It's getting difficult to guard the optimism

As I said on Tue, the polls for Obama look great and if this holds, he should win in 23 days. As of this morning, fivethirtyeight.com shows him with a 91% win probability, a 5-point popular vote spread (51.9:46.6)and 348 EV (270 needed), Pollster gives him 320 EV and an 8-point popular vote spread (49.8:41.9), while Intrade has him with 80% probability to win.

One of the neat things you can do is go to 270towin and play with the states to see various outcomes for the election. Taking for granted a win in all the 2004 Kerry states, it appears that Obama has also solidly locked in Iowa and New Mexico, bringing him to 264 EV. Amazingly, all Obama has to do is win one of the remaining tossup states: FL, OH, VA, NC, IN, CO, NV, or MO. McCain has to sweep every one of these swing states to win...and that's why sites that run probabilities like fivethirtyeight have Obama winning with 9:1 odds given current polling data.

Basically, my predicted map is shown below, in which Obama wins OH but loses FL, wins VA but loses NC, wins CO but loses NV, wins 1 of the 5 NE districts (Omaha) but loses both MO and IN. This would give Obama 307 EV to McCain's 231. I also predict Obama to win around 51% of the popular vote and I think McCain will get around 48.5%, with third-party candidates drawing less than expected due to the financial crisis:

Aren't prognostications fun?

And here's a countdown clock for the election:

One of my predictions came true!

Okay, so in March 2007 I predicted that the traffic from the blogsite I used to belong to, Debunking Christianity, would overtake the traffic on the blogsite Triblogue. I've been vindicated!

It seems that the statistics of traffic smooth out such that whether you use the information of visits in the last hour, day, week or month, they all converge on the same (relative) answer for traffic prediction.

DC is seeing over 1,000 visits per day, while Tblog is seeing 762. The DC average over the past 11 months (not including July 2008, since that's a partial datum) has been 27,000 visits / month. For some strange reason, March 2008 was a particularly good month for DC, with a huge spike in traffic up to 48,200 visits. No other month comes close, with April running a distant second place at 32,700. When I look at the 3/08 archive, a few of the posts have 100+ comments, so a few of them must be responsible for the huge influx. Perhaps a link from a carnival?

As of right now, based on traffic over the last month, DC will see 32,000 separate visits in the next month, while based on the same period's data, Tblog will see 21,000.

Does it really mean anything? Not in a cosmic sense. However, one of the (few) ways I feel I've made lasting contributions to the world involve my founding of Gator Freethought and its media impact, as well as my extensive work on getting Debunking Christianity's website up and running well. I decided a while back to remove myself from the site out of employment concerns, and asked John to scrub all references of my last name and such from the site.

Despite lacking cosmic potential impact, these two organizations, and their webpages, will be around for a looooooong time, I really hope. Even if they went defunct tomorrow, the ripple effect of all the lives they impacted, conversions or deconversions from religion, doubts or faith affected...it's something, at least. Given the largely-positive impact that DC and GF have on people, I feel really good about that. At least something of a legacy for my life has already been created, although it is more of what I've set in motion than what I'll be recognized for later on.

My "I told you so" moment

Ok, so it's time to gloat. Here is his full speech, and it is a great one.

Almost a year and a half ago, I put in my lot with Obama. In re-reading that post, it saddens me to see how much the Muslim rumors, propagated in large part by FauxNews' false report that he attended a Madrassa, have persisted. It also saddened me to see how race has played into the elections in large part due to Appalachian demographics. (BTW, see Montana, Iowa, Idaho...&c as a refutation of the claim that Obama can't win "working class whites").

Although there have been ups and downs, I saw his potential early on and I still see it.

He will make an excellent president.

Below, I've posted an electoral map prediction from Markos. I think it looks pretty good: Obama 283 - McCain 255. I would put money on an Obama win in 5 months just as I did put money on his primary victory in January 2007.

I can't wait!

On cell phones & brain tumors

Having a background in chemistry & physics, I am very skeptical of the new report that mobile phones cause brain tumors. Being a "good" scientist, though, I am willing to hear the detailed arguments and wait and see what evidence is brought forth to support the hypothesis.

The major cause of my skepticism is that electromagnetic radiation in the radio frequencies used by mobile phones (UHF) has wavelengths of around 10 to 100 cm. These energies are only high enough to cause bond rotation and vibration, not homolysis or ionization. If, on the physical level, this is true...what is the mechanism responsible for purported biological tissue damage? Government experts have agreed with this logic for decades.

Before people look at the UHF radiation, they should consider alternative explanations, nearly all of which could be fixed easily: I know that some heat is generated by the phones, and there can be some constructive interference, as well as issues with the batteries and materials in the phones themselves. If it is the case that cell phones cause health issues, I'll bet the ranch that one of these is chiefly responsible.

On a lighter note, check out this hilarious video about Expelled! It's supposed to poke fun at science & scientists, but as with everything else, it just makes creationists look stupid.

Consumer debt

*UPDATE: (6/8) - The breakdown in consumer debt, according to CNBC, is around $957B in "revolving" credit, comprised of credit cards and charge accounts, and $1.608T in "non-revolving" credit, comprised of college loans, car loans, etc. Doing the calcs on credit card debt, then, gives $957B/96M = $9958 per household. The average home having $10k in credit card debt is still rather scary...*

It seems almost incomprehensible that consumers now have $2.52 TRILLION in debt (besides mortgages).

The recent census estimates for the number of households in the US was 111 million in 2006; let's estimate 120 million households right now. Of those, estimate (generously) that 80% of all households have an active credit card, which means 96 million households have credit cards.

Divide $2.52 trillion by 96 million and you get $26,250 in credit card debt per household.

Despite protestations to the contrary, that looks like a lot of damn credit card debt.

I'm pretty worried about the economy. Stephen Roach talks about a "double bubble" that will only be solved by long-term painful re-adjustment of American's consumer spending and debt ratios. His proposed solution is focus on exports and re-investment in infrastructure. Our nation's infrastructure is crumbling, and Barack has a plan to invest the war's capital into exactly this sector, establishing a national infrastructure bank. Nice how that dovetails.

More reasons to worry about the economy

**UPDATE: 2/9/08, the hits just keep on coming**

I was introduced to Nouriel Roubini through a friend's stepdad, and I'm glad I was. A few days ago, Roubini gave us the 12 steps to a systemic financial crisis, and today he tells us why the government and Fed's actions leading to successful aversion of this crisis is unlikely.

I've posted interesting snippits below, they are long but worth the read:

Why the aversion of a systemic financial crisis is unlikely:

I will present in this article the eight reasons why I am skeptical that such a systemic risk scenario can be avoided…

Before we get to the many reasons why one should be pessimistic let us consider at least one reason why one could be more optimistic. The main good news in this respect is that, after being behind the curve in its assessment of the economic and financial risks, the Fed now gets it and is worried about a serious systemic financial crisis. For over a year the Fed assessment of the risks to the economy and to the financial markets was flatly wrong. The Fed argued that the housing “slump” would bottom out over a year ago; instead the housing recession got deeper and is nowhere near bottoming out; Bernanke argued repeatedly that the subprime problem would be a niche and contained problem; instead we have observed a severe liquidity and credit crunch that has spread to the entire financial system; the Fed argued that the housing recession would have no significant spillovers to the other sectors of the economy in spite of the importance of housing and in spite of the fact that housing is the main assets of most households; instead we are now observing an economy wide-recession. So to put it simply the Fed – as well as most macro analysts and forecasters - got it totally wrong in its assessment of the risks to the economy and to financial markets.

Today instead the Fed is certainly aware of the risks not just to the real economy but also to financial markets. As senior Fed officials argue in private the risk of a catastrophic event – a small probability of a systemic financial meltdown that would lead to a severe recession – is rising and this scenario, however unlikely, has to be avoided at any cost. This is the main reason why the Fed has thrown caution to the wind and has taken a very aggressive approach to risk management, as signaled by the 125bps Fed Funds easing in eight days in January.

What is the Fed's and the financial officials’ strategy to avoid the vicious circle of a severe recession and of a systemic catastrophic financial meltdown? Here are the main elements of this strategy and the important limitations and constraints to that strategy.

First, an aggressive monetary easing with the reduction of the Fed Funds rate to reduce the risk of a deeper and more protracted recession. The limits to this monetary policy easing are twofold. First, at some point the Fed needs to worry that an aggressive Fed Funds easing will lead to a disorderly fall of the US dollar, to foreign private investors pulling the plug on the financing of still large US external deficits and to higher imported inflation. Second, monetary policy is relatively ineffective in stimulating the economy as: there is a glut of housing, consumer durables, automobiles and it will take years to clear that glut; i.e. monetary policy becomes less effective as the demand for such capital goods becomes less interest rate sensitive under glut conditions or, in other terms, easing money is like pushing on a string. Second, the problems of the economy are not just problems of illiquidity but rather more deep seated problems of insolvency; and monetary policy cannot resolve serious credit problems in the economy.

Second, a strong provision of liquidity to financial markets to reduce the liquidity crunch in interbank and money markets. Such provision of liquidity failed to reduce such a crunch in the fall of 2007 until the Fed became much more aggressive in December with its new liquidity auctions. Since then interbank spreads have become smaller – especially because markets were pricing very aggressive Fed Funds easing - but such a liquidity crunch has not disappeared – as proxied by the crucial BOR-OIS spread while the credit crunch in credit markets has now become even more severe than in the fall. Also, interbank spreads may significantly widen again for several reasons. First, such spreads include two components, a liquidity premium and a credit premium; while the Fed can affect the former through its provision of liquidity it cannot affect the second and recent evidence suggests that interbank spread are now more driven by credit spreads. Second, with a worsening economy and increasingly large losses in an opaque financial system where lack of trust in counterparties is increasing and where counterparty risk will increase in a deepening recession, credit premia will become larger.

Third, an robust attempt to coordinate a private rescue of the monolines to prevent their rating downgrade and thus avoid another round of writedowns in the financial system. As a senior policy official put it in a private meeting at Davos rescuing the monoline is “a no brainer”. The trouble is that, while a few weeks ago it was thought that a $10 to $15 billion recapitalization of the monolines was thought to be doable and sufficient to prevent such a downgrade it is now becoming increasingly clear that the monoline losses on their insurance of toxic structured finance products are massive and that $10-15 billion will not be enough to avoid a now necessary and unavoidable downgrade.

Also, as argued here before, a business model that requires a AAA rating to remain in business is a business model that does not deserve an AAA rating in the first place. As also agreed by Bill Gross of PIMCO bond insurance of structured products was a form of “voodoo finance” that created AAA ratings for toxic instruments that should have never had such ratings in the first place.
And once the unavoidable downgrade of monolines occurs financial institutions will be forced to write down another $150 billion structured finance assets kicking another round of large financial losses. The downgrade of the monolines could also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. Finally, the monolines’ downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system. Indeed, in the last few weeks movements of the stock markets have been driven more by news about the fate of the monolines rather than the monetary easing news of the Fed, a signal that markets realize that the economy suffers of credit, rather than just illiquidity, problems.

Fourth, avoiding a more severe credit crunch by an aggressive support of the recapitalization of the financial system through capital injections by sovereign wealth funds (SWF). The risk of a credit crunch following the losses in financial institutions and their reduction in capital is serious. For example, Goldman Sachs estimated that $200 billion of losses in the financial system will lead to a contraction of credit of $2 trillion given that such institutions hold about $10 of assets per dollar of capital.

That is the reason why the Fed, the US Treasury and other financial officials have totally set aside any other concerns about SWFs (their foreign government ownership, their lack of transparency, etc.) and have aggressively supported the recapitalization of the financial system by such SWF. To avoid a more severe recession it is better to restore the balance sheet of the banks via a recap that reduces the need to contract lending and credit than via a contraction of the asset side of such balance sheet. However, this recapitalization of banks by sovereign wealth funds – about $70 billion so far – will be unable to stop the credit crunch and the credit disintermediation (the move from off-balance sheet to on balance sheet of SIVs, conduits and other vehicle; and the moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses in the financial system will dominate by a large margin any bank recapitalization from SWFs.

Based on our analysis such losses in the financial system could add up to more than $1 trillion - not just $200 billion – and a good part of these losses will be among financial institutions such as commercial banks and investment banks. Thus, unless SWF or other financial institutions are willing to throw much more good money after bad money (the Chinese SWF – CIC - lost 30% of its investment into Blackstone in three months alone; while BofA lost most of its $2 billion investment in Countrywide and is not at risk of doubling up its losses by taking over the insolvent Countrywide) it will be impossible to avoid a significant reduction in the capital of the financial system and the severe credit crunch that is now underway. And there is now evidence that even long-investment horizon investors such as SWF are starting to become skeptical about throwing good money after bad money into US and European financial institutions.

Also notice that recent data suggest significant losses and the beginning of a credit crunch among smaller banks and even some medium sized regional and national banks. The chances that banks with serious problems such as Wachovia or WaMu – as opposed to the Citis or Morgans of the world - will get massive support from SWF are very low.

Fifth, attempts to reduce the number of foreclosures among distressed homeowners and provide measure of support of the housing markets. These include the Hope plan to freeze the reset of some ARM mortgages, the lifting of some of the limits to the portfolios of the GSEs, the use of the Federal Home Loan Bank system to provide liquidity to mortgage lenders, use the FHA Secure loan refinance program to reduce the number of foreclosures, etc. But some of these plans are too little too late to make a difference while others are outright inappropriate uses of public money.

To understand the gargantuan challenge that policy makers face in controlling the severity of the housing recession note that it highly likely that US home prices will fall between 20% and 30% from their bubbly peak; that fall would reduce household wealth between $4 trillion and $6 trillion. Also, while the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use “jingle mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank).

Given the size of the meltdown in the housing market and the risks of massive default the measures undertaken so far are either minor band-aid solutions or inappropriate uses of public funds. The Hope plan – while going in the right direction in spirit – is so constrained that it will help only a very small fraction of subprime borrowers in avoiding a reset of their ARMs; studies suggest that – at best – only 5% to 10% of such borrowers will be able to benefits from such a reset. The severity of the housing crisis is such that even a hypothetical plan that allowed all of subprime borrowers to freeze their resets would not be enough. Currently politically unthinkable appropriate solutions – such as an outright across the board reduction of the face value of the mortgages of the order of 10% to 20% to reduce the jingle mail are unconceivable now but may become necessary in the near future to stem a tsunami of defaults and foreclosures.

The time will come – unfortunately too late – when financial institutions will realize that they are better off freezing the resets and, at the same time, write down a part of the face value of the mortgage, to allow strapped homeowners to avoid default as the alternative of foreclosure and selling homes at steeply discounted prices in a very illiquid markets involves larger losses for the creditors than a reduction of the debt burden of illiquid and/or insolvent borrowers. Unfortunately this rational solution to the mortgage credit problems will come too late and only when massive insolvencies will lead banks to appreciate the benefits of this alternative and more radical approach to mortgage distress. In the meanwhile the housing and mortgage carnage will continue at accelerated rates.

Similarly, the FHA Secure program has been so far a total failure and there are now suggestions to vastly expand it to make it more effective. The proposals to allow the GSEs (Fannie and Freddie) to buy or guarantee mortgages above the current conforming limits of $417k (all the way to a new limit of $729k) don’t have much merit. The jumbo loan market may be in distress now but why should the GSE heavily subsidize very large mortgages of upper class Americans. At the $417 limit the GSE are already seriously subsidizing the mortgages by middle and middle upper class households. Now extending this subsidy to the wealthiest households buying McMansions and expensive condos is highly inappropriate public policy. Also, as suggested by OFHEO, such plan may lead the GSE to divert their lending activities from buying and guaranteeing smaller and less expensive mortgages towards bigger jumbo loans.

Finally, the widespread use of the FHLB system to provide liquidity – but more clearly bail out insolvent mortgage lenders – has been outright reckless. Countrywide alone – the poster child of the last decade of reckless and predatory lending practices – received a $51 billion loan from this semi-public system; in the absence of this public bailout Countrywide would have ended up where it should, i.e. into outright bankruptcy. And the largesse of the FHLB system does not stop at Countrywide. A system that usually provides a lending stock of about $150 billion has forked out loans amounting to over $750 billion in the last year with very little oversight of such staggering lending. The risk that this stealth bailout of many insolvent mortgage lenders will end up costing massive amounts of public money is now rising.

Sixth, the Fed and other financial regulators have concentrated on trying to avoid the liquidity and insolvency problems of banks and other depository institutions. Through the provision of massive liquidity – including the new TAF auctions - to these depository institutions, the reduction of the discount rate and the easing of access to the discount window, via actions of forbearance such as the waiver of Regulation W or via the effective bailout of some subprime lenders such as Countrywide via the FHLB system the Fed and other financial regulators have been busy to avoid a “Northern Rock” style of bank collapse and run. Whether such actions are wise as some banking institutions are insolvent and whether such actions will be effective in preventing some bank defaults is open to discussion. There is increasing likelihood that some banks – even some large regional ones or some smaller national ones – may go under during a severe recession, regardless of what the Fed does.

But much more importantly the Fed is not directly able to resolve the liquidity and credit problems of the “shadow banking system” (as defined by the PIMCO folks). A more appropriate definition of this system would be the “shadow financial system” (as it is composed by non-bank financial institutions) and this system is now facing serious problems that cannot be easily addressed by the Fed. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions.

All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers.

Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can. The Federal Reserve Act does allow lending by the Fed to non-depository institutions only in extreme emergency conditions and after a very restrictive and cumbersome voting and approval process. And since the Great Depression such emergency authority to lend to non-depository institutions has not been invoked. Thus, while the liquidity injections by the Fed has been helpful in reducing the liquidity crunch among many depository institutions they have been ineffective in dealing with the liquidity and credit problems of such shadow financial system. This is the reason why the SIVs collapsed and their assets and liabilities had to be brought back on-balance sheet. This is why money market funds that experienced massive losses on their holdings of toxic ABS had to be rescued by their holding banks or financial groups. If some large hedge funds were to experience a significant run on their funding – as the risk of redemptions is rising given the large losses by some of them in recent months and in January and the coming deadline for redemptions – no one would be able to bailed them out, thus forcing a potentially dangerous fire sale of their assets in an illiquid market. And at this point one cannot now rule out that one or more large broker dealer may end up into liquidity or credit problems and face bankruptcy. These are all problems that the Fed and other financial regulators cannot resolve, either directly or indirectly.

Seventh, the Fed and financial regulators and supervisors are walking a very fine line between transparency/recognition of losses and forbearance. On one side they recognize the need for financial institutions to be transparent and reveal fully the losses on their balance sheets as the uncertainty about such losses is an importance source of the lack of trust and confidence that has made this crisis severe; they also recognize the need to avoid forms of policy forbearance that would exacerbate such a lack of confidence. At the same time the authorities are trying to avoid – via appropriate forbearance actions - a self destructive asset price deflation and fire sales of assets that would exacerbate the financial meltdown, the credit crunch and the collateral damage to the real economy. The trouble is that finding the right and appropriate “middle way” between transparency and recognition of losses and “appropriate” forbearance is very hard.

The logic of finding a middle way is obvious. Transparency and openness about the losses that financial institutions suffered is necessary to resolve the “Where is Waldo?” problem, i.e. the uncertainty among the investors on who is holding the toxic waste and how much of it; this uncertainty has been the source of the risk aversion, lack of trust in counterparties and liquidity hoarding that has worsened the liquidity and credit crunch. So, greater transparency and recognition of the losses is appropriate to restore confidence in the financial system.

On the other hand there is also recognition that under very distressed and illiquid market conditions too much transparency and too much marking to market may lead to a self-destructive cascade of asset prices falling below medium term fundamental values and the credit crunch getting worse. Specifically, there is now a risk that a vicious circle of financial losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will take leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses then will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit.

As one former senior financial official put in a private Davos session on systemic financial risk if we had today for the auto loans and credit cards an instrument similar to the ABX for pricing the value of subprime loans such form of market transparency would be self-destructive and lead banks to show massive additional losses, even larger than those warranted by the worsening fundamentals in the consumer credit market. In other terms, marking to market in a market where prices are discounted by illiquidity may be self destructive.

The problem is that this principle of avoiding – via appropriate forbearance - a self destructive cascade of asset fire sales in illiquid markets is a sensible idea that it is easier expressed in theory than being applicable in practice. Some of the early attempts to provide such forbearance were actually faulty and destructive of confidence: for example the super-SIV plan was conceptually faulty in the first place and its failure appropriate. If a fire sale of the illiquid assets of the SIV was inappropriate the right solution was not to park such assets in a freakish super-SIV. It was rather to bring back those assets on the balance sheet of banks where they belonged in the first place.

Similarly, the concern about the writedowns that will follow a downgrade of the monolines is well taken. However, desperate attempt to avoid a rating downgrade of monolines that do not deserve such AAA rating are highly inappropriate as the insurance by these monolines of toxic ABS was reckless in the first place. If public concerns about access to financing by state and local governments during a recession period are warranted it is better to split the monoline insured assets between muni bonds and structured finance vehicle, ring fence the muni component and let the rest be downgraded and accept the necessary writedowns on the structured finance assets. If these necessary writedowns will then hurt financial institutions that hold this “insured” toxic waste so be it as these assets should have never been insured in the first place. The ensuing fallout from the necessary writedown – such as the need to avoid fire sales in illiquid markets - should then be addressed with other policy actions.

These examples suggest that while the concerns of authorities on avoiding self destructive fire sales and asset price undershooting (relative to fundamentals) may be warranted providing appropriate – as opposed as inappropriate and self destructive forbearance – is easier said than done. The Fed and other financial authorities are looking for a “middle way” but that middle way may not clearly exist in practice. Thus, there are serious limits to the authorities’ ability to follow sensible policies that avoid a vicious circle of asset price undershooting and excessive credit contraction.

In this regard market perceptions that the Fed is out there to bail out investors and the stock market are also not conducive to greater confidence in the monetary authorities. While the Fed goal may rightly be that of bailing out Main Street rather than Wall Street a recession is now not only unavoidable but also necessary to reduce the imbalances – excessive spending relative to income – that were festered by the asset and credit bubbles that burst last year. While public policy should be concerned about a contraction of demand and economic activity that is in excess of what is necessary to restore economic and financial sustainability public policy should not aggressively prevent the necessary economic adjustment that is now required, i.e. a painful reduction of consumption relative to income and an increase in the saving rate that is necessary to bring the economy on a more sustainable growth path over the medium term.

Thus, the perception by markets that the Fed is trying to avoid the necessary economic correction and the necessary adjustment in asset prices – including a needed sharp reduction in equity price and in home prices and the necessary increase in credit spreads – is a matter of concern. While moral hazard will be contained by the massive losses that lenders and investors will suffer regardless of what the Fed does the perception that the Fed is trying to prevent the necessary adjustment in asset prices is not confidence building. While the Fed may be running out of bubbles to create and while inflation may end up being the last of the problems that the Fed faces ahead market perceptions that the Fed has now altogether ignored concerns about moral hazard and concerns about future inflation are now starting to undermine the credibility of the Fed.

Eighth, and finally, the Anglo-Saxon financial system is in a severe crisis – as argued by Martin Wolf or – as argued here – this is the first crisis of financial globalization and securitization. The reform of the financial system to reduce the risk of future destructive credit and asset bubbles is a massive undertaking that the G7 and the Financial Stability Forum have just started. Formally senior financial official argue that everything is on the table and open to discussion and reform: the flaws and wrong incentives of the securitization (originate and distribute) model, the conflicts of interests of the rating agencies, the poor risk management in financial institutions, the lack of true stress testing, the importance of liquidity risk, the wrong incentives deriving from the system of compensation of bankers and financial sector operators who have an agency problem relative to the firms’ shareholders and an incentive to gamble for redemption, the lack of information and transparency in the financial system, the flaws of Basel 2, the problems of pricing and valuing complex structured finance products, as well as other issues.

Reforming this system is urgent to restore confidence in the financial system and reduce the risks of boom and busts in asset prices and credit that are becoming increasingly self-destructive. It is one thing to have such boom and busts in less developed and complex financial system with lower degrees of financial innovation. It is another one to have these repeated and increasingly unstable cycles in very complex systems that private sector agents and public sector regulators and supervisors don’t fully understand and are unable to control. The risk that a systemic financial meltdown in this most complex “black box” financial system that has run amok will cause a “black swan” event with destructive real economic and financial consequences is rising.

And while policy makers and regulators now claim that everything is on the table in terms of reforming a faulty financial system they stress in private that their preferred approach would be one of “self-regulation” and reforms undertaken by private financial institutions rather than new rules and regulation imposed by authorities. While the right balance between principles and rules in regulation and supervision is open to discussion the recent experience suggests that excessive reliance on principles not backed by appropriate rules, the delusional hope that internal models of risk management will provide the right amount of risk taking, the wishful thinking that “self-regulation” will work, the hope that financial institutions will self reform the system of compensations of bankers are all mistaken views. A more robust set of rules, regulations and supervisions will be necessary as excessive reliance on self-regulation and market discipline has shown its failure. Starting with the interim report that the FSF group headed by Mario Draghi will present to the G7 finance ministers we will see how serious financial official are about reforming the system and reducing the medium terms risks of a systemic financial crisis. For the time being there are good reasons to be skeptical that the right policy actions and reforms will be undertaken.

In conclusion, the risks of a systemic financial meltdown of the sort that I described in my previous article are rising. While the Fed and the financial policy authorities are now fully aware of the risks of this scenario – after a long two years where they misdiagnosed the problems in the economy and the financial system – and they are starting to take some of the appropriate policy actions in the monetary and financial spheres, a realistic assessment of the risks in the real economy and in the financial system suggests that it will be very hard to avoid a severe economic recession and the financial fallout of such a recession. And the risks of a systemic financial crisis that will exacerbate such a US recession and will lead to near recession conditions around the world are now rising.

The 12 step program:

Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession…

First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use “jingle mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders’ stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession.

Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages – already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.

Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global.

Third, the recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package – short of an unlikely public bailout – is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.

Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines’ downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead – with a short lag – to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide – an institution that was more likely insolvent than illiquid – has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks’ bankruptcies will add to an already severe credit crunch.

Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans – a good chunk of which were issued to finance very risky and reckless LBOs – is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone – not avoid – such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions.

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD – or recovery given default – rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen. While on average the US and European corporations are in better shape – in terms of profitability and debt burden – than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection – possibly large institutions such as monolines, some hedge funds or a large broker dealer – may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can.

Tenth, stock markets in the US and abroad will start pricing a severe US recession – rather than a mild recession – and a sharp global economic slowdown. The fall in stock markets – after the late January 2008 rally fizzles out – will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT – Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors’ risk aversion – will massively widen again. Even the easing of the liquidity crunch after massive central banks’ actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.

I'm pretty pessimistic.

Deep Thoughts (with Jack Handey): Oil, v2

In the first installment of deep thoughts on oil, I tried to distance myself from a claim that we're on the right side of the Hubbert curve with respect to oil production.

Even the most optimistic scenarios have the right-side of the curve pushed out to 2040 or so:

Now, as I pointed out in the first installment, along with the higher price of oil comes new methodologies of extraction, like shale oil. These same sorts of development may push the availability of oil out for another 500 or 1000 years, but the question/problem is the rate of production versus rate of consumption. At the risk of sounding like cursed Cassandra, I now have a few more authoritative voices to back up my fears: consider The Economist's article this week on C. de Margerie, CEO of Total Oil.

Mr de Margerie's opinions also stand out, at least within the ranks of senior oilmen. Last year he declared that the world would never be able to increase its output of oil from the current level of 85m barrels per day (b/d) to 100m b/d, let alone the 120m b/d that energy analysts predict will be needed by 2030. That is in stark contrast with the view of Rex Tillerson, the chief executive of Total's larger American rival, Exxon Mobil, who argues that the world is neither short of oil, nor likely to be any time soon. It also contradicts the line of the Organisation of the Petroleum Exporting Countries (OPEC), which claims that the only thing that prevents its members from producing more oil is the fear that no one will buy it.
...
Mr de Margerie is careful to point out that he is not predicting “peak oil” in a geological sense. His definition of peak oil is “when supply cannot meet demand”. He believes that the fuel that the world needs to keep its cars and factories running may well be out there, somewhere. It is just getting harder and harder to extract, for technical as well as political reasons. For one thing, he points out, the output of existing fields is declining by 5m-6m b/d every year. That means that oil firms have to find lots of new fields just to keep production at today's levels. Moreover, the sorts of fields that Western oil firms are starting to develop, in very deep water, or of nearly solid, tar-like oil, are ever more technically challenging. There is not enough skilled labour and fancy equipment in the world, he believes, to ramp up production as quickly as people hope.
...
Perhaps the best measure of Mr de Margerie's gloomy outlook for the oil industry is his eagerness to get Total into nuclear power. Though he says he is not about to increase Total's token 1% stake in Areva, France's nuclear-engineering giant, he clearly sees nuclear energy as part of Total's future. Why would an oil firm want to enter such a controversial field, unless it feels that it is already out on a limb?

Although I doubt we'll see doomsday scenarios like this one playing out any time soon, it is necessary to be mindful of how many other predictions about oil have been wrong -- like how, back in August, experts declared it would never go up to $100/barrel. I'm ready to buy that Honda hydrogen car & power station now.

Less writing

Posting has been slow and probably boring. Here's an update on the personal side.

I always hesitate to say that I am going to stop writing entirely for some period of time, because that never seems to pan out, but it just seems that I have naturally written less as a result of my new job, and that it doesn't have to be a mandate for me. So, we'll see what happens, but I'm pretty sure that I won't be posting as much as time goes on. One nice thing is that, with my contract up for renewal in a few months, I can then consider (afterwards) making my site public again. That is certainly preferable, albeit risky, to me on several levels, given the nature of private schools, parents with huge endowments/influences, and my penchant for offensive rants on here.

We'll see...

Gloom and doom

Want some free advice from a professor of economics?

• US recession and global economic slowdown in 2008
• Central banks are behind the curve and Fed easing will not prevent a US recession
• Severe financial losses (over $1 trillion) and systemic risk forthe financial system
• Recoupling of the rest of the world with a global economic slowdown
• Cash is king: avoid a variety of risky assets
• Further sharp and persistent re-pricing of risk
• The credit boom/bubble party is over!

Nouriel Roubini was among the first to see the oncoming recession, and both he and Krugman, another economist whose prescience is well-documented, are bearish and in general agreement that house prices have a long way left to fall. For our part, Amber and I will be waiting to buy...

I wonder, if the worst-case-scenario plays out, how stable our jobs will be. We work at a high-end private school, and generally speaking, upper crust incomes are affected least by recessions, so hopefully our school would face no issues of solvency as the demand would remain high for a slot at Hammond.

Why the GOP will lose in '08

The "Grand Old Party" is in trouble, its own insiders declare. The solution? Convince poorer people that Jesus is a Republican.

Let's analyze some facts:

1. The country where the terrorists were located who attacked us on 9/11 is Afghanistan
2. The person who is most singularly responsible for 9/11 is still at large there
3. 15 of the 19 9/11 hijackers were Saudis; our continued reliance on Arab oil is a national security risk and strategic error
   
4. Iraq had absolutely no connection whatsoever to 9/11 or terrorism before we invaded
5. Terrorism in Iraq sprang up as fanatical Muslims fought against what they saw as "an occupation" by the infidel West of their homeland -- a cause célèbre, according to the NIE
6. Justifications about removing a "murderous dictator" ignore the fact that our invasion has caused the death of tens of thousands (if not hundreds of thousands) of Iraqi deaths
7. We armed Saddam with chemical weapons that he later used on his own people
8. We trained Afghanis in the art of warfare and they are now using these tactics on us
   
9. Now, we are losing ground in Afghanistan (and have been now for some time), and it has been the deadliest year yet for our troops there, despite the increasing role NATO plays in the war
   
10. The only conclusions one can make at this point center on the fact that even if we "win" in Iraq, we'll only be undoing the damage that we caused by invading and fighting an unjust war; we are clearly not "winning" in Afghanistan, which was a just war that has been bungled by the Bush administration and their failed policies
    
11. If Dems don't win this election cycle hands-down, I may be lost in despair over the stupidity of the American electorate

Apropos #3 above, Dems have finally passed an energy bill, one which reduces our dependence on foreign oil and strengthens our national security.

Deep Thoughts (with Jack Handey): Oil

Those with no plan for the future will inherit the plans laid by others.

I used to laugh when my dad told me he thought the government should impose a $1 tax on gasoline. I tried to tell him how that would slow growth to a crawl and cripple the economy for years. After reading today's Friedman column and giving it some thought, I now wonder if ol' dad didn't have it right all along.

What worries me a great deal is the relationship between oil and climate change and war.

At the risk of sounding like cursed Cassandra, I want to wax poetic about peak oil for one second. No one actually knows how much oil the world has left, because the Arab states refuse to allow independent audits of their reserves and fields. It could very well be the case that they have been plotting (for decades) to hobble the mighty US giant by making us completely dependent on their oil up to the day it runs dry. At that moment, our economy and our military would be crippled. When I think about Iran wanting to build nuclear facilities, even at the risk of war, it only reinforces this concern. It's like they know we're on the right side of Hubbert's bell curve. If this is true, friends, then we're all fucked.

But, let's say this is not the case at all, and that oil fears are unfounded. Let's say for a moment that we have 200 years of oil supply left in the ground. In fact, recent advances in shale oil technology seem to hold great promise that perhaps as much as 15 million barrels per day of our 21 million barrels per day consumed could be domestically supplied. What does this change in terms of US foreign policy? Not too much, given that we are still not capable of being "energy independent" -- i.e., able to supply all of our own oil demand.

Few people, certainly, would deny that those who control our oil supplies wield enormous influence over us. Some might argue that they are co-dependent since their economies become structured on the export/sale of this resource to us, and so in effect, that we are in a symbiotic relationship. They might say that worrying that Iran/OPEC/whomever would stop selling oil is absurd because their countries would bankrupt themselves.

People like the Heritage Foundation, in this assessment of the ties between national security and US dependence on oil, are irrational and incoherent:

Energy independence, defined as competitive local production of all the energy we need, remains a mirage. It is energy security that we need to accomplish, in which abundant and affordable energy supply is within reach of all Americans. Rec­ognizing the inherent, systemic, and long-term instability of the global oil markets is the first step in addressing the problem the U.S. is facing.

This was their grand, sweeping conclusion. They spell out the fact that by 2017, 70% of US energy needs will be imported if current trends continue, but then they say to just keep importing it. Don't solve the problem, in other words, just use more military force to try to secure the sources of those imports. Absolutely irrational...especially given that the DoD uses more oil than any other source in our country.

This came after admitting that striking Iran would be disastrous for the global supply of oil, and could push prices up to $83 pb if Iran's 15 million barrels were cut off from world supply:

The economic consequences of a military strike on Iran's nuclear facilities to the world energy mar­ket would likely be significant, if not disastrous. Immediately following military action, according to a Turkish assessment, uncertainty about Iran's abili­ty to sustain oil production at the current level of 4 mbd could drive oil prices above $80 per barrel.[9] If Iran retaliated and escalated by shutting down the Strait of Hormuz, which would merely require plac­ing anti-ship mines in the strait,[10] the temporary loss of more that 15 million barrels of oil to the international market could drive oil prices above $83 per barrel, the historic height of the 1970s (adjusted for inflation).[11] In fact, a recent Heritage Foundation war game and economic study specu­lated that oil prices could go as high as $120/barrel for a limited time.

Guess what? We're already at $95 and this supply hasn't been cut off. Try again. Looks more like $120 is a closer guess.

Conservatives have no answers when it comes to energy policy. They want to continue the status quo. This is the most irresponsible and dangerous possible approach to our country's long-term economic stability and national security. We must develop more energy independence. Now.

Whether or not you agree with the science of climate change, you cannot deny that oil revenues are being funneled to terrorism and that we are, indirectly, buying the very weapons and supporting the very enemies we send our troops to die fighting with each $ we spend on oil. Saudi Arabia and Iran are both state sponsors of terrorism, and their entire economies have been supported by our addiction to oil. In graphical form, it looks like this:


Learn to equate a gasoline pump with a gun, and you'll start to get the picture.

The energy alternatives already exist, and so the government's role at this point is to make those alternatives viable and competitive on the world market. So long as oil-sponsored politicians run our country, nothing will change. Both Barack Obama and Hillary Clinton know this, and have great energy plans to fix the central issue of transitioning America's oil-based economy into a green and sustainable one.

It's time to elect a responsible and bold leader as America's chief executive, not another regressive conservative who cares more about the status quo and doesn't connect our oil addiction to our wars and national insecurity.

Go progressive.

I agree with Jack Handey -- we need to elect a robot as president next, so we can recover from the Bush years by allowing the newly-elected robot President to tour the country and take bullets from enraged citizens.

Great college football weekend

A good football weekend all-around for my two teams:

• We went to the UF-USC game -- see a picture here. We had great tickets, but had to pay $130 each (section 1, row 20, seats 3 & 4), close enough to Tebow for my wife to swoon (yet again). Watching him put up 7 touchdowns was amazing, and I can see why he's in the running for the Heisman. And do keep in mind that he's just a sophomore...wait until next year! Florida is #12 in the BCS, and they need Kentucky to beat Georgia and either Vandy or UK to beat UT to get a shot at the SEC title. Then, if they beat LSU in the title game, they would have an excellent shot at the BCS title. (yes, I'm being a little irrational here) More likely, they will end up with a nice top ten finish with no berth in the Sugar Bowl.
  


• VT finally beat FSU. They're now ranked #10 in the BCS. Go Hokies! They need to beat Miami this Saturday and UVA next Saturday. UVA looked really strong stomping the shit out of the 'Canes.

Rudy & the mob

From one of the first times I saw Giuliani, I swear I thought to myself, "he looks crooked, like a mobster or something." While prescience is not one of my gifts, and such shallow judgments must be brushed aside in exchange for evidence, I have to wonder, with Rudy's ever-widening Bernard Kerik scandal, if I was on to something. At any rate, Rudy scares me more than pretty much any other front-runner because of his insane foreign policy -- he'd definitely start a war with Iran. His domestic policies are modeled right after King George, as well.

New Barna Poll on Christian Trends

A while ago, I analyzed some leading indicators about the growth of Christianity in today's world. I was responding to a claim that today's Evangelical kids are leaving the fold at a faster-than-ever rate as they grow up. My conclusions at the time were:

First, the numbers for the rise and fall of Christianity's numbers are all over the map, but two cited trends are ubiquitous: i) the rise of fundamentalist sects, and ii) the demise of "liberal" and Catholic sects in the modern world. While the latter seems logical enough, the former is a bit suspect to me. According to Mission Frontiers, Christianity is growing on the global scale at approximately 2.6% per year, while the population growth (globally) is around 1.6%. That means that at best, Christianity is enjoying a worldwide 1% increase. What we find with all these numbers, though, is a huge upsurge in the population of fundie/charismatic believers in 3rd world countries -- the Catholics' previous stronghold is being assaulted by Evangelical missionaries. How much of the net 1% increase is only in 3rd world countries?

Now, a new Barna poll seems to confirm this suspicion. The title of the article says it all, "Most Twentysomethings Put Christianity on the Shelf Following Spiritually Active Teen Years." The caveat in buying this is what I said a long time ago: you have to carefully examine how Barna defines a Christian. Oftentimes, their criteria are so strict that many people who I would call "serious Christians" are cut from the poll. For example, they may be asked, "Do you believe that all Scripture is inerrant?" And when they respond, "No," they're not considered Christians.

The intensity of religious commitment is lower among young adults, but not as low as might be assumed. Among those in their twenties and thirties, 6% have beliefs that qualify them as evangelical. This is statistically on par with the level among today’s teenagers (5%), but about half the rate of those over age 40 (12%). One-third of young adults (36%) qualify as born again Christians, which is slightly lower than the 44% of those over 40. (In the Barna survey, evangelicals and born again Christians are defined based upon religious beliefs and commitments, not based on the terms people use to describe themselves.)

This is how Barna's "4% of teens have a Biblical worldview" poll was conducted.

Barna's definition of a biblical worldview included a belief that absolutes exist and a belief that the Bible defines them. Additionally, the definition stipulated a belief that: Christ lived a sinless life; God is the "all-powerful and all-knowing Creator of the universe and He stills rules it today"; salvation is by grace and not by works; Satan is a real being; Christians have a responsibility to witness; and the Bible is "accurate in all of its teachings."

The research found that those who attended college were more likely to have a biblical worldview than those who did not (6 percent versus 2 percent). Married adults also were more likely to have such a worldview (5 percent for married people versus 2 percent for singles). Also, 10 percent of Republicans but only 2 percent of independents and 1 percent of Democrats had a biblical worldview.

I would say that the 6% figure quoted is thus likely far too low.

In the new poll, they conclude that 81% of 29 years olds were "churched" as teens, but only 20% are still "spiritually active" and 61% disengaged in their twenties. There are other international polls that confirm this is a worldwide trend:

Australian Youth Follow The Secular Trend

Aug. 11, 2006

Less than half Australia’s young people say they believe in a god, and many believe there is little truth in religion, a new study has found. The three-year national study, a joint project between Monash University, the Australian Catholic University and the Christian Research Association, found many young people live an entirely secular life.

Spanish Youngsters Have Had It With Religion, Too

Aug. 11, 2006

A poll of 1,450 young people in Spain shows that most believe that religion is of little importance and has no place in schools. The survey of people aged 15 to 29 shows that attitudes have changed radically since the era of the dictator Franco. Then, homosexuality was banned. Now gay marriage is legal, with 80 percent of those who were asked agreeing with the change in the law.

Despite these trends, we must be careful to reject the hasty generalization that "religion is dying" -- because it's not, (neither is atheism) and because many people have fallen into this trap before, especially claiming that "science is destroying religion."

I also want to reaffirm something I've said before -- I don't seek the demise of religion. I am not even sure that all religion is bad or harmful to humanity. If we call ourselves freethinkers, then we ought to have an evidentialist approach to such questions, and SFAIK, no such evidence exists. What I would love to see is the demise of anti-intellectual elements of all religions.
________________
Technorati tags: God, Religion, Atheism

Statistical Note of Interest

This post is solely an observation of facts, using the benchmark of a well-known theistic group blog that I think serves well as a comparison to this group blog. Don't go over-analyzing my motives or what this is supposed to mean, please.

That said...Debunking Christianity is set to overtake Triablogue in site traffic, according to data from sitemeter for both sites:

Triablogue Sitemeter traffic prediction


Debunking Christianity Sitemeter traffic prediction:

In comparing stats, you want to use the largest data set possible to minimize your error and maximize your confidence interval approach: thus, use the data from the entire previous month. Based on that data, the Triablogue gets 1 more visit per hour, 35 more per day, 243 more per week and 1,053 more per month than DC. Of note is that DC has been around since January 2006, while the Triablogue has archives going back to April of '04.

Also note that the stats will change over even the course of the day, so don't fuss at me for poor subtraction if you aren't using the stats from the pics above.

Possibly of more interest is that the readership of the tblog has been pretty stagnant over the past year, and the upward trend of DC's readership may indicate that within 2 months, we will have higher stats across the board:

DC (year)
tblog (year)
As I said, these are anecdotally amusing to me, not indicative of any deeper meaning. Thanks to all the readers of DC for your support and comments: theists and nonbelievers.

On the "Prophecies" of Atheists, and Other Topics

On the Triablogue post Atheist Eschatology and the False Prophets, Paul Manata criticizes those who have made "prophetic" remarks about the future of religion. Paul is especially concerned with those whose predictions declared a near and present end to religion -- crushed and killed by the power of scientific progress. I actually agree with him on some points. Our comments on that post run over into Dusman's combox. I've pasted the exchanges below.

I initially replied at Tblog (1/12/07, 7AM):

Anyone who claims to have prescience regarding the future state of man, or the overall effect of religion upon man, would have a heavy burden of evidence to bear.

I have long wrestled with the idea that religion is entirely bad for mankind. I am not sure that this proposition is true.

I am sure that fundamentalist dogmatism, and especially that which conflicts with scientific knowledge, is dangerous for the progress of mankind. However, part of that very progress is the peaceful spreading of knowledge through education, and not forcing "conversions" or "deconversions" upon people, or ever erecting a state which enforces any sort of religion or irreligion. Freedom of religion is part of our progress. States like the USSR, North Korea, North Vietnam, Cambodia, etc., etc., show us the danger of [tyrannical] fascism that attempts to strip from [by force] people the freedom to express and practice religion.

I've commented more on this at length. I have begun to consider that some sorts of religion, and some of its rituals and beliefs, may serve as a sort of "placeholder" for many people who do not have the interest or rigor to critically and seriously examine (exhaustively) philosophical arguments. At some point, the placeholder may be rightfully usurped by the person's own acquisition of beliefs -- rather than inheriting and swallowing wholesale the prepackaged orthodoxy. However, people must have beliefs about morality, and value. If they cannot be bothered to consider, as one alternative, the existential arguments concerning man's freedom to transcend and determine value, or the arguments of virtue theories of ethics, or of utilitarianism...then what will they consider? Is it possible for humans to exist in a sort of vacuum of beliefs? No.

From whence cometh their beliefs? Parents. Schools. Experience.

Some religions would provide a better set of beliefs than some of these 3 sources. For instance, I think that Buddhism would confer and prescribe a better way to live than a child reared in North Korea and educated (indoctrinated) by its schools and their "Great Leader". Ditto with some religious fundamentalism.

Religions have, by time and necessity, evolved. They have dropped off the more primitive aspects (ie blood sacrifices) and adopted humanistic aspects (ie altruism and charity). Therefore, much good comes in the package. Much that intersects with rational thinking can be found in the box that is orthodox religion.

And therefore, I have a hard time feeling the same sort of impetus to deconvert the masses that, say, Sam Harris or Dawkins do. I find myself too skeptical to paint with so wide a brush. However, I do wish that those persons who hold specific religious beliefs that I consider detrimental to progress [and to the person's own mental health] would give an ear and some credence to the arguments against those beliefs. I am frightened by anti-intellectualism, which runs rampant in some religious circles. And that is what compels me to argue against those topics that I do.

wlotter thoughtfully responded (1/12, 12:25 PM):

Daniel,

You speak often about the "progress of mankind". I am assuming of course that you imply progression towards a somewhat absolute 'scientific' and 'moral' framework shared by all mankind resulting in a utopic existence? And what would that look like? (Or at least a favorable transient step?).

Realistically for you ( personally), meaning of life can only be derived from your interpretation of the progression itself and the part you play/played. (Regardless of how many scientific 'facts' you have within your grasp.)

I wonder if this is less illusionary than a Christian's quest for heaven?

And I am sure you would say would say that a Christian's meaning is derived from a set of myths that they believe.

I wonder sometimes if deep down we are all just searching for heaven. And if we are, why?

To which I retorted (as Nelly Furtado, 1/12, 4:21 PM):

You speak often about the "progress of mankind". I am assuming of course that you imply progression towards a somewhat absolute 'scientific' and 'moral' framework shared by all mankind resulting in a utopic existence? And what would that look like? (Or at least a favorable transient step?).

I like the way Richard Taylor has illustrated aspects of Sisyphus to point out that, even if no cosmic meaning exists, or no objective measure by which to measure progress or significance, we cannot deny that value has intrinsically subjective character. I think this applies well to your question. Let us assume that when the sun expands to swallow the earth, that this is the end of mankind. Does that render the value I have for my own life nonexistent? No. It only renders it cosmically and objectively insignificant.

I have no vision of utopia. Progress may be an end in itself.

Realistically for you ( personally), meaning of life can only be derived from your interpretation of the progression itself and the part you play/played. (Regardless of how many scientific 'facts' you have within your grasp.)

My meaning can be derived from whatever I find valuable -- from the happiness of my spouse to the rolling of my rock up a hill.

I wonder if this is less illusionary than a Christian's quest for heaven?

Perhaps not, in the ultimate sense. Perhaps we are all just shadows and dust, in the cosmic sense, striving against the unstoppable wind which scatters us abroad. But what ought we do? Find no beauty? Find no meaning? Have no values? It is impossible to do otherwise.

And I am sure you would say would say that a Christian's meaning is derived from a set of myths that they believe.

Some. Most of a Christian's meaning is derived from their sense of self and family, much of which is based on experience and reality. So long as the believer thinks that God is happy with them, this equates to their being a good person, and being "on the right path". This gives them the same sort of tranquility that I have in being on that same "right path" and in being "a good person". Myths are not necessarily false, as they can illustrate truths.

I wonder sometimes if deep down we are all just searching for heaven. And if we are, why?

Death is too much for our self-awareness to bear. Futility leads to despair. And that is why every culture throughout history invented religions and religious myths. Neandertals have even been found with the evidence of death rites and rituals at their gravesites.

I have more thoughts along those lines, and some very general ideas on existentialism, and Sisyphus, in this post.

Paul then replied, but obfuscated my words (1/12, 5:24 PM):

"I like the way Richard Taylor has illustrated aspects of Sisyphus to point out that, even if no cosmic meaning exists, or no objective measure by which to measure progress or significance, we cannot deny that value has intrinsically subjective character. I think this applies well to your question. Let us assume that when the sun expands to swallow the earth, that this is the end of mankind. Does that render the value I have for my own life nonexistent? No. It only renders it cosmically and objectively insignificant."

So you subjectively assign value to your life, even though there objectively is none.

Thanks for the admission.

Atheists choose to ignore reality and invent stories for themselves.

But then they complain that Christians invent religion and ignore the scientific finding of "the real world."

At any rate, since it's subjective then there's nothing objectively wrong with the child molester who subjectively assigns his life the value and purpose of "lover of children."

I called him on it (as Boy George, 1/12, 6:53 PM):

Paul,

As usual, you commit a non sequitur as you leap from ones sense of self-purpose to the issues surrounding moral duties, obligations, and properties.

I don't feel like chasing off after that red herring. I've had my say.

Paul (1/12, 8:18 PM):

Boy George,

No, I simply said that a child molester could assign the subjective value to his life that he chose to.

You'll note that I said there was nothing objectively wrong with him assigning subjective value to his life.

I never said that the act itself wasn't wrong, just the assignment of value, which the above commenter said in his post.

So, as usual, you forget to even apply critical reading skills to just a few sentences a theist writes, let alone an entire book.

But, to take it further, given the atheist that I responded to, I don't see how any "objective morals" could exist. Remember, he said,

"no cosmic meaning exists, or no objective measure by which to measure progress or significance"

And given this outlook, one would have a defeater for all his beliefs, including his ethical ones. So, even though I'm not guilty if the crime yoiu accuse me of, I wouldn't have been even if I did what you said.

Now, I could go off on a tangent about how careless internet atheists seem to be these days, but I don't feel like chasing that.

I've had my say.

best,

~PM

Me again (as Boy George, 1/13, 3:55 AM)

Paul,

Actually, she said:

"...even if no cosmic meaning exists, or no objective measure by which to measure progress or significance..."

Very convenient of you to have left off the boldened part.

1/13/2007 3:55 AM

Paul's last response at the Tblog (1/13, 8:47 AM)

I didn't need that part in ther Boy George because my point has to do with there actually being no cosmic value and meaning.

My point was, *given the view* that meaning and value is subjectively assigned, then what's the problem wioth a molester assigning himself the value of "lover of children?"

So, the "even if" did not affect my point.

Now, if you want to say that there possibily *is* cosmic value and meaning, that is objective, well now we're back to the other problem.

Or, if you just want to remain *agnostic* about our origens, our purpose, etc., then as I said above, you have a defeater for all your beliefs.

glad I could help,

~PM

Then things move to Dusman's blog, following his reply to Paul's post, I wrote:

Isn't it a bit silly to compare the two "camps", since one claims supernatural powers of prescience and the other doesn't?

Dusman responded (4:24 PM):

Greetings to our church blog Mr. Morgan!

Now, to answer your question, I'd say no. This is because (1) Paul Manata never claimed to have supernatural powers of prescience, and (2) since he wrote the article with a different intention than that which you've seemingly superimposed upon it, your above comment which was obviously designed to show that he is making a category error is simply unsubstantiated. Take care and I appreciate you taking the time to post.

And Paul rejoined (7:21 PM):

Daniel,

Isn't it a bit silly to be a member of a camp that doesn't claim supernatural powers of prescience, uet still make prophetic predictions? If you have no business predicting future events, then don't do it! So, your post serves to undermine the friends in your "camp."

Anyway, you missed the relevant point of comparison, as Dusman points (literally as well, look at his picture!) out.

I find it odd that you'd be sticking up for a "camp" that has made the predictions I docummented for hundreds of years. I mean, since when does being an atheist give you freedom to just wildly assert things about the future, especially when the assertions consistently fail to come true.

Now, you can think in agreement with the atheists prophets of doom, and predict that Christianity will end once people read a few more science books, but, using induction, it appears that those claims won't be coming true.

To which I replied (6:45 AM):

Dusman,

(1) No, he didn't, but the belief system of Christianity holds within it the intrinsic capability to interpret prophetic, divine, and therefore true accounts of the future. Atheists have no parallel source to go to in order to try to fit the vision of prophecy over the picture of present events.

(2) Paul wanted to point out that people have been wrong about the demise of religion. He's right. It's just silly, though, to compare Christian eschatology [claimed as divinely inspired] to atheist eschatology [admittedly fallible].

Paul,

Every human being bets on the future with each decision they make: you call football games before they're played, you don't enroll in college without the belief that you will complete it, etc., etc. We humans have the capacity to imagine the future, and therefore, we often make predictions.

I mean, since when does being an atheist give you freedom to just wildly assert things about the future, especially when the assertions consistently fail to come true.

I don't quite understand this. Are you claiming that we are not all free to make predictions, if we so choose? Now, the question of taking our predictions seriously, or gaining prestige and authority in the area, is another matter entirely. However, stock market gurus do exist. Certain people seem to be very good at predicting the future (in limited respects). Are you saying that they shouldn't attempt to do so, for their own benefit (and that of others)?

I don't claim to belong to a "camp" of any sort. I certainly share beliefs with other people, just as you do with other people. But I think just as you would distance yourself from, say, the Catholic view of birth control [perhaps], so I would separate myself from anyone who claims to know the future with any degree of certainty.

Was or was not your intent to show that people were wrong in predicting the demise of religion? If so, then you accomplished that, and I agree with you on it. Which leads to the next point:

Now, you can think in agreement with the atheists prophets of doom, and predict that Christianity will end once people read a few more science books, but, using induction, it appears that those claims won't be coming true.

I wrote:
"If people agree that the scientific method establishes knowledge, and that faith is not knowledge, then the bifurcation of science and religion is a deep and meaningful issue. If faith has not suffered, it has certainly adapted as knowledge has been established to contradict the teachings and interpretations of the Bible. Admittedly, theists may always claim that the contradiction lies in the interpretation of their Scriptures, and not in the Scriptures themselves, but the effect of marginalization of faith via scientific progress is a real phenomenon that I think modern theists are quite well-aware of."

Do you agree or disagree that the establishment of knowledge via science (or at least, the belief in this knowledge) has diminished, in some respects, people's reliance upon the Bible? I'm not claiming here that some people don't take the Bible's authority (or belief thereof) over that of scientific evidence. But you must admit that science has forever changed the landscape of Christianity.

I don't think Christianity will die off from science. I think it will continue to evolve. Just as it has for thousands of years.

Around 1 billion (or more) Christians accept many scientific theories that you (and many others) reject, for example. That is a huge impact on the body, is it not?

And, the secularization of Europe is something the Pope has candidly admitted as of late. The global trend of secularization is that modern, technologically-advanced societies are trending that way (with the USA as a stubborn slow holdout), while the 3rd world is expanding in religious belief as Communism fell and missionary efforts have redoubled there: esp. Africa and India.

I think modernization and science don't spell "doom" for Xians or religion in general, but spell "change".

Paul shot back (2:57 PM):

Hi Danny,

So when Bertrand Russell, Dan Dennett, Sam Harris, et al. predict the end of faith they're just doing the philosophers equivalent of "calling football" games?

Couldn't have said it better myself. And here we thought the atheological minds that the public hears the most from were actually trying to use reason.

Bottom line: My post pointed out that atheists have their own embarrassing prophets to silence. Before you go picking on Christians, clean up your own back yard. from my perspective, it's pretty messy.

My last comment (written 1/17/07, don't know when Dusman will allow it to be posted); Paul words in italics:

So when Bertrand Russell, Dan Dennett, Sam Harris, et al. predict the end of faith they're just doing the philosophers equivalent of "calling football" games?

Yes, basically.

Couldn't have said it better myself. And here we thought the atheological minds that the public hears the most from were actually trying to use reason.

They are. Just like you do when you call a football game. And my analogy may be a little better than I thought: when you use your brain to calculate probabilities and compare stats, you use reason in calling the game; but, your evaluation will always be a little skewed towards the team you (identify with) like the most. It's hard to be impartial in matters of football or religion, isn't it?

Bottom line: My post pointed out that atheists have their own embarrassing prophets to silence.

I disagree with the concept of silencing people. I disagree with the concept that people aren't free to predict the future all they want. If they garner support for their "prophecies", I think it's absurd. But, just as they are free to do this, so people are free to take their prescient powers seriously. I do not.

Before you go picking on Christians, clean up your own back yard. from my perspective, it's pretty messy.

Perhaps the better way to put it is to say: "If you're really freethinkers, do you need a shepherd around to tell you what the future will be like, or can you judge her/his words and think for yourselves?" I don't have the right or obligation to "silence" anyone, but I could try to persuade persons whom I think put way way way too much stock in, say, Dawkins.

Anyway, I understand your point, but I still think you're trying to parallel two orthogonal lines: you can't compare religion with non-religion in this way, when there is no meaningful basis for comparison of the two camps' self-styled "prophets". People [stupid ones] really believe that Pat Robertson hears from God; no one thinks that of Dennett. Therefore, no one thinks that Dennett has to be right...contrariwise...

Thanks for the civil exchange.

I thought the conversation worth sharing. I hope you agree. Please feel free to comment if you agree, disagree, or anything in between!

**UPDATE: Paul wanted me to include a comment he left after I had written this post. So let it be done:

Paul's last comment at Dusman's place, 8:49 PM --

Well, Danny, people's hearts get the best of them when they "call" football games. I still like the analogy. In fact, it's even closer than we thought. Here we have a bunch of emotional atheists rooting with their heart and not their head. I did that, but the Chargers still lost! I mean, you may think they're applying reason, but if I picked the wrong team for the past few hundred years, I think you'd say that my emotions are getting the best of me. I mean, would you listen to a Vegas Line on the odds is they had been wrong for hundreds of years. No, he'd get fired. And so ther best thing for you guys to do is fire the emotion driven atheists (Dennett, Bawkins, Harris, et al)., and find a new odds maker.

I can parallel the two because I think atheism is just as religiously driven and motivated as Christianity is. And, two, I'm comparing the goofballs in our camp with the goofballs in your camp. A wrong prediction is a wrong prediction, no matter which way you slice it. If we're getting mocked, you're getting mocked.

Paul basically repeated what I said in a much earlier comment -- that I laugh at people who take anyone's claims to prescience seriously. Thus I can't/don't have to "fire" anyone, since I never employed them to do my thinking or analysis for me. And I'll admit that when it comes to being in a "camp" with others of like mind, it is quite possible to be driven by emotion to defend a fellow camper's position before thinking it through clearly. Thus, I'll admit that many people, me included, may rush to propose something, or defend something, on the basis of emotion alone without considering the merits of the argument. In the case of "predictions/prophecies", this is clearly often the case. But, since I don't typically refer to any of these fellows as idols of mine, and since I have actually distanced myself from two of them (esp. Dawkins), you may not be able to paint me with this broad brush.

If you notice, when I mock Pat Robertson, I don't claim that all Christians are being mocked. When I mock Jerry Falwell, I don't claim all Christians are also theocratic loons. I even specify from time to time that not all are. You ought to consider the same application of selectivity: not all atheists make dumb predictions. Furthermore, some atheists post scientific polling to support their predictions. **END UPDATE**
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