Wednesday, October 22, 2014

The Turmoil of Economic Inequality

Of all the potential dangers of economic inequality--slow growth, reduced upward mobility, and so on--social destabilization is the most worrisome.  This is when people say, "Enough.  We're not waiting for things to happen.  We're making them happen.  Our way."

The pro-democracy demonstrations in Hong Kong were nominally over Chinese attempts to limit the freedom of Hong Kong's elections by vetting candidates.  Only pro-Beijing candidates need apply. But growing economic inequality in Hong Kong fueled the anger of the demonstrators.  Wealthy Chinese are buying up prime real estate in Hong Kong, pushing prices beyond the reach of the local middle class.  The wealthiest Hong Kong residents are, like the 1% elsewhere, growing disproportionately richer.  Job and other opportunities for many others are looking bleaker.  Middle class Hong Kong residents began to see less and less for themselves in the status quo.  They didn't take things quietly.

Democracy is a mechanism by which the 99% push back against the growing wealth and power of the 1%.  Without democracy, oligarchs and plutocrats flourish.  China has an authoritarian government, whose powerful members and their families are intertwined with China's economic elite.  The ordinary citizens of Hong Kong have no voice in the northern capital.  Public protest is only way for them to be heard.

Modern day mandarins in Beijing no doubt shivered when protest banners unfurled in Hong Kong.  Since the days of dynastic China, rebellions against the central government have usually ignited in southern China.  Far from the seat of power, the discontented more readily questioned claims to the Mandate of Heaven.  Indeed, both of the rebellions that unseated the last emperor, and then the Chinese Nationalist government (now a vestige on Taiwan), began south of the Yangtze River.  In recent weeks, Communist cadres have no doubt been taking more business trips to warmer climes.

Turmoil from economic inequality is not limited to Hong Kong.  In the city by the bay, middle and lower income San Franciscans have bristled at the invasion of the geeks from the Silicon Valley.  Young technocrats have driven up real estate prices and Yuppified neighborhoods that heretofore took pride in their eccentricity.  Charter buses used for commuting by the options-compensated have been attacked by the not-so-well compensated.  The so-called trickle-down theory isn't entirely benign.  Capitalism has losers, and the losers will push back.

America is a democratic nation, although increasingly dominated by Big Money as a result of U.S. Supreme Court decisions striking down various limits on campaign contributions.  Democratic Party get-out-the-vote efforts in 2008 and 2012 have held the forces of wealth at bay for now.  But countries tend to work best when they have a government of the people, by the people and for the people.  Economic inequality cannot continue to increase indefinitely; and consequently, it won't.  The only question will be how it ends.  Let's hope it doesn't end badly.

Sunday, October 5, 2014

The Student Debt Dilemma

Some predict that student debt will be the next asset bubble that will make the financial markets crash.  That's unlikely, but student debt is a huge and growing problem that gnaw away at economic growth until something changes.

Student debt won't bubble and burst like mortgages because the impact of losses wouldn't be centralized in the financial system.  The reason why mortgages, and their kissing cousins, mortgage-backed derivatives, almost blew up the world's financial system in 2008 is that when the ship hit the sand, the impact of losses was concentrated on the largest financial institutions, in particular an insurance company called AIG.  These institutions would have been rendered insolvent toute de suite, and the financial system would have been engulfed by a roaring flushing sound.

Some 20% or so of student loans are in default, and very possibly many more will never be fully repaid (for various reasons, it's sometimes possible to avoid default by paying small amounts of student loans but not be repaying fast enough ever to fully pay off the debt).  The impact of these losses will be spread out over time, and much if not most of it will fall on the U.S. government.  Which means that taxpayers will bear a lot of the burden, along with private investors.  But it will be a diffuse, albeit large, burden rolling out over years and decades.  There won't be a sharp poke in the eye at a discrete moment in time that will trigger a financial crisis.

But the aggregate amount of student debt keeps growing (it's over $1 trillion now), and the burden of repayment is growing commensurately (especially since interest rates on federal loans will float, and given today's ultra low rates, they can float only in one direction).  The burden of defaults and other nonpayment will also grow.  It's anecdotally said that student loans are holding up everything for many young adults--marriage, car purchases, home purchases, having children, and so on).  Maybe it makes sense that the sharing economy (car sharing, bike sharing, and the various iterations of the rental economy) is booming.  Young people can't afford to buy things, so they purchase the use of things for short periods of time.  This may be good for the environment, but it hinders economic growth.  If the burden of student loans becomes heavy enough, the impact could be lifelong, and entire lives could end partially unlived.

Student loans are almost impossible to discharge in bankruptcy.  It's easy to get federal loans--you just need to be admitted to an accredited institution--so there's an understandable reason for making them hard to ditch.  Otherwise, taxpayers could be asked to give free college educations to vast numbers of people.  And college educations provide lifelong benefits, so it's arguably fair to ask people to repay college loans, even if it takes a lifetime.

But student debt has become a bear trap for those who default.  Of course, their credit scores are knocked down.  That seems fair enough, but that's also where the kidney punches start.  Many employers won't hire a person with credit problems.  If you are laid off and then default on your student loans, you may not be able to get a new job to repay them.  Sometimes, you lose a professional license (like a nurse's license), which makes it even more difficult to find a job to repay the loan.  Defaulted loans continue to bear interest and penalties are imposed for default, thus ballooning the amount you have to repay.  So, if you have significant student debt, here's what you have to do:  (a) never lose a job; (b) never get so sick that you have to take major time off from work; (c) tell your aging parents that you can't help support them in their old age; (d) tell your spouse he or she can never lose a job, get so sick that they have to take major time off from work, and provide no support to their aging parents; and (e) never do anything that would otherwise result in default.  Getting to like rice and beans, network television broadcast to a TV with rabbit ears, and knitting your own socks, would also be good.

What will happen is, eventually, substantial relief will be given by Congress to student loan defaulters.  The exact scope and terms of the relief aren't easily predicted.  But it will happen.  Why?  Because the problem has become too big, and full repayment is increasingly unlikely for too many borrowers.  Since students from middle and lower income classes are the most likely to take out loans, the burdens are distributed in a regressive way.  Sooner or later, that will find expression in the ballot box.  When too many people labor under the burden of student loans, their combined political voices will overwhelm the lobbyists and influence peddlers employed by the student loan industry and the educational institutions that free-ride on easy educational credit.

There's a precedent for allowing student loans to be discharged in bankruptcy--that's bankruptcy itself.  When Lord Cornwallis' Redcoats surrendered at Yorktown in 1781, there was no such thing as bankruptcy.  Debtors were not only expected to repay their debts in full, but could be imprisoned until they did so.  As one might expect, the use of debtors prisons wasn't always fruitful.  A debtor in prison couldn't work or otherwise do much to repay.  But debtors were commonly imprisoned in the belief that the world was a better place for it.

However, as America grew into a bustling, vibrant industrial nation, voices of reform argued for giving debtors a chance for a fresh start.  Freed from old debt, individuals could more fully participate in the economy and provide for their families, thus strengthening future generations.  Creditors pushed backed, contending that a man's word should be his bond and that shiftless, lazy and prevaricating deadbeats shouldn't be able to hoodwink those that extended credit in good faith.  But the voices of reform won the debate, and America became one of the early adopters of the concept of bankruptcy.

Permitting bankruptcy shifts risks, placing more of the burden of default on creditors and less on borrowers.  As a consequence, market forces led creditors to adjust their practices, raising interest rates on all borrowers and eventually adopting the credit scoring system.  In effect, all borrowers pay for the defaults of some, but all borrowers have the option of bankruptcy.  Since you never know when life may blow up in your face, this may not be so bad.

The student loan crisis will eventually impel something similar. The sheer, growing size of the problem will force change.  Student loans increasingly are no longer just the problem of some, but the problem of many, most and perhaps even all. Of course, if student loans become dischargeable in bankruptcy, other changes will result.  Interest rates on the loans would likely increase, so that all borrowers cover the costs of defaults.  And educational institutions may be required to pay a portion of defaulted loans--at least for those students who don't graduate, so that colleges don't accept applicants who are unlikely to graduate and then free ride off the loan revenues from those students.  These changes would be appropriate, since taxpayers shouldn't have to fund handouts for the educational sector. 

The current student loan crisis is yet another illustration of the problems of easy credit.  Easy credit at first seems like a bargain, and everyone loves it.  But there's no free lunch, and the costs of easy credit will eventually emerge.  When the problem becomes so severe that it cannot continue in the present form, then it will change.

Sunday, September 21, 2014

The Online Challenge For Higher Education

Higher education is moving online, and that's a trend that will continue and expand.  The costs of college degrees have risen sharply over the past 40 years and this trend shows few signs of abating.  Cost considerations alone will force many students to look for online alternatives.  It doesn't matter that physical institutions offer the benefits of face-to-face classroom interactions and social opportunities that could create lifetime friendships.  When college costs continue to rise 5% or more a year, and incomes rise scarcely at all (except for the top few percent), numerous students from less privileged backgrounds will be financially squeezed out of traditional college experiences.  How quickly and how far online education grows depends on how purveyors of online education and traditional colleges confront certain basic challenges.

Online education has to prove that it can provide a quality education, one that makes its graduates competitive in the marketplace for good, well-paying jobs.  Online students obviously won't enjoy football Saturdays, beer in the student union, or impromptu chats with professors; nor will they be able to disgrace themselves with embarrassing behavior on fraternity row on weekend nights.  And it's difficult to replicate certain educational experiences online--laboratory work for physics and chemistry classes isn't quite the same if all you're doing is watching someone else do it through a computer monitor.  But the educational content of many, and perhaps most, college courses can be presented online with little or no loss of substance.

The online educational process may be more adaptable to meeting the needs of employers.  Physical institutions tend to subscribe to a traditional belief in the value of a broadly based liberal education.  While this concept remains valid, it isn't essential for everyone.  The billionaire founders of Microsoft, Oracle and Facebook are all college dropouts.  The denizens of academe may sneer at trade schools, but Europe's most powerful economy--Germany's--includes trade schooling as a crucial part of its educational system.   There is more to life than work, but life really stinks if you need a job and don't have one.  If online schooling can produce competitively employable graduates, it will transform education the same way that Amazon and Alibaba have transformed retailing.

Physical colleges have overpriced their product, and now confront an overcapacity problem.  The elite schools (the top 100 or so) will continue to do well because there will always be a certain segment of the population willing to pay (or having parents willing to pay) the costs of a name brand sheepskin.  Students aiming to be professionals--doctors, lawyers, and so on--will benefit from the friendships and contacts they make by being on campus. Students who don't really know what they want to do may be able to find a focus for their energies from exposure to the breadth of topics covered by a liberal education.

But the days when getting a college degree in anything and still being readily employable for a good salary are long gone.  There is increased pressure on kids at the high school level to choose a field and get a focused education so they can get a job.  Mid-tier colleges that provide good students with a good general education will find that's often not enough.  And even as they struggle to adapt, they'll be competing against numerous other mid-tier colleges that are struggling to adapt.  Reality is that a lot of mid-tier colleges have limited half-lives.

Much of the problem lies in the easy availability of educational loans.  There is no meaningful underwriting process for these loans.  Anyone admitted to an accredited institution can get a loan.  And, in order to preserve the principle that there's no free lunch, these non-underwritten loans are virtually impossible to discharge in bankruptcy.  For many kids, educational loans are like a pact with the devil--easy to enter into, but binding for eternity.  Many colleges are culpable participants in this pact.  They used the availability of easy education credit to raise tuition and fees much faster than incomes were rising, and to pad the compensation of administrators and top level college officials.  They aren't stuck with having to repay defaulted loans of their students.  So they have every incentive to encourage students to take out loans that benefit the college and its officials, but impose no costs when the educations they provide aren't sufficient to land the students good jobs.

Political considerations preclude any meaningful reform of college loan programs that would balance the costs and benefits, particularly by penalizing colleges for churning out graduates who can't repay loans that the colleges helped them obtain.  But economic forces will compel change.  Many high school graduates, looking at the bear trap college loans can become, will choose low cost routes through community college, trade schools, and, increasingly, online education.  Many physical colleges that have floated on the cushion of educational loans will have to downsize or close, as their cost structures cannot be sustained by their likely future revenue stream.  They will no doubt lobby the political process, whose knee jerk reaction will be to make college loans even easier to obtain.  But that will, if anything, make the problem worse, not better.  Students, having been served too many coffee drinks by well-educated baristas, won't take the bait. 

The economy as a whole is better off if students can obtain high quality, low cost educations.  Indeed, as the American middle class continues to decline, inexpensive higher education may offer one of the few avenues for recovery.  The end result will be workers who can succeed, prosper, and consume, rather than have pauper's lives in quasi-debtor prison. 

Wednesday, September 3, 2014

Easy Money: Reinvesting Dividends

Some of the easiest money comes from reinvesting dividends.  Over long periods of time (such as 20, 60, or 80 years) dividends accounted for a little more than 40% of total stock market returns.  Stated otherwise, if you spent dividends, as opposed to reinvesting them, your portfolio would have enjoyed only a little more than half the return it could have gotten with reinvested dividends.  Remember that reinvesting dividends has a compounding effect, and compounding is very, very good for your net worth (see http://blogger.uncleleosden.com/2009/09/if-you-love-compounding-compounding.html).  Your total return can be greatly magnified with compounding, accounting for well over half the long term return.

It's easy to reinvest dividends when you invest in mutual funds.  On the account opening form, just check the box for reinvesting dividends and interest, and the mutual fund's administrator will do the rest. Dividend reinvestment plans (DRIPs) offered by the company issuing the stock are clumsier, since you have register with the company and the shares are less liquid (not so easily sold).  Some brokerage firms will reinvest dividends received in your account.  However, you may not have from DRIPs or brokerage accounts the diversification that offers a reasonably steady flow of dividends.  The easiest way to reinvest dividends is through mutual funds (make sure you choose a fund with low costs).

You'll have to pay taxes on the dividends if they're held in a taxable account (although possibly at a lower rate than what you pay for ordinary income).  If your investments are in a tax-sheltered account like a 401(k) or IRA, dividends will be reinvested as a matter of course and you'll pay taxes when you withdraw the money, or convert or transfer to a Roth account.  For money from tax sheltered accounts, taxes will be assessed at ordinary income rates.  But taxes are imposed on dividends even if you don't reinvest.  So they're don't really affect your decision whether or not to reinvest.

Reinvesting makes money for you while you're sleeping, cooking dinner, playing golf, mowing the lawn or indulging in more screen time than you'd ever allow your kids.  Don't pass up this chance to make easy money. 

Saturday, August 30, 2014

The Next Market Bubble

Bulls and bears alike wonder when the next market bubble will emerge and pop.  In recent years, major stock market downturns have come from bursting bubbles.  Recessions, threats of war, terrorist attacks and other disturbances have caused market ripples.  But the big gut wrenchers--the nosedives that wrecked your retirement--have come from the popping of asset bubbles.  The gross over-valuation of tech stocks in 2000, the ridiculous real estate lending of 2005-07, those are the events that clobbered equities.  What does the future portend?

Today, the mess in the Middle East grips our attention.  Medieval atrocities by the Islamic State, a mosh pit with weapons in Gaza, mind-numbing slaughter in Syria and sectarian strife in Iraq appall and fascinate.  But none of them will significantly drive down stock valuations.  They just don't have the economic impact.  The Ebola epidemic is now raging out of control in West Africa.  But America's economic exposure to West Africa is miniscule.  And the disease isn't likely to present a major threat to the industrialized world.

Is there an impending market bubble that could burst and dynamite the world's financial system?  The answer is maybe, in Europe.   The European economy is slowing.  Growth is seen only on alternating Sundays.  The EU stays afloat on a cushion of sovereign and bank debt--a lot of it.  With Europe's slowing economy, it will be tough to pay down this debt and expedient to refinance by issuing even greater amounts of debt.  Risks to larger members like Italy and France are rising.  The EU is a financial and currency union without a unitary government.  Thus, it is tailor made to borrow in bulk without governmental controls to interfere.  We in America know from the 2007-08 mortgage crisis what happens when you bulk up on debt that can't be easily repaid.  The vast amount of European debt presents potential systemic risk, just like the vast amount of American mortgage debt outstanding in 2007.

Exacerbating Europe's problems is the war between Ukraine and Russia.  As Russia's direct involvement in combat is becoming increasingly clear, the war is likely to have ever greater impact on Europe.  Sanctions by the West will probably be heightened, and Russia's retaliation will likely hit Europe harder than America.  Europe's financial system could begin to totter as the EU is pushed into recession and capital flees the Old World.  (Indeed, part of the buoyancy of U.S. stocks can be attributed to the arrival of capital now fleeing Europe.)  A run on the Euro could be the straw that breaks the bubble's back.

The European Central Bank, as always, does a fan dance about how accommodative it will be.  While it's become much more interventionist in the past couple of years, it remains constrained by its anti-inflation charter and the stolid, ever-frowning Germans. Maybe the ECB will save the day.  Or maybe not.

Europe's economy, as a whole, is larger than America's.  A tummy ache there could affect the rest of the world.  if you're worried about where the next bursting asset bubble could come from, keep your eye on Europe.

Tuesday, August 19, 2014

Vladimir Putin and the Art of War

Sun Tzu, the Chinese military strategist, wrote in The Art of War:  "[T]hose skilled in war subdue the enemy's army without battle.  They capture his cities without assaulting them and overthrow his state without protracted operations."*  This would seem to have been Putin's approach from the beginning of Ukrainian crisis.  Without a shot fired, Russian troops seized Crimea.  Crimea was low hanging fruit, since Russian military personnel were already there on a base that Ukraine had allowed Russia to maintain.  Vlad the Invader was no doubt emboldened by the ease and bloodlessness of this victory to seek control of eastern Ukraine.  And he probably hoped to use his success in Crimea to bluff and bully Ukraine into surrendering without Russia having to fight a hot war.

But things haven't gone Putin's way.  After initial ineffectiveness, the Ukrainian military has rallied and is now on the way to retaking all of eastern Ukraine (except perhaps for Crimea).  Only two major cities (Donetsk and Luhansk) remain in rebel hands, and both are surrounded by the Ukrainians. While a substantial news blackout seems to exist with respect to combat operations, it's clear that the Ukrainian military has suddenly attained the ability to use heavy weapons effectively against the more lightly armed separatist forces.  The success of Ukraine's air force is unclear; the separatists tout shootdowns, but the Ukrainian military is mum on successes.  If Ukraine's air force can now effectively support its ground forces, the separatists haven't got much of a chance.  Air power, as the Islamic State learned the hard way in Iraq, is still the trump card on the battlefield.

How has Ukraine so suddenly become so capable in battle?  One wonders if there aren't advisers in Ukraine, who speak the language with non-native accents and can offer the benefit of experiences from other wars.  No military in the world has as much experience as the U.S. military.  And the Iraq War, fought on flat terrain in and around towns and cities, would have been similar in many ways to the fighting in Ukraine,  It is hard to imagine that there aren't U.S. Special Ops personnel and CIA agents working with the Ukrainians.  Recent claims by Ukraine that its artillery pummeled a Russian armored column entering Ukraine at night, if true, would strongly indicate an American role.  How could Ukrainian artillery smack the yogurt out of a Russian column at night without precise targeting information, such as might be provided by American satellites and drone aircraft? 

But now is not the time for Ukraine and the U.S. to celebrate.  Putin cannot afford to be seen as a loser in this war.  If he were, he'd lose his job, and maybe more.  He'll lash out like a cornered rat if forced to face definitive defeat.  Even as we write, there are reports of rebel reinforcements being sent from Russia into Ukraine--some 1,200 men with 150 armored vehicles, including 30 tanks.  (There we go with U.S aerial surveillance again.)  Putin won't stop fighting.

Yet, the Ukrainian military is holding its own and more.  If Putin overtly sends Russian troops into Ukraine, he'll probably sustain more casualties than the war weary Russian people will tolerate.  (Russia took painful losses in Afghanistan and in the wars in the Caucasus.)  Western sanctions would escalate sharply and capital flight from Russia, already a torrent, would become a flood that would impress Noah.  The Russian economy could crater, threatening to take Putin down with it. So an overt invasion of Ukraine by Russian troops entails tremendous risk.

Putin is for practical purposes limited to using the separatists rebels, who are now outnumbered and outgunned.  As a result, he has violated one of Sun Tzu's principles:  "If weaker numerically, be capable of withdrawing."  He cannot commit the forces needed to win, but he cannot withdraw.  He is trapped.

What will Putin do?  Most likely, he'll continue and perhaps increase the covert assistance and support he's been giving the separatists.  The more success the Ukrainian military enjoys, the more desperate Putin will become, and the more covert action he will take.  Since there seems to be a ready supply of separatist rebels, Putin could keep the war going at least for a while.  If the Ukrainian military defeats the separatist forces on the battlefield, the rebels could go underground and fall back on terrorist tactics that have become all too familiar in today's world.  And Putin could apply the economic weapons he's used in the past, such as shutting off the natural gas Russia exports to Ukraine and Europe.  Ukraine may well be on the way to battlefield victory.  But instability and disruption will continue.

*Sun Tzu, The Art of War, translated by Samuel B. Griffith, Oxford University Press, 1963. 

Monday, July 28, 2014

The Failure of European Economic Integration

Economic integration--intertwining the economies of nations--was supposed to promote economic efficiency, prosperity and ultimately peace.  The idea was that if nations need each other to keep their economies humming, they wouldn't start a shooting war.  Continental Europeans, having suffered tens of millions of deaths in two world wars, were particularly impassioned with this idea.  Who can blame them?  Arms races and wars hadn't solved their problems.  The League of Nations didn't solved their problems.  Why not give mutual dependence on each other for cheese, wine, sardines, sausage, and pasta a chance?

At first the idea seemed to work.  The EU prospered in its early years.  We now know those salad days resulted to a large degree from inexpensive borrowing by poorer EU nations, who snarfed up too much easy money and now struggle to avoid the death of a thousand budget cuts.  But optimism held sway in the early days of the EU, and economic kumbaya was extended to the nations of the former Soviet Union, including the big brown bear itself.

Economic integration provides leverage.  The proponents of the EU thought that the leverage would be used to restrain aggression. But leverage by itself is morally neutral, and can be used for good or evil.  Give leverage to a son of a ditch (sp), and he'll use it for evil.  This is what we see in Ukraine today, where Vlad the Invader has seized Crimea, and is sponsoring a "rebellion" in eastern Ukraine against the Kiev government, a war that is increasingly being conducted by Russian soldiers and Russian operatives.  As Russian personnel take over the fighting, the war is morphing into a clash between nations.  This is exactly what economic integration was supposed to prevent. 

Europe's response to Vlad's invasions has hardly gone beyond a tepid wrist slap, and talk of stronger sanctions is matched by behind the scenes maneuvering to prevent any economic consequences from the sanctions.  The horror of the shoot down of Malaysia Airlines Flight MH 17 was quickly followed by France reaffirming its intention to deliver a Mistral class helicopter carrier to Russia, a substantial warship that Russia apparently could not itself build.  Economic integration, it would appear, trumps moral rectitude.

Putin is using economic integration as a weapon, and in his insidious hands, it's devilishly effective.  Europe is dependent on Russia for gas and oil, and can't easily substitute other suppliers for Russia.  Putin has apparently increased his support for the rebels in Ukraine since the Flight MH 17 atrocity. He has much to gain by doubling down.  His increased aggressiveness forces the U.S. and Europe to struggle to respond, and this struggle heightens the divisions between the New World and the Old. He renders NATO a hollow shell, something the Poles have publicly admitted.  Putin doesn't have to conquer Ukraine, or even eastern Ukraine.  All he has to do is keep stirring the pot, and in so doing highlights Europe's dependence on Russia and America's weakness.

Economic integration doesn't turn a monster into a nice kitty.  When done with a dastard (sp), he remains dastardly, and will look for opportunities to slip the knife between the ribs of his trading partners.  The Europeans have, through economic integration, delivered themselves unto evil, and they are now paying the price.

Friday, July 18, 2014

Malaysia Airlines Flight MH 17: Putin's Money Problem

Inevitably, lawsuits will be filed over the shoot down of Malaysia Airlines Flight MH17 in eastern Ukraine.  Typically, the plaintiffs' attorneys will name as defendants just about everyone who had any connection with the shoot down and his uncle.  The airline itself will surely be a defendant.  But we know that.  What's interesting is that Vladimir Putin might, depending on circumstances, be a defendant.

In a civil lawsuit, such as those that will be filed, legal liability does not necessarily depend on proving that the defendant deliberately pulled the trigger or ordered the downing.  A person who was negligent or reckless with respect to supporting and arming the rebels in eastern Ukraine (assuming they're the ones who actually fired the missile) might have civil liability.  Information reported indicates that Flight MH 17 was following a well-established international route at a cruising altitude of 33,000 feet, which is typical of commercial airliners.  Just what do you think might happen if you give a bunch of Ukrainian rebels under air attack from the Ukrainian air force a missile system capable of reaching that high?

Since the Ukrainian separatists might not have the expertise to operate a missile system such as the one that evidently downed Flight MH 17, Russian personnel may have had their eyes on the radar screen and fingers on the trigger.  If so, the link to Putin may be strengthened, and his potential for personal liability increased.

If Vlad faces potential personal liability to the Flight MH 17 plaintiffs, he could have a serious money problem.  Although he denies having money stashed in the West, news reports have suggested he may control tens of billions of dollars of assets, maybe as much as $50 billion.  The plaintiffs' attorneys and the insurance companies that make payouts to MH 17 claimants have a powerful incentive to hunt down that money, if it exists.  And who knows?  Maybe they'll succeed.  In that case, Vlad could lose some or all of his hell or high water fund.

The nation of Russia, too, might be liable if it is shown to have provided the missile system.  And it's potential for liability would be heightened if Russian personnel actually operated the missile system.

There is historical precedent for holding bad actors on the international scene liable for civil liabilities.  In 1988, Libyan agents bombed Pan American Airlines Flight 103.  The next year, Libyan agents bombed a commercial airliner flown by UTA, a French airline (UTA Flight 772).  In both cases, the nation of Libya ultimately paid substantial sums of money (totaling billions of dollars) to settle civil claims. 

One big problem for Vlad is that the toothpaste is out of the tube and he can't put it back.  With the plane already shot down, all he can do is scramble to cover his butt.  Current news reports indicate that heavily armed men of uncertain identity are blocking international investigators from getting to the crash site.  Perhaps other men of uncertain identity have recovered the black box and . . . well, maybe the black box will be another victim in this tragedy.  Possibly, many bankers in Western nations are working day and night to shift assets of shadowy Russian entities to new and more obscure locations that are likely to entangle the curious in a briar patch of banking secrecy laws.  But Russia itself can't disappear, nor can it conceal all of its assets. 

The Obama administration has been accused of taking a tepid tack on sanctions over the Russian invasion of Ukraine.  European nations have been criticized for being even more equivocal.  But, to make a living as a plaintiff's attorney, you have to be as shy as a great white shark.  And, unless they have accidents with poison-tipped umbrellas, plaintiffs' counsel for Flight MH 17 claimants may be relentlessly pursuing Vlad and Russia for years.

Thursday, July 10, 2014

The EU Bubble

Today's kerfluffle in the stock markets over the debt default of an entity affiliated with Portugal's largest bank reminds us that if there is a financial bubble anywhere, it's in EU sovereign and bank debt.  EU sovereign debt and the debt of EU banks have become almost synonymous.  That's because they are linked by a problematic circularity.  EU banks have invested heavily in EU sovereign debt.  EU nations, in turn, have pretty much become the guarantors of the debts of their banks.  Thus, the banks borrow to invest in sovereign debt, and the sovereigns in turn guarantee the banks' debt that funds the sovereigns.  It's rather clever, as long as nothing goes wrong.

However, one could note that EU banks and sovereign nations appear to be burdened with each others' liabilities, and that the guarantees of EU nations accordingly have limited efficacy.  Given that the EU and its banks, in toto, can be reasonably described as overleveraged, this circularity can become a circular firing squad if there is a run on a major EU bank or an EU sovereign member nation.  This is particularly so since no EU nation can issue its own currency and pay its or its banks' debts with printed money.

Of course, the European Central Bank has in recent years made a show of pointing to shining armor it could don and white horses it could mount to ride to the rescue if there is another European financial crisis.  And it has adopted accommodative, money printing-like maneuvers when the going got tough (like letting EU banks use sovereign debt as collateral for borrowings at the ECB without any discounting of their face value).  If the dustup across the pond is limited to Portugal, the ECB should be able to find one way or another to keep the cookie from crumbling.  But if other EU nations, particularly larger ones like France, begin to waver, the EU financial bubble could burst in a nasty way.  The economic consequences could be bad.  Given the growing extremism in Europe, the political consequences could be worse.

There are some asset classes in the U.S. that may be getting bubbly.  Many Internet stocks are suspect. Housing except for the $1 million and up price range seems to be struggling.  In addition, small cap stocks haven't been doing well recently and may turn out to be a bubble bursting.  But it's unlikely that the frothiness of these asset classes could re-trigger the Great Recession.   On the other hand, if the EU sovereign nations can't keep their banking systems on an even keel, then all bets are off. 

Wednesday, July 2, 2014

Guinea Pigs On Facebook

There's a bunch of guinea pigs on Facebook, around 689,000 of them.  You wouldn't recognize them as rodents if you just looked at their Facebook pages.  Instead, you'd probably think they were people, some younger than the age of 18.  But guinea pigs they are, used by Facebook in an experiment to manipulate users' emotions by making the news feeds these users received either more negative or positive, and then measuring the effect on posts written by the g-pigs.  Evidently, g-pigs' emotions could be changed positively or negatively by the content of the posts they received.  In other words, emotion manipulation by Facebook seems possible.

Facebook claims that its terms of service allow this kind of experimentation.  If you didn't read the terms of service, then bear in mind that the possibility of this kind of horseship (sp) is exactly is the reason why you should read them.  But it may also be the case that Facebook's terms of service were kind of general, and written in that uniquely obtuse and obstructive language called legalese.   We would guess they didn't include a guinea pig clause, which explicitly informed users that they might be selected to be subjects in experiments in emotional manipulation where they wouldn't be informed of their selection and the emotional manipulation would be conducted in quite a non-obvious way.  So even if you were among the assiduous 0.01% who actually read the terms of service, you still might not have realized that you had just registered for the guinea pig draft and could be called up for service at any time.

Of course, one suspects that Facebook might not have wanted to let the g-pigs know what was going on.  Unknowing g-pigs would likely produce more meaningful experimental results than users who knew what was going on.  And if one considers Facebook's corporate interests to be more important than the interests and dignity of its users, then all this might make sense.  But if users are thought to be deserving of fair treatment--radical notion, that--then you'd have to conclude that Facebook really stinks for having done this.

The world is full of emotional manipulation: advertisements, political campaigning, editorials, op-ed pages, robo-calls from every manner of charity you never heard of, etc.  And when it's clear that the game is to manipulate your emotions, that's okay (at least when it's directed at adults).  But when emotions are manipulated sneakily, and your participation isn't made known to you, then that's a reason to avoid Facebook and any other social networking websites that pull similar carp (sp). 

You have to wonder if the emotion manipulation experiment signals that Facebook has reached its zenith and is in decline.  Has Facebook run out of bona fide, valuable services to provide to users?  Is it now stooping to emotional manipulation to keep existing users and bring in new ones?  Do we really need Facebook, or have we been manipulated into thinking we need Facebook?