Opinion

Gregg Easterbrook

The next bubble: short selling

Jul 22, 2010 15:48 UTC

bubbles

Tech stocks drove off the cliff in 2000. Real estate went poof in 2007. Financial stocks melted down in 2008. So what’s the next bubble to burst? Short selling.

As we look back on three major market busts in a single decade, we have begun to idolize the shorts. Michael Lewis’ book, “The Big Short,” does exactly that. The New York Times just did so as well, lauding a shorts fund manager named Hugh Hendry, who says he wishes he could “short Obama.”

Practically everyone involved in capital markets now admires David Einhorn, who, in early 2008, warned that Lehman Brothers was dangerously leveraged. He was excoriated for saying so, and got the last laugh when his short-sales of the firm became lucrative.

Because shorts of the recent past look smart – and some became wealthy — it’s suddenly trendy to bet on decline. Investors now jumping into short selling — gambling that worrisome trends will continue — are making a move they should have made several years ago. This is exactly how bubbles form! Lots of people, recall, jumped into high-tech Internet stocks a couple years later than they should have, gambling on the notion that positive NASDAQ trends would continue.

According to figures compiled for this column by Lipper senior analyst Tom Roseen, from June to September of 2008, as the Dow and S&P were spiraling downward, a net of $10.7 billion flowed out of dedicated short bias funds. With a big fall in progress on Wall Street, that was the time to take profits on short positions. Since then, Roseen finds, a net of $26.9 billion has flowed into short funds.

Obama’s new air quality regulations are exactly like Bush’s

Jul 14, 2010 21:47 UTC

lasmog

President Barack Obama is being praised for proposing new air quality regulations to reduce smog and acid rain. Obama’s proposal is a good idea — and strikingly similar to air quality regulations that were proposed in 2002 by George W. Bush, then fought with white fury by Democrats and environmentalists.

The reforms Obama suggests today could have begun eight years ago, were it not for intense opposition from the very people now backing the idea. And therein lies a tale of Washington dysfunction.

In 2002, Bush offered legislation to amend the Clean Air Act of 1970 to reduce smog and acid rain emissions by about two-thirds, while regulating airborne mercury emissions for the first time. You’d think this would have drawn applause from Democrats and environmental lobbies: instead their reaction was angry condemnation. Supposedly the bill was not strict enough because new standards would not go into force for several years, with the final, strongest rules not taking over until 2018. Way too long to wait!

Jul 14, 2010 21:45 UTC

POINTS THAT DIDN’T QUITE MAKE THE COLUMN:

* In 2001, the FDA warned pregnant women not to eat Great Lakes fish because airborne mercury settles on the Great Lakes. Since then, according to daytime talk shows and to some environmentalists, airborne mercury from U.S. power plants has been an incredible menace. Mercury emissions from power plants should be regulated. But perspective is missing from the debate.

United States power plants account for around 3 percent of new mercury being emitted to the environment. In 2002, and again in 2005, George W. Bush proposed to reduce U.S. power plant emissions of mercury by 70 percent — which would have reduced the U.S. power plant share of environmental mercury to around 2 percent. Environmentalists and editorialists said the proposed Bush cut was far too little, that a 90 percent cut was needed. But because American power plants are such a small slice of the problem to begin with, reducing their mercury emissions 90 percent would have cut the U.S. power plant share of environmental mercury to around 1.5 percent — barely different from what Bush proposed.

So because of a fight about whether a problem should be reduced to 2 percent or 1.5 percent, nothing at all was done. Environmentalists didn’t discuss how small the power-plant contribution is to mercury exposure, because that would undercut scare-tactics fundraising.

Why we let our young soldiers die in Iraq and Afghanistan

Jul 8, 2010 14:03 UTC

Aghansoldiershill

In Afghanistan and Iraq, United States forces are trying to fight a shadowy enemy that does not wear uniforms, while being told to protect corrupt governments. But here is the really disturbing parallel between the current conflicts and Vietnam: Washington is drawing out the troop presence in Afghanistan and Iraq long after any justification has expired, in order to postpone that moment when it must be admitted we did not succeed.

America won’t fail in Afghanistan or Iraq — but won’t succeed, either. Lives are being sacrificed so that American leaders can continue pretending otherwise.

A terrible price

Lack of success is different from failure. The United States military wins nearly every battle, and in Afghanistan and Iraq, most U.S. soldiers and aircrew have behaved in exemplary fashion. But the United States has not known success — we have not stopped Afghanistan and Iraq from being horrible places. Inconclusive outcomes, neither success nor failure, seem likely now. American leaders seem incapable of facing the prospect that a vast expense of blood and treasure has been directed toward an inconclusive outcome.

Jul 1, 2010 15:41 UTC

OTHER TIMELY POINTS FROM THE LOGIC COP:

Russian Spies

It’s not clear in what sense the “Russian spies” were spies, since they are not charged with espionage and, according to this Washington Post report, were specifically instructed by their government to avoid classified material. They’re been charged with failing to declare employment by a foreign power, which essentially means they were unregistered lobbyists.

What were the “spies” up to? According to the Post, their task was to ingratiate themselves with wealthy or influential Americans, then find out what these people were talking about. Going to such trouble to discover the kind of information printed on websites that can be read for free from any laptop in the world suggests Moscow actually believes that secret councils of the wealthy in New York City and Washington are pulling the strings on U.S. life. As for the “spies,” it has long been the case that most of the information reported home in breathless cables by intelligence operatives simply comes from local newspapers. Those who live in luxury abroad as “agents” have long hoped their home governments won’t catch on.

Tesla Motors

Tesla Motors, the first American automaker IPO since Ford Motors, 54 years ago. Tesla, which makes high-performance battery-powered cars, is being celebrated as some kind of testament to the entrepreneurial spirit. What a crock. This company is heavily subsidized, and builds a plaything for the rich.

Supreme Court’s best decision ever on gun regulation

Jul 1, 2010 14:10 UTC

Guns

Even people who don’t like guns ought to be happy about this week’s Supreme Court ruling that the Second Amendment – the “keep and bear arms” clause of the Constitution – binds state and local governments, in addition to the federal government. Way too much time and energy has been wasted arguing about the Second Amendment: it’s obvious the Framers expected private ownership of guns.

While the decision makes clear there exists an individual right to possess firearms, the decision also makes clear that firearm ownership may be regulated. That is every bit as important as settling the argument regarding the breadth of the Second Amendment. In fact, this week’s Supreme Court decision could be the best thing that ever happened to gun regulation – and I say that as someone who’s owned guns.

Thanks, Supreme Court, for making clear that gun ownership can be regulated. There is now no doubt an individual right of firearm possession exists, and also no doubt government may regulate that right.  So let’s fix the regulation of guns — by focusing regulation on dangerous firearms.

McChrystal ‘scandal’ is phony

Jun 23, 2010 17:51 UTC

McChrystalWashington, D.C., is the world capital of phony. Even by Washington’s low standards, the Stanley McChrystal “scandal” now in progress gives phoniness a bad name.

Yes, General McChrystal showed poor judgment in making impolitic remarks on-the-record. But most of what the general said was simply being honest about the shabby aspects of government administration. McChrystal said a rival had leaked a memo to make McChrystal look bad. That’s exactly what happened! The general said he didn’t want to open an email from Richard Holbrooke, who is an accomplished diplomat, but also a haughty man known for condescending hectoring. No sane person wants to open an email from Richard Holbrooke. And General McChrystal pretended not to recognize Joe Biden’s name. People in Washington snipe at each other, stop the presses!

That’s it – the above comments are the super-ultra-mega scandal. Consider:

Nearly everything being attributed to McChrystal was not said by him. That President Barack Obama was “uncomfortable and intimidated” during his first meeting with McChrystal, that National Security Advisor James Jones is “a clown” – these comments did not come from McChrystal. In the Rolling Stone article they are sourced to an “advisor” and an “aide.”

Jun 23, 2010 17:42 UTC

POINTS THAT DIDN’T QUITE MAKE THE MAIN COLUMN:

* The 1981 controversy regarding OMB director David Stockman’s comments to The Atlantic involved genuine points of policy. President Ronald Reagan had said supply-side economics, and supply-side tax cuts, were fundamentally intended to help the poor: Stockman told The Atlantic that everyone in the White House knew supply-side was a gift to the rich – that White House rhetoric was “a Trojan horse” to conceal what the Republican Party’s wealthy donors wanted. Top-rate income tax reduction may have been justified, but that’s a separate issue from whether the president was being honest with the public. Compared to the dustup over McChrystal, the Stockman controversy was substantive.
* The 1951 firing of Douglas MacArthur involved policy disagreements and statements far worse than a worst-case reading of the Obama-McChrystal situation. MacArthur publicly accused President Harry Truman of advocating “appeasement and defeatism” regarding China, attempted to order his units into military actions that civilian leadership had forbidden, and demanded the Korean War end with China surrendering to him personally – the latter suggesting MacArthur had come unglued.
Truman made himself seem weak by flying out to Wake Island to meet MacArthur, rather than recalling him to the White House. It’s a long trip from Washington to Wake Island even today, via jet; imagine doing this in a prop plane, for the convenience of your disobedient general. In the White House, the president has the home-field advantage. Barack Obama was right to meet McChrystal there.
*Wasn’t there some kind of oil spill? The McChrystal confabulation gives BP a few days’ vacation from the front page. “They will never forget you/till somebody else comes along,” as the song goes. And we’ve already forgotten who BP pushed off the front page — Toyota and Goldman Sachs. Sources tell me Toyota sent BP a big box of fancy chocolates, while Goldman Sachs sent flowers and a card that reads, “BP, luv u 4-ever! {signed} Goldy S.”
* This sort-of-scandal needs a name, and the “XXXX-gate” formulation is exhausted. Propose your names for the scandal using the reader comment space below.

Jun 17, 2010 18:08 UTC

POINTS THAT DIDN’T QUITE MAKE THE MAIN COLUMN:

*“We need additional federal relief because our state constitution requires a balanced budget.” Governors often say this as a way of rationalizing giveaway demands. In effect they are saying – because my rules forbid me to be responsible for my bills, you must pay for me. I think I’ll try this argument with the waiter next time I’m out to dinner!

*Unlike the U.S. Constitution, which is structured to be hard to amend, state constitutions are a snap to alter. The Texas state constitution has been amended 467 times, the Maryland constitution amended 198 times – versus 27 amendments for the U.S. constitution. In many states, a simple vote of the legislature amends the state constitution. Because of this, most states could amend their constitutions to drop budget-balancing. It’s just that states don’t want to, because pretending their constitutions are etched on stone tablets and cannot be altered is a way of shifting the burden to the federal level – as well as exempting  governors from criticism for deficit spending.

*Many state and local governments already borrow using municipal bonds and the new Build America Bonds, which are federally subsidized. Steven Malanga reports in the City Journal that muni bond debt has increased from $1.7 trillion in 2000 (stated in today’s dollars) to $2.2 trillion today. So if borrowing your way out of difficulties is smart – this is what local governments tell Washington when they demand extra money – why don’t state and local governments do their own borrowing, and make their own repayments?

Stop bailing out the states

Jun 17, 2010 13:56 UTC

Most states’ fiscal years are ending, accompanied by what is becoming an annual ritual – demands that Washington bail out state and local deficits.  In 2008 and 2009, federal taxpayers covered for the featherbedding and corruption at the local level by awarding state and local governments a total of about $275 billion in bonus payments. Right now on Capitol Hill, state and local governments are demanding a fresh $50 billion round of bailout checks.

Set aside that when states refuse to pay their own bills, they hand the debt to federal taxpayers – all of whom live in states.

Set aside that the states’ claims they must be subsidized because “we are required by law to balance our budgets” is a total political fiction – more on that below. Set aside that governors refuse to make hard budget choices, demand bailouts for their states — then campaign by denouncing the big spenders in Washington.

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