Prelude to Peace

The year 2009 came with the crackling fireworks in Gaza. As if Operation Cast Lead had not already reverted the peace process between Israel and Palestine, the government that was formed by Israel’s legislative election in February has yet to send out signals of sincere commitment to renew the efforts in order to achieve piece with the Palestinians. The Palestinian Authority in Ramallah is still struggling to exert its authority over its own territory. With deep divide between two parties, Fatah and Hamas, within the government, the Palestinian government’s ineffectiveness is also eroding the patience of the international community, especially that of its hawkish neighbor.

Daniel Barenboim, the conductor of Chicago Symphony Orchestra and a close friend of Edward Said, once made an analogy between the Oslo peace process and Beethoven’s 7th symphony during a televised interview with Charlie Rose. He remarked that the Oslo Accords have all the right elements in it to establish peace between Israel and Palestine but the execution of it by both parties were impeded by reluctance and therefore the faith of commitment had been worn out by the delay. He compared this phenomenon to conducting Beethoven’s 7th Symphony in Largo when it was written for Presto. All the notes would remain the same and yet the music would sound completely different.

A quick review of events that succeeded the Oslo Accords would validate Barenboim’s claim. After Rabin and Arafat shook hand in front of the White House, Israelis continued to settle in the West Bank as the Palestinians struggled to reach a unanimous recognition of Israel as a state. In 1996, after Oslo II, which established Palestinian authority in major cities in the West Bank, the number of violent incidents took an upturn. Then the Second Intifada started in 2000, followed by a major war between Israel and Lebanon in 2006. Finally, the Gaza war that took place earlier this year falls into an almost predictable sequence.

Israel’s new prime minister, Benjamin Netanyahu met with U.S. president Barrack Obama on Monday at the White House. The main objective of the meeting is to discuss the archetypal Israeli concerns: Iran’s nuclear capacity and activities of various anti-Israel organizations. The gist of the 90 minutes meeting can be encapsulated into the following series of inquiries and responses:

Israel: Are you on our side, will you support us as your predecessors did?

U.S.: You are one of our most important allies, of course we support you. But only under the condition that you accept a two-state solution.

Israel: I agree with you that Israel must be recognized as a state, more importantly, a Jewish state [Ruling out Right of Return as a possibility]. Israelis are committed to live side by side with the Palestinians in peace. [Notice the omission of the words “two-state solution”]

U.S.: Let me reiterate that the acceptance of a two-state solution is nonnegotiable.

Israel: Let’s the change the topic. Say if we have evidence which lead us to believe that Iran’s nuclear capacities is imminent, and we initiate military retaliation, are you going to back us?

U.S.: Iran’s possession of nuclear weapons is simply unacceptable and it must be stopped. I am willing to take a tough stance on this matter.

Israel: So you are going to provide us with the proper aid to strike Iran.

U.S.: I certainly hope we won’t reach that point. In fact, I will not let the situation get to that point. Remember “Yes we can!”.

Israel: “No you won’t!” [Next time, I will be back with a detailed military.]

Although the White House claimed that the meeting was productive and conclusive, with the Obama’s signature “effectiveness”, it is not difficult to realize the strains that Obama faces in trying to push his agenda of resolving the Palestine-Israel conflict forward. As brilliant and effective as he is, Obama cannot boast in the experience department. Netanyahu, his Israeli counterpart, has already served as prime minister once in the late 1990s, which means that he operates on experience, not theory. America’s unconditional support is crucial to Israel’s foreign policy, and this is exactly why Netanyahu made this trip. Netanyahu’s ultimate goal is to renew the U.S.’s steadfast commitment to support Israel in its national security agenda.

The last administration had established a somewhat troubling legacy in regard to the Palestine –Israel conflict. Bush’s unwavering support for Israel has tipped the balance among government in the region. Empowered with American support, Israel grew bolder and careless with its national defense measures. The most dangerous consequence of American’s unconditional backing of Israel is the moral hazard it creates within the Israeli government. An article in an earlier issue of The Economist had the perfect analogy to capture this problem: The American dog should be wagging the Israeli tail, not the other way around. It would not be too long of a stretch to say that America’s staunch support for Israel has lead to the formation of the present right-leaning government. “Yes, we can. The Americans are onboard with us” is an accurate way of describing the Israeli mentality in the recent past.

In order for the peace process to move forward, America needs to redefine its role as a peace broker. During the Bush administration, America could hardly call itself a mediator. It would not be an exaggeration to call Bush-era America a perpetrator of violence in the region. As a mediator, the U.S. must maintain a sensible neutrality to promote fairness in this process. In order to remain neutral, the U.S. must find its own independent stance in the conflict and remain firm. So far, the Obama administration has managed to stick to its principle, emphasizing two-state solution as a sine qua non to the continuation to the peace process. Israel is likely to be forced to accept this condition at openly at some point because resolving the century long conflict with the Palestinians is in its best interest and ultimately, it has no other choice.

By pinning the support for Israel on top of the two-state solution, the U.S. government is sending out a clear signal to Israel that it must be willing to compromise its hawkish positions. The European Union will mostly likely take the lead from the U.S. and assume a similar stance on Israel. Israel must soon realize that it needs to muster all the support that is available, not just in the Western world but in its locality as well. Israel’s aggressive attitude towards the Palestinian Authority in the West Bank is both perplexing and inimical to its interest. Knowing that Hamas is at odds with the Fatah-dominated government, it is not difficult for Israel to exploit this situation and alienate Hamas. Why make an enemy when you can make a friend? Excessively pressuring Mahmoud Abbas is not going to curb Hamas’ terrorist activities in Gaza. In addition, with the upcoming election in Lebanon and the increasingly likelihood that Hezbollah will be taking a more dominant role in the Lebanese government, Israel really needs to make friends. Hopefully, its current right-leaning government can keep Israel from being alienated in a hostile environment.

Even if Israel were to overtly embrace the two-state pretext for further peace negotiations, the peace cannot be achieved unless the Palestinian Authority can demonstrate its ability to curb terrorist attacks on Israel by its own people. The current state of the Palestinian government is pathetic. Mahmoud Abbas is being forced into a political cul-de-sac, with pressures coming from Israel as well as his fellow Palestinians. If the Palestinian Authority cannot form a coalition government that is committed to make peace with the Israelis, then not only will the peace process stall, the hope of ever establishing the state of Palestine will die as well. However, this is no easy task. Convincing Hamas, an organization whose goal is to annihilate the state of Israel, to give up its weapons along with its raison d’etre is almost impossible to perceive.

There is a reason why the conflict between Israel and Palestine lasted this long. The issue itself is extremely complex and difficult. For America, not only does President Obama have to compose a peaceful melody with the right tunes, he must also to conduct it well and stick to the original score. And to actually perform the prelude to peace, Israel and Palestine better be playing on the same tempo.

The Military Op Mistake

   The Notion of Fact V. The Idea of Fiction: The Military Op Blunder and How America Needs to Face Reality and Deal With The Tyranny of Federal Supremacy

By Jimmy M.

     About a week and a half ago, President Barack Obama celebrated his first 100 days in office. Many were speculative as to why this tradition still stands today and if it does actually serve as a good indicator of the President’s progress. The tradition began under FDR, with his stated agenda of reform under the New Deal platform. How it is understood in regards to President Obama, therefore, is that it is a period used to examine past key reforms that were made or issues that were addressed. It is interesting to note though the particular fashion in which the President “celebrated” that success. The event I am mentioning is the “military photo op” that flew just a little too close to comfort near buildings in NYC. The President made a cardinal mistake, which has already been confirmed. What I would like to point out about the instance is the level of dialogue between the federal government and all the lower forms of government. Mayor Bloomberg has made it quite apparent that he did not know the President ordered such a special training mission and that if he did in fact know about it, he would have done everything in his power to stop it. I’m no movie critic, but I would give “Mayor Mike” an A+ for his acting skills. I mean really you have almost all of the public fooled. This public statement of course buttresses his chances and image of winning the seat for an unprecedented third term as mayor (an issue of which I do not want to go any further into as my opinion has and still remains unsettled by). There is speculation as to who knew the Boeing plane along with fighter jets were going to run such a mission: primarily the NYPD and a few other agencies. But if the NYPD did in fact know that such a mission was taking place then they failed to perform their most basic duty and that is to instill order. This is obvious because the people who were working at these buildings were obviously panicking about what was happening.

     Why is it necessary to conceal such important information to the people who are directly involved? This event isn’t particularly a random occurrence, but this continues to be the norm of the federal government. I have discussed issues in the past about auditing the Federal Reserve (which should have happened if people would just stop and think for a second about how they are held responsible annually by their government down to the last cent – it is only just to endorse the higher officials to conform to the same system). My main concern is that the security within the building weren’t notified either. The everyday-man is left wallowing in ignorance while the puppeteers are left with glee and smirks. There is way too much evasion and lack of self-responsibility in the federal government. I am not ignoring that the President has made significant strides in passing beneficial bills such as the civil service requirement and the other on stem cell research, but acts like these, that are clearly formed without first considering the reactions or consequences, cause great public outrage and distress. Especially after the precedent has been established following the Bush administration and that we are fighting an ongoing war against terrorism across the globe. The action itself can only be ascribed to insensitivity on the part of the President. It is funny though how the media toned it down that it was President Obama’s direct order and how much stupidity was ingrained in such a hasty act. Had it been Bush, we would have never heard the end of it. For all the negative criticism that will emerge from this, the President should have anticipated it from the first place.

     The military photo op could also be regarded as a stealth mission by the President, in case any terrible or unimaginable event should happen in Washington and he needs to flee immediately. But it is often the case that when such things are performed or practiced, such events are not too far behind. For example, there is a common adage and belief that you don’t talk about or mention death for fear of it striking you or one of your immediate family members. It is the case here. By President Obama conducting such missions, the public should be curious as to his reasoning and if there is information being withheld that would justify such an evacuation. If I had to take one guess I would say that the President would flee the Capitol building due to an act of retaliation from either a Palestinian-American or just a Palestinian in general. The United States continues its overt aggression with Palestine by periodically bombing the nation, maybe in an attempt to get cooperation for capturing Osama, the man Bush swore he would capture but after Iraq began suddenly developed a lasting case of Alzheimer’s. Projection of might to nations that have already developed a terrible understanding of the western agenda in part by past Western leaders will only further strain relations. If the President wants to get the public on his side, end criticism he shouldn’t make such errors of poor judgment like the military op fiasco; he should avoid further aggression with Middle Eastern nations by not bombing them or any other actions that would impose democratic might; and lastly he should be keenly aware of our country’s history regarding foreign nations and should learn that unwarranted transgressions of the past must not be repeated – history has a tendency to repeat itself, as the first citizen he is directly responsible for making this not happen. If such precautions aren’t taken into consideration we may likely see the final straw of the citizenry’s patience. The swine flu and how that is handled may be cause to act and a call to arms. If a call to arms does not take place, Rick Perry and the notion of secession is an appropriate response to discontentment in how the federal government is resolving the disease outbreak and securing its borders. This event shows us that the federal government is the immediate terrorist threat to the public and it is our duty to quash the era of federal unaccountability by forcible removal of such leaders from office.

Geithner: Messiah for Economy, or Mouthpiece For Wall Street

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Is There Such a Thing as Austrian Investing?

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The Great Philosopher…Sarah Palin?!

The Notion of Fact v. The Idea of Fiction: Once There Was a Politician, Now We See a Philosopher: Sarah Palin’s Immigration Solution

By Jimmy M.

     A few short weeks ago, and this problem is still lingering today, the New York Times reported the huge drug bust of a couple of cartels along the border between Texas and Mexico. As time has shown, immigrants have found and take these opportunities to make it to America and earn a better living. They bypass all the necessary requirements to become an official citizen, and therefore none of their salary goes into the Social Security system. Another benefit is that these immigrants, when hired, do not adhere to regular standard wages laws. Their jobs could last for 45 to even 55 hours a week in some rare and extreme cases. But why is this a big deal now? What makes it worth writing about? Well that can be answered by the statement Alaska’s Governor Sarah Palin made regarding the problem. According to Palin, they are not America’s problem. These immigrants are not even a “problem” at all, for Palin believes that since they do not follow the standard procedures to obtain citizenship, they cannot be officially recognized as people, no matter what the circumstance. The immigrants have a sort of phantom condition, where local authorities are told to ignore or condone any crimes they may commit because they really aren’t here. What a great philosophical understanding Sarah Palin has, huh?  I guess as long as the police officers know that the immigrants aren’t thinking when they act, that they really don’t exist.

     I think Mrs. Palin’s best bet is to stick to what she knows best and that is anything immediately related to Alaska. I think a strong reform to challenge the problem of immigration in the United States is to create some sort of incentive, a long lasting benefit for the immigrants. But then that would raise the ire of many current citizens, so some sort of middle ground needs to be reached. It is imperative to have some sort of legal device to close the turbulent streams as it stands right now. The immigration problem is so complex and there are so many intricate weaves in this huge web, that somewhere along the line someone is going to get snubbed. For our politicians, you really can’t be afraid for snubbing someone just because you have to get things done. I wonder how ancient philosophers would view Sarah Palin’s advice. Would Socrates approve, because I am pretty sure Descartes does. Hopefully, Glenn Beck won’t follow in Sarah Palin’s footsteps. We can’t afford now for politicians to become islands unto themselves as Hemingway warned.

Google/Murdoch Lawsuit

                                                        

War Dammit!!

The Notion of Fact v. The Idea of Fiction

: Two Heavyweights Battle It Out: The Murdoch “Fox” v. The Google Bomb   

 

 

By Jimmy M.

     There is a very interesting debate that is currently taking place in newsrooms around the world today. At the forefront of this debate are two powerful industries, both of which serve to disperse information. These two industries, Google and (for the sake of simplicity) newspaper publishers. This debate again is focused on an interpretation of the first amendment and what is being garuanteed. What is happening between Google and newspaper publishers is a case of copyright infringment. Google serves as a huge search engine to find up to the minute news stories, stories which they take from news coverage sites such as CNN and the NY Times. But you might say what’s the big deal? There is freedom of the press you know. That’s exactly the heart of the matter. This problem with regulating the content that is shared on the internet has come up once before with the music industry and the infamous Napster website. At precisely what point can we say speech is not “free”? That there is a sum to be paid due to sourcing your information or facing the legal ramifications of committing plagiarism? Hell, I feel if I got to source where I got my quotes from, Google should do the same.

     But how can Google get away with this? Committing such a blatant illegal activity? Google is not one “person” per se. Google is an artificial one thanks to the protection under the fourteenth amendment. What Google is doing is waiting for a news source to publish a breaking story and then taking that story and posting it into their engine. The qualms that the newspapers have is they are spending money going out breaking these stories, but they receive no credit from sites like Google or AOL for example. Now the man who is leading this “holy crusade” (you’ll see why I chose this phrase in a minute) is no stranger to pushing the envelope. In fact he owns a whole network that is dedicated to pushing the envelope with their stubborn attitudes to defend ideas that may have or may have not been proven soundly wrong. The man I am talking about is Rupert Murdoch. If you don’t know who I am talking about, think back a couple of months to the Daily Post cartoon. His name got a lot of traffic then like it is now. The inherent problem according to Murdoch is that there is no restitution made for the newspapers. Google doesn’t charge the access to the story like you would if you wanted to read a printed story. Instead, Google profiteers of of ad revenue for the amount of hits the page receives. Presently, the solution to this poblem seems to be levying some sort of subscription surcharge regarding the use of Google, like Itunes did to challenge music theft from Napster. This solution may or may not, it all depends on how the first amendment is interpreted in Court, particularly the freedom of the press phrase. This is all part of an ongoing lawsuit, the result of which I am hoping the newspapers win partly because of a “vocational bias”. It will be very interesting to see what context the court applies to the First Amendment.

     If I were to resolve this issue there would be a number of examples to fall back on. These examples are failry recent ones mind you that serve to show the vague language of the first amendment particularly involving free speech and free press. The first example I would base my decision on is from a case where the state of Tennessee created a database where everyone who earned a firearm and an accompanying permit was placed under its directory. Clearly here the first amendment is in direct conflict with the second amendment. One may argue that the second amendment supercedes that of the first, but that seems like a non-sequitir. The way that was resolved was by forewarning the public and the result was no one was put in the database. Yes, yes I know its an issue of security and a safety precaution, but at the same time its also a case where the other side of the coin was not taken into account. You can’t perform an act without weighing both the positives and the negatives of such act. But anyway, back to a resolution between the unrestricted internet and content of printed material. The resolution I would propose, even though it might seem petty is placing some sort of trademark, that is representative of all stories covered in order to save expenses. I know that the counter to this is going to be all newspapers cover the same story, that will never work. And I will readily admit that yes a lot of it is the same for all papers, but I would argue that the way in which those stories are covered are not the same. Some are more insightful than the others. I will use a fire for example. This story can be covered from two perspectives, from the point of the firefighters called into action or from the neighbors of where the fire occurred. The other perspective is the person who lives in the house but that won’t be very useful since it is clearly subjective. The firefighters know the degree of the blaze directly and can deduce how the fire started. The neighbors could not tell you how the fire started, only what they were doing once they learned there was a fire.

     I think this lawsuit that Mr. Murdoch is bringing against Google and other online sources will have a momentuous impact. It will certainly bring a lot of changes to both the newspaper industry and the amount of access one has to stories on the internet. It will also be interesting to see if the court system uses any precedents to base their decision for example the NY Times v. United States. This example serves as what material could be released to the public. Here the case is what material is “free” to the public. Is knowledge that comes from the internet free? Is knowledge itself free? For the first question we will have to wait and see how things progress for the second it is most certainly not because there is a thing called tuition to get that education.

The AIG Bonus Shenanigan

The Notion of Fact v. The Idea of Fiction: The Pirates of the AIG and the Tragedy of American Democracy    

By Jimmy M.

 As of two weeks ago, President Obama’s bailout to the banking industries passed giving the endangered banks some much needed help. AIG, one of the banks that received a portion of the bailout money, created public outrage by giving 170 million dollars (taken from the bailout mind you) to its employees as bonuses. All this has already transpired, so why am I continuing to beat a dead horse? To that I would answer in the negative, for I hope to end the discussion of this blame game among politicians and have someone fess up to their actions. As it stands right now, three major figures within our government have been pointed at and have been somewhat condemned. The first is Christopher Dodd, remember him? The guy who was vying for the Democratic Presidential nominee in as little as 8 or 9 months ago? He is most notoriously linked to the AIG bonus scheme with the passage of the Dodd Amendment. The Dodd Amendment was a write in by Dodd that allowed AIG to give their employees bonuses. That argument sees Dodd taking the fall with the logic being, “Hey! Why are you angry at us? When we reviewed and voted on that bill, that wasn’t stipulated under our watch. Besides, we only had an hour to vote on the bill due to the urgency and alarm expressed by the President concerned with the health of the economy”. But then, one must see this as only the lowest rank in the political hierarchy. In today’s society, it would make sense that the little guy takes the fall, even if it was the case where he was only following orders from someone above (?).

     The second argument and person that stands on the hot seat and may be the person to get the ax as a result is Timothy Geithner, the current US Secretary of the Treasury. Geithner’s role with the Obama administration is to be the economic advisor and “financial minister” who deals with domestic, international, financial, and tax policies. Here one could argue that Geithner should take the blame because he allegedly discussed it with AIG members in November of 2008, well before Obama got into office and maybe even he assumed the outcome a little beforehand. Protesters also feel that Geithner is responsible because of his expressed duties as treasurer. If this argument should be the case, is it then possible that we will see a new position added to the cabinet, one that works cooperatively with the treasurer? My guess is this is probably very unlikely. My gripe with this argument is the omittance of Ben Bernanke. It seems self-evident that should Geithner take the fall, Bernanke has to be also somewhat responsible. We could even go one step further as to say Henry Paulson should be added to that list. And why are all these people public enemy number one? For all except one, they are part of the declining banking system. Two of the three mentioned are at the heart of the problem, instead of being investigated, they get a free pass. Need I mention anymore about Geithner other than the fact that he was the head of the NY Federal Reserve before taking his post under the Obama administration? Geithner does not speak on behalf o the American people; he speaks on behalf of the “Wall Street robber barons” a clique that is quickly ascending to notoriety and infamy at an astounding pace.

     The third argument for who should be held accountable is perhaps the most compelling. As I mentioned before, the arguments are patterned in the way of climbing the government ranks. The first that we looked at was from the very bottom of the pyramid. Now we will take our turn at questioning the very top of the pyramid, the President. I find this argument to be the most intriguing of the three. People who believe Obama is at fault exclaim that the President was the very last person to see the bill before it was put into law. Therefore, one can conclude that the final version had to go through the executive office before it can be taken into action. Many believe that Obama is hypocritical for expressing outrage on the “Tonight Show” over the AIG bonuses because of the aforementioned claims.  This argument strikes me as curious because to some degree there is fact but than to another degree there is some distortion. For example, President Obama gave orders to Congress to vote on the bill in an hour’s time. No more and no less. Should President Obama have been aware of the bonus stipulation, wouldn’t he have polished the details just a little bit more? He also set up orders to review future banking industry practices, not the current failing ones. I think there is a legitimate concern with Obama’s response to the bonuses and swift response which I use the adjective swift very loosely.

     My take then on the AIG bonus fraud is no different than those of the past. I equate what went down within AIG to be nothing different than what happened at Enron. The only difference is the fashion in which the money was laundered and who that money was taken from in order to give to someone else. The people who should be given blame are in fact the AIG. I will admit, there is some underhanded tactics between the company and the government going on but in order to bring about any immediate change we must return to the scene of the crime and put out the fire. Prosecute figures within this company first, and then the public will be given the chance to force the tycoons of the country to spill out the juicy details and unstated facts. The prevalent sense of greed by those social elites is unsettling, particularly in a time where there is no wafer to live off of and the bread our country currently relies on is going stale.

     However, this is a small amount of hope. Here, I would like to take the opportunity to mention that a bill will be discussed this Friday, April 4^th that would see the Federal Reserve begin to be audited. I know this might get a little bit off topic but there was recent news that the bailout money Congress forked over to the banks was on a blank check, meaning that the banks could write whatever amount they pleased. New information has come up concerning the Fed that 9.7 trillion dollars has gone “missing”. Missing is certainly the operative and guarded way of describing it, don’t you think? I would like to express to you to help see that bill gets passed by contacting whoever necessary to vote for the bill. This is a process long in the making (after the Glass-Stiegel Act was repealed). The Fed has been around since 1913 and not until now have they been held accountable by us the American citizenry. To say “We’re not telling you because we don’t have to” is no longer a defense or excuse as to avoid criminal prosecution. On Friday, see to it that these people are served hard justice.

The Fate of Capitalism

In recent weeks, the soupe du jour news story is the $165 million bonus that AIG is giving out to its employees. Senators and representatives have been fighting ferociously over the legitimacy of the bonus on Capitol Hill. To tax, or not to tax? As the public anxiously awaits some kind of poetic justice on one culprit of the financial meltdown,
many economists can only sit back hopelessly and watch the politicians continue to try to appeal to the masses while letting the country sink further and further into an economic black hole.

Sure, the AIG bonus is a social and perhaps legal outrage, but when the country’s projected deficit for this year is 1.75 trillion, 12.3% of the forecasted GDP and its ability to finance its debt can be potentially crippled by China’s announcement regarding the abolition of U.S. greenback’s status as desired reserve currency, there is something to be said about the government’s priority amidst this financial Armageddon. A $165 million bonus seems like a trifle when compared to the $1.75 trillion deficit or the possibility of the nationalization of the banking system. As the call for nationalization gets louder, the government is taking its last chances with capitalism.

The Federal Reserve has recently unveiled a drastic measure in the hope to jump-start aggregate demand. Last week, the Fed announced it would purchase $300 billion worth of long-term Treasury bonds along with $750 billion worth of agency mortgage backed securities. This will allow the Federal Reserve to control long-term rates, which have previously been determined by the market. After several attempts to drive down mortgage rates to halt the housing downturn through liquidity injections, mortgage rates remained above the desired level that would effectively stabilize housing prices. The Fed hope to lower the mortgage rate through this massive purchase of agency mortgage backed securities. If housing price stabilizes, the increased in perceived wealth among households can lead to increased spending, thereby boosting economic activities.

With the Federal Funds Rate at virtually 0%, the traditional monetary policy instruments have been rendered obsolete. Previously, open market operations are designed to impact the short end of the spectrum of government securities. But the Federal Reserve is intervening in the market for long-term government securities. This action has taken quantitative easing to an unprecedented scale. Of course there is a cost associated with every economic decision. In this case, the Federal Reserve is running the risk of hyperinflation and economic collapse in the future. But in order for the economy to have a future, it needs to survive the present inferno.

Finally, the U.S. Treasury announced another plan to solve this financial conundrum of epic proportion. The plan is called Public Private Partnership Investment Program. This program is specifically designed to deal with the securitized assets, such as mortgage backed securities and collateralized debt obligations on banks’ balance sheets.

The practice of securitization has invariable lead to the current financial crisis due to the moral hazard it brought on through risk transfer. When loans can be packaged together and sold to someone else, the banks do not have to worry about default risk. Once the bundled mortgages are sold, default risk becomes someone else’s problem. However, risk transfer does not equal risk elimination, and the risk remains in the system. After subprime mortgage crisis broke out, the securitization market evaporated. Hence, massive amount of assets that potentially contain nonperforming loans are engraved onto the balance sheets of the banks. To avoid insolvency, banks horded all the capital that they have been forced into receiving from the government to cushion potential losses in the future. How can capitalism be maintained if the capital market dries up? Consequently, nationalization appeared on the menu.

Timothy Geithner seems to either think that annihilating the securitization market is too drastic a measure or the securitization process is still somewhat salvageable. Thus, the Public Private Partnership Investment Program effectively created a market for securitized assets. The purpose of setting up this market is to allow banks to dump their illiquid and nonperforming assets to free up their balance sheet so they can start facilitating capital movements in the economy.

In order for this “dumping” to take place, renaming toxic assets “legacy assets” is only a start. The necessary condition is that someone has to be willing to purchase these toxic assets. To incentivize, Uncle Sam doled out a sweet package called the Public Private Partnership Investment Program. For every dollar the private investor put down to purchase the assets, the U.S. government will match it with one dollar and will finance up to 85% of the winning bid with non-recourse loans. If the asset turns out to generate positive returns, then perhaps the worst is over. But if the assets incur losses, especially large losses, then taxpayers will bear most of the burden because the non-recourse loans are ultimately financed with taxpayers’ money. The private investor lose only what they put in.

Geithner’s system appears to be a solid market approach to get rid of the illiquid assets on banks’ balance sheets. However, the system is banking on the assumption that the auction market is capable of pricing the assets correctly. But how much are these assets really worth? The auction system through which these legacy assets will be sold is likely to push the ultimate purchase price towards to its true value. But one of the reasons that these legacy assets are toxic is the lack of uncertainty of their worth. In other words, if the auction overprices these assets, the U.S. will have to run an even bigger deficit, or simply nationalize the banks, a measure deemed inevitable by several prominent economists.

Even an investment with such high potential gain and a loss capped at 7.5%, where would private capital come from in the middle of a messy recession? With a half-dead banking sector, ailing manufacturing sector, the focus has to be on international investors. But if China does not want to buy anymore U.S. government debt that is risk-free, there is no reason for it to invest money in illiquid assets with unknown risk.

Although the prospect of running the Public Private Partnership Investment Program successful is bleak, there is a still hope. There is a way to build up capital from private sources and it has been done before. In 1907, legendary financier J.P. Morgan, along with several other tycoons, pledged their private funds to keep the banking system solvent and prevent bank runs. If there is to be a modern reenactment of this historic episode, the hope would fall on the likes of Warren Buffet. Buffet has the financial ability to back Geithner’s program. Even though the recession has taken its toll on Buffet’s assets, his company is still way ahead of the pack. More importantly, Buffet’s name will lend a tremendous confidence boost in the program and the economy in general.

So, will Warren Buffet, the great capitalist, save capitalism?

Picture of the Day

Laissez Faire and Hong Kong

In the book Free to Choose, Milton Friedman believes the best example of Laissez Faire that we have today is Hong Kong. “A speck of land next to mainland China containing less than 400 square miles with a popluation of 4.5m people… The density of population is 185 times as many people per square mile in the United States. Yet, they enjoy one of the highest standards of living in all of Asia.”

Few facts about Hong Kong:

No import tariffs

No minimum wage laws

No fixing of prices

No captial gains taxes

Max of 20% income tax for the richest

No VAT

No sales taxes