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    2013 Year in Review (Part 2)

    Broken markets, too much debt, and less & less liberty
    by David Collum

    Friday, December 20, 2013, 5:26 PM


Footnotes appear as superscripts throughout this review; associated hyperlinks can be found here. The contents are as follows:

Part 1

Part 2


“This could go down as a blunder of historic proportions.”

~ Tyler Cowen on Cypriot bailout

Cyprus could slide into grinding abject poverty without anybody really noticing, but that is only part of the story. Confiscation of bank deposits was declared illegal and unreasoned by squeals across the blogosphere and globe. The reality might be a little more nuanced and a little scarier. A number of countries have mechanisms for confiscation embedded deeply in their legal system, including the United States.197 Come again? Poland overtly nationalized private pension funds.198 Spain implemented a “clunkers for cash” program by converting 97% of the social security pensions to Spanish government debt, up from 50% in 2008. Russia nationalized its pension funds.199 Both the IMF proposed a 10% tax across the Eurozone,200 and the BIS proposes bail-ins internationally including the U.S.201 Ouch. France’s President Hollande wishes to remove the inflation adjustment from the country's pension fund.202 Next up? Inflation, of course.

People in positions of power seem enamored with the bail-in (confiscation) model to correct imbalances. A student of history would not find this surprising. According to Matt King of Citigroup, “the very success of the [Cyprus] solution now being adopted seems likely to lead to its replication elsewhere.”203 The Troika set their sights on Luxembourg, possibly for another beta test.204 Eurogroup head, Jeroen Dijsselbloem (pronounced “Diesel….BOOM!”) suggested that “a rescue program agreed for Cyprus…represents a new template for resolving euro zone banking problems, and other countries may have to restructure their banking sectors.”205 EU economic affairs chief Olli Rehn enthusiastically endorsed the bail-in model while assuring Europeans that “the limit of 100,000 euros is sacred; deposits smaller than that are always safe.”206 Very soothing words indeed.

JPM warns of capital controls across Europe. I suspect that an ongoing stealth bank run is afoot in Europe. Would you keep your money in Luxembourg, Portugal, Spain, Italy, or Greece? I didn’t think so. Dmitry Medvedev caught many people’s sentiments with the cryptic but unambiguous suggestion that you should “Get all money out of western banks now!”207 It’s not just Europe: the Aussies are going to double-tax their Roth IRA equivalent.208

Let’s bring it to the U.S. and see how we're doing. The risk of confiscation is showing up in some not-so-subtle ways. The U.S. Consumer Financial Protection Bureau is weighing whether it should take on a role in helping Americans manage the $19.4 trillion they have put into retirement savings. Bureau director Richard Cordray is “interested in…what authority we have” but “didn’t provide additional details.” Little good will come of this. Beware of people from the government offering to help. Along comes Fed governor Donald Kohn declaring that a bail-in is needed to protect the system from too big to fail banks.209 You now have my attention, Don.

In 2006 I diversified my assets across a broader range of banks to dodge bank runs—I did see it coming—but that now provides much less protection. New bank account protection changed from $250K per account to $250K per Social Security number.210 Deposits in foreign branches of U.S. banks are no longer FDIC insured. We are all Cypriots now. A number of years ago the blogosphere was chattering about the role of a depositor at banks and owners of equities and mutual funds at brokerage houses. In the simplest of terms, equities are in the name of the brokerage. That turns us peasants into creditors and not very senior ones at that. (File under lessons learned from MF Global.)211

Steve Forbes warned that a Cyprus-style seizure of your money could happen here.212 I’ll take “Holy Shit!” for $1000, Alex. JPM has already limited cash withdrawals and wire transfers abroad for reasons that elude me now but probably will become clear later.213 This move seems to be at the behest of the Federal Reserve. Apparently, only the Fed is allowed to ship unimaginable sums to other countries.

Jim Rogers certainly sees dead people: “401k plans, IRA’s, and pension plans which the government knows about [may be next]…Anything they know about they might easily take”214 (my emphasis). Discussions at the highest levels have already hinted at capping retirement withdrawals to a “$205K per year annuity.”215 A little rampant inflation could bring many retirees under that umbrella (not unlike the alternative minimum tax.) The term “annuity” should also trouble potential heirs. In other incarnations, the administration proposes to “prohibit individuals from accumulating over $3 million in tax-preferred retirement accounts.”216 (I think they meant “tax-deferred, because “tax-preferred” is a phrase of little merit.) Does that mean that they will skim anything above that? It ain’t just Mitt who will take a hit. I may terminate my sheltered contributions.

“This is a major, major game changer…full-blown socialism, and I still can’t believe it happened”

~ Lars Seier Christensen, CEO of Saxo Bank

The brutal reality is that the pension doomers (Pete Petersen, Larry Kotlikoff, and Rich Marin to name a few) know that the system is going to topple. Reality could be far worse than the threats described above, and it will play out at the local, state, and sovereign level. Cities are confiscating assets in police raids as a source of revenue.217 The use of eminent domain to confiscate mortgage-backed securities ostensibly to help home owners is downright creepy.218 Remember: austerity is not a policy.

“And now you know the rest of the story.”

~ Paul Harvey

The Fourth Estate

“It’s become a cliché these days to say you don’t trust the media. But you know what? You’re right not to do so. The problems aren’t as bad as they appear. They are much, much worse.”

~ Brett Arends, Wall Street Journal

In the ultimate irony the media was in the news this year. Of course, there were the little things like Charles Payne buying stocks before touting them on Fox Business News. Chicago algo traders who were beating the speed of light in trading (see Broken Markets) appeared to be getting their advance info on the Fed minutes from “sequestered” prostitutes posing as reporters. My favorite mishap was this poor guy whose first day on the job at a local station didn’t go as smoothly as he’d hoped.219 But there were some really big stories. Some, like the role of the Guardian in the Edward Snowden leak and battles over what defines a legitimate member of the media (hint: not bloggers), are embedded in Civil Liberties. Other media-centric scandals are mentioned here.

Bloomberg reporters were snooping on traders using the famous Bloomberg terminals. Traders were baffled by Bloomberg’s sleuthiness. The snooping was detected when a Bloomberg reporter asked about someone who had “not logged into his terminal in a few weeks.”220 Don’t lie to me Big Mike: Did Bloomberg reporters use a subscription service to monitor the activities at the big banks? Not exactly a Chinese wall. Ten’s of thousands of intercepted text messages give this story a shade of Rupert Murdoch.

The University of Michigan confidence numbers (MCSI), popular triggers for algos and HFTs, were being released by Reuters early; dissemination times depended on a tiered pay scale.221 The earliest notices went to the deep-pocketed banks and brokerages, of course. Academia got a black eye when it was revealed that University of Michigan was in on the scheme. When New York attorney general Eric Schneiderman told Reuters to cease and desist, he ran into a remarkably remorseless opponent;222 Reuters defended their private service and reserved the right to allocate data as they saw fit. This is not a bad argument, but Reuters terminated the practice (at least until the furor dies down). The odd pre-release trading disappeared.223

An interesting new form of media has emerged that is either the very beginnings of a media revolution or a skit in Saturday Night Live. Either way, I wanted a piece of that action, so I did an hour on BTFDtv.13 BTFDtv is an unscripted, unproduced, unprofessional, and at times very uncouth network of shows that live stream on the web. This new group was formed by a bunch of crazed traders who seem to share collective roots at Zero Hedge. Time will tell if this idea gets legs. Watch and just BTFD (buy the dips).

CNBC—Rise Above

“You shouldn’t be saying things you cannot prove….Fact? What’s a fact? I don’t like spewing things that are not actual facts on this program.”

~ Maria Bartiromo, JPMorgan Chase spokesperson



These media shills are like fools

They’ve broken old media rules

They don’t apply heat

But praise the elite

To help them abscond with our jewels

~ @TheLimerickKing

These Banksy/Robert Frost wannabes are Twitter legends who crank this stuff out. I requested the media theme.

Every year I manage to pick a fight or two that is unnecessary, but I simply cannot resist. Let’s get right into it with CNBC. We are all sympathetic. Your ratings are tanking to 20-year lows in an up market.224 Although I am still smarting from my failed Twitter campaign to be a guest host on CNBC under the pseudonym “Joe Sixpack”, I must admit I really like some of the pundits. Kelly is great. Andrew, Becky, and Rick are affable. Liesman has his moments. Joe seems to be recovering from his bout of Kudlowphilia and showing real signs of grasping the severity of the problems we must solve. Hobbs and Sedgwick should contribute to the unemployment stats.

Let’s get to my really big gripe: You guys breathlessly announce earnings beats without a shred of useful information. A vast majority of your earnings are reported "ex-items." If those items are so dismissably rare, why do they appear every quarter from nearly every company? In the olden days you called them “pro-forma" earnings—earnings with embedded vendor financing deals, monetized eyeballs, and written down operating expenses. Pro forma earnings were bogus, and we had a train wreck to show for it. Well, you’re doing it again. I’ve griped about “ex-items” to you guys directly via Twitter and gotten answers suggesting you “don’t have time” or “talk about that a lot” or that “you make an excellent point”. My favorite was, “I hear you, Dave, but it’s what the market tends to trade on—what is delivered compared to what analysts expect.” Apparently, these traders you speak of are trend followers who don’t even care if the numbers are fake and are quite likely not human. The rest of us—the viewers who you hope will number in the millions—would like some truthiness.

Start afresh. Rise above. When you report earnings “ex-items” ask the following questions:

  1. What were the “items” being excluded?
  2. What was the dollar value of the exclusion?
  3. Are you friggin’ kidding me?

Provide the facts, and you might get your viewers back. As it stands, only the algos and algo-like traders use the data, and they are not going to generate advertising revenues; you'll get lapped by BTFDtv if you’re not careful. CNBC—We deceive-you decide. I think it’s time for you folks to decide.

And while you’re at it, work on some of the little stuff. Jerry Bowyer explains in “Confessions of a CNBC Optimist” that his job was to “body check” pessimists. One of Kudlow’s bearish guests was subjected to such brutish behavior that the next guest on called it a “Sacco and Vanzetti interview.” Brian Sullivan’s attack on Elizabeth Warren was embarassing,225 and he got outplayed. Calling Jon Hilsenrath a “Fed watcher” is like calling Heidi Fleiss a “date”. Your series on “Market Masters” series could have been called “Pandering to Power”. Also, could you please quit kissing Warren Buffett’s ass so much? He is the greatest investor in the world, but the fawning gags me with a spoon.226 He is, after all, a deeply embedded insider with an unparalleled skill at gaming the system.

“Let’s say you believe that China is making up the numbers. But if the stock market there keeps going up because of it, and you believe the government will keep priming the numbers, isn’t that sort of a reason to bet on the Chinese stock market?”

~ Brian Sullivan, CNBC

Yes, Brian, that is an excellent strategy if your goal is to be on the reality TV show The Greater Fool. Rise above…rise above…

Bankers and Finance

“I’m standing in one of New York’s most crime-ridden neighborhoods. I’m standing on Wall Street.”

~The Daily Show

“Financial Sector Thinks It’s About Ready To Ruin World Again”

~ Headline from the Onion

“They don’t have a ‘negative cash-flow position’. They’re broke! They’re fucking broke!”

~ George Carlin

2013 seems like an off year for banking crimes. Of course, there was a steady stream of behavior that makes you want to lynch a bunch of them, but we witnessed volumes of follow-throughs of old scandals and very few new, really colorful ones. The high point of the year was when JPMorgan decided to communicate with the public via Twitter by encouraging questions using hashtag #askJPM. They got thousands—literally thousands—of the most truly raucus rhetorical questions you could imagine:

"I have Mortgage Fraud, Market Manipulation, Credit Card Abuse, Libor Rigging and Predatory Lending. AM I DIVERSIFIED? #AskJPM"

~ Representative tweet to #askJPM

JPMorgan Chase was the major focus of the DOJ’s catch and release program, rendering this syndicate the biggest headline grabber of the year. The shear magnitude of JPMs trouble was foreshadowed by a $28 billion slush fund set aside for legal problems.227 For weeks at a time you couldn’t click Zero Hedge without seeing a new charge. Gretchen Morgenson and Bill Moyers suggested that the JPM board of directors needed stronger oversight, possibly removing oversight powers from the chairman of the board, Jamie Dimon. That would be the same Jamie “That’s Why I’m a Bigger Douchebag Than You” Dimon who is JPM’s CEO in desperate need of oversight. The idea that Dimon would be removed from the Board sent Bartiromo heels up (again) in his defense.

Lehman creditors sued JPM because the London Whale (Bruno Iksil) mismarked positions that led to an epic and apparently rather invalid $8.6 billion margin call in ‘09.228 The most senior trader suggested that his group “stop reporting losses unless there was a market-moving event that could easily explain the losses.” No wonder bad news comes in clusters. The chief risk officer promoted fibbing about these trades, failing to grasp that a “risk officer” is there to mitigate risks.229 JPM discovered that some of the attacks against the Whale’s losing trades were coming from within the JPM itself—a form of autoimmune disease. The former CEO of a major banking subsidiary told me that he discovered traders “buying our own shit”.230 TBTF means too big to function I guess. JPM eventually threw a couple of expendable employees under the bus to clean up the Whale scandal, but at minimal inconvenience. (Temps were hired to vacuum the 12th and 13th floors.) I’m sure they were just legions of honest mistakes needing only an apology, but the DOJ insisted JPM accept guilt by publically declaring “my bad.”

JPM had to ante up some serious bucks for making Jefferson County, Alabama squeal like a pig owing to kinky derivatives deals that sent them into insolvency.231 The robosigning fine came due this year.232 Good news: the dozen or more fraudulent “Linda Green” signatures at the center of the robosigning controversy have all been indemnified;233 there is no mess that is too big to clean up with the stroke of the pen.

“If JPMorgan were just an average mook on the street, by now it would have been consigned for life to San Quentin”

~ Saule Omarova, University of North Carolina School of Law

Whether it's the ethanol derivatives or the energy markets in general, the Enron-esque manipulation of commodity prices by JPM continues. (JPM has not yet rigged the aluminum and copper markets because Goldman controls those234 along with pornography,235 which they promptly sold once they got caught.) JPM’s rig-a-thon extended into the Forex markets,236 but they’ve seen the error of their ways. They've now moved the most dubious deals offshore, away from the long arm of the aggressive U.S. regulators.237 This is purely prophylactic; there are no regulators fitting that description.

JPM’s really big problems came in the form of gargantuan fines for their role in mortgage-backed securities. I must admit to being sympathetic to their supporters’ (Bartiromo’s) claims that these problems were baggage from Countrywide and Washington Mutual that JPM absconded with at steep discounts. Maybe the $28 billion is just a claw back of the $30 billion of Fed backing they garnered during the forced purchase of Bear Stearns. If so, the Feds stuck that landing like a Rumanian gymnast. Tax deductibility of the penalties added salve to the wounds of all but 100 million taxpayers.

“A billion here, a billion there, pretty soon, you’re talking real money.”

~ Everett Dirksen, former U.S. senator

Many summaries of this criminal behavior have been penned, all of which have led to the expected number of prosecutions (zero).238 A few generic deeds of the banks are also worthy of comment. Fifteen states banned payday lenders, prompting the banks to move the funding for them off shore. Six BofA employees accused BofA of shepherding homeowners into foreclosure rather than through the Fed-assisted mortgage restructuring. For the record, I think BofA had this one right (see Housing); nevertheless, the BofA whistle-blowers should get remote starters for their cars. Whistle blowing has become a dangerous career path; the truth no longer protects you from retribution. I return to this in Civil Liberties.

We discovered that BofA gives bonuses to employees who acquire high ranking government jobs, showing that the door truly revolves. A clause in his 2006 contract scored big for the new Secretary of the Treasury, Jack Lew, and probably much bigger for BofA.239 This is not surprising given Lew is in Robert Rubin’s orbit. Insider trading in the Heinz acquisition was tracked to Goldman.240 Goldman’s "Fabulous Fab" Fabrice Tourre went to trial and nobody cared.241 After years of being called a lunatic, Patrick Byrne of Overstock was exonerated when emails surfaced showing that traders had indeed naked shorted his stock into dust.242 (Naked shorting is illegal and very destructive to small cap companies.) S&P, a banking subsidiary euphemistically called a bond rating agency, defended against charges of fraud in its ratings by correctly arguing that the reports put out were mere “puffery” and not to be believed. That is true, but then they lost.243 That’s an 0-for-2 ouch. Nomura got caught helping Banca Monte dei Paschi di Siena use derivatives to hide losses.244 In an Escherian way, Deutsche Bank used derivatives to cover up derivatives losses.245 The quadrillion dollar derivatives market, rich in counterparty risk, seems like the odds-on favorite to destroy the world, but for now it serves its purpose:

“Banks use derivatives they create to help their clients deceive the public. Other times, they enable the banks to deceive those clients.”

~ New York Times

Hank Greenberg et al. sued the Feds for an unlawful taking when the Feds essentially nationalized AIG.246 I’m taking Greenberg’s side. Stockman describes in The Great Deformation how the bulk of AIG was fully cordoned off from its derivatives traders that supposedly would have brought it down. Reams of statutes insured (pun intended) that AIG would not have been dragged under, providing yet further evidence that The Great Intervention of ‘09 was both a colossal breach of capitalism and illegal. In a more general sense, the system should not have been saved in its current, highly mutant, form. Dean Baker provided a nicely phrased, sarcasm slathered, thank you to Tim Geithner, who just exited the private sector-sponsored public sector to buyout firm Warburg Pincus via the revolving door.247 There were tackier exit channels than that, but he will need a good tax accountant nonetheless.

“You’re going to look like you’re giving money to people who were responsible for burning down the economy.”

~ Tim Geithner, former head of the New York Fed

There’s a story that is potentially big and hasn’t gotten much coverage. Most know that Elizabeth Warren isn’t a fan of the banks. She has criticized them for getting freebies from the Fed of $85 billion per year. Warren and McCain have introduced a bill to break up the ginormous banks and bring back Glass–Steagall-like regulations.248 The untold story is that brilliant credit analyst Chris Whalen criticizes Warren for being off on her numbers—way off on her numbers. He claims that the central banks are actually giving them a monetary reach around of $500 billion annually.249 Chris is not just some internet wingnut…or maybe he is now.

There is a ray of sunshine for the consumer. I got checks from TIAA–CREF for overcharging fees to my accounts. Quite the unexpected windfall gain: 0.002% of the balance. What legal costs were accrued prying that out of company’s cold fingers?

“Due to recent overall decreases in interest rates and beginning on June 17th, 2013, interest paid on savings accounts will be reduced from .010% to .001%.”

~ Citigroup sign in a Tokyo bank

The financial industry is sending us a clear message stated succinctly by this 13-foot sculpture in front of Italy’s stock exchange:

When the next crisis comes, consumers may have a message or two for the banks:

“If I had a rocket launcher some son-of-a-bitch would pay.”

~ Bruce Coburn

The Federal Reserve

“The Fed has multiple tools.”

~ Ben Bernanke

Truer words were never spoken. The Fed seemed particularly unmoored this year. They have a balance sheet of nearly $4 trillion and growing at $1 trillion per year. We were promised the taper—a reduction in QE—and they seemed determined to do it, but then they went limp. (NB-We just got the tip.) What was that all about? Fed governor Richard Fisher openly stated that the failure to taper “did not reflect the discussion at the policy-setting table.” Well, I guess that’s what happens when you all put your heads down to vote. So they’re printing a trillion dollars a year, and they don’t know how to stop? But maybe they are not really printing money:

Congressman: “Is that printing money?”

Bernanke: “Not literally.”

The congressman should try this one: “Is that creating money in some form?” Or how about, “Do we look so friggin’ stupid as to not know why you used the term literally and that there is no ink or paper involved?” It would be great if there was some higher authority that could give me a little help on this one:

“In the common vernacular, that is termed ‘printing money.’”

~ Paul Volcker

Thank you. As you might imagine, I have reams and reams of quotes from various Fed governors and regional presidents collected throughout 2013, and I must admit that they baffled me. You get claims like this pair of gems:

“We’re manufacturing [money] out of the blue…the monetary base is off the charts – absolutely off the charts… And, believe me, I’m the biggest inflation hawk.”

~ James Bullard, President of the St. Louis Fed

“We’ve got low inflation; that’s why I’m not worried”

~ James Bullard, President of the St. Louis Fed

Narayana Kocherlakota of the Minnesota Fed said that “monetary policy is too tight”, whereas Dennis Lockhart hailing from the Atlanta Fed says, “this is an entirely new dimension of monetary easing, both in terms of quantity and quality”. Quality money printing indeed! Lockhart expands on this at a later date noting that “growth of the Fed’s balance sheet could have longer-term consequences that are worrisome.” Consequences of the highest quality no doubt. Lockhart also noted that “we only have a mandate to concern ourselves with the interest of the United States”, completely ignoring the written record showing that QE II (and more) went straight to Europe.172 John Williams of the San Francisco Fed, in a moment of great clarity, told us that “when house prices fall, people turn much more pessimistic about future house price appreciation.” Very wonky. He confessed that “asset bubbles are likely to be far more complicated than the simple and elegant rational models we have relied on.” You mean the models that are too simple, not that elegant, and completely friggin’ wrong? Greenspan was a flawed model.  

“The most notorious episode of monetary ease, however, occurred in July and August 1927, when Strong, though alarmed by the American market’s speculative and inflationary tendencies, nonetheless forced through the Federal Reserve system a decrease in the discount rate from 4 to 3 percent.”

~ Priscilla Roberts, Federal Reserve of Richmond, 2000

Richard Fisher from the Dallas Fed reminded us of a hilarious event from the dusty archives in which George Soros raided the British pound: “We haven’t forgotten what happened to the Bank of England. I don’t think anyone can break the Fed.” If there is a way to break the Fed, the guys at the FOMC will find it. My favorite was when Fisher described how “big money organizes itself somewhat like feral hogs,” reminding me of the mobsters who Fed a live victim to feral hogs, marveling at their appetites. Fed governor Jeremy Stein chastised buyers of corporate debt for “reaching for yield.” Now whose fault might that be?

All year I scrambled to piece together the Fed garble into a coherent picture with no luck, and then I had an epiphany: It’s not supposed to make any sense. Economist Vince Reinhart nailed it.250 He argues that in 1994, the Fed pushed for transparency by publishing the FOMC minutes, which promptly showed that the governors all sounded like imbeciles. This soon caused the discussions to become stiff, orchestrated, and altogether useless for real decision making. The Fed learned to cover up its foibles a la Breakfast at Bernie’s: the Fed would prop their completely incoherent Fed Chair (Greenspan) in a chair to babble “Fed Speak” at Congress. They branded this garbled dialect as a skill rather than just the bloviating incoherent Fed Chair working from flawed models. With Greenspan’s departure, the Fed desperately needed incoherence. The Fed discovered that a series of seemingly thoughtful statements from the individual governors, when put together, made no sense whatsoever. Shazaam! Total confusion.

This "orchestrated incoherence" is only a theory mind you. The Fed may just be a bunch of sub-average IQ types who are, collectively, an incoherent committee of academic bureaucrats. I do, however, think Bernanke is a smart guy despite his odd penchant for explaining the Great Depression without ever mentioning the role of bad monetary policy in the 1920s (at least in his public talks).

Being a smart guy, Bernanke sensed the ship taking on liquidity and grabbed a seat on a lifeboat by announcing his retirement, which initiated a search for the next grand pooh–bah of the FOMC. Yellen took an early and decisive lead, offering Obama the chance to appoint the first female Fed chair. And then, without warning, the banks decided that Larry Summers should come out of nowhere to steal the lead. Larry Friggin' Summers? Is this the same Larry Summers who said a Harvard student wearing a suit either had a job interview or is an asshole?251 The guy who lost Harvard $2 billion on crazy swaps deal?252 The guy said by a colleague to be "uncontrollable”?253 Is he the guy who sent letters to Ken Lay of Enron pledging assistance in deregulating the energy markets?254 Yes, he is that Larry Summers, and it turned into yet more Obamarabilia. It became clear that, no matter how much Robert Rubin wanted Summers planted at the Fed, you couldn’t put enough lipstick on that pig and you’d certainly never get it to fly. Obama had to suck it up and go back to Yellen, prompting Steve Liesman to call it “sloppy seconds. ”Way to go Steve! How about another keg stand?

“Obama’s senior economic advisers—still dominated by Clintonistas and aging acolytes of Robert Rubin—are pushing the president to choose Summers as the successor to Ben Bernanke, whose term ends in January. And they are urging Obama to make the announcement right now, before the opposition can get organized.”

~ William Greider, journalist and author of Secrets of the Temple

The next task was to do a little Yellen rehab and start deifying her in earnest. They must deify the FOMC chair because the banks require a Fed chair with the moral authority to do anything the banking system wants no matter how destructive it might be to the rest of us. The Fed chair cannot be questioned. Fed Governor Fisher leads off: “She’s wrong on policy, but she’s a darn good, decent, wonderful person.” Whoa! Can we do a little better than that, Dick? The puff pieces by seasoned journalists on the White House payroll began in earnest. Soon Yellen was brilliant, undeniably not sloppy seconds, and was the star who prevented the “panic of 2010”, which is why nobody ever heard of the “panic of 2010”. She became the only Fed governor to have seen the crisis coming and to call it right. If she did see it and did call it, she would certainly be the only one, but she didn’t. Peter Schiff dissembled that myth by plowing through her speeches and showing that she was as clueless as any of them.255 The Age of Yellen is upon us, and that woman knows how to print money (but not literally).

Some of the smartest folks on the planet are screaming that the Fed is cornered. Books will be written on the subject. The Fed is rapidly approaching a fateful moment when it becomes the sole buyer of U.S. Treasuries. The Fed governors make hawkish speeches so that they can then give dovish speeches and say, “I am the biggest inflation hawk but…” and then finish that phrase with some putty-headed statement demonstrating that they do not understand what is coming our way. They are basing policy on all those times in history that copious money printing ushered in new eras of prosperity. Unfortunately, nobody has compiled that list and uploaded it to the internet yet.

“This Bernanke experiment will end in immense inflation”.

~ James Grant, Grant’s Interest Rate Observer

I would like to defend Bernanke on one point. He is reputed to have said that he was 100% confident he could control inflation and attached a 15 minute time scale to it. What he actually said was that he could raise rates within 15 minutes, which is literally true. Readers who think the quality of the Fed’s balance sheet doesn’t matter should read Benn Steil’s description of how selling junk assets into the marketplace to contain inflation won’t work.255a And even all those tools at the Fed know that the law of diminishing returns is closer in the rearview mirror than it appears. Someday the monetary training wheels will come off, and you know what happens when the wheels come off. We are hobbled by the harsh reality that none of the Fed governors played Division 1 lacrosse.

“The Federal Reserve: We bail out so you don’t have to.”                         


“I’m proud to be President of the United States”.

~ Joe Biden, U.S. Senator

Following last year’s Baptists and Bootleggers theme, I will continue with a discussion of a few bootleggers who seem worthy of attention yet do not fall neatly into other categories—a few hand grenades lobbed for posterity. The bootleggers come from many strata, but they all generated a “WTF?”, “OMG!”, or “LOL”. They are not all bad. Some—Ray Dalio a case in point—just seemed to fall off the wagon briefly. The numbers are low because the Bootleggers who really get my goat are in government, big banks, central banks, and prison. (Actually, none of them are in prison.)

We begin with the crazy Norwegians in charge of handing out highly lucrative Nobel Prizes. Of course, the Nobel Memorial Prize in Economics was contentious to the uninitiated because it was given to a guy whose theories on efficient markets have not aged well (Fama). For those whose theories sound great but aren’t, we should give them the Nobel Participation Award. (To irate economists, I’m sure he’s a nice guy and great economist, but we simply don’t give prizes to chemists for sketchy theories.) The Peace Prize was particularly odd in that it was given to a fictional committee with no known members charged with preventing a past Nobel Peace Prize winner from bombing the hell out of Syria. Another new category, the Nobel PC Price, could go to Paul Tudor Jones for his comments about challenges women face in workforce after having spawned children.256 (Tudor was really more of a Tudor Turtle on that one.)

I think the world of Ray Dalio and have heaped considerable praise on him in the past. However, he seemed to go inexplicably soft. I began to suspect he was looking for a cabinet-level position in the Obama administration; he didn’t get one, but the absence of evidence is not evidence of absence. His comments about how we are in a “beautiful deleveraging”—a combination of inflation and deflation that will guide us to the promised land—seemed insensitive to those incapable of buying travel insurance (hedging) for this long and costly journey. A beautifully produced 30 minute video glossed over the pain incurred by the 99%.257 An unrelated shocker came when Ray stated, “Ironically, by increasing your risk in the bonds you are going to lower your risk in your overall portfolio’’258 OK, but how do you achieve this lower risk? By using leverage in your bond portfolio! The article brings it home with the money shot from a supporter of the thesis: “Proponents say it is risky not to use leverage.” I disagree but have no creds to stand on. The good news-bad news is that leverage already in the bond market suggests that we are going to do the experiment. The very premise that bonds and stocks move in opposite directions seems to fly in the face of data from the 1970s.

CNBC’s most watched sequence occurred when Bill Ackman and Carl Icahn brawled during primetime.259 It was ostensibly about Herbalife (Ackman short, Icahn long), but it more looked like two guys having a pissing match writing epithets in the snow. (DNA tests showed an odd inverse correlation between the handwriting and the urine source.) I’m sure Ackman has some bootlegger qualities, but it would be hard to root for Icahn. (One of his peers refuses to even eat a meal with him.) In any event, Ackman soon found that many of his positions—long or short—mysteriously turned hard south. Icahn licked Ackman, and Ackman licked wounds. I think the message is do not piss off a mean bastard worth a gazillion dollars while other billionaires stand around placing huge bets on the fight. As an aside, I do not short stocks but Herbalife seems poised for a plummet now that Ackman and weak-knuckled imitators got squeezed out. Ackman gives Herbalife a one-year life expectancy, ironic for a health supplement company.

Stevie Cohen of SAC Capital got beat up pretty fierce this year. He’s not going to jail (of course), but District Attorney Preet Bharara appears to have extracted some serious Bitcoin out of him (>$1 billion) as well as put a stake in SAC’s heart.260 Patrick Byrne, still smarting from the pain of naked short sellers beating down Overstock.com (maybe Stevie Cohen?), took out a full page ad to mock him: “Shooting SAC Capital dead and throwing all of its employees into the street is civilization scraping some dog shit off its shoe.”242 Catchy prose, Patrick. Citigroup was fined $30 million for sending Cohen et al. insider information.261 The fine was kept low given Citi is already a ward of the state. It would appear that Stevie did not follow Corzine’s lead and bundle campaign donations for the guy calling the shots. Jeff Sachs suggests that the bundling did get him some serious slack.262

I, by the way, think NY District Attorney Preet Bharara is (or will be) a bootlegger too. He went to a few too many hedge fund conferences.263 Politically ambitious NY District Attorney’s pissing off the richest guys in New York have always struck me as paradoxical. My crystal ball sees a political career for Preet as early as 2016. I wonder who’s funding the campaign…

Greenspan, no longer in the Central Banker category, drew scorn for his new book entitled, The Sap in Purgatory: Risk, Human Screw-ups, and the Future of Forecasting Without a Clue (or something like that). Let us just say that everybody—everybody—agreed that he has overstayed his welcome. Bill Fleckenstein, hedge fund manager and coauthor of Greenspan’s Bubbles, summed up his own views succinctly: “lock me in a room with that scumbag”.

A few others get comments in rapid fire. David Tepper has grown fond of the limelight. He waxed bullish on CNBC while contemporaneously liquidating some large positions.264 Maybe he was rebalancing. Al Gore sold his small network to global-warming Al Jazeera.265 There’s something odd about that one. Greg Mankiw defended the 1%.266 I do too if we are talking about the Titans of Industry who build nations, but that was not Greg’s slant. He declared he would not respond to his critics (bad idea), and then the link went dead, but not before the diatribes made it to press.267 Steve Schwarzman of Blackstone denounced raising the 15 percent taxes on much of their income by suggesting “It’s a war; it’s like when Hitler invaded Poland in 1939.”268 Invoking Hitler to win a debate is covered by Godwin’s Law:269

Godwin’s Law: As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1.

Steve Rattner admitted to directing funding of some GM pension plans and not others during their bailout and restructuring.270 His image rehab is taking a little longer than he had hoped. AIG’s CEO Bob Benmosche stepped in it again when he said that “outrage over banker bonuses was intended to stir public anger, to get everybody out there with their pitch forks and their hangman nooses, and all that – sort of like what we did in the Deep South. And I think it was just as bad and just as wrong.”271 Godwin’s Law 1.0.1 covers civil rights analogies.

“After four and a half intense and wonderful years as CEO of Groupon, I’ve decided that I’d like to spend more time with my family. Just kidding – I was fired today. If you’re wondering why…you haven’t been paying attention.”

~ Andrew Mason, CEO of Groupon

Now that is my kind of bootlegger!

Paul Krugman

“When they created the Euro they created a thing like the gold standard.”

~ Paul Krugman on good fiat currencies

“I think forming the Euro was a mistake, but it’s a very different thing to say it should never have been done”

~ Paul Krugman on bad fiat currencies

Paul Krugman gets his own section, and Paul’s detractors may get a chuckle. That group, by the way, is headed by Niall Ferguson who got in a slugfest with Paul this year272 and David Stockman who seems to deeply appreciate Krugman-quote-laden emails. Although I will never win the Nobel Prize in Chemistry, Paul gives me hope that there is a Nobel Prize in Something out there with my name on it. He is the blogger’s gift that keeps on giving. His horsemeat-laced nuggets have made me clean up the aftermath of more snot bubbles than any public figure. I don’t recommend reading them all (actually I do) but they are a stunning display. Without further ado – that rocket is not going to launch itself –  I offer this Collectors Edition of Paul Krugman’s Greatest Quotes of 2013. I salt in a few oldies for flavor and context.

“People talk about waste, fraud, and abuse. There isn’t a whole lot of that in the U.S. government, except in defense.”

~ Paul Krugman on efficiency of government

“We should have been able to get all the relevant parties in a room and say, look, this inflation has to stop; you workers, reduce your wage demands, you businesses, cancel your price increases, and for our part, we agree to stop printing money so the whole thing is over. That way, you’d get price stability without the recession.”

~ Paul Krugman on the ‘70’s inflation

“Higher personal savings is really bad for the economy”

~ Paul Krugman on the paradox of thrift

“Stuff that’s now being called “currency wars” is almost surely a net plus for the world economy.”

~ Paul Krugman on Beggar Thy Neighbor policies

“European economy works; it grows; it’s as dynamic, all in all, as our own.”

~ Paul Krugman in 2008 on the European juggernaut

“We tended to reduce our debt when the economy was strong.”

~ Paul Krugman referring to all but the last 61 years

By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”

~ Paul Krugman in 1998 on passing fads

“As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate”

~ Paul Krugman on poor career choices

“Food and gas prices are not driven by Ben Bernanke.”

~ Paul Krugman on the source of inflation

“I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.”

~ Paul Krugman in 2003 slipping up and making a valid point

“So, have you heard the one about the trillion-dollar coin? It may sound like a joke. But if we aren’t ready to mint that coin or take some equivalent action, the joke will be on us—and a very sick joke it will be, too.”

~ Paul Krugman on the $1 trillion dollar platinum (Bit)coin

“He’s just ruining his own brand.”

~ Paul Krugman countering Jon Stewart’s vicious claim that a $1 trillion coin is “making shit up”

“Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy.”

~ Paul Krugman on the destructive power of saving and productivity

“Maybe I actually am right, and maybe the other side actually does contain a remarkable number of knaves and fools.”

~ Paul Krugman on his detractors

“…being proved wrong but continuing to loudly assert the same thing again and again regardless.”

~ Krugman on the definition of “Derps” from “Derpistan”

“America really does have a weird broccoli addiction…my favorite vegetable is arugula.”

~ Krugman in NYT on the history of General Tso’s Chicken

“I believe that all of these positions are misguided.”

~ Jeffrey Sachs on Paul Krugman


“I do expect the S&P to go below 666. I expect absolute carnage. But I’m more bullish than I was.”

~ Albert Edwards

“Albert Edwards, the famously bearish Societe Generale strategist, has turned more bullish”

~ Yahoo Finance Headline

I didn’t know whether to put that pair here or in the media section. Oh well. Every year I like to give a hat tip to the Baptists, the folks calling for their brethren to get some religion. Some are perennial, but we lose and gain a few each year. I’ll let them speak for themselves with minimal additional comment. Are they right? Nobody knows for sure, and they are all mortals. If we wake up in 2024, however, having experienced 24-year-long lost decade we were warned. In the least, the quotes are blogger porn.

“Japan is near the point where they just can’t borrow anymore…there is nowhere to go….We believe that war is an inevitable consequence of the current global economic situation.”

~ Kyle Bass, Founder of Hayman Capital

Kyle is a versatile bear, but he has a serious Japanese fetish. A colleague watched one of his talks and promptly bought gold. You should watch at least one of them.19,273,274

“It’s not a free market. It’s not a clean market…. The market isn’t saying anything about the future. It’s saying there’s a phony buyer of $19 billion of Treasuries a week…I see a storm coming, maybe bigger than the storm we had in 2008, 2010….the demographic bubble I was looking at way back in ‘94 that started in 2011, we are right at the first ramp-up of this thing that is about to hit.”

~ Stanley Druckenmiller, Founder of Duquesne Capital

The normally camera-shy Wall Street legend, Stanley Druckenmiller, came out repeatedly to denounce the distortions. He declared in so many words that he is mad as hell and isn’t going to take it anymore. He gave his investors’ money back in 2010.

“There’s no one in the stock market today except drugged up day-traders and robots… This is utterly irrational…how could someone in their right mind believe that you can have interest rates… at zero for nine years?…we’re almost on the edge of another explosion at the present time.”

~ David Stockman, Former Reagan Economic Advisor and Blackstone Group

Stockman is prolific. You could fill a 600 page book with his vivid quotes, and he did. It is listed in the book section at the end.

“I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time….We were working feverishly to preserve the impression that the Fed knew what it was doing….You’d think the Fed would have finally stopped to question the wisdom of QE….the Fed announced a new round of bond buying…Wolfgang Schäuble immediately called the decision “clueless.” That was when I realized the Fed had lost any remaining ability to think independently from Wall Street…Fed is at the center of that dysfunction… It has allowed QE to become Wall Street’s new “too big to fail” policy.”

~ Andrew Huszar, former Morgan Stanley administrator of QE1

Andrew ran the $1 trillion dollar QE program.275 This is an astonishing confession and a must read in its entirety.

You’ve got to look behind the markets to see what is happening….We don’t know when the storm is gonna hit but it has to happen…when you look at our debt to GDP eventually you reach a point where there is no turning back…this is a rape of unborn children: it’s generational theft of an enormous magnitude…”

~ Ken Langone, Founder of Home Depot

There were rumors that Langone brought down Spitzer, but that is probably just internet noise. He does indeed appear to be a tough guy.

“We have seen extraordinary, heretofore unimagined, feats of money printing and interest rate suppression by not only our central bank but almost all of the major ones, and people have become complacent.”

~ James Grant, Editor of Grant’s Interest Rate Observer

Jim is so smart and scholarly about monetary history that he is the only permabear who can go on CNBC and get them all (but Liesman) to shut up (STFU).

“Policies that misallocate savings away from productive investment and toward unproductive speculation are the same policies that do long-term violence to our nation’s standard of living.”

~ John Hussman, Founder of Hussman Funds

John uses a remarkably patient valuation strategy by looking at equity returns ten years out. His clients must be faithful, because it is not the optimum marketing ploy while the markets remain frothy. But when they turn…

“This is a mathematical fact. Tens of trillions of dollars is being extracted from the United Sates of America”

~ Dylan Radigan, former CNBC host

Dylan left the stage this year to chase interests in hydroponic farming, but before doing so he did what the psychologists refer to as “going completely bat shit.” This is a must-see rant.276

“Big banks should be tasked with the job of deciding how best to split themselves up”

~ Brooksley Born, former head of the Commodity Futures and Trading Commission

Brooksley attempted to bring derivatives trading under regulation in the late 90s, but was mugged by the Committee to Destroy the World (Summers, Greenspan, and Rubin) in Congressional hearings. Frontline did a brilliant, must-see expose’ on this fateful moment in history.277

“The recent trading environment has felt something like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen….QE Infinity has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying….The markets’ ability to withstand any adversity is highly questionable, and it appears to us that the Fed is basically paralyzed”

~ Paul Singer, founder of Elliott Management Corporation

Singer is an elite hedge fund manager annually invited to the Ira Sohn Conference.

“I see nothing in this environment inconsistent with my view that this is the biggest, most precarious bubble in history.”

~ Doug Noland, senior portfolio manager at Federated Investors

Noland is a brilliant credit analyst who documented the credit bubble from the late ‘90s with unparalleled thoroughness and clarity in his weekly Credit Bubble Bulletin.278

“Wall Street has run the White House for the last 15 or 20 years..and has made quite a mess of things.”

~ Jeff Sachs, globally prominent economist at Columbia University

Sachs is a mainstream economist who normally seems rather optimistic. He showed up on the airwaves repeatedly, with a vengeance, and without notice in 2013, warning of dire problems within the system.262,279 I recommended him to our business school dean for the “ethics lecture”.

“This is the first time in recorded history that all major central banks have been flooding the market with artificial money printing…trying to debase their currencies at the same time.”

~ Jim Rogers, Founder of Beeland Capital

Rogers is now a permabear. He is a tough interview: you throw him a lob pitch and he declares it a stupidly obvious question before answering it. But he’s direct and grizzled and a former partner of George Soros.

“If the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse. For if you must rescue everything, then ultimately you will be able to rescue nothing.”

~ Seth Klarman, founder of Baupost Group

Klarman’s militancy has reached new levels: I have too many brilliant quotes to chose from.280,281 He gave money back to investors for only the second time in Baupost’s history.282

“Lost in the angst over inequality is the critical role that central banks have played in exacerbating the problem.

~ Stephen Roach, Yale and former executive director of Morgan Stanley

Roach was one of the original bears who saw big messes in the making more than a decade ago and still retained his job in a major brokerage house.

“We are in the middle of an epic credit bubble, in my opinion, the likes of which I haven’t seen in my career in private equity.”

~ Joseph Baratta, head of Blackstone’s Private Equity Group

Interesting candor given that these guys live and die by a leveraged financial system.

“Tell me about the last few times you have taken the big Wall Street banks all the way through trial…my question is when did you take them to trial?

~ Elizabeth Warren, U.S. senator

I wrote a couple of blogs for Elizabeth before her political fame. My ability to endorse Ron Paul on his official 2008 presidential website and be a “self-confessed groupie” of Warren caught the attention of the Guardian and my neurologist.12 It's quite simple: I think they are both honest.

“As more lives and communities are destroyed by the system that creates vast amounts of wealth for the few, the more heroic it sounds to 'give back.' It’s what I would call 'conscience laundering'—feeling better about accumulating more than any one person could possibly need to live on by sprinkling a little around as an act of charity. We’ve got a perpetual poverty machine. It’s an old story; we really need a new one.”

~ Peter Buffett

Yes, that was indeed Warren Buffet’s son.283 Last year I quoted Warren’s dad beating Warren about the head and face for Warren’s self-serving views about gold.1,2

“Goldman has to be changed from the outside. The market could do it, but the government is standing in the way.”

~ Michael Lewis, author of Moneyball, The Big Short, and Liar’s Poker.

I’ll read anything Lewis writes and watch any podcast. His ability to find the narrative within the story is unparalleled.

      (1) How much does QE contribute to the growing inequality of wealth in this country, and what are the risks this creates?

      (2) How much systemic risk does the Fed create by becoming what Warren Buffett termed ‘the greatest hedge fund in history’?

      (3) How might the Fed’s expanded balance sheet and its failure to even begin to ‘normalize’ monetary policy four years into the recovery limit its flexibility to deal with the next recession or crisis?

~ David Einhorn, CEO of Greenlight Capital

Some view Einhorn as one of the dark lords of the hedge fund world. Others know better.

“The Fed is really playing a dangerous game…I want them to stop. They should knock this off. This is bad. This is a heroin addiction. This is not good. This is not smart.”

~ Barry Sternlicht, founder and CEO of Starwood Capital Group

This interview left Joe Kernan—Joe Kernan—speechless.284

“The odds are that the world is experiencing a bigger bubble than the one that unleashed the 2008 global financial crisis.”

~ Andy Xie, former Morgan Stanley

Xie lost his job as Morgan Stanley’s Asian guru when an internal email slathered with candor leaked to the outside world. It’s a fascinating read.285

“The higher we go, the less surprised I will be to see the stock market crash. How big a crash could we get?…40%–55%.”

~ Henry Blodget, Business Insider

The Henry Blodget? Yes. He’s channeling John Hussman in this quote, but he’s done a nice job at building Business Insider, which I find contentious but addictive.

“Two percent inflation will halve the currency in 20 years; it’s not my definition of price stability”

~ Paul Volcker

We need another Paul Volcker, not a Greenspan, Bernanke, or Yellen. As Yoda said, “There is another.”

Government Gone Wild

“A government in which political power is for sale to the highest bidder puts the wealthy at an extreme advantage, as they have the means to buy political power to conserve and expand their share of the national income.”

~ Charles Hugh Smith, OfTwoMinds.com and one of my favorite bloggers

Eric Holder and Lanny Breuer

I put a bat to Holder last year. His feckless pursuit of criminal elements—his dogged determination to protect them—inspired one big “heckuva a job, Eric” out of me. For a guy who started adulthood as a militant campus radical,286 he sure morphed into a cog within that which he opposed. He left open the option on drone strikes against American citizens,287 faked statistics on fraud cases brought to trial (but only by a factor of five),288 prosecuted a government official in a bribery case but left the deep-pocketed banker unscathed,289 illegally recused himself from a case without providing a reason,290 failed to respond to a child pornography ring of government employees, and admitted that some banks are too big to risk prosecution. Holder signed off on a subpoena that went after a Fox news reporter’s private emails calling the target “a possible unindicted co-conspirator.’’291 Fifty Congressmen signed a letter asking for Holder’s demotion to “unemployed”.292 Holder is really more of a placeholder, but he is still employed.

We got some excitement when Frontline aired the exposé entitled, The Untouchables.293 It is a must see. Assistant Attorney General Lanny Breuer argued that “I don’t accept for one moment that you all are finding whistle-blowers that we’re not.” The plot thickened at precisely the moment when the highly expendable Breuer admitted that some banks were too risky to prosecute:

“If I bring a case against institution A, and as a result of bringing that case, there’s some huge economic effect…it’s a factor we need to know and understand.”

~ Lanny Breuer, assistant attorney general on Frontline

Well, there was indeed a ripple effect because the following Monday Lanny announced that he would be spending more time with his family.294 He then promptly took a job at Covington and Burling (former employer of Eric Holder) for an estimated $4 million per year,295 establishing the market price of family time.

Lois Lerner

A mild-mannered IRS commissioner found herself sitting in the hot seat when it was discovered that IRS agents had targeted right-wing organizations as conspiracy theorists in the tea party had been alleging. What started as a rogue agent was soon working its way toward the White House. A Freedom of Information Act (FOIA) suit retrieved records showing 157 visits by Ms. Lerner to the White House,296 which is probably close to Cheney’s count when he was acting president. She made the Football Hall of Fame for biggest fumble when, as Commissioner of the IRS, she claimed under gentle questioning by Congress, “I am not very good at math.”297 She tried to “plead the fifth” but then said something that negated her plea.298 Oops. It’s under the bus for you, lady! Lerner went on “administrative leave” in May.299

Epilogue: It is claimed that the tea party still has tax problems. The irony of it all is that the tax exemption of many political organizations should probably be questioned. The really twisted part is that some suspect that Obama released the IRS scandal to douse the flames of the Benghazi scandal. If all this were not funny enough, there was an IRS micro-scandal in which IRS employees partied their asses off on the taxpayers dime and, when questioned, announced they had lost their receipts!300 You can’t make this shit up.

Mary Jo White

As previous SEC head Mary Shapiro took the revolving door to high income at Promontory Financial Group, the new head of the SEC, Mary Jo “M–Jo” White, took her place. Technically M–Jo should not be in this section yet, but I am taking out a put option on her stay at the SEC. Joe Saluzzi and Sal Arnuk, Wall Street veterans and authors of Broken Markets, wrote an open letter to her begging her to unbreak the markets. Their need to send such a letter is telling. Chris Whalen seems to like her,301 whereas Matt Taibbi makes a case she will be a “Wall Street darling”.302 Bloomberg’s Jonathan Weil paints a grisly picture of White’s conflict of interest with payouts to M–Jo by her current white-shoe law firm that will continue in perpetuity.303 One of her earliest policy moves was to authorize hedge funds to advertise.304 I concur with the decision—the Supreme Court already dealt with that one in the context of lawyers—but am confident it will produce the sequel to Boiler Room. Despite the usual wave of puff pieces of little value that preceded her first day at work, the New York Times editorial staff appears to have planted their flag in the camp of doubters.305

Government Shutdown

This section will be short, not for any partisan reason but because I find it difficult to talk about. On the one hand, you have a government totally out of control for which a kill switch on the machine seems appropriate. On the other, the guys shutting it down seem like a bunch of D-bags. I am not apathetic—they threw my entire research program into limbo and did irreparable harm to some federal research programs when the laboratory animals had to be euthanized. (That, by the way, is what is called a “First World problem”.) They all seem hopelessly incorrigible. On a humorous note, the U.S. Treasury’s solution was to start tweeting:

“Congress should act as soon as possible to meet its responsibility to the nation and remove the threat of default”

~ Treasury Department ‏@USTreasury

Revolving Door

The unholy alliance between finance and government has been referred to as “soft corruption” because it is nearly impossible to trace the quid pro quo payments after leaving office to deeds while in office. Geithner’s leaks to big banks during the crisis appeared to be significant and profitable for some.247 Robert Khuzami, the former enforcement director at the SEC, has cashed in his chits for a $5+ million salary at Kirkland & Ellis, a prominent Wall Street law firm.306 There are so many examples. I’ve seen estimates that 50% of political and politically connected folks leave via the revolving door. I guess they've gotta work, but the soft corruption seems undeniable.


Halliburton was convicted of destroying evidence about the Deepwater Horizon oil spill. Maximum fine: $200K.307 Congress found itself “not guilty” for taking loans from Angelo Mozillo.308 Interior secretary under George Bush, in an oddly poetic scandal, was said to have spent $200K of our money remodeling his bathroom, making him Interior Design Secretary.309 The real scandal in Washington isn’t what’s illegal but what the snollygosters in Washington can do legally. This is described in the book This Town listed in the books section below.

Pondering the words from a Joe Sixpack of Yore to an Elder Statesman is instructive:

“If you had the right to give anything, the amount was simply a matter of discretion with you, and you had as much right to give $20,000,000 as $20,000. If you have the right to give at all; and as the Constitution neither defines charity nor stipulates the amount, you are at liberty to give to any and everything which you may believe, or profess to believe, is a charity and to any amount you may think proper. You will very easily perceive what a wide door this would open for fraud and corruption and favoritism, on the one hand, and for robbing the people on the other. No, Colonel, Congress has no right to give charity.”

~ Old Farmer to Congressman Davy Crockett

Mr. Obama Goes to Washington

“We don’t have a domestic spying program”

~ Barack Obama on Jay Leno

I try to keep this review non-partisan or at least hurl nasty bipartisan epithets, but I think it is a bipartisan view that the Potus had a particularly bleak year. Obama supporters and IRS auditors should skip to the next section; I am not trying to piss you off. On further reflection, everybody could skip to the next section, but a 2013 Year in Review simply must confront President Obama’s problems.

Despite his oratory skills and affability, his roots in the Chicago School of Politics leads me to suggest at the outset that he was not pristine.1,2,3,4 This year ushered in some truly disturbing stuff, however, causing his approval ratings to drop below those of a crack-headed mayor of Toronto. Those looking for hope and change seemed to get neither. I did not vote for him, but I am highly sympathetic to those who did. Liberal democrats including Michael Moore, Matt Damon, Bill Ayers, Cornell West, and the ACLU turned on him.

“I think of this as President Bush’s fourth term.”

~ Ari Fleisher, White house press secretary for George Bush

The year started out generically with the Benghazi fiasco in which Obama boned it badly by not providing support to an embassy. Lives were lost, and then he tried to cover it up.310 That’s standard fare for a president these days. But the tide just kept rising and sands kept shifting. The IRS-gate (see Lois Lerner above) had White House fingerprints all over it. The journalist phone hacking scandal was nasty but short lived. The White House defended Hoovering up Verizon phone records to fight terrorism. (Catch that Hoover double entendre?) This story got some serious legs when a high school graduate, aficionado of fine strippers, and NSA analyst Edward Snowden entered the scene (vide infra).

The Affordable Care Act—ACA or Obamacare—ironically turned into a third trimester abortion. A website that could have been put together by a couple of kids from Palo Alto High was contracted out to one of Michelle Obama’s Princeton contemporaries311 for $500 million and appears to have thrown the entire healthcare system into a tailspin. The key promise—we didn’t have to participate if we didn’t want to—turned out to be a very big lie.312 Now we have millions without healthcare or with significantly more pricey healthcare. The head of it all, Kathleen Sebelius, still has her job. (Her maiden name was Gilligan, apparently unbeknownst to the Daily Show writers.)

“I will provide our intelligence and law enforcement agencies with the tools they need to track and take out the terrorists without undermining our Constitution and our freedom.”

~Barack Obama, 2008

A book by Jeremy Scahill entitled Dirty Wars (see Books below) describes the modern U.S. war machine. Scahill, no right-wing hack by any measure, said that Obama was statistically more hawkish than George Bush the Younger in every category. Obama promised to get rid of Guantanamo, which many inferred did not mean setting up a new gulag elsewhere, but it never came to pass. The NDAA, the Snowden affair, and drone warfare are so egregious that they get relegated to the section on Civil Liberties.

And then there's Syria. In an odd parallel with the HBO series Newsroom in which our troops supposedly used sarin gas, Bashar al-Assad reputedly used it against the Syrians.313 Assad had every weapon pointed at his head so you would not have predicted that. Subsequent evidence surfaced that it was not his call314 or not even Assad's troops.315,316 Nevertheless, Obama had this terrible hankerin’ to bomb Syria for reasons we will never be privy to (although natural gas may be involved), but he realized he was in political trouble.317 First the White House tried to dial it back with Kerry announcing that America would launch an “unbelievably small and limited effort” to punish the Assad regime.318 Nothing says I love you like a cruise missile. Then Vladimir Putin pulled off some diplomatic moves that were savvy for a treacherous commie bastard:

“The United Nations’ founders understood that decisions affecting war and peace should happen only by consensus…The profound wisdom of this has underpinned the stability of international relations for decades…No one doubts that poison gas was used in Syria. But there is every reason to believe it was used not by the Syrian Army, but by opposition forces, to provoke intervention by their powerful foreign patrons”

~ Vladimir Putin, New York Times

Conflict was preempted at the last minute by some malarkey about a Committee to Save the World (a different one) that would disarm Syria.257 Phew. That was close. We almost killed a pile of Syrians trying to prevent them from killing a pile of Syrians. It sure seemed like bombing Syria was a really stupid idea.

Obama’s Wall Street supporters were constantly embarrassing him with their looting and pillaging. I think his truly colossal failure as president will prove to be his unwillingness to rein in the banking sector when the window of opportunity knocked in ‘09. Matt Taibbi referred to him as the “architect of too big to fail”,319 although that seems like too much credit. He did, however, choose to save his top fundraiser, John Corzine, all the banks, and anybody else of wealth and power. I am oddly optimistic that he will be offered another crisis to justify reining them in as the market decides to test Yellen’s resolve.

Potus signed a few dubious bills including one that protects Monsanto against all torte actions pertaining to genetically modified organisms (GMOs),320 another that allows Congress to not disclose their financial holdings,321 and one that facilitates prosecution of whistle-blowers.322 He has been beating on the media with a rolled-up copy of the Constitution, threatening—of all people—Bob Woodward.323 His administration ducked FOIA requests about the seemingly dubious Bin Laden raid by moving files to the CIA,324 which they then dealt with using standard embassy methods.

I am no liberal democrat, and Barack Obama is no Jack Kennedy. The good news is that the 150 rounds of golf must have dropped his handicap to parity with the 10-year bond yield.

Civil Liberties, Part 1

 ”It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.”

~ Thomas Sowell

“Tyrants preserve themselves by sowing fear and mistrust among the citizens by means of spies, by distracting them with foreign wars, by eliminating men of spirit who might lead a revolution, by humbling the people, and making them incapable of decisive action.”

~ Aristotle

Every year I write about civil liberties. It’s a personal need I guess. This is a decaying plotline with 2013 offering up some particularly poignant and at times gruesome instances in which the freedoms of individuals conflicted with awesome power of the state. We found ourselves immersed in “secret programs approved by a secret court, issuing secret court orders, based on secret interpretations of the law” as described by one U.S. senator. I’ve cordoned off what seems like the routine breaches of constitutionally granted freedoms (Part 1) from the special case of Edward Snowden versus The National Security Agency (Part 2). We have nothing to fear if we are not doing anything wrong, right? Ask former Soviet citizens how that worked out. We’re not worried about our privacy? Put your diary online.

There is a fine line here: Where does whistle blowing end and traitorous acts begin? We should err toward the former. In any case, it was an ominous year for whistle-blowers, and it seems likely to worsen. I have quaint recollections of whistle-blowers protected by the truth. Once the whistle had been blown, the storyline moved from whistle-blower to the abuser of power. Nowadays whistle-blowers, whether government or corporate, are dealt with severely, apparently to send a message to wannabes that tattling on the powerful is a poor career path. NY Fed employee who blew the whistle on Goldman got fired.325 Thomason Reuters employee who went to the FBI with information about the early releases of the Michigan confidence data was fired.326 Aurelia Fedenisn, a former State Department inspector general investigator, shined a light on alleged wrongdoing by U.S. officials around the globe and had law enforcement officers camp out in front of her house.327 Bradley Manning paid a dear price for his disclosures. I am less clear on this one, but the message is still clear: go to the press and spend life in prison.328 Obama DOJ forced reporter Jim Risen to testify against a CIA whistle-blower.329 That CIA spook, had some choice descriptions of torture tactics used in prison.330

This is your life, this is your country – and if you want to keep it safe, you need to get involved.

~ Aaron Swartz, 1986–2013

The untimely death of Aaron Swartz captured hearts and minds of many.331 Swartz, a boy genius who seems to have been a suicide risk owing to mental illness, organized a grass roots movement in a matter of days to shut down the heinously oppressive SOPA332 discussed in last year’s review.1 He got himself in a bit of hot water when he did a high-bandwidth dump of academic articles into the public domain from MIT servers. Whereas MIT promptly covered its ass,333 Swartz was unable to do so. It was bad judgment, possibly illegal, but in no way profitable or destructive. Nevertheless, a zealous prosecutor with his own skeletons—a childhood murder conviction sealed by the court—over-charged Aaron, looking to put him away for decades. The best case scenario was $1.5 million in legal fees and an acquittal.334 Swartz snapped from the pressure and hanged himself. This may be the prosecutor’s second such suicide.335

We move to the next untimely death, that of Michael Hastings.336 Hastings was a prominent journalist, also showing signs of state-induced stress. He was working on a story about the FBI and they were working on a story about him.337 He became exceedingly agitated by what he believed was intrusive surveillance. He died in a one car accident that he thought was suspicious. Say what? Yes indeed. Michael unsuccessfully tried to borrow his neighbor’s car that night, claiming that his car had been tampered with.338 Forced to use his own car, he drove off into a fiery demise. Very odd, but this is probably just another conspiracy theory.

Then there was the dreaded George Zimmerman case. Was it cold blooded murder of a Skittles-toting kid or self-defense by a guy getting pummeled by a 6’2” street brawler? Although I am intrigued by a video synopsis by Stefan Molyneux,339 this is not the Michael Lewis narrative I care about. The power of the state was a subplot: the prosecutor organized anti-Zimmerman protests,340 sued Alan Dershowitz and Harvard for criticizing her,341 and over charged the case and committed serious breaches of protocol (according to Jonathan Turley).342 The real story, however, was the denunciation of the verdict. Nowhere in the cacophony of screams about the injustice did I discern any evidence of misconduct by the jury. It seemed like a potentially sympathetic group of well-meaning citizens. They listened to the case, deliberated for a time proportionate to the volume of testimony, and delivered the verdict. That, according to our system, is the correct result by definition. To denunciate the verdict is to denounce the system.

Chris Dorner, former LAPD policeman,343seemed to be pushing his Constitutional rights into dangerous territory by repeatedly over a period of years alerting his superiors to rampant graft within the department. Peer pressures mounted, and Dorner snapped. He declared war against the authorities, killed a few people (as did the police344), and reputedly died in a fire. What’s the Michael Lewis narrative in this one? First, he left a manifesto.345 I recommend you read it and ask whether he was nuts, a recluse, a classic whack job. Of considerable import, it is rumored that authorities used domestic surveillance drones to catch him.346

I detest drones—domestic or foreign. If some sovereign state was flying drones over my hometown and lobbing guided missiles through kitchen windows, I hope I would have the cajones to oppose that foe using any means—an enemy combatant, a terrorist. Domestic drones also drive me nuts, and scare me at a visceral level. I do not even like those seemingly passive speed monitors; they are desensitizing us. I hate automated speeding tickets. How are you going to feel when you get a speeding ticket on some back road late at night with nobody in sight because you were digitally tracked? I do not want to be tracked by my cell phone or car GPS. I am willing to forfeit security for freedom of speech and movement. This level of surveillance is destructive and makes a mockery of our Constitution. It is also the beginning of something that could become virulent.

The Constitution forbids the domestic use of military troops. The easy workaround is that you militarize the police. Maybe it’s just perception—smartphones catching it more often—but instances of unruly displays of force seem to be picking up. New Hampshire police bought armored cars to defend against “groups such as the Sovereign Citizens, Free Staters, and Occupy New Hampshire.”347 That would be us. We caught the Boston bombers. It was a heinous crime that showed us that some things you cannot defend against. I’m somewhat agnostic on this one, but they essentially put Boston under martial law; it’s hard to defend against that too. If you cannot deliver security as promised, can we at least have our privacy back?

Mandatory drug tests in high school may seem good to some parents.348 But even minors are granted Constitutional protections against illegal search. Mandatory DNA swabs at traffic stops is an idea of dubious merit.349 A grocer was arrested for depositing too much cash.350 Cash is a civil liberty—a form of privacy—we should protect ferociously even if it is a rapidly depreciating asset. I do not care if drug lords use cash; they also use cars, condoms, and boats.

A kid sat in jail for months without trial for poor judgment about what you should post in jest on Facebook. Apparently, using LOL does not undo the speech crime. More than 7,700 people have been arrested protesting the absence of banker arrests.351

As described in The Fourth Estate section above, the media’s rights are getting trampled on, forcing reporters to take special precautions to protect their sources. Pissing off the media may have been a bad move for the totalitarians, although I believe that the media is already under a firm grip.

California passed a zero tolerance—zero tolerance—DUI law.352 Do you know how many substances are considered intoxicants and how long they take to completely clear your system? You better figure that out before you drive to work tomorrow morning.

It appears that the DOJ investigated Standard and Poors for downgrading U.S. debt and not being owned by Warren Buffett.353 That is a heinous crime. Eminent domain of mortgages—said by some to be an illegal taking—is going to be used in Richmond.354 Contract law is optional when crony capitalism sees a pie to be divided. Some restaurants are requiring ID to use $100 bills.355 If I knew of one, I would go there with only $100 bills and no ID. Take it or leave folks: it’s “legal tender” you morons. Facial recognition software is being used in shopping malls to optimize your shopping pleasure, but to me it brings new meaning to Black Friday sales.356

The Supreme Court, a body of judges who draw scorn but remain in my wait-and-see box, repealed the Voting Rights Act of 1965.357 I am even less qualified to have an opinion on this one, but it smells odd. They also ruled that remaining silent can and will be used against you in a court of law unless you properly invoke your Fifth Amendment rights.358 The bad guys will figure out how to do this; honest people will go into an arrest ignorant of this technicality.

Apparently those wussy Guantanamo detainees didn’t like the waterboarding everyday, spurring them to try to take the final exit with hunger strikes. We force fed them because there was simply no other way to ensure that they rot in a cell without legal recourse.

Michael Lewis resurrected the Sergey Aleynikov case359 that I've summarized previously.4 Sergey did not invoke his Fifth Amendment rights because he thought he could clear up a misunderstanding when he was accused of stealing the Goldman Sachs software used to manipulate markets. He got 97 months in prison for a “theft” that profited him precisely $0. The conviction was overturned by the United States Court of Appeals for the Second Circuit. No problem. They arrested him again from a different jurisdiction on different charges (the crime of pissing off Goldman), avoiding the constitutional prohibitions against double jeopardy. He was convicted.

Civil Liberties Part 2—Edward Snowden versus the National Security Agency

“I do not expect to see home again”

~ Edward Snowden

With the aid of Glenn Greenwald of the Guardian, NSA analyst Edward Snowden stepped forward to denounce the agency's spying tactics, obliterating any hope of his having a normal future.360 This could have easily been deemed a traitorous move and quickly shoved to page 17, but it simply wouldn’t go away: Snowden had the goods. He had the evidence. The story morphed into Hoover 2.0—privacy invasion on steroids.

Everybody (except the Amish) knows the Edward Snowden story. Many do not know it is an old story. The ghosts of the NSA past are haunting reminders that we knew it all along:

“America’s intelligence gathering…capability at any time could be turned around on the American people, and no American would have any privacy left. Such is the capability to monitor everything: telephone conversations, telegrams, it doesn’t matter. There would be no place to hide…I know the capacity that is there to make tyranny total in America, and we must see to it that all agencies that possess this technology operate within the law and under proper supervision so that we never cross over that abyss. That is the abyss from which there is no return.”

~ Frank Church, U.S. senator on Meet The Press, 1975

"A Federal Court of Appeals recently ruled that the largest and most secretive intelligence agency of the United States, the National Security Agency, may lawfully intercept the overseas communications of Americans even if it has no reason to believe they are engaged in illegal activities. The ruling, which also allows summaries of these conversations to be sent to the Federal Bureau of Investigation, significantly broadens the already generous authority of the NSA to keep track of American citizens.”

~ David Burnham, New York Times, 1983

“No laws define the limits of the NSA’s power. No Congressional committee subjects the agency’s budget to a systematic, informed and skeptical review. With unknown billions of Federal dollars, the agency purchases the most sophisticated communications and computer equipment in the world. But truly to comprehend the growing reach of this formidable organization, it is necessary to recall once again how the computers that power the NSA are also gradually changing lives of Americans—the way they bank, obtain benefits from the Government, and communicate with family and friends. Every day, in almost every area of culture and commerce, systems and procedures are being adopted by private companies and organizations as well as by the nation’s security leaders that make it easier for the NSA to dominate American society should it ever decide such action is necessary.”

~ New York Times, 1983

“All you need to know about so-called oversight is that the NSA was already in violation of the Patriot Act by the time it was signed into law.”

~ Thomas Drake, former senior executive of the NSA, 2005

“I don’t have to listen to your phone calls to know what you’re doing. If I know every single phone call you made, I’m able to determine every single person you talked to. I can get a pattern about your life that is very, very intrusive. . . . If it’s true that 200 million Americans’ phone calls were monitored—in terms of not listening to what they said, but to whom they spoke and who spoke to them—I don’t know, the Congress should investigative this.”

~ Joe Biden, future vice president of the United States, 2006

“The KGB, the Stasi, and the Gestapo could never have dreamt of having anything that’s as great or comprehensive as this capacity to monitor the population and control it…that unfortunately is what our government is doing.”

~ William Binney, former NSA cryptomathematician, 2012

Is Edward Snowden a traitor or a patriot? It depends on who you ask:

“[Edward Snowden] has revealed evidence of what appears to be crimes against the Constitution of the United States”

~ Al Gore, former vice president of the United States, 2013

“I don’t look at this as being a whistle-blower. I think it’s an act of treason.”

~ Diane Feinstein, liberal democratic senator from California

“America has no functioning democracy at this moment…I think the invasion of privacy has gone too far…[Snowden’s insights are] likely to be useful because they have informed the public.”

~ Jimmy Carter

“I must admit in my darker moments over the past several months, I’d also thought of nominating Mr. Snowden, but it was for a different list.”

~ Michael Hayden, former Director of the NSA and CIA, implicitly referring to the presidential "kill list"

“It is the height of naiveté to think that, once collected, this information won’t be used”

~ Wolfgang Schmidt, former Stasi agent

“I hope we follow Mr. Snowden to the ends of the earth to bring him to justice.”

~ Lindsay Graham, U.S. Senator from South Carolina

“When the American people find out how their government has secretly interpreted the Patriot Act they will be stunned, and they will be angry.”

~ Ron Wyden, U.S. Senator from Oregon and member of Senate Intelligence Committee

“NSA is one of the largest employers in my district, and it works everyday to keep us safe.”

~ Dutch Ruppersberger, U.S. representative from Maryland

“There has not been in American history a more important leak than Edward Snowden’s release of NSA material—and that definitely includes the Pentagon Papers 40 years ago

~ Daniel Ellsberg, analyst who released the Pentagon Papers

“To the extent that you have aided and abetted Snowden, even in his current movements, why shouldn’t you, Mr. Greenwald, be charged with a crime?”

~ David Gregory, Meet the Press

Michael Hayden fessed up that the NSA did not disrupt 54 terror plots as claimed but rather “one, perhaps two”.361 Director of National Intelligence, James Clapper, admitted to perjuring himself to Congress about NSA activities;362 he was put in charge of the independent investigation into NSA spying.363

Every major tech company in the world appears to be under NSA control. The CEO of Yahoo, Melissa Mayer, slipped up by describing consequences: “If you don’t comply, it’s treason.”364 Facebook’s head of cybersecurity worked for the NSA.365 The CEO of Lavabit, an encrypted internet provider pressured to participate in NSA data collection, closed his business.366 Pending prosecutions suggest that shutting down the company was not one of his options. The participation of Verizon, AT&T, Microsoft, Yahoo, Google, Facebook, PalTalk, AOL, Skype, YouTube, and Apple rewarded with multi-million dollar compensations for their services makes it clear that every tech company has been infiltrated.367

So who did the NSA spy on? You, me, our emails, our cell phone calls, Angela Merkel, the participants at the Davos economic summits, the United Nations, spouses, girlfriends, anybody who uses a credit card, everybody doing everything. Politicians under surveillance included a young senator from Illinois who became president of the United States. It is not a bold extrapolation to presume that they are still spying on him.

So here’s where it gets really nasty. The NSA has been feeding information to local law enforcement agencies.368 NSA is also providing information necessary to cover up the illegality of the search and seizure that put the domestic police forces on the scent. “It sounds like they are phonying up investigations” said Nancy Gertner, Harvard law professor and former federal judge.368 The DEA has been a favorite recipient of NSA-derived information.

All those dastardly folks defending the NSA may not be as evil as they sound. They may be very afraid or, at the very least, terminally spineless. What dirt do they have on Graham, Feinstein, Obama…? Grow a pair, folks. The ACLU is not spineless.369 One must assume that The ACLU's communications have been monitored since its formation back in 1920. Michael Hayden refers to the rest of us Snowden supporters as ““nihilists, anarchists, activists, LulzSec, Anonymous, twentysomethings who haven’t talked to the opposite sex in five or six years”. I protest: I am not a "twenty-something”.

“What makes us different from other countries is not simply our ability to secure our nation. It’s the way we do it, with open debate and democratic process.”

~ Barack Obama

Mister President. Correct me if I am wrong—you are the constitutional lawyer by training—but I believe you are charged with defending the Constitution of the United States, and it is a treasonous and an impeachable offense not to do so.


“A witty saying proves nothing.”

~ Voltaire

What are the lessons that I take home from surveying the financial and political landscape of 2013?


They look broken to me. Maybe I am simply grumpy from being on the wrong side of them this year, but it’s not hard to make the case that state control of the money supply and explicit state control of the price discovery mechanisms elicit behavior that, although seemingly profitable at times, is likely to lead to lousy returns in the least going forward and, more likely, to an 80-car pile up in the fog produced by loose monetary policy. I sense that many investors know we are in trouble and are responding in a National Lampoon-esque way by throwing a Toga Party. Everybody—equity traders, bond traders, Forex traders—all seem to have one eye on the exit. It is a truism of markets, however, that the party cannot last and, by definition, the exits are not big enough for everybody to leave at once. There will be some serious bag holding. Will the banking system hold up to another body blow? I haven’t a clue. I do know that the two painful years that I was completely on the wrong side of the market previously—1999–2001 holding gold and no equities—seemed interminable then and look like a blip now. Keep dancing at your peril.


I will say it one last time. Austerity is not a policy; it is the result of bad policies. We don’t get to duck the consequences of our high-flying ways—spending more and saving less—anymore than the alcoholic gets to regrow a liver. By every measure I can find, the debt is burdensome, generational, and coming at us like a force of nature. The entire world is run on a paygo system. We haven’t stockpiled food, shelter, or any other consumable because we can’t. What you can stockpile are chits, IOUs, promises from others to do the heavy lifting for you. As the boomers retire, they will find that their stash of chits cannot buy them goods and services from the Chinese because the Chinese hold chits of ours. Our kids can’t readily provide all goods and services; we outnumber them. I believe that unfunded liabilities, promises made that were not cashed in at the time, represent latent inflation pressures. The cashing in of these IOUs—large numbers of chits chasing limited goods and services—could trigger a virulent inflation. In this paygo system, we flourished while the boomers produced and were compensated with promises. Now we are about to hit the downslope.

Civil Liberties

If you’ve made it this far, I imagine you are a little nervous about the future. Our civil liberties are under attack by a growing and increasingly onerous state armed with invasive technology. It might not even be some master plan. Which locust destroyed the field? Which snowflake caused the avalanche? Government is a living, breathing organism that evolves but is not always benign. George Orwell is looking prophetic. We should defend ourselves while we can, although I am worried that we are way behind. As you hear some numbnut wax euphorically over facial recognition software in the grocery store, extrapolate beyond the snack food aisle. We should defend every civil liberty, no matter how trivial it may seem. Hope is not a strategy.

I certainly did not expect to get this gloomy. To bring some balance, read a few listicles describing “deathbed regrets”.370 You will find that the dying make no mention of bonds, stocks, Bitcoin, or even gold. Their regrets and reflections are more primal. And with that, I finish with a list of books I read this year.

“This too shall pass.”

~ Somewhere in the Bible


“I cannot remember the books I’ve read any more than the meals I have eaten; even so, they have made me.”

~ Ralph Waldo Emerson

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil

In 2012 I gave a heads up on this book pre-publication. It is now in print and starting to accrue some serious accolades. Steil has an Austrian economic slant and is a fellow at the Council on Foreign Relations (CFR). He describes a fascinating battle between Harry Dexter White and John Maynard Keynes before, during, and after the 1944 Bretton Woods Conference in which the future world currency regime was hammered out. We get deeply insider views of the events in a prose and presentation that I found gripping. Keynes’s role as a diplomat, unknown to many, may have been his most important single contribution. Heads up: Steve Hanke of the Cato Institute and Johns Hopkins University also has a book on the Bretton Woods Conference coming.

Setting Sun: The End of US Economic Dominance by Brandon Adams

Brandon’s book is only 100 pages of book. He wanders through arguments that suggest that the U.S. is headed for tough times going forward, culminating in a painful deleveraging that is likely to last for many years (decades). What started out as a pleasant synopsis of what I thought I already knew proved to be a great read. The prose, citations, and arguments are all sound. Brandon tells an excellent tale even for a connoisseur of fine doomsday books. It is clear that he did not just pound this out but rather let it evolve—he let it come to him. I am envious.

The Great Deformation: The Corruption of Capitalism in America by David A. Stockman

This is Stockman at his most militant. The book starts with him pounding on the crooks and liars. It is six hundred plus pages of relentless pounding—a gigantic blog. I thought it was great, but I don’t think he will convince non-believers. He is way too pissed off, and if they haven’t gotten it by now only another crisis will bring the point home. For us believers, it is a great overview with some really great insider wisdom from his days in private equity. T-shirt idea: “I finished the Great Deformation” (to be sold by Snorg-Tees, of course.)

The Panic of 1907: Lessons Learned from the Market's Perfect Storm by Robert F. Bruner and Sean D. Carr

This was an easy and entertaining read. One gets a real sense of what a bank run feels like. A leveraged speculator in community banks goes insolvent, starts a run at his primary creditor, and next thing you know you have panic spreading through the New Your banking system and eventually the nation. Many of the stories you may have heard in snippets throughout the blogosphere. It was a nice compilation of the narrative in one place. The descriptions of what was going on in back rooms and at the teller windows was very entertaining.

The Thomas Sowell Reader by Thomas Sowell

For Thomas Sowell fans, this is a treasure trove of brilliant essays on all imaginable topics written throughout the author's life. He challenges volumes of dogma coming from the intelligentsia, a term of scorn used by Sowell repeatedly, especially the intelligentsia’s proclivity for rescuing the masses from self-inflicted wounds. It is clear that Sowell dismisses the end result of their efforts as disastrous and questions their motives. Those willing to entertain his ideas with an open mind will be challenged, provoked, and impressed. Some will find his ideas intolerable.

The Big Con by Crackpot Economics by Jonathan Chait (2008)

I’ve had time to reflect on the G.W. Bush presidency and the ascendency of republican economic policies. Over the last decade I must have read a dozen Bush bashing books starting with Paul O’Neill’s. By the time Bush's presidency was over, there was a lot to be upset with. This book, however, did not age well. It is way too partisan.

The Map and the Territory: Risk, Human Nature, and the Future of Forecasting by Alan Greenspan

There is no way I spent one penny or consumed one molecule of ATP reading this narcissistic egomaniac’s book. Now he’s doddering on the brink of cluelessness. I put it here to see if you are paying attention.

The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn'tby Robert I. Sutton

This is a humorous little book describes the role of assholes in the workplace. It was entertaining. The key message is that someone who is truly an asshole is not worth keeping around no matter what other talents they seem to possess.

Made to Stick: Why Some Ideas Survive and Others Die by Chip Heath and Dan Heath

The Heath brothers bring complementary skills to put together a treatise on why some ideas stick and others do not. The book was described to me as a game changer—Moneyball 2.0. I found it excellent and well worth the read. I am a sucker for this kind of Gladwellian tale. The money shot: tell a narrative.

Dirty Wars: The World Is A Battlefield by Jeremy Scahill

Scahill is a left-wing, anti-war journalist of considerable repute. He describes the evolution of the modern war in which small armed forces can attack sites around the world. It is a history of the modern U.S. war machine. He is no fan of the right, but Obama takes a serious beating. Scahill describes him as more militaristic than Bush by essentially every measure. It’s a good, although unpleasant, read.

This Town: Two Parties and a Funeral—Plus, Plenty of Valet Parking!—in America's Gilded Capital by Mark Leibovich

The author is an insider describing the world of Sodom and Gomorrah that we call Washington DC. It’s good, although not quite what I hoped. Leibovich describes in lurid detail selfish, craven behavior that is so bad that there is little wonder the politicians never achieve anything. It complements Peter Schweitzer’s Throw Them All Out.

1491: New Revelations of the Americas Before Columbus by Charles C. Mann

I’ve tried to grapple with pre-Columbian history on several occasions, and it simply does not click for me. This one didn’t either. I imagine others might disagree. The strange names and details that I didn’t seem to care about, and efforts to sell the civilizations of Mesoamerica as comparable to any in Europe, fell flat. Try the slightly later post-Columbian history by reading Mayflower.

The First Human: The Race to Discover Our Earliest Ancestors by Ann Gibbons

The author—Gibbons? Really?—describes the race to push human remains back further into the past. We now have human fossil records dating back 8 million years. This is less a tale of human evolution and more a tale of whacky anthropologists battling for turf, prestige, and the good graces of the National Geographic Society. It is a window into their world in which the fights are so venomous because the stakes are so small.

Dark Sun: The Making of the Hydrogen Bomb by Richard Rhodes

Rhodes describes the making of the thermonuclear hydrogen bomb (not the atomic bomb). It has some physics in it, but it is an easy and riveting read about the Cold War era. Funny story: 20 years ago I was in the faculty lounge at Cornell, suggesting that mutually assured destruction (MAD), as dangerous as it is, has worked so far. A cranky old guy sitting right behind me decided to take issue with that view. It was Hans Bethe.

Cronkite by Douglas Brinkley

Many of us grew up watching Walter Cronkite (thinking he was Walt Disney). This is a story of his (Cronkite’s!) career, the evolution of broadcast news, and events that shaped boomers lives. Cronkite was a very intense guy, not what we saw on TV. Familiar names like Smith, Safer, Murrow, Rooney, Huntley, Brinkley, and Walters come to life. Dan Rather, on the other hand, comes off as an unflattering body part.

Why We Get Fat: And What to Do About It by Gary Taubes

Taubes puts forth essentially the message of the Atkins diet; carbs kill, especially the ones you don’t see (high fructose corn syrup.) He really nails it when he rephrases the title question, “what influences fat deposition?” He does an amazing job of dealing with the seeming truism that calories in-calories out is the only rational model. For the record, cutting carbs is very hard to sustain.


Last year I named the many who have contributed to this interesting journey through the financial markets. This year I wish to draw attention to the guy who taught me the most about business, inflation, deflation, distressed assets, and the miracles of capitalism—a CEO who created some serious wealth:

Edward H. Collum

11/20/27 – 08/01/13

Thanks Dad

~ David Collum

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  • Sat, Dec 21, 2013 - 1:30am

    David Collum

    David Collum

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    Posts: 28



    Testing comments section

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  • Sat, Dec 21, 2013 - 2:20am



    Status: Bronze Member

    Joined: Sep 22 2010

    Posts: 470


    the pdf?

    I've even tried the refrigerator stare, but can't find the pdf link.

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  • Sat, Dec 21, 2013 - 3:17am

    Joshua Horan

    Joshua Horan

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    Joined: Jun 21 2008

    Posts: 14


    FDIC insurance reference

    I was struck by the following statement:

    "New bank account protection changed from $250K per account to $250K per Social Security number.210"

    However, link 210 doesn't seem to cover this issue. Anyone know where I can read more about this?

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  • Sat, Dec 21, 2013 - 9:10pm



    Status: Member

    Joined: May 05 2009

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    Congrats on an epic job of analysis, with a heroically plucky attitude!

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  • Sat, Dec 21, 2013 - 9:45pm

    Joshua Horan

    Joshua Horan

    Status: Member

    Joined: Jun 21 2008

    Posts: 14


    FDIC Insurance reference

    I noted the following from the article:

    "New bank account protection changed from $250K per account to $250K per Social Security number.210

    however, reference 210 makes no mention of FDIC insurance. Has anyone else heard of this? The FIDC website doesn't seem to agree with the statement in the article.


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  • Sun, Dec 22, 2013 - 12:23am



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    Posts: 206


    Solutions at the edge of the energy cliff?

    Great read but no solutions. Maybe there aren't any solutions any more, just consequencies. The best we can do is to keep the show on the road for a little bit longer, perhaps. Welcome to the age of decreasing energy.

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  • Sun, Dec 22, 2013 - 5:55am

    Mark Moran

    Mark Moran

    Status: Member

    Joined: Dec 21 2010

    Posts: 4




    Solutions? There are no near term outs.  We are in a deep cultural low.  The only way out will be for our society to encounter, struggle through, and overcome broadly shared hardships and existential challenge.  The past 3 generations created this circumstance - as a culture we simply do not have the collective courage or strength of will to even acknowledge the problems we have created, much less solve them.

    Sorry to be so bleak.  But in my thinking, the best thing that aware-folks can do is to teach your children the founding principles of liberty, personal responsibility, and virtue.  With that foundation, preserve as much of your personal wealth as possible and convey that to your children.

    For example, buy a farm, build a barn, build a smoke house, build on-site power generation, put animals on the land, plant fruit trees, pay off the bank's interests and above all give it to your children debt free.   Doing so will give them as good a starting point for their struggle as possible.

    The only solutions to be had will be through our children’s exertions in a world that you and I can not yet imagine.

    Respectfully submitted


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  • Sun, Dec 22, 2013 - 10:56am



    Status: Member

    Joined: Mar 12 2013

    Posts: 206



    I don't think you're been bleak. Bleakness is a decreasing world energy supply and an increasing world population coupled with near zero awareness. I get very few thumbs ups when I post comments about energy and the economy. The difference between the middle ages and our current age is energy. Ed

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  • Tue, Dec 24, 2013 - 4:37pm



    Status: Member

    Joined: Apr 20 2009

    Posts: 171



    The term "Massive systemic corruption" continually comes to mind. History has shown this always ends badly.

    The fact that Larry Summers almost became Fed head is a sure sign that there is no honesty, accountability, or even any fear of retribution from the general public among the elite. The grifting will continue unabated.

    Get out of debt and learn to fend for yourself and like minded friends and family.  That is the only solution you can personally have any control over.  Good Luck!

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  • Thu, Dec 26, 2013 - 9:46pm



    Status: Gold Member

    Joined: Jan 01 2010

    Posts: 934


    Brooksley Born Frontline

    There seems to be problem at NPR that it can never question if Bailouts encourage even more casino activity.   What if LTCM was not bailed out?   Just as TARP was sold it was never necessary to bailout LTCM.   The bast regulation is "losing money".  There is no 100% safety in Nature and if there is a big loss then pursue it privately in court.

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  • Fri, Dec 27, 2013 - 3:03pm



    Status: Bronze Member

    Joined: Jun 19 2008

    Posts: 83


    Same Question

    That statement caught my eye, too.  I'm wondering if it referred to retirement accounts only, like IRAs at a bank.  The best I could find from the FDIC website is this:http://www.tdbank.com/bank/fdic_insurance.html

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  • Fri, Dec 27, 2013 - 3:39pm



    Status: Platinum Member

    Joined: Oct 01 2008

    Posts: 1566


    KathyP wrote:That statement

    [quote=KathyP]That statement caught my eye, too.  I'm wondering if it referred to retirement accounts only, like IRAs at a bank.  The best I could find from the FDIC website is this:
    I believe this link should answer your question:
    [quote]The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.[/quote]

    FDIC Deposit Insurance Coverage Limits
    by account ownership category

    Single Accounts
    owned by one person
    $ 250,000 per owner

    Joint Accounts
    owned by two or more persons
    $ 250,000 per co-owner

    Certain Retirement Accounts
    includes IRAs
    $ 250,000 per owner

    Revocable Trust Accounts
    $ 250,000 per owner per beneficiary up to 5 beneficiaries (more coverage available with 6 or more beneficiaries subject to specific conditions and requirements)

    Corporation, Partnership and Unincorporated Association Accounts
    $ 250,000 per corporation, partnership or unincorporated association

    Irrevocable Trust Accounts
    $ 250,000 for the non-contingent, ascertainable interest of each beneficiary

    Employee Benefit Plan Accounts
    $ 250,000 for the non-contingent, ascertainable interest of each plan participant

    Government Accounts
    $ 250,000 per official custodian (more coverage available subject to specific conditions)

    To calculate your deposit insurance coverage
    Use the FDIC's Electronic Deposit Insurance Estimator (EDIE) at: www.fdic.gov/edie.

    For questions about FDIC coverage limits and requirements
    Visit www.FDIC.gov/deposit/deposits, call toll-free 1-877-ASK-FDIC, or ask a representative at your bank.

    That "$250K per Social Security number" language may apply to accounts with multiple owners such as the "joint accounts" listed in the table.  And, its "per insured bank" meaning you can have accounts in different banks, each of which is insured up to $250k.  Also, as I read it, you can have an IRA account and a savings account in one bank, each of which are covered up to $250k.  Hope this helps.

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  • Sat, Dec 28, 2013 - 8:52pm



    Status: Bronze Member

    Joined: Sep 22 2010

    Posts: 470


    The FDIC plan under a bail-in scenario

    Since we're on the subject of FDIC rules, has anyone looked at what might happen to FDIC insured money in accounts if a "Bail-in" (take the money from depositors) approach to saving the banking system is implemented? I am not aware of any insurance against 'account taxes' or 'deposit account fees' or whatever such a bail-in might be tagged.  After the Cyprus test case this approach is definitely on the table.

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