There is a “shadow banking” system that has massively and often unknowingly leveraged client assets into possibly the largest credit bubble the world has ever seen.  Because of more favorable rules, much of the leverage has occured in the Euro, meaning a collapse of the Euro will be much more catastrophic than the public is aware.

One of the shadow banking systems favorite tools is re-hypothocation.   This means institutions can use client funds as collateral for the institutions own investments.  The institutions take $1 of client collateral and use it to purchase $1.40 to $2.00 of investments for the institution.   So for $1 of client money, the client may be trading at leverage, and the institution is trading at leverage.

A much more thorough explantion is provided by Reuters, who concludes

The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently. To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up.

Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.

For further reading we suggest this dire post from zerohedge.com,  who sees truly frightening possiblities

It turns out the next AIG was among us all along, only because it was hidden
deep in the bowels of the unmentionable shadow banking system, out of sight (by
definition) meant out of mind. Only it was not: and at last check there
was $15 trillion in the shadow banking system in the US alone, where the
daisy chaining of counteparty risk meant that any liquidity risk flare up would
mean the AIG bankruptcy was not even a dress rehearsal for the grand finale.

The real threat is not the collapse of financial institutions, but the threat of governments stepping in to resuce so called “to big to fail” insitutions.   Governments don’t have the money, so they will print it up via the central banks.  This will certainly lead to inflation, and perhaps hyper-inflation.

A more hopeful opinion on the odds of hyper-inflation is provided by dailycapitalist.com

I respect many of the writers who believe that we will experience hyperinflation. A number of them are, like me, students of Austrian theory economics. I think most of them are jumping the gun. At this point none of the economic or political factors required to set off hyperinflation are present. A careful analysis of theory, fact, and history leads me to conclude that inflation/stagflation is our future. It is quite a leap of fancy to say we are certain to have hyperinflation.

CBS’s 60 Minutes documents how wrongful wealth was created in the run up to the mortgage crisis.

Mortgages are ‘originated’ between the borrower and the original lender through the services of it’s brokers.  The originating lender then may keep the loan, or may decide to resell the loan to another lender.  Originating lenders can also bundle loans into a package and then resell the package.   The originating lender makes money from the fees charged to originate the loan, and from selling the loan to others.

When reselling the loans to other lenders, the originating lender represents that the loans meet certain guidelines pertaining to the ability of the borrower to repay the loan and the value of the collateral.  High risk loans (sub prime), with less qualified buyers and less collateral, command higher fees and higher interest rates, and earned higher profits for the originating lender.  Much higher.

If the originating lenders made loans that did not meet the standards, and then knowingly resold these loans to other lenders, they would be profiting from a crime.  Managers and executives who received compensation from the resale of the misrepresented loans would be profiting from a crime.  If the originating companies stock price rises as a result of the profits from reselling these loan packages, executives made millions of dollars in stock options from a crime.   And if the whole thing fell apart, the investors who bought the loans, and the investors who bought the stock of the originating company, would lose billions of dollars from a crime.  And if the losses were so large as to endanger the financial system and cause government to bail out the failing loan originator, the tax payers would be paying for the crime.

In the two pieces below, 60 Minutes documents Countrywide and Citicorp both knowingly engaged in fraudulent loan origination.  This is the kind of wrongful wealth we can all agree should be stopped.

Not sure whether to laugh or cry over this excellent piece by Jon Stewart and The Daily Show.   The original Bloomberg article focuses on $13 billion in profit that banks accrued from $7.7 trillion in near zero rate loans from the Fed.   The US government spends $40 billion a day, to put the $13 billion in context.  The Fed claims the loans have been repaid and that they actually made money for the US government.  Well, that may be so if you choose the ignore the inflationary effect of printing up $7.7 trillion.  The money may have been “paid back”, but it’s still in the money supply.  To put that inflation of the money supply into perspective, it’s about half of our annual GDP.

The Bloomberg article also highlights the fact that decision makers in Congress were kept in the dark.  A Congress that had trouble passing a $700 billion TARP program surely would have been impacted by the news that the Fed was bailing out the banks with $7.7 TRILLION.

Enjoy…

Coming into Paris by cab gets you thinking about the riots there a couple of years ago, because the outer rings of the city seem to be overwhelmingly populated by Arabic/Muslims and are uniformly bleak in appearance.   This is not the tourist Paris; it is a depressing cityscape just to drive through.  Of course the French have a very difficult relationship with their–very large–Muslim population, which has not been assimilated and is struggling to adjust to the increasingly tight strictures imposed by the secular French state on some forms of religious observance.  Chadors are not allowed in public, headscarves are banned in schools, and now there is talk of banning even headscarves in the public sphere altogether. France (terrorism aside) has a really volatile history with the Muslim world, including the Algerian and a hideous Paris flare-up in 1960 in which the French police killed several hundred Algerian immigrants and dumped their bodies in the Seine.  How did I get off on this history tangent?  I’ll stop here.  Back to Paris.

The contrast between the outer rings and the central core of the city is stark. Everywhere we went, and we covered large swathes of the city on foot, the place was humming with a diverse, multiethnic polyglot of vitality and prosperity.  It helped that we had beautiful, balmy weather, but the streets are packed with seemingly prosperous people, the restaurants and humming, and there are none of the rows of shuttered storefronts so common to many American cities.  European economic woes aside, this is no Detroit.  Far from it.  Part of this prosperity, though, comes from the uniformities imposed by a papering over globalization: Starbucks and other chains are everywhere. In some places this almost gives the feeling of walking down 5th Avenue in Seattle (one thing conspicuously lacking in the core city was observant Muslim women in headscarves. Central Paris shows a very diverse racial/ethnic mix, but some forms of discrimination/segregation look alive and well).

Of course not all is affluence and prosperity, even to the casual stroller.  There are street people here, looking just as wracked and desperate as their American counterparts, but in significantly fewer numbers.   I found myself doing the same sort of four step shuffle around them: first step sympathy, second step embarrassment, third step guilt, fourth step gone.  To all appearances the French give these unfortunates a similarly wide berth, with the same sort of body language.  Just a discouraging bit of cross-cultural commonality. There is less crime there–especially violent crime–but the same big city tensions pertain.  We talked to a shop owner who had lived many years in Daytona Beach, and returned to Paris in the last couple of years.  He had recently been mugged in the square outside his T-shirt shop, and said the stresses of living in the city were about to drive him back to Florida.

This brings me to the police.  They are everywhere, clad in a bewildering array of uniforms to guard public buildings, stroll the streets, roar around on motorcycles.  We even saw two uniformed police serving as crossing guards at an elementary school, and this on a sleepy side street about 15 feet wide.  The most striking thing about them–besides their colorful costuming–is that by our count they are about 99% white males.  A few women, but we didn’t see one face of color in uniform.  Not one.  In a city as diverse as Paris, this can’t be good.

I’ll give you a couple of serendipitous tourist moments illustrating the vitality of the city. We were walking along the Seine and happened on a large global photography exhibit stretched along the river.  Some of the images were quite powerful and haunting–kids in limbo in a lonely Russian orphanage, depressed Japanese self-scarring flaggelents (a phenonema I didn’t even know existed).  We happened to step into St Eustache, a Renaissance Catholic Church–more like a cathedral–during services.  A woman got up to sing, and her transcendently beautiful voice soaring through those high stone arches was almost enough to make a believer of me.  These two things happened on one day, which just shows what a heady mix of aesthetic and even moving stimulation Paris can be, and I haven’t even mentioned the museums.

In a way there isn’t much to say about the museums of Paris just because there is so much to say: they are a parallel world within the wider city world, a sort of gulag of art and history that Stalin might have imagined if he had been a humanist.  Here are a few fragments. There is series of Rembrandt self-portraits in the Louvre from youth to old age that in their own pictorial was suggest the liniments of that life and mind developing as powerfully as any print autobiography.  The huge, wraparound series of Monet Water Lilies in the Orangerie Museum are almost hallucinatory: you can become mesmerized and drown in those blue depths.  In the Pompidou Centre, there is a fascinating little documentary film covering a group of twelve year old Liverpool schoolchildren discussing an (unseen)
Picasso painting.  Somehow these kids, casually draped all over each other, burrow down into the heart of how Picasso uses form, emotion, and color.

Of course some things are a bit more earthy, such as the hordes of big black motorcycles blasting through the streets. It is apparently a Parisian law that these bikes are required to go from 0 to 60 between stop lights, making as much noise as possible (which is deafening). The curious thing is the cross walks actually work–the motorcycles bearing down like a pack of hungry sharks calmly halt and allow you to cross the street alive.  Paris has a thriving rent-a-bike program, in which Parisians check out bicycles from innumerable kiosks and placidly pedal around through the ravening, snarling traffic.  They look nothing like Americans ripping around on their $2,000 bikes and $500 biking outfits–Parisian bikes look like 1960 vintage Schwinns and they just pedal about slowly in their street clothes.  One American idea they should adopt is bike helmets. Parisians don’t wear them.  Still, I didn’t see any shattered bikes or squashed heads on the streets, and I was looking.

The women.  The stereotype goes that Parisian women have a certain attractiveness.  Believe it. I view it as a form of harassment.  For instance, I looked up from my menu at a sidewalk cafe to see a server who was one of the most beautiful women I’d ever seen, wearing a sweater off (way off) one shoulder.  I thought to myself, Really?  I’m just trying to order lunch here!  Please to stop assaulting me with your stunningness!  This sort of harrowing experience was repeated everywhere.  They come at you in waves.  (P.C. Note: I’m aware that the Strauss-Kahn adventures in New York have helped blow the lid off the real problem of French sexual harassment.)

This little report has been an impressionistic hodgepodge, but that is the sort of thing encouraged by the experience of Paris.  This is a city that is all surface and all depth, all present and all past. It sets off echoes in your head.  You can stand on a bridge over the Seine looking down at Notre Dame looming in the distance, or stroll down one of the innumerable narrow little streets lined with shops and restaurants, and suddenly start thinking about a counterpoint of Liverpool kids and Russian kids, calmly studying art on the one hand, desperately holding it together on the other.  Or you might find yourself trying to backpedal several centuries and imagine what it would be like for Parisians circa 1640 entering St Eustache from very different streets and hearing a woman’s singing voice echoing off those cavernous vaults.

Sometimes I say, “I’m Libertarian”.  Confusion, curiosity, even contempt ensues.  People see Libertarians as selfish, or perhaps naive.  Others confuse it with anarchism or anarcho-capitalism.  For shorthand, I tell them Libertarians are socially liberal and economically conservative, which is plenty deep enough for most polite conversations.

Now and then someone shows interest, wants to know more, wants to understand, and can discuss while remaining polite.  Politeness is important, because all good Libertarians oppose coercion,  so a heated agrument to persuade someone about Libertarian views would be like bombing the infidels to teach them Christian Love and Charity.

So for the interested only, I start with the Moral Foundations Theory of  Dr. Jonathan Haidt.   In a nutshell, the theory argues there are five fundamental moral values which transcend society or nationality, and that individuals simply place higher priority on different moral beliefs.  His studies have shown that different ideologies have different priorities.  Consequently, discussion of politics is largely a discussion of morality in disguise.

With that in mind, I talk about Penn Jillette because, hey, who doesn’t like Penn Jillette?   He’s funny, he’s smart, and he can do magic.  He’s also Libertarian.  Reason.tv recently interviewed him, with lots of talk of atheism and Libertarianism.  Penn is smart, real smart, but his main point is “I don’t know”.

Those innocuous three words  in the context of political/moral ideology become poignant.  He said,

“My whole take on Libertarianism, I don’t go with pragmatic arguments at all, the arguments that our whole world would function better, I don’t go for the arguments that the free market is magic and if we left it alone everyone would be better or happier off.  I always go to kind of a pure ideological, moral point of view.  And I just don’t know…

(My) point of view on Libertarianism is simply that each person has to make  decisions for themselves and I don’t know what’s best for other people.

For a Libertarian ‘not knowing’ means that you, or anyone else for that matter, doesn’t know what’s best for another person’s life.  The things you value both socially and economically may be (and probably are) vastly different from another individual’s. This is neither a good nor bad thing, simply a side effect of different moral beliefs.  Penn talks about Hillary Clinton as an example, “All her motives are very very good. I’m not one of those people that believes she’s an evil dragon lady. I think she really does want everybody to be happier and healthier and more successful and everything else.  But she knows what’s best for them.  And I don’t think there’s anything you can do more insulting than act like you know what’s best for someone else.”

If my friend is still with me, I’m ready to go for the deep dive…

‘Not knowing’ suggests a critical aspect of Libertarian philosophy, the non-aggression principle.  In essence the non-aggression principle states that no human being has the right, under any circumstances, to initiate force against another human being, or to advocate or delegate its initiation.  Applied to Libertarian principles, both freedom of contract and personal property are aspects of self determination, and interfering with either is synonymous with aggression.

Penn expands on this with discussion of three dogmas that hurt American Society.  The first is God, although not the idea of God, but the social meddling that comes with a fundamentally theistic view of social issues.  It’s a point that ties in with the concept of not knowing, because a fundamental aspect of religion is faith – a form of knowing based not on certainty, but on belief.  Combined with strict social views taught by many creeds, you’re  left with a world view in which you feel you know, by virtue of  faith, the best way for others to live their lives.

The second dogma regards the assumption that people are bad, selfish, lazy (insert negative adjective of your choice), when in fact most people are generally pretty good.  A Libertarian will assume that when left to their own devices an individual will act in a way that is ultimately positive, either for themselves or society as a whole (although the two are by no means mutually exclusive).

Finally, Penn suggests the famous quote “Ask not what your country can do for you, but what you can do for your country” has got it all wrong.   For Penn it isn’t the first half of the quote which is problematic, but the second.  To Libertarians the role of  government is to get out of the way and let people live in a manner suitable to them.  Much of government’s intervention into a person’s life is ultimately a form of aggression.  An individual’s duty is not to the government, but to each other.

If my friend talked to 10 different Libertarians he’d receive a plethora of answers,  just as he would if he talked to 10 different Liberals or Conservatives.  But I always find it’s hard for him not to agree  there’s lots we just don’t know, that non-agression is a good thing no matter who you are, and that the only person who knows what’s best for you is you.

In the words of Penn, “I think that not taking anything from the government, not giving anything to the government, and doing nothing wrong is a fine way to live.”

“This is a contest of values. This is a choice about who we are and what we stand for.”

                   - President Barack Obama, in comments regarding his Jobs Bill.

The New York Times cheered the President’s value based message, calling Republican values “elitist and narrow”.  Commentators on both sides have take up the clarion call of moral authority.  Paul Krugman recently observed “…something I don’t think most political commentators have fully absorbed: at this point, American politics is fundamentally about different moral visions.”   That it’s a moral question is one thing Mr. Krugman and Karl Rove can agree on.  Mr. Rove recently wrote, ”Politicians would be wise to remember that high taxes also are a matter of principle… This makes taxation a moral issue as well as an economic one.”

Are they right?  Can we really equate politics and morals?

Politics is Morals

The New Republic had this to say about Rep. Paul Ryan’s budget plan “His basic moral premises are foreign, even abhorrent, to liberals. He seems like a person you’d like to negotiate with, but there’s nothing to negotiate over.”

Amen to that, according to Dr. Jonathan Haidt of the University of Virginia.

Dr. Haidt’s research has shown that in the presence of moral motivations, thinking and reasoning aren’t worth much.  His groundbreaking Moral Foundations Theory demonstrates that our political beliefs are a reflection of our moral beliefs.  Dr. Haidt found that we start with intuition, and for the most part use moral reasoning  not to determine, but to justify our intuitive perceptions of right and wrong.  We then tend to bind ourselves into social groups with similar values, which reinforce our intuition but tends to blind us to other groups intuition/morals.

Dr. Haidt theorized that the resulting groups bound together by shared morals could explain our political differences.  Building on prior research  and his own international field work, Dr. Haidt articulated 5 dimensions of morality; Harm, Fairness, Loyalty, Respect, and Purity.  When applied to American political ideology, he found that Liberals prioritize Harm and Fairness, while Conservatives value all five more equally (this does not mean Liberals disregard the other 3, only that they give more weight to Harm and Fairness).   The result is our political views are a reflection of our morals, which themselves are explanations for our personal intuitions regarding right and wrong, and simply put there is nothing more to talk about.

If there’s nothing to discuss, what are Mr. Krugman and Mr. Rove to do about their moral disagreements? Shall they keep at it until one of them persuades or panics a majority into adopting their moral viewpoint?   Are moral beliefs subject to majority rule?

History doesn’t think so.

Moral Belief is a Human Right

It was the Stoics of antiquity (3 BC) that first recognized the independence of man’s mind, as Seneca the Younger wrote ” …but the mind is independent, and indeed is so free and wild, that it cannot be restrained even by this prison of the body, wherein it is confined.”   By 1 BC this idea evolved into recognition of the inherent equality of all men.

The recognition of men’s equality led to the Reformation age (circa 1500′s) concept of the liberty of conscience.  As Martin Luther wrote, “Since, then, belief or unbelief is a matter of every one’s conscience, and since this is no lessening of the secular power, the latter should be content and attend to its own affairs and permit men to believe one thing or another, as they are able and willing, and constrain no one by force.”

By the late 1600′s  John Locke (the intellectual forefather of modern Liberalism) articulated the concept of natural rights, “life, liberty, and estate”, as rights belonging to all without limitation. Even Thomas Hobbes, who developed the concept of the social contract and was the antithesis of Locke regarding natural law, respected the right of man to think for himself;   “For moral philosophy is nothing else but the science of what is good and evil…Good and evil are names that signify our appetites and aversions, which in different…men are different: and diverse men differ not only in their judgment on the senses…but also of what is conformable or disagreeable to reason…”.

In the 1700′s  Francis Hutcheson called these natural rights unalienable, or rights that no law or social contract can separate from an individual.  As Hutcheson wrote, “Thus no man can really change his sentiments, judgments, and inward affections, at the pleasure of another; nor can it tend to any good to make him profess what is contrary to his heart. The right of private judgment is therefore unalienable.”

Hutcheson’s “unalienable” was made famous with the Declaration of Independence, which declared in 1776 that  “all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness”.   Just a few years later The Declaration of the Rights of Man, part of the French Revolution in 1789, includes Article 10, “No-one shall be interfered with for his opinions, even religious ones, provided that their practice doesn’t disturb public order as established by the law.”

John Stuart Mill continued the intellectual heritage in the 1800′s, writing in On Liberty (1859)

This, then, is the appropriate region of human liberty.  It comprises, first, the inward domain of consciousness; demanding liberty of conscience in the most comprehensive sense; liberty of thought and feeling; absolute freedom of opinion and sentiment on all subjects, practical or speculative, scientific, moral, or theological. (emphasis added)

And in the mid 1900′s  The Universal Declaration of Human Rights, passed by the United Nations in 1948 with Eleanor Roosevelt playing a central role, would codify the statement that remains both law and inspiration today.  The Guinness Book of Records  has called it the most translated document in the world.  Article 18 states

Everyone has the right to freedom of thought, conscience and religion; this right includes freedom to change his religion or belief, and freedom, either alone or in community with others and in public or private, to manifest his religion or belief in teaching, practice, worship and observance.

In 1971 John Rawls, a liberal widely considered one of the 20th century’s most important political philosophers, considered moral and religious freedom an unalienable right existing in the original position

Now it seems that equal liberty of conscience is the only principle that the persons in the original position can acknowledge. They cannot take chances with their liberty by permitting the dominant religious or moral doctrine to persecute or to suppress others if it wishes…

Moreover, the initial agreement on the principle of equal liberty is final. An individual recognizing religious and moral obligations regards them as binding absolutely in the sense that he cannot qualify his fulfillment of them for the sake of greater means for promoting his other interests.

Importantly, the human right to moral belief is not contingent on the source of those beliefs.  Morals may be thought of as originating from intuition, reason, or environment.  The origin of those beliefs has no effect on the right of the individual to hold them.   Man’s right to moral beliefs based on intuition, reason, or environment are just as inviolate as religious beliefs based on intuition, reason, or environment.

So if Mr. Krugman and Mr. Rove’s opposing political beliefs are reflections of their fundamental human right to moral belief, they might as well be arguing about religion.  But we don’t argue about religion in this day and age, we respect and tolerate differences.  It wasn’t always so.

A (very) Brief History of Religious Toleration

Religious tolerance in the western world got its start in the late 1600′s.  Prior to that, religious persecution was the rule.

Christians were a minority religion in the Roman Empire and were persecuted until Constantine I converted to Christianity in the 300′s AD.  Christianity embarked on a 1400 year quest to rid the western world of heresy.  In 1215 the Catholic Church declared “Secular authorities…shall be admonished and induced and if necessary compelled…to exterminate…all heretics pointed out by the Church”.  Persecution was supported by intellectuals including Saint Augustine and Saint Thomas Aquinas, who once wrote heretics deserved “not only to be separated from the Church, but also to be eliminated from the world by death”.  Martin Luther in 1543 described the Jews as “base, whoring people, that is, no people of God, and their boast of lineage, circumcision, and law must be accounted as filth.” He wrote they are “full of the devil’s feces … which they wallow in like swine,” and the synagogue is an “incorrigible whore and an evil slut”.

Though there were always dissenting voices, persecution’s decline began in the mid 1600′s led by John Milton and others.  By the mid 1700′s, the path to religious toleration would be pioneered in the fledgling United States, with the adoption of the Virginia Statute for Religious Freedom and the First Amendment.

The inviolability of religious belief is today enshrined in our culture and our law. Our protection has two dimensions, 1) The Establishment Clause prohibiting the government from establishing a national religion, and 2) The Free Exercise Clause guaranteeing free exercise of religious practices.

We are protected in the holding and practice of religious beliefs, and we are protected from having religious beliefs imposed on us by the government or anyone else.

Moral Tolerance

By recognizing moral belief and religious belief as analogous human rights, we simply substitute moral/morality anywhere we use the terms religious/religion with respect to rights.  Hence we could say we are protected in the holding and practice of moral beliefs, and we are protected from having moral beliefs imposed on us by the government or anyone else.

John Rawls expresses the equivalency of morals and religion and their independence from the government in Theory of Justice

The government has no authority to render associations either legitimate or illegitimate any more than it has this authority in regard to art and science. These matters are simply not within its competence as defined by a just constitution. Rather, given the principles of justice, the state must be understood as the association consisting of equal citizens. It does not concern itself with philosophical and religious doctrine but regulates individuals’ pursuit of their moral and spiritual interests in accordance with principles to which they themselves would agree in an initial situation of equality. By exercising its powers in this way the government acts as the citizens’ agent and satisfies the demands of their public conception of justice. Therefore the notion of the omnicompetent laicist state is also denied, since from the principles of justice it follows that government has neither the right nor the duty to do what it or a majority (or whatever) wants to do in questions of morals and religion. Its duty is limited to underwriting the conditions of equal moral and religious liberty.

And if Dr. Haidt is correct that our morals are our politics, we can also say we are protected in the holding and practice of political beliefs, and we are protected from having political beliefs imposed on us by the government or anyone else.

Aspects of both liberal and conservative ideologies demand obedience.  Mr. Krugman and the liberals demand our money to support their conception of social justice.  Mr. Rove and the conservatives demand our money to support the military-industrial complex.  Both demand our childrens money by funding their visions with debt.  Would Mr. Krugman and Mr. Rove give up obedience in favor of moral/political tolerance?

Thomas Jefferson would; from the Statute of Virginia for Religious Freedom

that to compel a man to furnish contributions of money for the propagation of opinions which he disbelieves is sinful and tyrannical

Changing the World

In this article we made the case for moral belief as a fundamental  human right.  Everyone has a right to their own beliefs, and to have all beliefs that don’t cause harm to others respected and tolerated.

Our political leaders encourage us to self identify as Democrats or Republicans, willingly binding ourselves to a collection of beliefs which we may not fully share, and blinding us to understanding of the other party.  We can find ourselves defending positions we don’t fully support against opponents we don’t fully understand.

But we are increasingly rejecting the simplistic two party categorization and instead participating in many networks that support  our many interests.  These networks, often local, sometimes virtual, bring us in closer contact with other people who may share our passion for the subject, but approach it from a different perspective.   Cooperation overcomes our blindness and erects bridges built on toleration and understanding that are helping us find solutions.

In our next article we will take you on a tour of remarkable ideas and experiences in modern toleration. We think you will be amazed at both the research and practical experiences taking place throughout our country and the world.   A recent Rasmussen survey showed about a third of us already refuse to label ourselves as Republican or Democrat.  Contrary to what self serving politicians and the media encourage us to believe, our research suggests that the real conflict today is between an emerging post-partisan culture disgusted with and struggling to free itself from the confines of petty partisan politics.

Sign up here to be notified when Part II is posted.`You will recieve a link via email to confirm, please check your spam folder if you do not receive.

Anwar al-Awlaki, then and now

The Wall Street Journal provides a retrospective look at the extensive positive media coverage received by Anwar al-Awlaki, an American citizen recently killed by drone attack in Yemen.

In the early 2000′s, al-Awlaki was hailed as a moderte Muslim capable of bridging the cultural gap between Islam and the West.  Some excerpts…

New York Times:

…Mr. Al-Awlaki, who at 30 is held up as a new generation of Muslim leader capable of merging East and West: born in New Mexico to parents from Yemen, who studied Islam in Yemen and civil engineering at Colorado State University.

Baltimore Sun:

“Al-Awlaki bridges the two worlds as easily as he shifts from lecturing on the lives of the prophets to tapping phone numbers into his Palm Pilot [a now-antiquated electronic device],” reported the paper on October 28, 2001. “He and other Muslims say they support action against terrorist leader Osama bin Laden in retaliation for the Sept. 11 terrorist attacks[.]”

NPR:

“Awlaki, whose mosque is one of the largest in the U.S., sees himself as a Muslim leader who could help build bridges between Islam and the West. [B]ut political scientist Telhami says these are difficult days for Muslim moderates”

Interesting background information on (reportedly) the first American citizen to be assassinated abroad.

Class warfare, or fairness?  The Brookings Institute explains.

From a well done article at brookings.edu. concisely describing the “Buffett Rule”.   Since it is brief, we quote the entire article below:

On Monday, the administration released its deficit reduction blueprint. One part of the administration’s proposal, which has received enormous attention, was that the Joint Select Committee on Deficit Reduction observe the “Buffett Rule” if it attempts tax reform. The furor over this proposal is surprising and the debate about it seems to have largely missed the point.

For background, the proposed Buffett Rule, so named from Warren Buffett’s op-ed in the New York Times, says, “No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families.” Setting aside the ambiguous definition of “middle-class,” the intent of the proposed rule is clear: tax reform should follow the principle of vertical equity, a hallmark of the progressive tax system—that as one’s income increases so should one’s tax payments as a share of income.

To see why the furor is surprising, note that the Buffett rule is an extremely mild form of progressivity—it just says that tax payments as a share of income shouldn’t be lower for someone with high income than for someone with low income. Is anyone seriously proposing the opposite? That people with income above $1 million should pay a lower share of their income in taxes than a middle-class family? If not, then what is objectionable about the Buffett Rule?

Opponents to the Buffett Rule frequently make the point that households with the highest-incomes already, on average, pay a higher portion of their income in taxes than middle-income households. Indeed, according to estimates from the Tax Policy Center, those making over $1 million in cash income paid an average federal tax rate (excluding excise taxes) of 29.1 percent while those with cash income between $50,000 and $75,000 paid an average federal tax rate of 15 percent.

This type of analysis, though, is based on averages. The Buffett Rule as proposed by the administration would apply—precisely and only—to those high income households who are paying less than the middle class average tax rate. The fact that the average tax rate among very high income households is higher than among middle class households means that the system, on average, is progressive, but it can still be the case—and is—that some people with very high income pay little or no taxes. That is what the Buffett Rule is addressing.

The Buffett Rule is also a matter of horizontal equity, a concept often used when analyzing the fairness of tax proposals but notably absent from the current debate. In an equitable system, people of similar means should have similar tax burdens. The Buffett Rule could improve both the vertical equity and the horizontal equity of the federal tax system by ensuring that every millionaire pay a minimal rate.

To be clear, the administration did not suggest how the Buffett Rule be implemented nor did it score specific versions. Rather, it proposed that the Joint Select Committee observe the principle of vertical (and horizontal) equity when trying to reform taxes. The Buffett Rule could be a guideline either for tweaks to the tax code that will reduce the deficit or for comprehensive tax reform. In any case, the vehement opposition to the proposed rule seems unfounded.

Well said.  The New York Time cites Treasury Department estimates that there about 60,000 “some people”, and taxing them per the Buffett Rule would raise approximately $1.3 billion per year…about 1/10 of what the government spends every day.

Libertarian beliefs about Liberal beliefs.

In his book The Revolution, Ron Paul cites an essay by William Graham Sumner titled “The Forgotten Man“.   Mr. Sumner began the essay with this:

The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together to decide what C shall be made to do for D. The radical vice of all these schemes, from a sociological point of view, is that C is not allowed a voice in the matter, and his position, character, and interests, as well as the ultimate effects on society through C’s interests, are entirely overlooked. I call C the Forgotten Man.

We thought it would be interesting to list the assumptions underlying this framework as a way for Libertarians to make their case.  From the Libertarian perspective then, Liberals assume that:

A & B know what’s best for D.

A & B are not self-interested

C will not help D unless A & B compel him.

A & B are fine with using force to coerce C into helping D.

A & B are not fine with C using force to resist helping D.

A & B prefer C to be unarmed.

C will not help D unless A & B compel him.

C will not help D unless A & B compel him.

Without the assitance of A & B, D will languish or even perish

D wants the help of A & B, or for that matter C.

D will be grateful for the help.

D will not become dependent on the help.

The help will not discourage D from helping himself.

The use A & B have for C’s resources is superior to what C would do on his own.

A & B have dominion over C and first claim on the fruits of his labor.

C will try to avoid his “responsibility” to help D, so they must confiscate his earnings first by withholding from his paycheck.

There are more D’s than C’s, so A & B will get elected by taking from C and giving to D.

A & B are making the world a better place.

.

Krugman: More stimulus.  Much more.

The nobel laureate argues we aren’t doing enough and urgently need to reverse course through government spending and expansion of the money supply.

What should be happening? The answer is that we need a major push to get the economy moving, not at some future date, but right now. For the time being we need more, not less, government spending, supported by aggressively expansionary policies from the Federal Reserve and its counterparts abroad. And it’s not just pointy-headed economists saying this; business leaders like Google’s Eric Schmidt are saying the same thing

Be sure to catch Eric Schmidt’s recent comments too…

But the current strategy is ludicrous. You have a situtation where the private sector sees essentially no growth in demand. The classic solution is to have the government step in, and with short-term initiatives help stimulate that demand. If they do it right, they’ll invest in income and growth producing things, like highways and bridges and schools.

Paul Volcker cautions the Fed against playing fast and loose with inflation.

Top strategist: “I believe printing money to be a fundamentally dishonest endeavour”

Dylan Grice takes a strong stand against government money creation.  Mr. Grice is one of the world’s foremost finacial strategists according to the Thomson Extel Survey.

Here’s his view, heavily edited for brevity.  Read the full transcript here.

…I believe printing money to be a fundamentally dishonest endeavour. Think about how it works. When the central bank, at zero cost, increases the monetary base by 1%, where does that money go? Answer: into the market for government bonds.

By issuing bonds to itself the government seems to have miraculously raised
revenue without burdening anyone else. This is probably why the mechanism is
universally adopted throughout the world’s financial system. Yet free money does
not, and cannot, exist… someone, somewhere has to pay.

But who? This is where the subtle dishonesty resides, because the answer is that
no-one knows…The point is we can’t know who will pay, only that
someone will pay. Thus the government has raised revenues
without even knowing upon whom the burden falls, let alone telling them.

The burden of this money printing…seeps silently into the
economy, falling indiscriminately but indubitably on unseen, unknowing victims.

The full article is much more extensive and highly worth reading.  In particular he makes the point that increases in asset valuations, not just goods as measured by the CPI, should be included in the inflation calculation.

Mr. Grice prefers the classical definition of inflation, which is inflation of the money supply.  For those who share this view, here’s a sobering chart…

Esquire argues Jon Stewart needs to take a stand.

High school Valedictorian speaks out against public education

Humorist reveiw the week, from politico.com

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens… The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

John Maynard Keynes, 1919

Government has a bottomless piggy bank, and it’s us.  We just don’t realize it.

Keynes was referring to inflation of the money supply.  In simple terms the money supply is the total of everyone’s physical money plus everyone’s bank accounts.   Government can increase or decrease the total supply of money through actions of the Federal Reserve (Fed).  In fact, one of the Fed’s main functions is to regulate the money supply, this is called monetary policy.

When government increases the supply of money, the money already in circulation is automatically worth less.   It’s much like shares of stock.  If you own 100 shares of a company that has 1000 shares outstanding, you own 10% of the company.  If the company was able to issue 1000 new shares, your 100 shares would now own just 5% of the company.  This kind of action in a company’s stock is called dilution.   When it happens to money it’s called inflation.  Same effect.  Whenever new stock/money is created, the value of existing stock/money is now lower.

Let’s look at it another way.  We all know that when lots of people want something, the price goes up.  For example, you may wish to purchase a new car.  You have the money.  You know the price should be $15,000.  Then, just before you go to buy the car, the government announces they will give everyone who doesn’t have a car $20,000 to buy a car with.  Suddenly lots of people have access to the cash needed to buy a car.  Guess what the dealer does to the price?   At first your $15,000 was valuable enough to by a car, but after the government increased the supply of money available to buy cars, your $15,000 was no longer valuable enough to afford the car.   So (the government program) increasing the  supply of money  made the value of (your) existing money lower.

At any given time you own a certain percentage of the money supply.  When government increases the money supply, the value of your money is lower.  But since your bank account didn’t change, you wouldn’t have any way of knowing.

How would you become aware you now own a smaller percentage of the money supply?   When money is created,  more dollars are chasing the same amount of things to buy, causing prices to rise.  This rise in prices is how we measure the effect of increasing the money supply, so over time the rise in prices has come to be referred to as inflation.  The Consumer Price Index (CPI) is our most common measuring stick for inflation.  Because the economy is so large and complicated, it is impossible to know which prices will rise, when they will rise, or by how much they will rise when the money supply is increased.

So, whenever governement increases the money supply, it is eventually ”paid for” by an increase in the price of something, at some time.

How does government increase the money supply?  For reasons too complex to explain here, the Fed mainly controls the money supply by setting interest rates.  The Fed can also directly create dollars.  It creates new dollars by simply increasing the total in it’s own bank account.  If you’re unfamiliar with this it may sound incredible, but that is actually what happens.  The Fed can create money and use it to buy anything it wants.

One of the Feds favorite things to buy is Treasury Bonds.  The sale of Treasury Bonds is how the U.S. government finances it’s deficit spending.  When the government needs to borrow it announces a sale (the term they use is auction) of T-Bonds.  Guess who buys the T-Bonds?  The Fed.  Where did the Fed get the money?  They created it.  The Fed is by far the largest holder of US government debt, usually holding about 50% of the total.

This is called “monetizing the debt“.  If you’re the government and you’re short of cash, it is much quicker and easier than raising taxes or borrowing from the Chinese.

Monetizing the debt means (since the government inflated the money supply) we will eventually pay for it in inflated prices. And since the Fed is independent, they don’t have to tell anyone what they have done, what they are doing, or what they intend to do.   This is what Keynes is talking about when he says governments can confiscate the wealth of their citizens secretly and unobserved, and why not one man in a million can diagnose it.

Is there any limit to how much money the Fed can create?  Yes, it’s just that no one (including the Fed) knows what that limit is, because it’s just too complicated.  They know if they create too much money, inflation will increase.  If they create way too much money, they will lose control and money will hyper-inflate causing disruptions in society (imagine prices rising 50% or greater every year, which has happened many times in world history, and some voices believe can happen again in the U.S.).  This is why the Fed always says their main job is to fight inflation.  The Fed believes it can manage the money supply any way it wants, as long as it controls inflation.  So in practice, the inflation rate is the main limit on how much money they will create.

An inflation rate of 1-3% is, A) low enough that citizens won’t notice, and B) low enough the Fed doesn’t think it will lose control.  An inflation rate of say 10% is high enough citizens will notice and the Fed will fear losing control.

How did we get into this situation?  At the turn of the century economists developed theories that by managing the money supply they could control the business cycle, meaning they would prevent down cycles and keep the economy in a permanent semi-boom cycle, which would feature near full employment.   Especially after the Great Depression, this sounded mighty good.  And so, the last 100 years has been a living experiment.  All the booms and busts, including the one we are experiencing now, have been the result of the unforseen consequences of various interventions in the economy by government.

Likewise, no one knows what would have happened if the government had not been intervening.  And that is the battle line in the debate between (so called) Keynsian economists and ‘free market’ economists.  Stay tuned.

UPDATE:  A reader posted this article to reddit.com, generating extensive comments.  See the full thread here.

A more technical (and scarier) description is provided here by zerohedge.com.

Ross Douthat takes on the income inequality issue in a NY Times op-ed piece.   The issue of income inequality is at the very heart of liberal thought development.  It stems from the early 1800′s, when the excesses of capitalism (long hours, low wages, child labor, etc) demanded reform.  Britain passed the Poor Law to provide subsistence level support for all citizens.  By 1900 the call expanded beyond subsistence to an argument that all members of a just society had a right to a ‘living wage’, and that if the economy did not provide a job with a ‘living wage’ it was by no fault of the worker, and the just state should step in to ”make good” the promise of a living wage.   This was to be provided by taxing the rich; redistribution of income.

The problem was, how much redistribtion was the right amount?  The early writers took no position, and essentially adopted the Utilitarian principle of the ‘greater good’.  Applied, the idea was we should tax the wealthy and redistribute their income until it caused more harm than good.  This cavernous gap in ideology has remained an open question for over 100 years.  How to resolve it?

One of the more popular methods became comparasions of income between the top and bottom tiers.  I have not yet come to the exact argument as to why a widening gap between top and bottom is a de facto social injustice.  Nonetheless, it is widely considered a ‘bad thing’.  But is it?

Mr. Douhat introduces us to factors that effect changes in income inequality:

For instance, inequality is driven in part by low-skilled immigration: it nudges wages downward for native workers, and the immigrants themselves are taking longer to achieve upward mobility than earlier generations did…

Inequality is also driven by the collapse of the two-parent household, which disproportionately affects the poor and working class, depriving them of the social capital they need to rise…

Inequality is perpetuated by our failing education system — and especially by the bloated cartel responsible for educating the nation’s poorest children.

Lacking an objective statement of the ideal income equality, the US is usually compared unfavorably to European countries.  A 1994 paper by Richard Freeman and Lawrence Katz addresses the comparasion:

Why did wage inequality and educational wage differentials rise more in the United States than in other advanced countries?  We attribute the exceptional experience of the United Sates to the way shifts in the supply of and demand for skills work themselves out in the decentralized U.S. labor market, compared with how they operate in other labor markets.  Our explanation has three parts…

The first is that changes in the supply of and demand of labor skills substantially alter wages and employment of different groups of workers in the manner predicted by economists’ supply and demand market-clearing model…We further expect supply and demand to have their largest effect on young or less experienced workers on the active job market as opposed to experienced workers with substantial job tenure…

The second part of our explanation identifies…differences in wage setting and other labor market institutions across countries…The stronger the role of institutions in wage determination, the smaller will be the effect of shifts in supply and demand on relative wages…[E]ducation and training institutions also mediate the effect of market forces…Social insurance and income maintenance institutions also affect labor outcomes…generous income maintenance or unemployment benefits that allow workers to remain unemployed for a long period can reduce their willingness to take low wages to obtain work… 

For the third part of our explanation we turn to institutional changes, such as product market deregulation and changes in unionization…The important institutional changes in the 1980’s were the decline in trade union power, which was exceptional in the United States, and the decentralization of collective bargaining that characterized diverse European countries.  Both of these developments are likely to produce greater earnings differentials. 

To simplify, one explanation for income inequality is that the U.S. labor market is shifting towards higher paying jobs requiring education and away from lower paying jobs.  A bad thing?  Should we ‘fix’ the ‘problem’ by taxing the higher paid?  Mr Douthat concludes:

The European experience suggests that specific policy interventions — the shape of the tax code, the design of the education system — may matter less in the long run than the sheer size of the state. If you funnel enough of a nation’s gross domestic product through a bureaucracy, the gap between the upper class and everybody else usually compresses.  But economic growth often compresses along with it.  This is already the logic of our current fiscal trajectory: ever-larger government, and ever-slower growth.  That combination could eventually create the more egalitarian America that Democrats have long promised to deliver. The question is whether Americans will thank them for it.

The baseline goal of health care reform is to provide quality care to the maximum number of people at an affordable cost.  Seems obvious, but in the endless debate about public versus private, death panels, the heavy hand of government or rapacious health insurance companies that basic goal vanishes into verbiage.

To this end, this article about the Swiss system is a useful tonic. It has the flexibility of  a private system, with the proviso that requires everyone to carry insurance and sets basic parameters regarding profitability and costs of coverage. Of course there are problems–how could there not be? Cost to individual citizens tends to run high, and there is some friction between doctors and insurance companies about allowable procedures. Still, the overall cost of the system is far below ours, and the quality of care is generally high. These virtues entitle the Swiss system at least to a hard look.

California’s 2/3 supermajority rule for spending legislation is addressed in an article for truthout.org by George Lakoff, Professor of Linguistics at the University of California, Berkeley.

To paraphrase George Tenet, this should be a slam dunk.  As a simple principle of democratic rule, legislation should be enacted by majority vote.  Lakoff is absolutely right that California law as it now stands in effect gives a one third minority of legislators veto power over the will of the majority.

Of course it is true that rule by simple majority at the moment would give Democrats the legislative advantage, but this will not always be so, depending on which way the electoral winds blow.  Whatever one thinks of pending legislation, budgets, etc., Lakoff has a strong case that the supermajority rule as it now stands is a recipe for gridlock and undemocratic on its face.

Choice works.  Just ask La Crosse, WI.

The folks there deserve credit for more than their famous boots, they have also pioneered ‘end of life’ care that works at the Gundersen Lutheran Health System; it preserves choice and dignity.  And it also happens to be less expensive.

From the Washington Post:

La Crosse became a pioneer in addressing end-of-life questions in the mid-1980s, after Hammes, a native of the city who has a doctorate in philosophy from Notre Dame, arrived at Gundersen as the director of medical humanities, charged with educating resident physicians about ethics. He noticed a “troubling pattern,” he said, in which family members struggled to make medical decisions, such as whether to continue dialysis after a stroke.

“We’d turn to the family and say, ‘We need your input. If your mother or father could speak now, what would they tell you?’ And the family would say, ‘If we only knew,’ ” said Hammes, 59. “I could see the distress. They were going to have to live with themselves, with the worry about making a mistake. This was unacceptable.”

The hospital began urging families to plan while people are healthy. For those who want help writing a directive, a physician will discuss the powers and limits of medicine and explain to family members what it means if they agree to serve as the “health-care agent.” They will also help people define the conditions under which they would no longer want treatment. Hammes said people often define this as “when I’ve reached a point where I don’t know who I am or who I’m with, and don’t have any hope of recovery.”

The directives are power-of-attorney forms that protect physicians and family members against liability, and the hospital makes clear to its doctors that they are expected to follow them. Today, more than 90 percent of people in town have directives when they die, double the national average…

…locals say it is because Gundersen and the town’s other hospital, Franciscan Skemp, have urged planning. “People here have their feet planted in the ground,” said Barbara Frank, a retired teacher. “They’re no-nonsense sorts of people, without a lot of illusion. That was the fertile soil upon which it was planted. But there’s no question it was helped by the two medical centers taking the lead and saying, ‘This is a good thing for you to do.’ “

By creating a culture of planning, this community has improved it’s citizens control of health care choices.  And by coincidence, it’s also turned out to be less expensive, as none other than Newt Gingrich explains:

Let me give you an example that I find fascinating. In LaCrosse, Wisc., the Gundersen Lutheran Hospital system is, according to the Dartmouth [Atlas of Health Care], the least expensive place in America for the last two years of life. They have an advanced directive program, and over 90 percent of their patients have an advanced directive. They have electronic health records, so everybody on the staff knows what the advanced directive is. They have a very strong palliative care program for using drugs to manage pain. They have a hospice program.The result is today, the last two years of your life in costs are about $13,600. The last two years of your life at UCLA are $58,000. Now, why should Medicare pay $58,000 for the same outcome if it could pay $13,600? You can say, well, Los Angeles is more expensive; they do a couple of more complicated things. So fine. So let’s say it ought to be $20,000 at UCLA. That’s still [$38,000] less than it currently is. …

The Gundersen experience demonstrates two things: 1) End of life planning can work, and 2) We don’t need government help to do it.  The Gundersen success begs the question why couldn’t Britain’s government run health care get this right (see Is ‘end of life care’ pro end of life)?  Mr. Gingrich suggests:

We don’t think the politicians can ever fix this because the hospital lobby is so powerful, and the doctor lobby is so powerful, and the pharmaceutical lobby is so powerful, and the medical technology lobby is so powerful. You’re not going to politically solve this, but if I could empower you to know that, people start making choices. We know, for example, that if a doctor knows price, 60 percent of the time they will prescribe the less expensive drug, just because of their common sense. It’s practical. We know that people are willing to look at practical outcomes.

Seems practical  to leave government out of it.

Where Did “We” Go?  By Thomas Friedman

The man who saw the meltdown coming had another troubling insight: it will happen again.