Lessons (not) learned: Staying the hell of out something you don’t know anything about

A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons. - Warren Buffet

One would think the several economic bubbles (and their inevitable violent bursts) experienced by the world and U.S. economy would provide some caution for investors looking for the next “big thing”. Unfortunately, this does not always seem to be the case, and even at the beginning of this recession, some investors poured a great deal of money into agricultural real estate. Last year, when commodity prices soared, farmland was seen by many people (most completely outside of the agricultural industry) as a solid investment. Farmland was purchased by investors and rented to farmers to work the land (50% of U.S. farmland is rented in this way). One of the key components of figuring out the value of the rents is the price of the commodities the land will produce. Investors bought the land and charged rents for farmers based on 2008 commodity prices, not anticipating the global financial meltdown. Of course, due to the recession, commodities prices are down. This creates an obvious problem for a lot of farmers, especially small farms.

So far, the recession hasn’t forced land prices down too far, based on the recent data from the USDA. The stronger dollar and lack of demand abroad has pushed prices for U.S. exports down, and hence, overall farm revenue. In other words, the land values are out of sync with the value of what the land produces—an obvious problem, with a number of parallels (think tech stocks and price to earnings ratios circa 1998, average home prices versus average household incomes circa 2005, etc.)

Of course, this is a problem—this kind of outside influence on the price of land hurts small farmers, especially those transitioning to sustainable and/or organic practices. At the end of the day, this kind of speculation raises food prices for everyone to the benefit of a few investors, encourages non-sustainable, short-term farming, will eventually lead to a collapse that will affect small farms disproportionately, not to mention consumers. The impact of agriculture is enormous, and touches each of us—we must, as citizens, demand that our governments do a better job at ensuring our agricultural viability.

What do we do about this? The government could financially fertilize programs like the First Time Farm Purchase Loan program (funded by the 2008 Farm Bill with a paltry $350 million), and other kinds of direct loans to farmers to purchase land. There should also be increased power for the FDA, working with the SEC, to regulate purchases of land by entities that will not be working the land. This agricultural “middle man” (the investors) only serves to raise food prices for the rest of us—taxing the hell out of renting farm land to farmers might be a way to encourage non-involved investors to stay out of the farmland business. Protecting vital and special resources like agricultural land should be a no-brainer—we’ve seen the damage bubbles can do to other, less important sectors of the economy, and we can ill afford this to happen to our food supply.

The Bankruptcy (Moral and Literal) of Conservatism

The future of the Republican Party sure looks bright, eh?

Just hours before the unemployment benefits fund was to run out in South Carolina, the state with the nation’s third-highest jobless rate, Gov. Mark Sanford relented Wednesday and agreed to apply for $146 million in federal funds to top it up, after weeks of refusing to do so.

The governor’s position had drawn rebukes even from fellow Republicans in the legislature, one of whom denounced him as “heartless.” Newspaper editorial pages in South Carolina questioned why he was adding to the anxiety of the state’s 77,000 unemployed residents. Legislators here said they could recall no governor ever refusing to ask for unemployment funds.

Leadership the nation can believe in! The Republicans are sure tuned in to the needs of the nation.

It's also interesting to know just how reprehensible a South Carolina politician can be before turning the collective stomach of arguably our least progressive state.

Public Works

I love Obama's public works package.

I love it because it shows that the new government actually cares about the American people, a nice change from the last 8 years.

I love it because we really need work on our infrastructure. The Republicans were never going achieve Grover Norquist's dream of drowning government in a bathtub, but they were happy to do so for the parts of government that make life better for Americans. Our infrastructure is in dire straits, as seen in the Minneapolis bridge collapse.

I love it because it is going to put people back to work. It's a return to New Deal style programs where the federal government steps in during economic crisis to give people jobs and get the economy going again.

And I probably love it because, like a lot of other liberals, I romanticize the New Deal a bit. I can't even say how many times I've heard people wish for a new Civilian Conservation Corps. There's something about that agency that really sticks in the heart of liberals, especially male liberals. I guess it has something to do with being outside, doing tough masculine work, but for a good cause rather than hunting or logging or something like that. This is obviously psychoanalytical speculation, but I think it not without merit. People don't romanticize the other New Deal agencies quite so much, but the idea of the government putting people to work in really productive, nation-building ways, is a liberal fantasy that I'm happy to share.

Sarcastic "You're KIDDING!!" Moment of the Day

I'm shocked, SHOCKED, to learn that the Bush administration sat back and did nothing when warned about the possibility of an economic collapse tied to the housing-credit-banking mess! Inaction on the part of the Bush White House?? A standard without precedent!

Collapse of the Academic Job Market

This is incredibly depressing.

There are approximately 1/2 of the tenure-track jobs in history this year that there has been in each of the last few years.

I assume the job market is equally grim in other fields.

Ugh. Hope the high schools are hiring in the next few years.

Auto Bailout

While I am personally mixed on the idea of bailing out Detroit, the Republicans sure seem to be trying to dig themselves the deepest grave possible in their intransigent opposition to it.

Vote Republican--we destroy iconic American companies!

The Future's So Dark, I Gotta Wear Giant Light-Gathering Telescopes

Colleges across the nation facing severe crisis accompanied with hiring freezes and outright cutbacks.

Picked a hell of a time to be on the academic job market, didn't I?

Time to start making backup plans I guess.

Recession and Environment

Brad Plumer makes a good point about the recession being bad for the environment. Some theorize that because recession means less building and less traveling, that it is good for nature. But this is short-sighted. It might mean a temporary reprieve for some land that is slated for development. It might mean a tiny reduction in greenhouse gas emissions (or more precisely, a smaller rise). But as soon as the economy picks back up, those slight changes will reverse themselves.

Moreover, lower oil prices are likely to dampen Americans' move to change their life styles. That SUV doesn't look so bad now, especially if it is close to paid for. Americans are incredibly short sighted on environmental issues. If scarcity is directly affecting their pocketbooks, they'll consider green alternatives. But as soon as they don't have to think about, they will revert to their most environmentally unfriendly habits.

Plus, we see the credit crunch slowing the building of wind turbines and other alternative energy projects.

The problem is that environmental issues are simply not central to our political narratives. They are not national priorities. In the 3 presidential debates, I believe the environment has been discussed for 5 minutes. Which is actually more than I thought it would be. It is not sufficient to leave alternative energy and larger environmental issues to the market. They need to be made national priorities that require direct federal intervention, along with the military and the economy. Each day we ignore our environmental problems is one day closer to them becoming a national emergency that will be incredibly difficult to handle.

One Down

The first American history that I had applied for was cancelled because of the financial crisis. How many more will it be? I hope those unemployment checks pay OK. Or maybe I'll end up living with my parents....

More on the Brazilian Economy in the Global Credit Crisis

Apparently, I jumped the gun on the volatility post below. As remarkable as the 16 cent jump in the Real-Dollar exchange rate was yesterday, early reports in Brazil today are saying it closed at 2.31 reais to the dollar, another 15 cent jump. So in the last two business days, the real has dropped an incredible 15%.

In response to asdfhja's question below, it's a little trickier. To be perfectly frank, I don't really know much about the "why's" of currency exchange in the world today. While I'm familiar with why the real has performed as it has in the past (1990s, Brazilian currency in the 1980s), I don't really understand the "why's" so much currently as the "what's".

That said, my understanding is that when economies in the U.S. or Europe do poorly, the exchange rate drops (i.e., goes up in absolute number to the dollar) in Brazil because investors pull money out of emerging markets to prop up the already-established markets. As Brazil is one of the biggest emerging markets in the world right now, they've been hit particularly hard in the past few days, as foreign investors have pulled out in order to try to conserve money and preserve the American, European, and Asian markets. In short, foreign investors are pumping their money into their own markets rather than foreign markets, in order to shore up the "homefront" first, which in turn leads to a plummet in foreign investment in Brazil. To my understanding, then, that is the most basic reason why the dollar-real exchange rate has jumped so radically over the last two days; I'm sure there are other factors involved too, but right now, all the articles and journalists writing about this (and there aren't many) are still in the panic phase, without really getting at the roots of why the exchange rate has been so volatile (and to be fair, it is probably too early right now to explain this - it's only been two days, after all).

In what's an extremely bizarre situation, though, despite this plummet in the dollar-real exchange rate and the Brazilian stock markets, Brazil's economy is not in trouble. I realize that that may sound impossible, or that I'm schilling for the Brazilian government as propaganda, but that's not the case.

Again, as I mentioned below, Brazil's economy simply is not being devastated in the way the American economy is for a number of reasons: while credit is increasingly important in Brazil, it is not a credit-dependent society like the United States (and indeed, many people still do not even have bank accounts there); the housing market in Brazil, where apartment ownership is the norm, works in a radically different way than in the U.S. (among other things, high-risk lending is not nearly as common); there was no housing bubble that was ready to burst at any moment; and Brazilian banks are not suddenly collapsing because they put all their money into a housing market that was so susceptible.

What is more, Brazil has diversified its economy radically over the last 20 years, exporting everything from automobiles to soy to ethanol to oil (thanks especially to the large oil deposit recently discovered off the coast of Sao Paulo state), and it is far more self-sufficient in terms of energy than many places in the world.

What is more, Brazil is not indebted anymore to the IMF or World Bank, so it has been free to invest its money in infrastructure as it deems fit, without having creditors come calling or having other institutions dictate how Brazil should spend its money, an issue that's still extremely sensitive in Brazilian politics. Just today, Lula asked why the IMF doesn't bail out the US and Europe with large, long-term, high-interest loans that give the IMF the right to determine how those countries should spend their money, just as the IMF did to Latin America in the 1990s, a point that's not without a sense of truth and fairness behind it from a region that the IMF did everything to destroy 10-20 years ago, all in the name of "neoliberalism." (He rhetorically answered his question by saying it's because the US and Europe are pretending they aren't in a major crisis the way Latin America was in the 90s, when the US and Europe had no problem insisting Latin America was and that only the US and Europe knew what was good for Latin America, something which Latin American presidents too readily agreed with, to the detriment of their own economies).

At any rate, what this freedom from debt to the IMF and World Bank has done is allow Brazil to invest in its own economy, rather than relying on foreign investors, and so when the foreign investors pull out, while Brazil's stock market suffers a hit, the rest of the economy can and has been remaining strong. And finally, as Randy points out in the comments thread below, the lower real value actually helps Brazil in its overall trade income, and the $200 billion in reserve do not hurt in any way, even as the dollar suffers.

All of this is not to say that the Brazilian economy is not going to suffer ill effects from this global crisis sometime in the future; anything is possible. Yet as Randy rightly says, "Brazil is in far better shape than most of us."

The Financial Collapse--A Trifecta for the Republicans

I am no economist. But maybe that's a good thing. Because this financial collapse was eminently predictable. At least I predicted something like this.

You mean terrible home loans to people who can't afford them aren't a good idea? That a completely deregulated Wall Street doesn't lead to endless wealth? That the Dow is not going to rise forever? That capitalism maybe shouldn't be a religion?

And it's not just me--virtually the entire left has predicted the same thing. I am not gloating. This sucks. What will the academic job market be over the next few years as I try to get a tenure-track job? Will I even have a job next year or especially the year after? What will happen to my friends and family? These are real concerns. Everyone has them now.

But any study of the past and any sober analysis of the present always suggested that such a boom was not going to last. And that the economic bubble was so gigantic that the burst would be extremely painful.

What this should do is complete the Republican trifecta of incompetence. Along with Iraq and New Orleans, the financial collapse should condemn the Republicans to being the minority party for the next generation. I hope that Democrats can rebuild the economy with the kind of regulation that made for such a great period of reasonable economic growth between 1945 and 1973. That they will remind Americans of what the government is supposed to do. That reasonable taxes to make society function are a good thing.

Unfortunately, the 1990s generation of Democrats drank the unregulated get-rich-quick capitalism of the Republicans and a lot of them are in Congress. So that's a fight too.

I wish that I and much of the rest of the left wasn't right about all of this. But it didn't take a genius to see this coming. It just took someone who wasn't a greed addict.

The Solution?

If I shoot myself, will Sallie Mae forgive my student loans?

Where Are Johnny Boy's Principles?

I don't understand. I thought McCain hated earmarks. Yglesias points out that a mere 9 days ago, McCain stated that a bailout loaded with pork was unacceptable. And now we see him voting for it. Is that what he flew to Washington to deal with? Make sure there were some good earmarks in there? If he really cared about earmarks, wouldn't he have voted against it?

In all seriousness, I'm sure he figured that having the bill meant more than the earmarks. But it does make him vulnerable on his pet issue.

Of course, I have no problem with earmarks. I don't necessarily like the process by which they are created and allocated. But I still believe in government spending to spur the economy and many of the earmarks serve science. McCain can laugh at the Montana project to study grizzly bear DNA, but that sounds like potentially valuable science from my perspective.

The new bailout plan is at best marginally better than the last one, but what makes it better are the provisions that have nothing to do with it. The clause forcing insurance companies to make mental health equal to physical health in their coverage. The increase on FDIC insurance up to $250,000. Money for rural schools. These are all good things, as are many of the other amendments. It would be nice for this money to be shared in different ways, but despite McCain's blustering, the system isn't changing anytime soon.

Priorities

Jeremy Elton Jacquot frames the bailout in the right way. He notes that the Bush administration is happy to ask for $700 billion to help their rich friends but is willing to spend nothing on anything else. The case Jacquot mentions is a very reasonably priced $70 million plan to help save salmon populations.

While I agree that some kind of bailout is necessary, just what could be done with that money? Go catch Osama Bin Laden. A national healthcare plan. Subsidies for alternative energy technologies. Providing mass transit around the nation. Any number of small programs that would make life better for Americans. But this will never happen. For Republicans, there are 2 things worth spending money on. Giving it to rich people and fighting wars. That's it. McCain last night kept talking about cutting spending except for defense. He wants more defense spending. A terrible idea. Just horrid.

The $700 Billion

In case you were wondering why the bailout number is $700 billion.

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

Leadership we can believe in right there.

The Banking Blob

With the news of bail outs, bank failures, congressional deals, and McCain's (to borrow from Barney Frank) "Hail Mary" (which looks like it will work about as well for him as for USC last night...), I've noticed that the significant and troubling conglomeration in the banking industry hasn't been exactly front page news.

Washington Mutual (which now ought to change its slogan to "D'oh!" from the pleasantly optimistic "Woohoo!") has been taken over in part by JP Morgan Chase (the company that took on Bears Stearns). This not only vaults them into second place in the Battle for the Biggest Bank, but gives JP Morgan Chase a great deal of retail banking outlets in the West (most of their branches at the retail bank level are in the Northeast). WaMu was one of the largest retail banks.

The biggest bank is still Bank of America, which recently got bigger by acquiring Merrill Lynch. There are still rumored to be several mergers and acquisitions being talked about behind closed doors. I doubt we've seen the last round of consolidation in the banking industry.

The question is, what does this mean? How will this affect normal people? I'm always wary of corporate consolidation; banks getting bigger and bigger seems to me a counter-intuitive move when weighed against recent events. JP Morgan Chase's purchase of some of WaMu's assets did save the FDIC some serious money, though. Who knows? And that, my friends, is the real crux of the problem for me. Who, indeed, knows what the best course of action is? If consolidation of the banking industry gives one pause, then the further consolidation of executive power (particularly in the Department of the Treasury and the Federal Reserve) that President Bush is advocating should as well.

What the Hell?

McCain is suspending his campaign because of the financial crisis? He wants to cancel Friday's debate?

What?

This is arguably the most desperate and pathetic move in the history of American presidential campaigns. Seriously. #1. It's even more weird since it is a foreign policy debate, supposedly McCain's speciality in a format that is not Obama's favorite. Huh. Sounds fine to me.

As many others have pointed out already, including Obama--part of being president is dealing with multiple things at once. I guess the Republicans are saying that McCain really cares about the economy--more than being president. But this is both absurd and is not going to work. I think Americans want actual leadership. They want someone who can deal with a financial crisis and take care of Iraq and deal with Russia and health care and a bunch of other things. All at the same time. McCain is showing that he either can't or won't do these things.

Barney Frank said this about McCain's stunt: "It's the longest Hail Mary pass in the history of either football or Marys." Yes. This is true desperation. It's badly thought out and shows him to be entirely incapable of the office.

The first thing I was thinking was that there have been lots of presidential campaigns in US history. They have happened in good times and they have happened in bad times. And no my knowledge no one has ever actually called for suspending the campaign. Then, Eric Rauchway did my homework for me. He points out that on September 24, 1864, we were in the middle of the Civil War. Campaigning was intense that year and did not stop for a second. On September 24, 1932, we were dealing with the Great Depression, a crisis more serious by like a magnitude of 400 to this one. Yet FDR, Hoover, and their surrogates were trading blows left and right. And On September 24, 1944, in the middle of World War II, Thomas Dewey was attacking Franklin Roosevelt. I'm sure David Horowitz would call this treason....

See, this is how you campaign. You talk about the issues at hand. You try to demonstrate how you will deal with them. You don't stop campaigning and try to cancel the upcoming debate.

Commentary on this from around the intertubes has been pretty interesting. Aimai picks up some good stuff from The National Review. This guy gives McCain some advice:

I think McCain should show up for the debate looking reluctant and disheveled. He could apologize for this condition, saying he had to rush back from doing the nation’s business. He could be like Grant having to apologize to the impeccably dressed Lee at Appomattox for showing up all muddy and in an old private’s coat. There was, after all, a war that needed winning.

Huh. I thought all NRO readers supported the Confederacy. Learn something new every day.

Meanwhile, David Letterman of all people really nails what I think the public response to McCain's stunt is going to be:

"You don't suspend your campaign. This doesn't smell right. This isn't the way a tested hero behaves."

Yes, indeed.

The 2008 presidential campaign may well go down as one of the 2 or 3 most bizarre in American history.

Overheard...

From Congressman Barney Frank this morning on The Diane Rehm Show, regarding the Republicans' resistance to limiting corporate executive severance pay (a.k.a. the "Golden Parachute") for companies that will be bailed out by the U.S. taxpayers:

"The Bush administration continues to insist that they can't accept any restriction on executive compensation for those companies that are benefiting. Frankly, I talked to the people in the administration about this and they acted [as] if I told the chief rabbi in Jerusalem to eat bacon on Yom Kippur. I mean, it kind of just resonates in a way that threatens their whole worldview".

In other news, it seems a few million people have been restored to sanity. Several new polls have come out in the last 36 hours, all showing Obama once again ahead (some show fairly wide 8 - 9 point leads).

Another bright spot of the financial collapse has to be the sobering of media coverage that has resulted in a happy media absence of everyone's favorite lipstick-wearing, Russia-seeing, executive experience-having, pageant-winning, young Earth creationist hockey mom. So, you know, that's good.

The Horror. The Horror.

In these times, what kind of sacrifices are our super-rich making?

It's rough out there.

A nose job in a hospital with a private nurse in attendance had been something of a rite of passage for Joan Asher's children. But when her fourth and last child was ready for her own rhinoplasty recently, Ms. Asher asked her to postpone it.

The financial markets were simply more out of whack than her 16-year-old's proboscis.

"The other noses were more prominent," the stay-at-home mother from a tony New York City suburb in Westchester County told her 16-year-old daughter. She could get hers done when things settled down.

Ms. Asher was able to let her daughter get her nose job before school began after plastic surgeon Alan Matarasso said he could do the procedure in his office operating room on Manhattan's Upper East Side for about $2,500 less than if they went to a hospital, stayed overnight and hired a nurse. At home, Ms. Asher stayed up most of the night after the surgery, putting cold compresses on her daughter's eyes every 20 minutes. "She was fine," she says. "It came out great.

In other horrors:

For her 50th birthday, Annette Pucci, a New York retail manager, planned to treat herself to a facelift by cashing in $15,000 in stocks. But after consulting with her husband, a manger with Consolidated Edison Inc., she realized their stock portfolio had taken such a hit that it was out of the question.

"It was a very big disappointment," Ms. Pucci said. Her consolation: a $1,200 Botox treatment she had this week instead.

Expensive jewelry -- one of the few bright spots in the luxury-goods industry until now -- appears to be a new victim of the financial crisis. Patricia G. Hambrecht, who helps private clients buy and sell high-end jewelry, this week watched a client in the financial-services industry slash his budget for his wife's wedding anniversary present to $20,000 to $25,000 from $50,000.

It's nice that the Wall Street Journal is out there reporting on the real suffering going on in America.

Via Roger Ailes.

Speculators

Can we please put to bed the myth that oil prices haven't skyrocketed because of speculators? Yes, that is not the whole story. But the idea of supply and demand is just absurd. Today, oil jumped by a mere $16? Why? Because the Democrats aren't willing to give Wall Street a complete bailout with no questions asked? The response is to invest in oil and other commodities, thus further shifting the suffering for the financial collapse on the backs of working Americans. Speculators are now making Americans pay more for key commodities, despite the fact that there is no supply and demand issues driving such a price spike.

This should not be allowed to happen. While I'm not calling for the nationalization of resources or for governments to enact strict price controls on the international commodity markets, there should be more closely regulated rules. I am comfortable calling on price caps, shutting down the markets when prices go up (and maybe also down) more than a certain percentage each day. I also support a large tax on oil profiteering and speculation.

Moreover, I oppose and deeply resent how Wall Street is forcing poor and working-class people around the world to make up for their failings. Congress should not only be investigating why the economic collapse happened and more closely regulating the financial industries. They should also be investigating who is pushing commodity prices to unreasonable heights, who is getting rich of it, and why we have such a system in the first place.

This is class warfare.