I consider this a must read article. It’s basically analogous to Roubini’s February 2008 article “The Twelve Steps to Financial Disaster,” which I posted back then (you can download the PDF from the first link here).

Excerpt: So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

“Mother of all carry trades faces an inevitable bust”
By Nouriel Roubini
2009-11-1
Financial Times (original)

Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

The writer is a professor at New York University’s Stern School of Business and chairman of Roubini Global Economics

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2009-10-29 UPDATE: Updated NASDAQ chart and comments.

Just time quick post. The annotations on the chart are self explanatory. Coming after a 7-month, 73% rally, they represent a yellow flag (caution). See also this weekly chart I posted last month, when we were at this same level, the one I posted yesterday, and the one shown below:

The mother of all moral hazards?

I’ll close with a quote from Mervyn King (Bank of England): “Bank bailouts created the ‘biggest moral hazard in history.’”  Indeed!

The GMO Quarterly Letter

“Just Deserts and Markets Being Silly Again” (PDF).  Good read.

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1a) The image above (except for my comments) came from Mary Meeker’s “Economy + Internet Trends” report (PDF). It’s is pretty much the same stuff her and her interns have been pumping out since the ’90s. Check it out for a regurgitation and updating of conventional “wisdom.”

1b) Comparing Rallies: 2009 vs. 1974-75 vs. 1938-39: Click to view.

2) Now on to the fun stuff: Chuck Norris on the downturn (finance humor):

• Chuck Norris has killed black swans with his bare hands.
• Chuck Norris rubs the VIX into his chest.
• Chuck Norris continues to short the Aussie market.

• Chuck Norris flies First Class.
• Chuck Norris fought gamma in nam and won.
• Chuck Norris still has his PB balances with Lehman. Don’t mess with him.
• Chuck Norris doesn’t use gates. He stops investors with one hand.
• Chuck Norris thinks 2 & 20 is soft.
• Chuck Norris will sub-underwrite Iceland.
• Chuck Norris isn’t scared by crowded trades.
• Chuck Norris will trade with any counter-party.
• Chuck Norris takes Iron Ore as a vitamin supplement.
• Chuck Norris trades currency with Citic.
• Chuck Norris thinks Fannie & Freddie should toughen up, and use some real leverage.
• Chuck Norris thinks Credit Crunch is a breakfast cereal.
• Chuck Norris’s subprime CDO is par bid.
• Only Chuck Norris can rollover commercial paper.
• Chuck Norris funds at Libor flat.
• Chuck Norris Asset Management is hiring and paying top dollar.
• Chuck Norris sold Countrywide cds at +1200 and bought it back at+350
• Chuck Norris can borrow at the discount window.
• Chuck Norris can sell $300bln in high yield loans before lunch.
• Chuck Norris’s curves are never inverted.
• Chuck Norris doesn’t hedge. He waits.
• Chuck Norris doesn’t mark to market. The market marks to Chuck Norris.

Bonus tidbits:

• The mother of all moral hazards? Bank of England’s Mervyn King: “Bank bailouts created ‘biggest moral hazard in history.’”
• PBS’s “Warning” uses the same Greenspan/Bush pic I used on AlansBubble.com (see its 2005 mention in the Financial Times).

Bonus random Chuck Norris jokes:

• Chuck Norris once had an erection while lying face down and struck oil.
• Chuck Norris once ate a whole cake before his friends could tell him there was a stripper in it.
• The Great Wall of China was originally created to keep Chuck Norris out. It failed miserably.
• The last digit of pi is Chuck Norris. He is the end of all things.
• The quickest way to a man’s heart is Chuck Norris’s fist.
• There is no ‘ctrl’ button on Chuck Norris’s computer; He is always in control.
• Chuck Norris does not need to jail break his iPhone.

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Took six months, but here are the rest of my New Orleans pics. The first batch of them, along with some narrative, is here.

Catfish dinner carryout:

Alan expertly shuttling plates (Amy and Cirilo in pic, too):

Mid-City Lanes Rock ‘N Bowl:

New folks in this pic: Carolyn (left) and Guzmary:

New person in pic is April, standing next to the owner (blue shirt):

Post-bowling munchies at Camellia Grill, before heading to Maple Leaf:

Maple Leaf:

Jam band doing Dylan cover (video clip):

Alan and Amy’s Pearl River Blues Blueberry Farm:

Unloading the truck after our roadtrip from Washington, DC to Lumberton, Mississippi (map showing Lumberton to New Orleans):

Yum, those are some good ribs (at Leatha’s):

Don’t even think about getting between Alan and his ribs:

Amy might be the best chef I know. Here she’s serving up some miracle breakfast, whipped up with local ingredients, such as eggs from some of their 80 organic, free-range chickens and raw milk direct from the neighbor’s cow. Note: I’m still trying to get this recipe from Amy. Amy, if you’re reading this, please send recipe (or name of dishes and I’ll look up recipe). Thks.

That’s it… right there:

Self-explanatory (I hope!):

Alan cleaning the yuk out of the composter-thingy in front of the high  tunnel (that greenhouse thing you see):

Amy potting in… the potting shed:

Amy giving some TLC to one of their many pets.  That one is either McGuffin, Chaussette (pronounced Show-set). Might as well list the rest of the menagerie here so it’s all in one place. From Alan: “Animules: dogs are McGuffin, Chaussette (pronounced Show-set), Rolly Poly, Chickaboom; cats are Georgia Bean and Peatree (or however the PETRE DISH? spelling goes). Chickens are unnamed beyond what a little kid might call them.”

The chickens getting some shade and Alan and I getting some sun while he talks to the real estate agent selling his place in DC. Hear the rooster do his thing during the exact phone call you see pictured! That rooster is one busy boy, what with 80+ hens that need regular servicing. (Correction from Alan: There were two roosters at the time I was there):

This is Georgia Bean:

Solo in N.O. Making Lots of Friends. First few pics are my hotel, which I got cheap on Priceline:

This is not my hotel, just a night shot of downtown. Shot taken from the ferry as we cross the river on our way back from a visit to the other side, where Amy grew up:

On this ferry:

These next shots are mostly over around Frenchman St:

Video clip from the Blue Nile. This is a hot jam band that played before Kermit Ruffins (video of Kermit):

“The city of New Orleans shall be here!”:

That first trumpet kid (right next to the adult on trumpet on the left) just rocked it. I think we’ll see and hear him big time when he grows up:

Jackson Square:

Met these guys at the bar. Good guys. One a teacher from Virginia (I think) and the other… shit, I forget now (waited too long to post the pics):

Next day:

Most of next pics are from Royal Street:

One of the bigger street acts (I saw that trumpet player earlier over at the Louisiana Music Factory):

Even the dogs in N.O.are characters:

Yes, it was a festival on Royal, today:

I saw this dude get busted by the cops for some reason or another:

Don’t ask, because I don’t know:

Clarinet Lady blow your socks off if you hear her play… amazing!

Nice bike:

Lots of pirates (there was a pirate convention… really!):

A fancy wedding at St. Louis Cathedral I stumbled across:

Some of my pirate friends:

She was supposed be handing out pirate flyers, but instead was hangin’ on the bench, talking with me. Don’t tell her boss!

Me and April grabbin’ some Po’ Boys at Mandinas Restaurant on Canal St:

That brass marker at the top is the Katrina waterline:

After dinner, April dropped me off down on Frenchmen and I immediately went to this place (forgot the name) and stayed all night (except to hit the awesome taco stand up the street). The place rocked and I was having a lot of fun with some local guys and girls from Florida. Video clip here.

These are the local guys (lawyers). Real nice:

Florida girl #1. The picture of Florida girl #2 didn’t come out (shit happens after a few too many Jagermeister shots):

Next day, somewhere in New Orleans:

He was every bit the character he looks like. Incredible act!

One of my favorite street bands:

I never heard of this place, but every day people were lined up in front and one day I walked by and there was only like two people in line, so I decided to try it. Glad I did!

Met him in line and we hung out at the bar. Turns out he’s also from DC:

The grilled oysters rocked:

Yes, more pirates… drunk ones at that:

Nice guy. I forgot his name, but you will often find him at Jackson Square:

These guys jammed (video clip here):

Great breakdancers (video clip here):

I did one night on Bourbon Street. This is it. You got to do it at least once when you’re in New Orleans. Had a blast. Went into every place with a halfway decent band — halfway decent is about all you’ll get on Bourbon Street, BTW, but the ones I saw were mostly all actually pretty good.  This lady could really sing:

Another place:

They’re doin’ the Electric Slide (see it):

Another band:

Some of Larry Flint’s holdings. Did I mention, my friend Maria here is Sweden is related to L.F. Whatever you think of him, you can’t say he’s not a colorful character. Actually, now that I think of it, check out this piece he wrote for HuffPo this summer: “Common Sense 2009.“

Do you think he’d take that horse into a bar? (see here):

The rest are Amy’s Pics (I Photoshoped that one of Alan down below). This first one is me in Jackson Square, where we stopped to eat our Muffulettas:

I believe he calls himself “Handsome John” (or maybe that’s what Carolyn called him or maybe I’m just imagining things). Nice guy. He and I compared motorcycle scars. Even though I totaled two, one into the broadside of a car making a left turn in front of me, he had me beat (he got run over in his own driveway by a drunk kid who lost control of his car):

Meet Mr. Andy. Mr. Andy worked lived on an island (the Isle of Mann) his whole life and never traveled much or visited America until he retired and decided it was time to see the world.  He landed in New Orleans sight unseen and met Alan and Amy by chance during the Katrina evacuation. Mr. Andy stayed with them and helped clear the farm. They’ve all been friends ever since.  If you’re lucky enough to meet Mr. Andy, you’ll notice the massive field of positive energy he radiates. It’s not the bubbling kind that sometimes makes you want to slp a person, but the , friendly, unassuming confidence, and faith (not the religious kind) that makes you want to be with them (Not like that… Not that there’s anything wrong with that, though). When you’re with Mr. Andy, you just feel like you can see the world more clearly, differently, and deeply (you can, because Mr. Andy has good drugs…. kidding). When you’re with Mr. Andy, you know that everything is going to be ok, everything as it should be. Mr. Andy is good. The world is good. Carolyn and Mr. Andy:

That’s my “I’m buzzed and happy after a great night of fun, friends, and music and can’t wait to eat another beignet” look.  BTW, about the only time there’s not a line at Cafe Du Monde is late on an off-season rainy night:

That’s Alan’s “I’m tired, get me the f**k home now” look:

Amy’s Mid-City Lanes pics. These are all from that same night in my set of pics, above. First bowling, then munch, then Maple Leaf:

Pose with the owner:

Luv the Maple Leaf:

And this is that same BBQ joint shown above in my set of pics.  Awesome BBQ. Yes you can eat all those ribs:

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Good times with Andreas, Calle, Heiko, JP, Lars, Martin, and Ola. Some pics and a video clip from last year’s trip is here.

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Back our 3-year anniversary trip to Riga, Latvia, via Stockholm, Sweden. Great trip, great weather, great food, people!

It was a nice surprise to be in Riga for the 20th anniversary of the Baltic Chain, a protest where 2 million people held hands over 600 kilometers (373 miles) spanning three countries (Estonian SSR, Latvian SSR, and Lithuanian SSR). Imagine that! I had know idea.

By the way, while we’re on the topic of protests and before I forget, here’s Larry Flint’s (yes, that Larry Flint) call for mass protest on HuffPo: “Common Sense 2009.”  What will cause the sheeple to reject the lies, reject their selfishness (and the selfishness of the politicians and mega corporations), and standup for each other (“we, not me”)?  Apparently a lot, since it’s not happened yet.  Sigh.  Now back to regularly scheduled blog post.

More about the Baltic Chain and its 20th anniversary:

• Wikipedia: “The Baltic Way“: “Within six months from the protest, Lithuania became the first of the Republics of the Soviet Union to declare independence.”
• France24.com: “Race marks 20 years since two million joined anti-Soviet human chain“: There’s a video, too.  “US Secretary of State Hillary Clinton issued a statement honouring the Baltic Chain 20th anniversary. It saw two million people from a total population of seven million in the three states hold hands in an unparalleled act of solidarity and defiance. Footage of the human chain was this year inscribed in UNESCO’s Memory of the World Register, a list of 193 archives of global significance.” Susanne and I happened upon the end point of the Riga leg of the race on Saturday night, after a real nice dinner at Vincents. That was our anniversary dinner. The rest of the trip we ate super cheap, as in baguettes, cheese, and sausage.  Our hotel, Nordic Hotel Bellevue, included breakfast (and use of a great spa, which we used).  We stayed there as part of a Tallink package deal.
• YouTube. There are many videos there.  For example, “Baltic Way 20th anniversary marked – 23 Aug 09” and “Motorcyclists Commemorate 1989 Baltic Way.”
• Continental Drifter: “Riga, Latvia“: Interesting article with a lot of history and description of The Museum of the Occupation of Latvia, which we did not see. We did not know about it until now, when I started researching.

Now on to the pictures, organized into three groups:

1. Stockholm (pics from before and after Riga)
2. Boat to and from Riga
3. Riga

Stockholm:

Boat:

Riga:

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Skåne is a huge area of southern Sweden.  This is the part where we were: Google Map.

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(Why do I single out Bezos here?  Because responsibility goes to the top and Bezos is the Founder, Chairman, CEO, and President of Amazon.)

2009-7-23 UPDATE: See bottom of this post.

I wasn’t going to comment on the recnt (and ironic) Jeff Bezos debacle, but yesterday a commenter on Cringly’s blog said: “Amazon has destroyed their business in one careless stroke. Once you lose the public trust, you never get it back.”

Although I think “destroyed” and “never” are too strong words, I share the sentiment, especially the part about violating trust (for example, violate my trust once and you’re out, with little chance of reinstatement).

Why is “destroyed” too strong a word?

Because, probably enough of Amazon’s customers don’t know or care about Bezos’ Orwellian, jack-booted thug maneuver or are not thoughtful enough to understand why it’s such a big deal.

Most of the people who do care might somehow punish Amazon a little, such as by going on a temporary buyer’s strike or writing a negative blog post (like this one), but they will probably come back to big bro Bezos and his website that knows more about you than you may know yourself.  The more you use Amazon, the more it learns about you, of course.  It’s the same, with Google, NetFlix, your credit/debit card purchases, mobile phone and location data, RFID chipped cards and passports, but all that’s another story. Reminds me, though, see this interesting Wired UK article: “The new hidden persuaders.”

So, why is this debacle so interesting?

Because, it’s a window into the fundamental principals driving the minds of Bezos and the rest of Amazon’s board and management.  Their actions *tell* us that he and they care more about money than ethics.

Why is this “tell” reliable?  Because, this is not poker, where we give fake tells in an effort to bluff (feign strength when we are weak or weakness when we are strong).  Bezos and Amazon were not bluffing.  There was nothing to gain by “pretending” to disregard customer trust for personal gain and/or the approval of a privileged few.  I’m sure Bezos will come out with an apology and Amazon an explanation, but you can’t take back a violation of trust or shift the accountability. This tell is the truth.

All this reminds me of the periodic Facebook debacles (see my rant from 2007), and some others. It almost seems like the same rudderless people are involved in all these stories. Unfortunately, they have learned that there are no consequences besides the occasional and brief media/blogger shit storm (and maybe a small and temporary customer and/or advertiser blip).

Taking it up a notch, this reminds me of American politics, at least during the tragic Bush era, when unethical people were able to lie, cheat, spin, and manipulate their way to the top and then stay there (for a while). The election of Obama was a referendum on that, but Joe Sixpack is angry, and he’ll be back, after all, he is a “real American,” and he won’t tolerate those educated and godless, baby-killing liberals (see Paul Krugman’s NYT article, “The Big Hate“).

PS: Bezos used to be a role model of mine.  Now, not so much.  He had a chance to stand up for principals and he didn’t.  Of course there would have been a cost (to Bezos) for standing up for those principals, there is always a cost to stand up for principals.  If it was free, it wouldn’t be called “standing up for principals,” would it?

BTW, I see Bezos listed prominently on 37signal’s “About Us” page.  In fact, he’s the only adviser listed on the whole page.  I wonder what they’ll do/say.  My bet is nothing or come out with a supportive blog post that lets them retain him.

2009-7-23 UPDATE:

See Jeff Bezos’ personal apology, below.  Not that he had a choice in the matter, but I’m glad he did it, albeit late.  That lateness actually gives valuable information, however.  No time to give details now, but you can figure it out.  Just run an example from your personal experience of: (A) someone trying to get away with something (or making a “mistake”), (B) then, after a shitstorm hits, issue an apology taking the bad behavior to the extreme, so that (C) you actually come out and defend them, and say “there, there, what you did wasn’t *that* bad, we accept your apology”.  Anyway, good job, JB, you machiavellian.  Do better next time, you’re a role model, you’re in a position to lead by example. Do it.:

From TechCrunch: “Amazon’s Bezos Apologizes For The “Stupid” And “Thoughtless” Kindle Incident“:

Amazon quickly admitted that the move was a mistake to the press with a bland statement, but that wasn’t enough. So today, right before the company announced its earnings, CEO Jeff Bezos personally apologized for the incident as follows:

This is an apology for the way we previously handled illegally sold copies of 1984 and other novels on Kindle. Our “solution” to the problem was stupid, thoughtless, and painfully out of line with our principles. It is wholly self-inflicted, and we deserve the criticism we’ve received. We will use the scar tissue from this painful mistake to help make better decisions going forward, ones that match our mission.

With deep apology to our customers,

Jeff Bezos
Founder & CEO
Amazon.com

2009-9-4 UPDATE:

From today’s New York Times: “Amazon.com Offers to Replace Copies of Orwell Book.”

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First, see these headlines and stories:

• TechCrunch: “In Our Inbox: Hundreds Of Confidential Twitter Documents“
• TechCrunch: “Twitter’s Financial Forecast Shows First Revenue In Q3, 1 billion users in 2013“
• TechCrunch: “Another Security Tip For Twitter: Don’t Use “Password” As Your Server Password“
• TechCrunch: “Twitter’s Internal Strategy Laid Bare: To Be ‘The Pulse Of The Planet‘”
• NYT: “Twitter Hack Raises Flags on Security“
• Twitter Blog: “Twitter, Even More Open Than We Wanted“
• NEW: TechCrunch: “The Anatomy Of The Twitter Attack” (blow-by-blow description and how-to manual)

Now, ask yourself this?

Is having (good) two-factor authentication (TFA) on its Google Apps and Gmail accounts something that Twitter would pay for?  A GToken, perhaps, for each user?

Of course, it is.  And, to answer the begged question: Yes, TFA could have prevented this breach.  NEW: See “The Anatomy Of The Twitter Attack” and consider what would have happened if Twitter would have been using TFA (and it was required for password resets).

It’s the same with many other individuals and companies. In fact, if good TFA is easily accessible, it will become a requirement, not just the differentiator it is now. Companies who tell their customers, partners, investors, lenders, etc. that they use security best practices will have to use TFA.

Mini rant / idea:

It’s 2009, and every person and company who wants should be able to get one token (or iPhone app or whatever) and register/authenticate it with websites that support it (somewhat similar to the OpenID or OAUTH model).

So there might be an OpenTFA.com or 1token.com website (or whatever) where consumers and companies buy these things and developers develop, API, implement, whatever.

Best to do everything open source. Many reasons for that, especially with cryptography and security (see your favorite crypto geek / security geek websites).

Why not do this and do it now? Yes, I’m aware of the problems. F-ck ‘em, problems are opportunities.  Actually, people are already working in this direction, including Stina Ehrensvärd, CEO and founder of Yubico. Stina was one of the panelists at the recent TechCrunch event Mike, Petra, Rassami, and team put on in Stockholm last month (official page and BuzzPal Blog page).

Cheers!

PS: Why did TechCrunch get so many links? Because they (Mike Arrington and team) broke and drove the story.

2009-7-17 UPDATE: From this Google blog post: “since 2006 we have supported SAML Single Sign On, a protocol that allows organizations to use two factor authentication solutions such as certificates, smartcards, biometrics, one time password devices, and other stronger tokens.”

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This is an important article for anyone who has student loan debt. The more your debt, and lower your imcome, the more important the article.

The new repayment option — the Income Based Repayment (IBR) plan — went into effect on July 1, 2009. It limits what borrowers have to pay to “15% of the difference between their gross income and 150% of federal poverty guidelines.”

What exactly that means, is up to your lender to determine, as I understand it. But it does appear that payments can be as low as $0.00. That’s bad, because interest accrues and is added to the outstanding balance, but it’s good because after borrowers “make payments on loans” for 25 years, the balance is forgiven.  (But what does “make payments on loans” mean?  What if those “payments” are $0.00?)

Bottom line is that everyone who feels burdened by their student loans should read this article, and its links, and figure out if this new plan is something for them. If it is, take action.

Problem is, how to figure all this stuff out? It may be so important, and complicated, that some people might want/need professional advice. That’s actually something I’ve long been interested in, but it’s been low on the priority list compared with my other projects. I would love to hear from any of you with the relevant knowledge, experience, and drive to setup a web- and phone-based business providing student loan consulting (in partnership with me). I’ve already got a good domain name: StudentLoanConsulting.com. I guess I could always sell or license that name as well. If you’re interested in any of this, just contact me.

Now on to the article:

New Plan Ties Reduced College Loan Payments to Income
By Jonathan Glater
2009-6-29
New York Times

For the first time in years, there is good news for college students who borrow to pay for their education.

Starting Wednesday, the federal Education Department will begin offering a repayment plan that lets graduates reduce their loan payments, based on their income.

“We know today’s borrowers are concerned about their ability to repay student loans in the current economic environment,” Arne Duncan, the education secretary, said in a statement. “This new plan addresses the issue head-on by giving them the option of a reduced monthly payment tied to their annual income.”

Also on Wednesday, the interest rate on new federal Stafford loans, the most widely used federally guaranteed student loan, will drop to 5.6 percent, from 6 percent. By 2012, the rate will fall to 3.4 percent, under a schedule mandated by Congress.

The changes come as student borrowers face a difficult job environment and after many families have found it harder or impossible to use home equity loans to pay for college. Since the credit crisis, it has also become more difficult and more costly to obtain private student loans, which are not guaranteed by the government and which typically carry variable interest rates determined by borrowers’ credit histories.

“These benefits are guaranteed, no matter what happens in our economy, and are kicking in at exactly the right time for millions of Americans,” said Representative George Miller, Democrat of California and chairman of the House education committee.

While the interest rate cut applies to new loans, the new repayment option is available to borrowers who took out federal loans or who used a federal consolidation loan to combine their higher-education debts.

The extended payment program, called “income-based repayment,” limits what borrowers have to pay to 15 percent of the difference between their gross income and 150 percent of federal poverty guidelines. After borrowers make payments on loans for 25 years, the balance is forgiven. (The Education Department already offered an “income-contingent” repayment plan, which was similar, but less generous.)

“These programs are such an enormous victory,” said Christine Lindstrom, director of the higher-education access program at U.S. PIRG, the consumer advocacy group. “It enables all borrowers to be able to face their life circumstances and know there is some flexibility and responsiveness based on what life throws their way.”

To help borrowers understand the program, the Education Department has set up a Web site with a calculator to determine monthly payments based on income and family size.

The extended payment plan is intended to work with another program that forgives federal loans taken out by people working in public interest jobs. If borrowers make payments under the income-based plan, the balance on their loans is forgiven after 10 years.

There is a catch, though. To participate in the program, borrowers must shift their loans into the federal Direct Loan program, in which the government extends credit directly. The forgiveness is not available for loans made by banks or other loan companies, like Citigroup or Sallie Mae.

The definition (PDF) of public service under the forgiveness program is broad. Jobs in government, public schools or colleges, nonprofit organizations, public interest law, early childhood education, public health or public libraries all could qualify, according to the Education Department.

The forgiveness benefit could lead to even greater interest in public service jobs, which are already drawing more applicants. For example, in the 2008-9 academic year, more people than ever applied to Teach for America — 40 percent more than the year before, said Kerci Marcello Stroud, a spokeswoman.

The earliest anyone working in public service could see any benefit from the forgiveness program is 2017, because the program began in 2007. So someone who started teaching in 2005, for example, would not get credit toward the 10-year period for working in 2005 and 2006.

Due to the length of the program, people interested in participating will have to be careful to document their public interest employment and to make sure they have the right kind of loans. Neither of the new programs help with repayment of private loans made by banks or other lenders.

This article has been revised to reflect the following correction:

Correction: July 1, 2009
An article on Tuesday about a new student loan repayment plan by the Education Department that lets graduates reduce their loan payments based on their income misstated the current interest rate on federal subsidized Stafford loans. It is 6 percent — not 6.8 percent, the rate for unsubsidized loans.

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(click to watch the video)

Just time for a quick post to mark the end of another great Reboot. This year’s theme was Action (last year was Free).

I gotta keep this post short, but below are some interesting links and my pics.  Check back over time, as new and updated content will be posted.

• Andrew Turner: OpenStreetMapping Party!
• Bruce Sterling: Closing keynote
• Leisa Reichelt: Bare Naked (open source) Design
• David Weinberger: Cyberutopianism + Activism
• Flemming Funch: The art of not-doing: Being in sync with what wants to happen (link to slides)
• Flickr: reboot11 tag
• HashTags.org: #reboot11 hashtag
• Heidi Harman: User-driven Innovation – a means for Social Innovation
• Martin Källström: Reboot11 participants jumping in slow-motion
• Niels Hartvig: How to start an open source project… with or without code
• Sebastian Deterding: Persuasive Design
• Tor Nørretranders: Evening talk
• Vimeo: My Reboot photo/music/video
• Vimeo: reboot11 tag
• YouTube: reboot11 tag

Regarding the BuzzPal t-shirt promo mentioned here, we gave away two t-shirts at Reboot (via this tweet) and are giving away one more right now to someone on the sign-up list. The winner is Jesse V, whom we are emailing now. Jesse has one week to claim the t-shirt, otherwise we’ll draw a different winner from the list. We’ll do more promos in the future, too, of course.

2009-7-2 UPDATE: @jmvanderpol just claimed his free BuzzPal t-shirt! Congrats, Jesse! We’ll be giving away more freebies soon. Just follow @buzzpal and signup here: http://bit.ly/dYtNN.

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Unity of Greater New Orleans is a group of amazing people working to end homelessness (in New Orleans).

We all want to help reduce homelessness everywhere, so this is just one charity of interest in that department, but it’s a good one.  We have to help each other, one person at a time.

Read the following article and let me know what you think: New Orleans Times-Picayune: “Squatters hidden in N.O.’s abandoned houses often need more help than other homeless people”: http://bit.ly/TT3V1 (Google Doc) or http://bit.ly/gh72s (PDF).

So did you read that article? That’s why I just made a donation to them through the Network For Good. Here’s the link to Unity of Greater New Orleans’s donation page in case you’re inspired, too. Either way, maybe re-share this post? Thanks.

PS: Pics and video from my latest trip to New Orleans, in April 2009.

Barack Obama:
Change will not come if we wait for some other person or some other time. We are the ones we’ve been waiting for. We are the change that we seek.

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A year and a half ago, Nouriel Roubini gave us his recipe for financial meltdown, The Twelve Steps to Financial Disaster, each of which unfolded in sequence. Now Nassim Nicholas Taleb gives us his “Ten Steps for a Black Swan-proof World” (below).

Roubini’s steps were the inevitable outcome of a flawed system. Sadly, perhaps, Taleb’s steps are not inevitable.

Additional reading:

• Selected Roubini articles on this blog
• Nouriel Roubini’s Global EconoMonitor blog
• Nassim Nicholas Taleb’s Fooled by Randomness blog

Now on to the article:

Ten Principles for a Black Swan-proof World
By Nassim Nicholas Taleb
2009-4-7
Financial Times

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

The writer is a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable (on Amazon.com: book or CD).

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Just time for a quick market update (here’s my prior update) and explanation of my May 6th tweet (the time stamp says 9:46 PM because I’m in Sweden, six hours ahead of USA ET, where it was 3:46 PM):

Just closed out all stock positions (long) I put on in the beginning of March: http://bit.ly/3299rF. Biggest gain: RIMM 89%; loss INTU -8%.

Comments on the chart below:

1. Monday (#1 on the chart) saw a gap up and new high for the rally on low volume.  That’s the first red flag. Tuesday formed a doji candlestick, which can sometimes be a warning after a long move (such as this monster rally of the March lows).
2. Wednesday (#2 on the chart), at the end of the day, when the entire daily candlestick and volume was almost completed, is when I sold the positions I put on March 17th (see tweet).  Wednesday’s action entailed a gap up at the open, then a new high for the rally, then an intra-day reversal to close virtually unchanged from the day before.  This occurred on high volume, which means it was churning.  Also the candlestick formation was a hanging man.  All of this was enough for me to cash out.
3. Thursday (#3 on the chart) was a nasty intra-day reversal.  The NASDAQ closed down 2.5%, as did other major indexes, some more, some less, but still suffering intra-day reversals on higher volume. It was the first major distribution day of the rally, and was likely confirmation that the 2-month rally is over (or at least due for a pause). Ideally (for longs), the market just rests for a few weeks while volume remains light, allowing stocks setup new (tight) bases.

Note: None if this is a prediction of what will happen next week or at any time after.  It’s just a record of what I was thinking and doing.  In a nutshell, the “patient” (the market) was not looking healthy, so I bailed.  Also, now that I’m back in Sweden, I need to focus on getting our apartment unpacked, cleaned, and organized after the kitchen and bathroom renovation).  Plus I need to get back cranking on BuzzPal, which I am doing!

Bonus Chart:

Here’s a weekly chart, showing the potential new bull market I discussed (and compared with the prior bull market) here.  After the March low, we had the monster rally, which printed eight consecutive up weeks.  This week we had the intra-week reversal, the first of the rally.  The reversal came on higher volume (but not the highest weekly volume of the rally).  There you have it!

Roubini’s Take (from a few weeks ago):

End of Economic Gloom? Not as Early as You Wish

EXCERPT:

The stock market’s latest ‘dead cat bounce’ may last a while longer, but three factors will, in due course, lead it to turn south again.

First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast as the consensus expects.

Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures and surging defaults on corporate bonds will limit firms’ pricing power and keep profit margins low.

Third, financial shocks will be worse than expected.

[Read the entire article here.]

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A long, but interesting and important article.

The Quiet Coup
By Simon Johnson
2009-05
The Atlantic

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

One thing you learn rather quickly when working at the International Monetary Fund is that…

…no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Click the chart above for a larger view

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

The Wall Street–Washington Corridor

Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis

The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on. Instead, Fed Chairman Greenspan and President Bush insisted metronomically that the economy was fundamentally sound and that the tremendous growth in complex securities and credit-default swaps was evidence of a healthy economy where risk was distributed safely.

In the summer of 2007, signs of strain started appearing. The boom had produced so much debt that even a small economic stumble could cause major problems, and rising delinquencies in subprime mortgages proved the stumbling block. Ever since, the financial sector and the federal government have been behaving exactly the way one would expect them to, in light of past emerging-market crises.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10 million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

The Way Out

Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.

Two Paths

To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

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UPDATE #1: Here’s a master page of New Orleans pics and videos: www.buzzpal.com/no.

UPDATE #2: Here’s the rest of the pics, all on one page.

Here’s the first batch of pics from my 9-day road trip down to Pearl River, Mississippi, and New Orleans, Louisiana.

Why/how’d I go on this trip?

To help my friend Alan move all his stuff down to his and his wife Amy’s organic blueberry farm, Pearl River Blues. Plus I absolutely love great road trips, and what could be better, especially if you love music, than a road trip to Mississippi and New Orleans, the birthplace of jazz, funk, and blues?

This first set of pics starts out at our old building in Adams Morgan, where I met Alan in 1994, when I moved in (he moved in a few years earlier).

Helping carry his stuff down three flights of stairs and into the truck were Alan, Kevin, Marc, Philip, and me. Max was in charge of beer, pizza, and truck packing. I think it took about five hours, at a medium pace.

After getting everything packed, we took showers and Alan said his goodbyes to his home of 20+ years and his life as a native Washingtonian. Then Alan and I hit the road, driving a couple hours to get the truck full of goodies out of the hood. We spent our first night (Saturday, March 28th) at Richard and Irene’s summer house, near Old Rag, Virginia.

Sunday morning we set off early and drove down to stay with Alan’s high school friend, Barbara, and her husband and kids in Huntsville, Alabama, home of NASA’s Space & Rocket Center. (Sorry, no pics of our stop in Huntsville.)

Monday was an easy drive to Pearl River, Mississippi, where we were greeted by Amy, Cirillo, four dogs, two cats, 80 chickens, and one (tired) rooster.

Amy made us an amazing lunch/dinner of pork chops and gravy with a side of green bean salad with bacon and olive oil (fresh bread and homemade salsa, too). After lunch, we took power naps and then Alan and I got to work unpacking the truck while Amy and Cirillo did some farm work.

Tuesday, after Cirillo’s delicious breakfast of huevos rancheros (fresh eggs from the free-range chickens) and homemade salsa (Mexican-style), we hit the road for our first day/night trip into New Orleans, which is about an hour and a half southwest of the farm. On the way in, Amy took us on a guided Katrina tour (Amy is from New Orleans). Pictures below.

Next stop was Central Grocery for a Muffuletta, stuffed artichoke, Barq’s (root beer), and Zapp’s Cajun Crawtators (potato chips), which we ate on a bench in Jackson Square Park. Yum!

After that was walking around the French Quarter, stopping off at the Louisiana Music Factory, and then meeting up with Amy’s cousin, Caroline, at the Ugly Dog Saloon and BBQ joint. Also hangin’ that night were Pittsburgh John and Mr. Andy.

Before heading back to the farm for the night, we stopped off at Cafe Du Monde for latte’s and beignets. I think we made it home at 3:30 and spent the next 30 minutes on the porch sipping Hornitos and going through the Offbeat magazine and other papers we scored to plan our music for our upcoming nights.

BTW, you still have time to get tickets and get down to Jazz Fest later this month and first week of April. I’ve only been once, but hope to go back again next year with Susanne and some of my original Jazz Fest crew, John and Steveo from my Georgetown MBA dayz (Jumbo Jet, guys. Good times. Are you with me?). For streaming music: WWOZ’s website.

The rest of my pics, and some videos, are coming in the next few days or so (check back). Before we get to them, though, I want to share a touching, and hopefully motivating article, plus my personal thanks and comments to Alan, Amy, Cirillo, April, Carolyn, Mr. Andy, Chris, Sam, and all the other people I met and hung out with on this adventure.

First, the article, which I found on the front page of The Times-Picayune on my flight back from New Orleans Monday morning:

Squatters hidden in N.O.’s abandoned houses often need more help than other homeless people [PDF]

Why do more people not care? What can we do? We can start by standing up for others. I don’t mean our friends and family, or the people who can do anything for our careers or desires, but for the weakest and most vulnerable among us. Also by communicating with our elected officials, and by taking it to the streets (hey, I’m from DC and attended my first protest/rally in 1984). And, of course, by giving what we can to whom we can, even if it’s just a smile or acknowledgment.

Next, my personal comments (originally in an email to Alan):

Thanks again for everything and apologies for almost certainly catalyzing, encouraging, and over-extending, so much back-to-back-to-back Nawlins action and otherwise delaying the settling in of your your settling-in process. For what it’s worth, the entire trip was a super-duper, over-the-top blockbuster for me. I mean crazy great! From the drive down, to the farm, to Nawlins and all moments, sites, smells (except the occasional Bourbon St stank), tastes, sounds, and more.

I made a lot of friends as I wandered the streets on my own this weekend, many of whom you will see photographed and videoed (once I get things processed and posted). This ranges from the pair of guys at the bar where I had lunch (one from DC, one from Jacksonville), to the reluctant forced-to-dress-like-a-pirate-event-flier-hander-outer I met at Jackson Square Park, to the pair of buxom pirates we chatted with, to my two drinkin’- and jammin’-buddy girl friends (from Jacksonville) I partied with at Cafe Negril (check out the accordon player who was there), to my Acme oyster-eattin’ buddy, who happened to be from Columbia Heights, Washington, DC, to the four Nawlins natives (attorneys) who bought us many drinks and some tacos from the taco truck on Frenchmen Street Saturday night, to the best breakdance-troupe I’ve ever seen (and I’ve seen a few), to the tween trumpeter who rocked it with the Treme Brass Band, to the tromboner and brass band who had people dancing in the streets, to the just-married couple who popped out of the cathedral just as a happened by (pics coming), to the horse who poked his head into the bar to listen to the music, to the Rock & Bowlers, to the keyboardist at Maple Leaf, and the…. it goes on and on. Yes, I was up ’till 4:00 AM a few nights and close to it a number of others (power naps are the key). I cannot believe so much fun was sandwiched into such a short time. Thank you!

You, Amy, Cirillo, and April made it all possible. You know I am a minimalist as far as stuff goes, that’s because I am an “experience guy,” specifically a “sharing experiences” guy. We did that. You guys did that. Thank you, thank you, thank you (that’s one for each of you, Amy, and Cirillo) and thanks to April, Caroline, right, and everyone else.

Special mention to Mr. Andy, who is living proof that anyone can change their lives dramatically, if they’re willing to (it’s a choice) escape the known, free their minds, free themselves, and launch into the unknown, to where our dreams live. Follow the white rabbit.

Now, finally, on to the pics

On the phone to Susanne, in Sweden

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Just time for a quick follow up to my March 11th blog, which nailed the March 10th low. Since then, we’ve had multiple follow-through days, however volume has been suspiciously low, which could, actually, be interpreted bullishly (in a “double bluff” kind of way, to make a poker analogy).

Since the follow through last week, I’ve accumulated small positions in six stocks (see my March 18th tweet).

As shown above, during the first week of March 2009, we retested and undercut the November 2008 panic lows.  In a minute, I’ll show you the chart covering the 2002/2003 low.

Remember those fall 2008 lows?!  Credit spreads exploding, “Blue Chips” imploding, option volatility shooting the moon, all the while my man Nouriel Roubini dancing a jig in the end zone and coming into view of the trembling herd of CNBC-loving sheeple, as his Twelve Steps to Financial Meltdown scenario came true.  I hope you were paying attention, because what you witnessed was a rare event, a panic combined with a slow-motion capitulation, as a I blogged about and documented as much as I could: Lots of great images and comments here and here, and this one even saw respected VC, blogger, and twitterer, Fred Wilson drop by to comment.  Wow!  Crazy dayz.  It’s really important to soak those kinds of experiences in, they’re invaluable.  Same thing for the reverse, the exuberant peaks, such as in winter/spring 1999/2000 with tech stocks and 2004, when the 2nd-derivative of price housing price change was peaking — and I sold my residence and started selling my Montana real estate.

Anyway, this possible “fall low, then spring retest” bottom reminds me of  the 2002/2003 bear-market low (see chart, bel0w), which followed a similar sequence, except most stocks and indexes did not undercut the fall lows on the spring retest (they did this time).

The question now is: Was the March 2008 low “the” bear market low, or just the launching pad for bear-market rally #2? Seems about 50/50 to me, but like I said last fall, most bear markets last longer than this one, but most aren’t this steep, either.

Also in that article is this chart, which shows the duration of a set of economic slowdowns. In the US, the recession officially started in December 2007 and was “announced by the NBER in December 2008 (see my Dec. ‘07 blog about private fixed investment and how it syncs with recessions and foreshadows the NBER).  If it’s a 2-year recession, it will end at the end of 2009.  If that’s the case, and if the forward-looking stock market does what it’s supposed to do (look forward 6-9 months or so), a spring 2009 bottom make sense.  If, however, an L-shaped recession, it might not end until 2010+, which would mean, “Buckle your seatbelt, Dorothy, ’cause Kansas is going bye-bye.”

One more point on the prior bear market: As shown and discussed last fall (bottom of this blog), the prior bear market had two rallies that showed on a quarterly chart.  We’ve only had one so far.  Could March 10th have been the start of another one.  Highly possible, but won’t know for sure a while.

What did I do?  I legged in last Tuesday, going from 100% cash to 12% stocks, then 14% stocks this morning.  Kind of cautious, I know, which actually suggests (in a non-statistically-significant way) that there’s more room to run (because many/most other people also have — too much? — dry powder).  On the other hand, we’re up 23% in less than two weeks, and we’re nearing the 200-day moving average from below, so some profit-taking is in the offing.  Cheers!

News of the day:

“U.S. stocks rallied, capping the market’s steepest two-week gain since 1938.”  More here, including stuff on the Treasury’s Public-Private Investment Program (PPIP): Bloomberg: “U.S. Stocks Jump, Capping S&P 500’s Best 10-Day Gain Since 1938.”

BONUS VIDEOS!

• Jon Stewart Bashes CNBC and Rick Santelli
• Jon Stewart vs. Jim Cramer on The Daily Show Face 2 Face
  
• Jim Cramer On “Daily Show”: Full Unedited, Uncensored Video

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Just a quick post to mark the first day of a new rally attempt, lead by financials, lead by Citigroup (NYSE: C). Look for follow-through (or failure) next week. I am slightly exposed to this rally, but not “all in,” especially with me living out of a suitcase for the past month (and for another two months). Cheers!

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