams so I got up at about 5.00 am and began to write in my blog. It just flowed as if someone else was writing it. I usually don’t post stuff I write until I have time to ruminate about the piece and do some editing, but that morning was different. So here is what I wrote: http://lacunaemusing.blogspot.com/2009/01/early-in-morning.html

After posting this, I went out for my usual walk as the sun was rising, wearing my radio earpiece. The station was playing the famous Martin Luther King, Jr. speech, “I Have a Dream.” What a magnificent, poignant rhetorical piece, so apt on the eve of this particular Inauguration day. I had forgotten its details (although I watched it live in 1963). So as I walked, I listened, and suddenly in the western sky, with the rising sun, a broad, magnificent rainbow appeared. It deepened during my entire walk and as King’s speech ended it faded (I could get spiritual over this).”

Monday, January 19, 2009
Early in the Morning
It is early in the morning on the eve of President-elect Obama’s inauguration – in fact very early, another restless night. When it is so early and still outside, sound travels and I can hear the CSX freight train in the distance, its deep-throated rumbling and horn warning the few cars out on the road at the numerous crossings nearby.

Perhaps subconsciously my sleeplessness on this, the celebration of Martin Luther King’s birthday, relates to the incongruous dreamlike images of the bookends of my political consciousness, from the Little Rock desegregation crisis of 1957, the freedom marches that culminated with the march on Washington in 1963 and Martin Luther King’s historic "I Have a Dream" speech, to the inauguration tomorrow of our first Afro-American President. All this breathtaking demonstration of profound social change in just my lifetime.

Much has now been said comparing Obama to Lincoln. In my “open letter” to Obama that I published here last May http://lacunaemusing.blogspot.com/2008/05/open-letter-to-senator-obama.html I said “Your opponents have criticized your limited political experience, making it one of their main issues in attacking your candidacy. Lincoln too was relatively inexperienced, something he made to work to his advantage. Forge cooperation across the aisle in congress, creating your own ‘team of rivals’ as Doris Kearns Goodwin described his cabinet in her marvelous civil war history.”

The Lincoln comparison is now omnipresent in the press, not to mention his cabinet selections indeed being a team of rivals. But I am restless because of what faces this, the very administration I had hoped for: a crisis of values as much as it is an economic one. The two are inextricably intertwined.

I am reading an unusual novel by one of my favorite authors, John Updike, Terrorist. One of the main characters, Jack Levy laments: “My grandfather thought capitalism was doomed, destined to get more and more oppressive until the proletariat stormed the barricades and set up the worker’ paradise. But that didn’t happen; the capitalists were too clever or the proletariat too dumb. To be on the safe side, they changed the label ‘capitalism’ to read ‘free enterprise,’ but it was still too much dog-eat-dog. Too many losers, and the winners winning too big. But if you don’t let the dogs fight it out, they’ll sleep all day in the kennel. The basic problem the way I see it is, society tries to be decent, and decency cuts no ice in the state of nature. No ice whatsoever. We should all go back to being hunter-gathers, with a hundred-percent employment rate, and a healthy amount of starvation.”

The winners in this economy were not only the capitalists, the real creators of jobs due to hard work and innovation, but the even bigger winners: the financial masters of the universe who learned to leverage financial instruments with the blessings of a government that nurtured the thievery of the public good through deregulation, ineptitude, and political amorality. This gave rise to a whole generation of pseudo capitalists, people who “cashed in” on the system, bankers and brokers and “financial engineers” who dreamt up lethal structures based on leverage and then selling those instruments to an unsuspecting public, a public that entrusted the government to be vigilant so the likes of a Bernie Madoff could not prosper for untold years. Until we revere the real innovators of capitalism, the entrepreneurs who actually create things, ideas, jobs, our financial system will continue to seize up. That is the challenge for the Obama administration – a new economic morality.

It is still early in the morning as I finish this but the sun is rising and I’m going out for my morning walk. Another freight train is rumbling in the distance. I hear America singing.

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That Old Russo Magic

Two years ago I explained why Richard Russo’s work so profoundly resonates with me, his portrayal of fractured families marching to a similar drum beat as my own. We respond most strongly to works of art that strike a chord of intimacy. At the time I was reading his Bridge of Sighs. I expectantly awaited his next novel, which recently was published, That Old Cape Magic.

It is pure Russo except he steps outside his usual upstate mill towns and makes Cape Cod, California, Maine, and the mid-fucking West his setting. (Words in italics in this entry are quotes from the novel.)

The heart of the novel (for me) can actually be found in the acknowledgments: And finally, my gratitude to my mother, whose recent passing caused me to reflect more deeply on inheritance and all that the word implies. Not to mention love.

Compare that to a quote from the novel: The problem seemed to be that you could put a couple thousand miles between yourself and your parents, and make clear to them that in doing so you meant to reject their values, but how did you distance yourself from your own inheritance? You couldn’t prevent your hair from thinning or your nose from taking over the center of your face. Even worse, what if he hadn’t rejected his parents’ values as completely as he’d imagined. In fact, the protagonist, Jack Griffin, after a lifetime of trying to distance himself from his parents, says to his wife: “Since yesterday, maybe for a while before that, I’ve been wondering…” He stopped here, unsure how to continue, though what he’d been wondering couldn’t have been simpler. “I’ve been wondering if maybe I loved them. It’s crazy, I know, but…do you think that’s possible?”

The novel is about taking responsibility for one’s relationships, for one’s life, reconciling the inner voices of one’s parents. They haunt Griffin throughout the novel until he finally casts off his parents’ ashes into the waters of Old Cape Cod.

Like Griffin, I too was the reluctant witness to [my] parents’ myriad quarrels and recriminations. And like Griffin, I had to tip toe around my mother: …even his most benign comments set his mother off, and once she was on a roll it was best just to let her finish. Their respect for his privacy had been, he knew all too well, mostly disinterest.

As a young boy Griffin adopts a family, the Brownings, during one of his parents’ vacations on the Cape. (The Brownings had offered the refuge he needed, though any happy family would have probably served the same purpose…) During my childhood I sought out other families, any family, to escape from the oppression of my parents (and the humiliation they caused), who were locked in silent, and sometimes violent combat. Griffin writes a short story “The Summer of the Brownings” later in life in an attempt to understand and exonerate his complicity in the relationship: Far from resolving anything, the Browning story probably just explained how he’d come to be the husband and father he was instead of the one he meant to be.

Russo develops a touching counterpoint story to Griffin’s, that of Sunny Kim, a shy Korean boy who loves Griffin’s daughter, Laura, from childhood and towards whom Laura has always shown kindness, even love, but not on a conscious level. Griffin worries about Sunny’s awkwardness and about being somewhat ostracized at his daughter’s birthday party as a child. It clearly reminded Griffin of his own childhood to which his wife, Joy, says “Quit worrying. They’re just kids. They have to figure these things out.” “That’s the problem,” he said. “They already have it all figured out. Who’s cool, who’s not, who’s in, who’s out.” Nobody had to teach them either.

And when Laura’s best friend, Kelsey, is married more than a decade later, and Laura is there with her own husband-to-be, Andy, Griffin watches from afar again: Back at the reception tent, when they finally decided to call it a night, Laura had detached herself from her friends, all of whom still crowded the dance floor, and came over to whisper in her mother’s ear that Andy had proposed during that first dance while they’d been watching. It took Griffin’s breath away to think that in the very moment of her great happiness, his daughter had remembered Sunny Kim and come to fetch him into the festivities. And he felt certain that he’d never in his entire life done anything so fine.

And, finally, at Laura’s wedding to Andy, Sunny comments that Laura seems to be happy and in love, and Russo leaves the reader with the aching truth: LOVE Griffin thought, smiling. Only love made such a leap possible. Only love related one thing to all other things, putting all your eggs into a single basket – that dumbest yet most courageous and thrilling of economic and emotional strategies. ‘I think she is,’ he said, almost apologetically. His daughter was happy and deserved to be. Yet, sitting here in the dark, quiet bar with Sunny Kim, Griffin couldn’t help wondering if the worm might already be in the apple. A decade from now, or a decade after that, would Laura suddenly see Sunny differently? Griffin knew no finer, truer heart than Laura’s but even the best hearts, as her mother could testify, were notoriously unruly. Would some good, unexpected thing happen in his daughter’s life, something that caused her very soul to swell with pride and joy, whereupon she’d realize that the man she wanted to tell first and most wasn’t who she’d married today but the one who’d loved her since they were kids and who once, in the middle of the night, had trusted her enough to share his family’s shame? Would she understand that such trust and intimacy do not – indeed cannot – exist apart from consequence and obligation? Would she understand then what she didn’t yet suspect, that remembering Sunny Kim at the moment of her own great happiness at Kelsey’s wedding last year had been kind and generous, yes, of course, but also an unwitting acknowledgment of something yet hidden from her?

Indeed, as with all relationships, which ones develop as planned? We are after all, at best, improvising as we tumble along life’s journey, especially with our “inheritances” weighing upon us. All families are fucked up, observes Griffin at one point.

His relationship with his mother comes close to mine. He is forced to distance himself and his family from her and when his mother suggested she be the one to accompany Laura on the….College Tour, he put his foot down. “I’m sorry Mom,” he said, managing with great effort, not to raise his voice, but failing to keep the anger out of it, “but you don’t get to infect my daughter with your snobbery and bitterness. All that ends here, with me.” It had been a horrible thing to say, full of the very bitterness he was accusing her of. He regretted the words as soon as they were spoken, but there was no taking them back, nor could he quite bring himself to apologize.

In fact, that was Griffin’s plan all along: With respect to their families, Griffin had hoped to invoke a simple, equitable policy: a plague on both their houses….He had no intention of inflicting his parents on Joy or, when the time came, on their children.

When I remarried, my mother turned against my new wife (who she did not “approve” of as Griffin’s mother disapproved of Joy). This devolved into a cold war, my having to keep my new family safe by trying to break off any contact with her. Still she pursued us with invectives, accusations, chronicling hurts I was not even aware of, such as when my two-year old son (from the unapproved second marriage), said something innocent about “a punch in the nose” and my mother was outraged that we did not correct his “misbehavior.”

My father’s death became a catalyst in the war’s escalation. My “legal inheritance” was the contents of his desk and when I went back to my old childhood home, where my father had barricaded himself in my old bedroom in the attic, I went through the desk with my mother hovering over me to ensure that nothing “valuable” was taken for my younger son, the son of the “bad wife.” One thing led to another and before I knew it she was screaming obscenities at me and I rushed to my car promising I would never see her again and would never return. I left with my father's penknife, my only "inheritance."

I made good on my promise for many years, avoiding any contact with her. Those were among the our most peaceful family years, not something I was particularly proud of, but necessary – as Griffin felt, protecting his family from bitterness and derision.

One day I received a Valentine card from her – at my office to avoid acknowledgment of my new family -- and began to get calls from her there as well, which always started off in a strained pleasant way and moved quickly to strident tirades. I was forced to write her a letter to put an end to that. Richard Russo, if you are reading this, feel free to incorporate any part in a future novel and thank you for understanding us Griffins of the world.

Towards the end I made an effort at some reconciliation. My sons were now grown so they no longer needed to be protected. When we saw each other, we tried to avoid discussions of the past. After she had suffered a stroke and then a broken hip, I went to see her, alone, in an assisted living home. She was despondent and subdued and I knew she felt that her life was near its end. I walked her wheel-chaired, frail body in the garden. She patted my hand and her last words to me were, “you were always a good boy.” Three days later she was gone, almost exactly twenty years after my father. Since then “I’ve been wondering if maybe I loved them. It’s crazy, I know, but…do you think that’s possible?”


The last picture of my mother and myself before she died.

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Copeland Davis

Remember that name, Copeland Davis.

Earlier in the year I was inspired to write about the Florida Sunshine Pops orchestra. And, I’ve written before about jazz performers who are in a class by themselves, both those who are well known and those who work mostly in local venues, performing mainly for the love of the Great American Songbook.

The other night we attended the first of the Florida Sunshine Pops concerts for the season, which was a tribute to Richard Hayman and the Boston Pops. Hayman was the principal arranger for the Boston Pops for some 30 years, and today at the age of 89 is still active as the conductor of the Florida Sunshine Pops. Also, as one of the original members of the Harmonica Rascals he can still play a mean harmonica! His arrangements of Metro-Goldwyn-Mayer film scores are legendary.

This first concert of the season had a special guest performer, someone we’ve seen before, Copeland Davis, whose prodigious talents as a pianist inspired a standing ovation at the end of his first piece with the orchestra, Didn’t We? He brings a rare mix of gifts to the keyboard – first abounding warmth that shines through his presence on the stage, but, foremost, his ability to fuse blues, jazz, pop, and classical in one piece. I have seen some great jazz pianists and the only ones I remember having this ability are the late Oscar Peterson and Claude Bolling. At one point in his performance, in the middle of an arpeggio, Davis turned to the audience, slyly smiling, as if to say, “look, Ma, no hands!” I will go out on a limb and predict that Copeland Davis is destined to go way beyond the Florida market. Although his You Tube performances were not recorded under the best conditions, depriving him of the showcase he deserves, here is one I loved:

Homer & Langley

Ever since I first dealt with Amazon.com as a Publisher, sometime in the mid 1990’s, I also became their customer. Back then we were receiving regular faxed orders, usually for a few copies (with a photocopy of Jeff Bezos’ personal credit card!). I might have spoken to Bezos at the time, or one of his colleagues. Customer service, they explained, is their credo and they will build their business on that. We began to ship on open credit. The rest is history.

I buy most of my books from Amazon, frequently from their partners which costs nearly nothing, except shipping. It is sort of ironic as this can undermine prices on their Kindle, but given my interest in the physical book itself, the Kindle is not for me. I’m not a Luddite, but there is nothing like handling a printed book.

When we were recently in Asheville, we made our regular visit to Malaprop’s, one of the great remaining independent bookstores. They usually have a good selection of autographed copies and a couple of years ago I bought Russo’s Bridge of Sighs there. I was looking for Russo’s new novel That Old Cape Magic. Disappointed they didn’t have one this time, I sought out the next on my list, E.L Doctorow’s Homer & Langley. It is the best Doctorow novel I’ve read since Ragtime and the World’s Fair.

Reading an autographed copy has its drawbacks. No turning back corners to be able to find favorite passages. No reading on the beach. Handle with care. After reading, it belongs under glass like a museum piece.

The book itself is beautiful, printed on antique eggshell paper with a deckle edge, set in the Caslon type face, an old style face in the same family as Garamond, the classic crispness of which almost cries out to the reader to savor every word. And Doctorow’s writing is of museum quality too in its stark clarity and beauty. There are four main characters in the book, the brothers Homer and Langley Collyer, New York City, and Time (or the passage of the same).

Homer is blind but he is the one who can see truths as the book’s narrator and in various parts of the book is the one who leads the sighted. “People my age are supposed to remember times long past though they can’t recall what happened yesterday. My memories of our long-dead parents are considerably dimmed, as if having fallen further and further back in time has made them smaller, with less visible detail as if time has become space, become distance, and figures from the past, even your father and mother, are too far away to be recognized. They are fixed in their own time, which has rolled down behind the planetary horizon. They and their times and all its concerns have gone down together.”

A “Theory of Replacements” obsesses Langley, his older brother. “Everything in life gets replaced. We are our parents’ replacements just as they were replacements of the previous generation. All these herds of bison they are slaughtering out west, you would think that was the end of them, but they won’t all be slaughtered and the herds will fill back in with replacements that will be indistinguishable from the ones slaughtered.” Consequently, Langley lives his life collecting newspapers, categorizing stories, preparing what would be a “perpetual newspaper.” “He wanted to fix American life finally in one edition, what he called Collyer’s eternally current dateless newspaper, the only newspaper anyone would ever need. For five cents, Langley said, the reader will have a portrait in newsprint of our life on earth. The stories will not have overly particular details as you find in ordinary daily rags, because the real news here is of the Universal Forms of which any particular detail would only be an example. The reader will always be up to date, and au courant with what is going on. He will be assured that he reads of indisputable truths of the day including that of his own impending death, which will be dutifully recorded as a number in the blank box of the last page under the heading Obituaries.” Langley devolves into an antisocial eccentric, hoarding everything he finds, including his newspapers.

Doctorow’s story is somewhat based on the real life of the Collyer brothers who lived in New York City but it only serves as a loose sketch for the canvas of this tour de force. An odyssey of people, representative of time’s passing, drift in and out of their home, inherited from their parents, people from the depression, to WW II, to the Vietnam era, and the flower generation. While the brothers wage war with New York, the utility companies, and their neighbors, their home slowly degrades as time has its way and they withdraw from life itself.

Homer is a gifted pianist, the artist in the work, clearly Doctorow’s voice and sensibility. Homer has had one true love in his life, Mary Elizabeth Riordan, who, like everyone else in the novel, transits through the Collyer home never to return. She was his “prompter” in a silent movie theatre, whispering the changing scenes on the screen in his ear so he could play the appropriate music, his only job when he was younger. Then, she becomes his piano student and finally she leaves, becoming a Sister and a missionary in far away places, Homer occasionally receiving a letter. She is apparently murdered in Central America. Homer laments, “I am not a religious person. I prayed to be forgiven for having been jealous of her calling, for having longed for her, for having despoiled her in my dreams. But in truth I have to admit that I was numbed enough by this awful fate of the sister to be not quite able to connect it with my piano student Mary Elizabeth Riorden. Even now, I have the clean scent of her as we sit together on the piano bench. I can summon that up at will. She speaks softly in my ear as, night after night, the moving pictures roll by: Here it’s a funny chase with people hanging out of cars…here the hero is riding a horse at a gallop…here firemen are sliding down a pole…and here (I feel her hand on my shoulder) the lovers embrace, they’re looking into each other’s eyes, and now the card says…’I love you.’ ”

And as at the end of a silent movie the lens slowly closes and Homer cannot “see to see.”
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Awash in Liquidity

Again (see last post) I defer to another insightful analysis about the economy and why we might be at an investment inflection point, this time turning to the world’s leading bond manager, Bill Gross at PIMCO. His monthly investment outlook, Midnight Candles, details why the investment “bubble” is a long standing one, that as a nation which once relied on the production of real things, we became focused on “paper asset” appreciation by the 1980’s. Governments have artificially influenced those prices since then. Gross distills this in an interesting observation: “How many TV shots have you seen of people on the Times Square Jumbotron applauding the announcement of the latest GDP growth numbers or job creation? None, of course, but we see daily opening and closing market crescendos of jubilant capitalists on the NYSE and NASDAQ cheering the movement of markets – either up or down.”

That sets the macro economic scene, which has been compound with the crisis of the last couple years. More recently investors have flocked to riskier assets as the Fed has flooded the markets with liquidity and driven interest rates to nothing. Unless the real economy grows substantially, this has to end badly when the Fed reverses course. For this reason, Gross believes asset prices might be peaking.

Gross is certainly one of the more literate, philosophical money managers around, and his prefatory remarks set the stage in that venue. As one who is about Gross’ age, I identify with his feelings about being “Everyman.” I suspect he has read Philip Roth’s novel of the same title, but that’s another matter.

On a lighter side from my photo archives….

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Einhorn’s Speech and Bubble Du Jour

Sometimes you come across a point of view on our economic crisis that provides such clarity you want to share it. Such is the case with David Einhorn’s recent speech at the Helbrunn Center for Graham & Dodd Investing. Einhorn is President and founder of Greenlight Capital, a money management firm that specializes in long-short value oriented investments, and he is the author of Fooling Some of the People All of the Time, the story of Greenlight’s short sales of Allied Capital and the subsequent controversy that became highly publicized. I learned of this speech from a blogger colleague over at Fund My Mutual Fund but undoubtedly it has been widely circulated by others as well.

I have selected some salient points from the speech and post them here. If you read these, go to the entire speech, as quotes out of context cannot convey the full measure of Einhorn’s well-reasoned arguments. While his value oriented investing style will remain his approach, the current crisis has convinced him to include gold in his portfolio, something most value investors find antithetical.

I wonder what he thinks about the rise of the Dow to more than 10,000, a sixty percent “recovery” from its earlier lows. Late last year I had posted a summary of the Wall Street Journal’s headlines all of which were decidedly negative, the perfect contrarian indicator. Now, the market is being bid up with talk of green shoots and improving earnings. An anecdotal observation regarding the latter is the recently announced “improved” earnings (that is, a positive comparison to expected earnings, not normalized ones) of many of the Dow’s major components seem to be accompanied by a shortfall in revenue, in other words earnings that come as a result of cost cutting, particularly layoffs and hiring freezes. Corporations cannot sustain earnings growth without revenue growth and the latter cannot happen while real unemployment rates stubbornly remain in double digits leaving the consumer on the ropes.

The illogical exuberance of the market lately is in lock step with the dollar’s decline as interest rates have also disappeared into a black hole. Stocks have just become another commodity, with a more limited supply than the government’s ability to manufacture dollars. As the headlines of almost a year ago signaled a bottom, perhaps the recent introduction of the Porsche Panamera, a $133,000 four door sedan with a 500 horsepower twin turbo V8 that can reach 60 mph in a mere 4 seconds – the perfect car for the bailed-out gang on Wall Street in this energy-challenged age – foreshadows a new bubble.

Here are some salient points from David Einhorn’s speech (Value Investing Congress David Einhorn, Greenlight Capital, “Liquor before Beer… In the Clear” October 19, 2009) which should be read in its entirety here:

* As I see it, there are two basic problems in how we have designed our government. The first is that officials favor policies with short-term impact over those in our long-term interest because they need to be popular while they are in office and they want to be reelected. …. Paul Volcker was an unusual public official because he was willing to make unpopular decisions in the early ’80s and was disliked at the time. History, though, judges him kindly for the era of prosperity that followed. Presently, Ben Bernanke and Tim Geithner have become the quintessential short-term decision makers. They explicitly “do whatever it takes” to “solve one problem at a time” and deal with the unintended consequences later.

* The second weakness in our government is “concentrated benefit versus diffuse harm” also known as the problem of special interests. Decision makers help small groups who care about narrow issues and whose “special interests” invest substantial resources to be better heard through lobbying, public relations and campaign support…. [A]t some level, Americans understand that the Washington-Wall Street relationship has rewarded the least deserving people and institutions at the expense of the prudent. They don’t know the particulars or how to argue against the “without banks, we have no economy” demagogues. So, they fight healthcare reform, where they have enough personal experience to equip them to argue with Congressmen at town hall meetings. As I see it, the revolt over healthcare isn’t really about healthcare, but represents a broader upset at Washington.

* The financial reform on the table is analogous to our response to airline terrorism by frisking grandma and taking away everyone’s shampoo, in that it gives the appearance of officially “doing something” and adds to our bureaucracy without really making anything safer. With the ensuing government bailout, we have now institutionalized the idea of too big-to-fail and insulated investors from risk. The proper way to deal with too-big-to-fail, or too inter-connected to fail, is to make sure that no institution is too big or inter-connected to fail. The test ought to be that no institution should ever be of individual importance such that if we were faced with its demise the government would be forced to intervene. The real solution is to break up anything that fails that test.

(As a follow up to this last point, see today’s New York Times article: “Volcker’s Voice Fails to Sell a Bank Strategy: The former Fed chief said the giant banks must be broken apart and separated from risky trading on Wall Street, a view not shared by many in the White House”)

* Rather than deal with these simple problems with simple, obvious solutions, the official reform plans are complicated, convoluted and designed to only have the veneer of reform while mostly serving the special interests. The complications serve to reduce transparency, preventing the public at large from really seeing the overwhelming influence of the banks in shaping the new regulation. In dealing with the continued weak economy, our leaders are so determined not to repeat the perceived mistakes of the 1930s that they are risking policies with possibly far worse consequences designed by the same people at the Fed who ran policy with the short term view that asset bubbles don’t matter because the fallout can be managed after they pop.

* Over the next decade the welfare states will come to face severe demographic problems. Baby Boomers have driven the U.S. economy since they were born. It is no coincidence that we experienced an economic boom between 1980 and 2000, as the Boomers reached their peak productive years. The Boomers are now reaching retirement. The Social Security and Medicare commitments to them are astronomical. When the government calculates its debt and deficit it does so on a cash basis. This means that deficit accounting does not take into account the cost of future promises until the money goes out the door.

* [T]he Federal Reserve is propping up the bond market, buying long-dated assets with printed money. It cannot turn around and sell what it has just bought. ….Further, the Federal Open Market Committee members may not recognize inflation when they see it, as looking at inflation solely through the prices of goods and services, while ignoring asset inflation, can lead to a repeat of the last policy error of holding rates too low for too long.

* I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long-term value as difficult to assess. However, the recent crisis has changed my view. The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? Just because something hasn’t happened, doesn’t mean it won’t. Yes, we should continue to buy stocks in great companies, but there is room for [another] view as well. I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked. Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.

* For years, the discussion has been that our deficit spending will pass the costs onto “our grandchildren.” I believe that this is no longer the case and that the consequences will be seen during the lifetime of the leaders who have pursued short-term popularity over our solvency.

On the lighter side of things, here is something I caught at Westport Now, the online newspaper that covers Westport, Connecticut, where I worked for so many years. Our first office was built on the site of an old New England lumber yard, on the Saugatuck River at 51 Riverside Avenue, and I recognized the building, the one on the left, in Westport Now’s recent photograph, the same fall colors ablaze as I remember them nearly forty years ago…

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