Luck of the Irish

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Planet Money digs in a bit more to the Irish bailout, the so-called European Financial Stability Facility – and it isn’t pretty.

European countries aren’t actually putting their own money into that trillion-dollar bailout fund. Instead, the fund will borrow from investors around the world — the same investors who are growing wary of lending to a bunch of countries in Europe.

What’s more, the fund will be guaranteed by the countries that use the euro. So the more the fund is used, the more countries that are already struggling — countries like Spain and Italy — will be on the hook for potential losses.

This is like looking down the barrel of a howitzer. If someone else in the euro zone finds themselves short, which it seems like they will in the form of one of the PIGS (Portugal, Italy, Greece or Spain), and needs to draw on this fund (that has no money in it), it starts to look like a credit default swap. It breaks down like this –  if Spain, for example, gets into even more trouble and needs bailing out from the fund that they are  supposedly a certifior and contributor to, the fund could loose its AAA rating. From there’s, there’s nothing left to bail these guys out – they’re left a borrowing at market rates of about 7% (good for a credit card, bad when you owe a cool billion or five).  Then we start talking about countries defaulting – at which point nobody really knows what would happen, but it might make 2008 look like a good year in comparison.

Shmart Guys

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An interesting take on what almost crashed the financial system.

Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they’d have so much money they could then become professors or legal-services lawyers or whatever they’d wanted to be in the first place. That’s when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.”

“But you still haven’t told me how that brought on the financial crisis.”

“Did you ever hear the word ‘derivatives’?” he said. “Do you think our guys could have invented, say, credit default swaps? Give me a break. They couldn’t have done the math.”

More…

Two Sides of Texas

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On the bright-side…

Joel Kotkin, an urbanologist based in California, recently compiled a list for Forbes magazine of the best cities for job creation over the past decade. Among those with more than 450,000 jobs, the top five spots went to the five main Texaplex cities—and the winner of the small-cities category was Odessa, Texas. A study by the Brookings Institution in June came up with very similar results. Mr Kotkin particularly admires Houston, which he calls a perfect example of an “opportunity city”—a place with lots of jobs, lots of cheap housing and a welcoming attitude to newcomers.

He is certainly right about the last point: not too many other cities could have absorbed 100,000 refugees, bigheartedly and fairly painlessly, as Houston did after Hurricane Katrina struck New Orleans. With vibrant Asian communities alongside its balanced Hispanic, white and black mix, with no discernible racial tensions, and with more foreign consulates than any American city except New York and Los Angeles, Houston is arguably America’s most enthusiastically cosmopolitan city, a place where the future has already arrived.

And maybe the less so sunny….

Texas has the highest proportion of people lacking health insurance of all 50 states; the third-highest poverty rate; the second-highest imprisonment rate; the highest teenage-birth rate; the lowest voter turnout; and the lowest proportion of high-school graduates. Mr Shapleigh is not surprised that these figures are so terrible: Texas spends less on each of its citizens than does any other state. Being a low-tax, low-spend state has not made Texans rich, though they are not dirt-poor either; their median income ranks 37th among the 50 states.

The question is where will we land: An Alabaman nightmare of no-education, and the bottom of every national metric, or Californian distopia of overbuilt social programs that break the state’s financial back. More from The Economist.

Infographics

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bankruptcyhead

There’s nothing quite like a visual representation (from Good) of how completely and profoundly screwed we are. The scariest part is you could fit over 10 of the boats representing Enron into the one representing Lehman Brothers.

Yup, this free market thing is working out great.

What Not To Do

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Among the lessons to be learned from the GM bankruptcy: how not to run a company.

In its bankruptcy petition, G.M. said it had $82.3 billion in assets and $172.8 billion in debts. Its largest creditors were the Wilmington Trust Company, representing a group of bondholders holding $22.8 billion in debts, and affiliates of the United Auto Workers union, representing nearly $20.6 billion in employee obligations. (more)

That’s a lot of red on the books

Mondragón Cooperative

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Let’s take it as a given that the current system of education to workplace to post-work-productive member of society (aka retirement), is unbelievably busted. Those who want to pursue vo-tech careers have very limited options, those who get the four year degree are often times saddled with absurd dept, and prospect of needing to pursue further education to continue to succeed in their career. Then there’s our unrealistic, underfunded retirement situation that is well on its way to bankrupting our country.

Enter the Mondragón Cooperative Corporation, the worlds largest worker run co-operative organization in the Basque region of Spain.

The company was founded in Arrasate, a town in Gipuzkoa known as Mondragón in Spanish. The town had suffered badly in the Spanish Civil War and there was mass unemployment. A young priest, Father José María Arizmendiarrieta, arrived in 1941 and decided to focus on the economic development of the town, settling upon co-operative methods to achieve his goals. Co-operatives and self-help organisations had a long tradition in the Basque Country but had died away after the fascist victory in the Spanish Civil War.

In 1943, Arizmendi set up a democratically-managed Polytechnic School. The school played a key role in the emergence and development of the co-operative movement. In 1956, five young graduates of the school set up the first co-operative enterprise, named ULGOR (now Fagor Electrodomésticos) after their surnames, which during its early years focused on the manufacture of petrol-based heaters and cookers. In 1959, they then set up the Caja Laboral Popular (“People’s Worker Bank”), a credit union that both allowed the co-operative members access to financial services and subsequently provided start-up funds for new co-operative ventures. New co-operative companies started up in the following years, including Fagor Electrónica, Fagor Ederlan and Danobat.

What brought this to mind was the UAW’s recently aqquired big stake in the newly reworked Chrysler  and GM. What would it be like if this country had affordable, democratically managed institutions of banking, education, public utility, healthcare and employment as opposed to corporations concerend only about the bottom line? Organizations where the needs and concerns of the employees were complimentary to the needs of the stockholders because they were one and the same. There would still be competition that would lead to innovation, money would still be a prime motivator, but for once we might actually give a shit about people and long term health of the company as opposed to the short-term profits and shareholder benefits.

The Mess We've Made

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Want to understand the economic mess in layman terms?

…The earlier peak, which is way over on the left part of the chart, where debt is 100% of GDP, was in 1929. This is a map of twin peaks. One in 1929 and one in 2007.

Does that chart scare you?

Yes. That chart is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks, it’s something that had little to do with mortgage securitization, or ethics on Wall Street, or anything else. It says the problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us. We have over-borrowed. We have been living very high on the hog. We are, our standard of living has been rising dramatically over the last 25 years, and we have been borrowing to make much of that prosperity happen.

This American Life tries explains whats gone wrong, and more importantly, why we haven’t been able to fix it. Oh and one more really scarry note form the transcript on the topic of bank nationalization –

… if they WERE planning to take over the banking system … they wouldn’t announce it beforehand. They’d probably say exactly what they’re saying right now … wait till  everything’s set up … till they hired enough people and got all their plans in order … and then one Friday evening, they’d make an announcement, and nationalize the banks over the weekend.

If anyone needs me, I’ll be in my super secret survival bunker.

The Lost Decade

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Apparently, it’s dismal science week on the site this week. Richard Koo, chief economist at the Nomura Research Institute in Tokyo, seems to think there’s some similarities with Japan’s collapse of the 1990’s.

Like Japan in the 1990s, the U.S. is suffering what Koo calls a “balance sheet recession.” When asset prices collapse, the people who bought those assets with borrowed money are left with balance sheets underwater, and all they want to do is pay down debt.

“People are no longer maximizing profits the way it’s assumed in economics. They’re minimizing debt. The invisible hand of [economist and philosopher] Adam Smith works in the opposite direction,” he says.

More…

Percentages

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As a rule I don’t post things about work up here. I also try and post things relevant to my life (it’s my server space after all). But sadly, most of my life has been consumed by work-related drama lately, so it’s quite difficult to sit down and crank something out for the site that has nothing to do with my professional life. Hence the low traffic this week.

So without violating those rules I must say, it’s a curious thing, this capitalistic system we’ve forced our selves into. Pay to go to school, to get the money to get the car so you can drive to work to pay to get the things you want that break or wear out so you get to work harder to replace them. And repeat.

Alarmingly, according to my social Security statement, which came in the mail today if i earn at the same pace I’m going for another 37 years, the government will pay-out about half of what I’m making now (this provided that the avian flu or the republicans don’t get us first). What will half my salary now be worth in 2046, I wonder. A loaf of bread?

So where’s the reward? What am i working for? The system seems like an infinite logic loop that only leads to a system failure at the end (think Windows 95). Except the crashes are at the expenses of thousands of hours of real people’s time. Is the work we do enriching peoples lives, changing the planet, elevating our society? Mine’s not, how about yours – and more frighteningly, do we even care? Consider that time is the most precious thing someone can have, and people are our most precious resource – by the transitive properties the cumulative waste of our lives in this system is monumentally mind blowing.

Don’t get me wrong, I don’t want to go back to being a hunter/gatherer, but at the same time i think we’re smart enough to see when a system is broken. The question is what will the answer look like.

What the hell happened to all the hope?

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“We could lose a generation of potential and promise, as more young Americans are forced to forego dreams of college or the chance to train for the jobs of the future,” Mr. Obama said. “And our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world. In short, a bad situation could become dramatically worse.”

Combine that with the double-digit-unemployment remark, and this article makes for a real upper.