A bit of review on "The Mystery of Banking"

I recently finished Murray Rothbard's, "The Mystery of Banking."
That was such an eye-opening and exciting book (if you are the type of person who _can_ derive feelings of excitement from a book on economics)!

The overall aim of the book is to discredit the worth of the US Federal Reserve System, and fractional-reserve banking as facilitated by central banking in general.

In this, Rothbard puts forward some very well-reasoned and common sense practical arguments. I came away from the read with a new appreciation for economics as a field, and recognized now that the subject is perhaps overthought by most modern scholars. Economics isn't any sort of system so much as it's what results when groups of people act when influenced by just a few rather simple rules.

Anyway, Rothbard sets up his critique of the Fed and central banking by offering an easy-to-follow primer on some basic economics and history of money: how it developed, how people use it, how it is both supplied and demanded just like other products in an economy, and how those forces influence prices.

This first section of the book is crucial for non-economist folks to at least review. It assumes zero starting knowledge, and in short order will have you up to speed with a working knowledge of the mechanics of money. It also gives thorough treatment to the concepts it introduces. Once they become clear to you, it may start to feel redundant. I was able to skim over the final pages of this section. It begins historically, and you'll understand how a society gradually comes to the use of a modern coin-commodity money as its culture and technology and sheer size develop.

After the concepts primer, the following sections deal with how an evolved commodity money system is gradually influenced and ultimately usurped by government to transform into a fiat currency. This can only be done in complex societies where trust in institutions has been built up with the people for eons, or the culture will not ascribe value to the currency and merely recognize it for what it intrinsically is: valueless slips of paper (albeit with fun and artful printing).

A scholarly worth with detailed footnotes and citations, the book wonderfully fuses history with the theory to demonstrate and support concepts. The reader learns about the development of paper currency; its backing by hard money in gold and silver coin; and its use in banking to make hard money more convenient and secure.

The reader then is shown how the backing on paper currency, which makes it acceptable as money stand-in, is gradually removed via various mechanisms and interests until one is ultimately left with a money which a value "declared" by government, or fiat, rather than a thing with some intrinsic worth all on its own, the mere stand-in for hard money is declared to itself be the money, by fiat.

We then are shown how, after the conversion over to a fiat currency is complete, how now there exists possibilities for its value to be manipulated, and how these manipulative effects generally tend to harm society by subjecting it to booms of credit expansion, followed by busts as worthless credit is exposed and recessions and depressions result.

We by this point get to a crucial and cynical rub. Who benefits from a fiat currency? No one but government. Its unique properties offer levers of control which power-brokers may use to influence people and business. It also enables government to more readily pay for its operation. If all else fails, it may simply print more paper money and spend it. So long as the population continues to accept it. In this way fiat currency is the true source of inflation (along with fractional-reserve banking) and represents a hidden tax on populations as the purchasing power of their fiat paper slips is eroded.

The book does not necessarily advocate movement away from paper money or checkable deposit accounts, these do provide great security and flexibility benefits. Rothbard's concluding section does, however, advocate replacing the fiat nature of our currency with its former commodity backing in gold, re-imbueing true intrinsic worth to our dollar.

To this end, the book lays out a surprisingly straightforward plan to return our money to a gold-coin and bullion standard (note: not a gold exchange standard, which is very different). If implemented, we would wake up with the ability to go to our bank and redeem our paper dollars and checkable deposit amounts for a share of the real gold held in our treasury. This gold would be distributed to banks to back our deposits and to be offered in exchange for our paper notes.

Once done, our current paper money (in its current Federal Reserve Note form) would be redeemed for the gold and retired. The Federal Reserve System would then be liquidated and done away with. Our money would be gold on deposit with our local banks. Paper money could and probably would still exist, but as a type of gold certificate (like it had been before the Great Depression). Gold would be the real money, on deposit at a bank of our choosing (a competitive process) and used to back any contrived paper or card or electronic system we might develop to serve our desired for flexibility and convenience.

The point is that the heavy hand of government would once more be divorced from the value of money. We would be free to redeem our gold deposits and transfer them to another bank at any time and for any reason. Loan and deposit banking would again be separated. Fractional-reserve banking might not be outlawed (it would be difficult to enforce even if it was), but market competitive forces and depositor faith would keep banks honest about the redeemability of their gold reserves, lest customer fear of the irredeemability of their gold start a run and force a bank to reveal their insolvent standing.

The first section of the book shows you why such a state would be a good thing, if you don't see now the advantage. Among the claims by Rothbard is the notion that the business cycle is a side-effect of fiat money and fractional-reserve banking's ability to create new money out of thin air. Without this, all money has real worth, so business cannot be puffed up by "Monopoly" money for the relatively short boom periods when we ascribe this "thin-air" money the same temporary worth as money backed by real reserves. The waking up we do to the true valuelessness of this thin-air credit expansion is what drives the bust which follows.

After reading the book, my cynical nature cannot believe a time where we might ever return to hard money from government fiat money. Nothing short of a revolution and formation of a new nation could achieve this, in my view. Once government aquires the power to print a fiat money from its people, the vast new power this confers makes it a practical impossibility for government to then be asked to give up. It's like the "One Ring to Rule Them All".

To the government it is, "the precious." Even the honest reformers within government would come under grave pressure to keep the scope of their ideal reform strictly limited. What government voluntarily gives up its own power? The best we could hope for would be some sort of "custodial" relationship where government merely pledges not to use the power it will still have. That'd be like letting the alcoholic keep their Scotch bottle if he agrees never to take the cap off again. At some point he'd have himself a three-fingers of the delicious liquid, and he'd have a great excuse why.

"The Mystery of Banking," makes a great, entertaining, and enlightening introductory book to the Austrian School of Economics.

Duality of States

I am amazed sometimes by the duality of our nature, in ourselves and in our institutions.

This evening, after waking up to a stock market party with a clear Obama hangover, I catch the evening's Investor's Business Daily and read about California's measures.

California is universally known to the rest of the nation as the archetypal liberal state. After all, it's home to Hollywood and San Francisco. And while it's true that they fulfilled their role in renewing their liberal voice to the nation in yesterday's voting, internally it's a different voice.

Voters had previously voted in legislation which clarified and asserted the definition of marriage, as being between a man and a woman. It was a big issue at the time, and achieved significant popular support at the polls, and general detraction in the press.

Rebuffed by the apparent will of their fellow Californians, those affected by the statute mounted challenge, and ultimately the State's supreme court rule the new law contrary to the State's constitution, and struck it down. Rebuffing the rebuffers.

Last night, Californians dug in their heels and took their will a step further, voting passage of Proposition 8 to amend the California constitution such that the effect of that previously passed, then struck, statute can be finally the law of their land.

This was a rather conservative move, and so the development of this story from a state with outspoken liberal representation nationally, and a sure win for the New New Deal Obamanians. And they kept it up too, striking down two rather liberal alternative energy proposals.

Contrast this to my home state, North Dakota. Recognized as a state filled with common sense conservative thinking self-reliant rural stalwarts. You want steady hands on so many tillers? We're your people!

We in North Dakota generally send-up Republican presidents and tend to favor conservative principles in our internal government as well. We do favor Democrats for national representation, but more the blue-dog type. We're mostly farmers, and we're acting in our own self-interest to bring home the farming pork. Dems are usually good at this.

In a second major surprise to me, my fellow North Dakotans acted largely liberally at the polls. We did send up our electoral votes for McCain, and Gov. Hoeven and his Republican administrators received large reapproval to go back to work. But in four ballot measures which affect our internal politics, in contrast to liberal California, conservative North Dakota took a liberal tack.

We had a measure to deal with future oil-industry tax revenue in a fiscally responsible way, setting it aside in trust and trying to only spend the interest on that trust, in the knowledge that while the state's blessed with oil, as a nation we won't use it forever: defeated.

A measure to rebalance our tax revenue (which has been generating steady real surplusses of cash) and lower our personal and corporate income taxes: defeated (what sane conservative vetos a tax cut? Not a credit either, but a real rate reduction?).

A measure to establish a new government program devoted to campaigning against tobacco use: passed.

And a measure to take the independent and corporate-style running of our state's workforce safety and insurance program (which had been saving we taxpayers money), and bring it back under the direct control of the state: passed. (Folks I talk to largely blame this one on allegations of a culture of corruption within the non-government board overseeing WSI's operations.)

All actions rather unlike the reputation for conservatism we're outwardly known for to the rest of the nation.

It's a strange and interesting duality. You might say Californians now have a little taste of what it's like to be a North Dakotan, and the same is true for me of them.

Living The American Dream

As the last of the votes are counted tonight, it appears clear that we awake Wednesday, to an historic new era in America.

It is a truly cool thing to see it proven true (as I've always believed so) that race doesn't matter in America. Obama's election is resounding proof of this, and that's very heartening.

On that historic achievement of his election, I'd just like to cheer up the fact that Obama achieved this victory by his own merits and by winning the hearts and minds of the electorate. He did not have help from a contrived, government-sponsored multicultural initiative. He was not assisted through policies of affirmative-action, nor minority preference.

He got here on his own merits, his own effort, his own belief in our unique American ideal that this nation affords the same opportunities for all its citizens. We care more about what you're about and what you want to do, than what you look like or what life situation you've come from. He took that ideal and set about convincing enough of you that his ideas for leadership were what our government needed, and he achieved.

This is laudable and sweet, and that he now stands as proof of this ideal's reality cheers me up about the enduring promise of America.

I hope now too, that it's instructive to us to look to his example and others like him, and realize that we don't need crutches. People of parts of American society and culture can and do stand on their own. If we, their fellow Americans, like what they're about, we let them show us what they can do, we elect them, we hire them, we accept them on their merits. It's not about race or ethnicity or anything like that. Do not stand for any such mind pollution from here forward. It does not matter. And we can each embrace the freedom of that delicious realization. No crutches.

------

Well if you've read my other posts or internet detritus or encountered me in real life, you know that my personal politics do not mesh with those of our new President-elect, or most progressive Democrats or even a number of popular Republicans.

I've been on my own journey of self-discovery, and am a student of history. The more I absorb and experience, the more refined my views become. I am a Libertarian with some conservative sentiments. My philosophy holds that individuals should succeed or fail on their own merits; that our nation's framers struggled mightily to grant us enormous freedom, and a duty to ourselves and our nation to learn about and protect them, accepting the solemn responsibilities upon which those freedoms rest, and without which they would evaporate.

In keeping with that, my philosophy holds that our government ought to mostly act as referee, handing down standards and enforcing a rule of law so that the free market can work and we can be held to account for our promises to one another.

We are about to take a striking turn, now, to the left in this nation. America is redefining herself. I think we've been down some of these roads before, but we're going to take them again, and this time perhaps travel further along them.

Our culture has been shifting. I am not sure we any longer support the notions of personal achievement and self-reliance as we once have. We were founded on those principles. The emphasis now is on the community; that no one may stand alone. We used to trust one another, with government as arbiter. We now mistrust one another, and see government as provider.

In this culture, we desire to be unburdened. We are willing to exchange freedom for leisure. Responsibility is exchanged for a calmed mind. Freedom means choice and making the best choices require effort, responsibility, education, and critical thinking. I think many of us would just like a rest, to be absolved from the heavy responsibilities and consequences that stem therefrom. Let someone else (government) shoulder the burden. Designate and delegate and set your mind at ease that your hard problems will be solved for you.

I think also that we've grown a (to me surreal) trust and faith in our government, begrudging as it seems to be. We lament it nostalgically on the one had, but then turn round a look to it in the next moment. We trust and have faith in our government to protect us from harms (real, imagined, large, small, practical, individual or societal), establish the solutions to our problems, because we don't trust each other through markets anymore.

In my philosophy, government is not the answer. It can be severely malicious and impersonal, but even when well-intentioned, its actions always have unintended consequences which often make matters worse, or create a new and separate problem elsewhere. But it seems our culture would rather roll the dice on an imperfect government, than hang on to its freedoms and free choice and place trust in ourselves and in individuals around us.

I believe that this way be dragons. My reading of history informs me that such is the easy choice. In our worldwide experience, more pain and less of everything is the result. America and the freedoms her citizens yet enjoy are a precious and unique thing, known scarcely to any other population and then only in fragments.

The culture will go where it thinks best, and it feels as though, whether the majority of individuals within the culture realize it, socialism and relying on society instead of onesself is the proper path.

If we try this path and realize we've made a mistake, will we have the power to go back? Will the institutions of government to which we abdicated and delegated our liberty, allow us to resume it?

I believe the Democrat philosophy in this country is once of progressivism a/k/a socialism (semantics are important to socialists as they must always battle to win your heart over from the natural order of things). The individual and her desires or needs are subordinate to the state and society as a whole, as viewed from the perspective of the government, not from the perspective of the people governed.

It's a philosophy of personal choices and freedoms replaced with government dicta, impressed upon you for your own good, as the government sees you (not as you might see yourself), and for the good of all (not as we might see each other). It may be easier to let government handle the tough and sticky issues, to rely upon it for the things which require courage and self-determination from you. But, when it's left for government to decide, how can government thereafter keep itself in check.

In my opinion, such is a misguided philosophy doomed to fail. Proven to have failed time and again, but so outwardly temping, alluring, addictive. We seem destined to keep flirting with it, experimenting with it, convinced that this time it can be different. It never is, has been, or will be.

Freedom is not free. American liberty is very hard work. It's also the most unique and rewarding gift. You can exchange it for "free" things, but such things always have a hidden cost which you will pay somehow. That cost is always more expensive than had you held onto your freedom and choice and achieved what you wanted on your own.

For socialism to work, eventually dissenting voices and ideas must be eliminated. In a system contrived and apart from what arises natually, dissent is corrosive to the unity and harmony required to make the system turn. People who ultimately do not submit willingly will need to be punished or set apart for the good of the whole, as viewed by the government. After inception, you can't simply allow people to do what they want.

Isn't this the very sort of tyranny our framers sought to protect us from?

-----

I believe in the simple truth of free markets. Restrictions, subsidies or other impediments or attempts to control the free market, by government or by other market participants, merely distort the outcomes generated by the market. Within that contrived structure, the market is still operating. It cannot be stopped, because it's not a thing to be accepted or rejected, but a law of nature, like gravity.

Apply the distortion of subsidy, and the free market will adjust to the new operating environment. Costs of various things will merely move about to positions they would not occupy had there been no external or contrived intervention.

As a quick example: if President-elect Obama's tax proposals he's campaigned on are enacted, the result will be new costs everyone will bear. To take what was earned by one group and give it to another, means the group which earned it has experienced a cost which didn't previously exist. If that's a successful small business now paying a higher income tax, it represents a cost which will be passed onto its customers in the form of higher prices. The business's customers will pay for the "wealth" which was taken and given to another group.

If that business was supplying a thing which served as an input to another business product or service, well, now its costs have increased (not to mention that that business itself may pay the same higher tax which the first business did)...the free market will continue to work with costs being passed along directly or indirectly toward the customers, the free market mechanisms natually finding a new equilibrium, and the thing which appeared to be "free" is still being purchased...but with less efficiency.

Take a look at your phone/cable bill (or utility bill in many locales) sometime. Study it carefully. These industries are rather heavily regulated. Government taxes them directly for the privilege of doing business or for certain regulatory services of the government, or indirectly by forcing them to operate in a manner which would not have come about in an unperturbed free market.

It may grant subsidy on certain firms at the expense of others. These all show up as increases in the costs for the firms to provide you with your services and are not eaten altruistically by the companies but passed on to you. So many special levies exist that many of them are called out directly on your bill, itemized in dollars and cents for you.

All business eventually comes down to the individual, no matter how large the business is, so one way or another, you will pay when companies are asked to.

Heck, even higher taxes on the wealthy are bourne mostly by you as individuals. The higher tax represents a higher cost on the part of the wealthy CEO to provide the work or services for which they are paid so highly. As a result of the tax, he will thus demand more from the business which employs him, increasing the cost of products and services to you or to other businesses, but ultimately...to you.

In conclusion, I ask all Americans to do me this favor: keep score. If you believe in the campaign ideals forwarded by President-elect Obama and supported him, so much the better. You folks keep score too. If, as his campaign suggests, and a new Democrat supermajority congress enables, we begin to implement socialist policies with expanded government services and new forms of tax and subsidy, everyone of us regardless of relative economic standing will become more impoverished. Everything else being equal, some may see themselves lifted into a higher class from a lower class, but my bet is that these folks will at the same time be able to afford less than before, or have fewer choices available than before.

America is about aspiring to be your best. Until you reach an arbitrary limit set upon you by your socialist government. Beyond this point, it declares that you did not earn the fruits of your hard work, and confiscates the excess to be distributed inefficiently and often corruptly (when has any subsidy not involved a dose of scandalous pork?) to someone who did nothing to earn it.

In the final analysis, socialism enslaves by defining limits to your success and achievement in life. It removes freedom and choices by fiat or by causing them to be artificially uneconomic. It serves by an iterative process to bring everyone down to the lowest common denominator.

That's not change to hope for. Keep score.

For Americans to "wake-up" from the glittering promises of the campaign, it may first take a nightmare.

All This Has Happened Before, And Will Happen Again

Reading Murray Rothbard's, "The Mystery of Banking" Originally written in the 80s and updated over a number of editions for the present.

One theme stands out, quoting from Battlestar Galactica's 4th season: "All this has happened before, and will happen again."

Get a load of this passage from the concluding section, p. 247:

After Fed inflation led to the boom of the 1920s and the bust of 1929, well-founded public distrust of all the banks, including the Fed, led to widespread demands for redemption of bank deposits in cash, and even of Federal Reserve notes in gold. The Fed tried frantically to inflate after the 1929 crash, including massive open market purchases and heavy loans to banks. These attempts succeeded in driving interest rates down, but they foundered on the rock of massive distrust of the banks. Furthermore, bank fears of runs as well as bankruptcies by their borrowers led them to pile up excess reserves in a manner not seen before or since the 1930s.

Wow! That's eerily familiar! Greenspan low rates lead to large influx of cheap money, helped along by over-charged lending. Fear of deposit safety and bank solvency leads to some high-profile bank runs. Fed is right now trying to massively inflate by open-market purchases, loans to banks via its discount window, and now the TARP program. While the public at-large may not fear their banks as much, the banks still fear the public's solvency and won't lend (despite Fed encouragements) as they seek to build up reserves (known to us right now by the buzzworthy phrase, "deleveraging").

Watch the M2 figures (or M3, if we had them).

http://en.wikipedia.org/wiki/Money_supply

As we work our way through our present economic challenges, an election draws near. What I've learned so far has shown me that in our Great Depression, we took a bad, but not untenable situation and made it worse through unsound policy decisions and the meddling of two succeeding presidents who saw problems they believed only government could and only government should solve.

Then, as now remarkably, the economies of the world's nations were fairly interdependent. Our problems were not solely of our own making, and world economic circumstances shaped our government's actions. It's interesting to me, however, that while most of the rest of the developed world experienced a shock and a recovery during this time, none were quite as terrible as our own.

What I hope to learn in the reading ahead is whether we made the problem worse through more government intervention. Could the wrath and anguish and hunger of our depression been blunted if our government had done nothing, instead of trying to micromanage the economy?

Back then, after Hoover we elected a socialist in President Franklin D. Roosevelt. Much was accomplished during his tenure as President. Chances are you live in a town with a bridge built through his Civilian Conservation Corps program.

FDR believed in the government as solution for society's ills. Government was going to fix our economic problems, confer upon you the "right" to a well paying job, guarantee your financial security in old-age via Social Security, and hosts of other ideas and programs. The American Dream became under FDR, the American Promise (as in social contract, not as in vision of potential).

Our government as we live under it today, saw its genesis under his administration. FDR is recorded in crackly audio as well as in writings as believing that our Constitution was a stale and outmoded document. He wanted to modernize it, and he saw it as his duty to help spur that change; spur the change in the relationship of government to the governed. For good or ill, our nation would never be quite the same again. And it's not.

It's fascinating to me to see that these things are tending to repeat themselves in my lifetime now. We're in the beginning stages of another major economic crises. We've just experienced the first (and possibly only) major shock to our stock markets (1929's crash was similar, in that it was over rather fast, but the Depression would follow along in its aftermath). We can see the government beginning to inflate its way out and recapitalize major financial instituions with billions of dollars newly printed.

It remains to be seen if our recession will proceed as in the past few, and gradually fade, or if, like the Depression, reaction and changing government policy help to fashion it into something more ominous and lasting.

Then, as now, we're at a Presidential crossroads. We tipped toward government as a safety net and hoped for change in the bold voice of FDR. In fear of our future we accepted his socialist experiment. As we went to war for a second time, the experiment faded, but didn't ever go completely away. A nation united in the ultimate victory over absolutism in WWII repatriated vast swaths of veterans who has just been to hell and survived. They thought they could do anything, and when they came home, they set out to act decisively on their dreams.

They succeeded, transforming America into a premiere economic superpower. FDR's crutches were no longer needed. But the impact has stayed with us. Our society has come to accept and take for granted some of the government programs which were experimental in FDR's time.

Now...we again are afraid and concerned about out economic future. We're tilting in that fear back toward socialism. Once again we "hope for change" in the person of Barack Obama, whose ideas are much the same as FDR's. Government is the answer. Our Constitution is a stale document in need of retooling for a modern world. In "spread(ing) the wealth around," we look to once again subvert the American Dream into an American Promise. I am not sure why we think it will work out any differently this time, than it did in FDR's time. Our choices are shaped by our environment and experiences. Is it simply that most of us just don't know any better; haven't had those experiences which would teach us the lessons of history?

For me, I still have an innate curiosity for discovering how the world works. I desire to try to be less ignorant, even if that means what I learn might weigh heavily on my spirit. I'd rather die in knowledge than live blissfully in ignorance.

I recommend this book to anyone interested in gaining a greater appreciation for how our economy, and our banks, Fed, and monetary policy function. You'll get an education that will illuminate the meaning behind actions the Fed takes and what's really going on behind the headlines and sound bites over major news broadcasts. It's been a real eye-opener for me during our latest banking/lending/stock market crisis.

What's more is that the Ludwig von Mises Institute has a PDF version available on their website, formatted nicely if you're one of those people lucky enough to have an e-paper reader. I've been reading on my laptop, which has been OK.

Nearly finished with "The Mystery of Banking," my next book will be Rothbard's "America's Great Depression." I'm hoping to get a little inside baseball on why our depression happened, why it was so damaging, and why it took so long to recover.

I am already learning that "progressive" policy had become the trend in the beginning of the 20th century. Such policy helped push us to participate in WWI (also helped along by J.P. Morgan & Co, who had its fingers deep into the war machine, and a war would help bail it out of failing railroad interests). Participation with Britain (through the Genoa Convention) in a faux gold bullion standard after the war led to inflationist money supply expansion throughout the 20s. It appears this heavy expansion of the money supply created the ripe conditions for the 1929 crash.

In any case, if you find financial topics interesting, these books are worth your time, as well as some time spent at the Ludwig von Mises Institute website, which represents the Austrian School of economic thought (which has a very different perspective from much of the Friedmanite and Keynesian ideas taught in most of our colleges).

FireGPG is getting better

My last post was a test/demo of a bug I had encountered in the way FireGPG 0.5.2 was handling scooping up text from fields to clear sign and dump back. The signed text was in a very subtle way not exactly the same as the text in the field to start with.

Perhaps this was a problem on the order of a plaintext URL typed into the field vs. the URL with some underlying HTML being scooped up by the plugin.

In any case, the result was unreliable signatures. I've updated to 0.6.1, and the test blog entry below now validates correctly once the appropriate public keys are added to your ring.

The original authors and community forming around the plugin is doing a great job!

FireGPG test

-----BEGIN PGP SIGNED MESSAGE-----
Hash: SHA1

João Pinheiro wrote:
> I'm considering the option of adding a Photo ID to my GPG key to make it
> easier for people to identify me and verify that the key does indeed
> belong to me. However, there are a few issues that I would like to clear
> out before doing so.
>
> 1) PGP specifies 120x144 as the maximum resolution while GPG recommends
> the usage of 240x288. What image resolution would you advise me to use
> and how big can/should the actual JPEG file be? Is 6kb for a 120x144
> photo acceptable or should I try to stay below 4kb?

PGP will resize whatever resolution you supply to fit into its Key
Properties window. GnuPG relies on an external image viewer (e.g. MS Photo
Editor or whatever JPEG viewer you have). Resizing a 120x144 image 200% to
240x288 usually results in considerable image degradation. I favor the
higher resolution.

That said, it is almost trivial to get a 120x144 JPEG to fit into < 6KB.
This is not the case with a 240x288 image, which typically takes reducing
the JPEG's compression quality to 20%-30% to obtain an image <= 6KB.

I think if GnuPG is going to go with 4x the pixels they should make an
appropriate adjustment to the maximum image size, e.g. 24KB. I try to keep
my key's photo id images in the mid-teens.


> 2) I know that several keyservers used to have problems with Photo IDs
> some time ago. Are those issues still around or have they been solved by
> now? Do any servers have some kind of a public key size limit?

Those problems existed on the older PKS key servers. The issues are stilla
round on PKS, but have been eliminated by the new SKS key servers (see below).

The only limit on key size is common sense. IF one *REALLY* needs a 4096-bit
encryption key for email, they probably shouldn't even be using the 'Net. At
the present 1024-bit RSA and ElGamal keys are are considered "Standard" and
2048-bit keys are labelled "High Grade" on the X.509 certificate sites.

I'll paraphrase Rob Hansen's general advice here, "Unless you REALLY know
what and why you're doing something, stick with the defaults."


> 3) Which keyserver would you recommend for me to use from now on? I have
> been using keyserver.pgp.com over the past few months and I was
> wondering if there is a better/more widely adopted one out there.

I just answered this last Friday on Gnupg-Users. For simplicity, I'll just
copy that message.

> Is there a recommended(read Endorsed) Keyserver?

There is NO officially recommended or endorsed key server.

> I'm looking at the documentation we have here at gentoo.org and it
> recommends pgp.mit.edu. It has been suggested that this server is old
> and broken. Is this the case?

pgp.mit.edu works fine for older keys. It runs the PGP Key Server (pks). PKS
does not handle V4 key features well. Notable examples of mangled features
are multiple subkeys, a revoked subkey (tag 0x28), duplicate keyids, direct
key signatures (tag 0x1F), revocation signatures on userids (tag 0x30), or
photo IDs. There is also no development or maintenance being done on the pks
platform. One exception to the pks servers is keyserver.kjsl.com, which has
been patched to not mangle keys; however, it drops photo IDs.

The one PKS server at kjsl.com, the old LDAP keyservers (only one is still
on the 'net and it's unsynchronized, ldap://keyserver-legacy.pgp.com), and
the SKS servers handle v4 keys correctly. The new LDAP PGP Universal key
server at ldap://keyserver.pgp.com also handles keys correctly, but its
myriad additional signatures added to keys are often (jokingly?) cited for
the addition of the 'clean' options in GnuPG. It, for obvious reasons, is
unsynchronized.

The current platform of choice is known as the Synchronizing Key Server
(SKS). It is written to fully comply with OpenPGP specifications.

subkeys.pgp.net is a round-robin DNS lookup of four servers. Three SKS
servers and the server at keyserver.kjsl.com.

The address some of my correspondents and myself and refer to most users is
x-hkp://random.sks.keyserver.penguin.de. It's a round-robin alias that is
updated daily with the operational servers in SKS' universe.

For my own use, I use minsky.surfnet.nl. It's easy for me to remember (Yaron
Minsky wrote SKS and its Gossip protocol.) It's also short to type.


- --
John P. Clizbe Inet: John (a) Mozilla-Enigmail.org
You can't spell fiasco without SCO. PGP/GPG KeyID: 0x608D2A10/0x18BB373A
"what's the key to success?" / "two words: good decisions."
"what's the key to good decisions?" / "one word: experience."
"how do i get experience?" / "two words: bad decisions."

"Just how do the residents of Haiku, Hawai'i hold conversations?"
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Comment: Be part of the £33t ECHELON -- Use Strong Encryption.
Comment: It's YOUR right - for the time being.
Comment: Using GnuPG with Mozilla - http://enigmail.mozdev.org

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The above signed blog posting did not verify in-place in FireGPG when I encountered it on a different blog site. I selected the original text obtained with the [display original] link in FireGPG, and reposted it here to re-check verification. It does not verify here either.
As a further test, I again took the original text and saved it to a separate file. The file verifies OK. By this result it appears a bug exists in FireGPG.
I am clear-signing this post as an additional test. If you're a guest, you can find the public key in an earlier August 8 post in this blog.
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It would also be nice to have some type of hotkey or mechanism to temporarily disable FireGPG's mangling of page content.

Monday's vote failed to pass. Let's decide to adjourn.

I read this article from an economist part of a large like-minded group who is urging Congress not to proceed on the bailout proposals, as laid out by Treasury and the administration. It's worth your while to check it out!

Re: bailout plan. This guy has it right in my view. I've been listening to a lot of folks on the issue. We don't need a bailout, at all. The more the superbanks holding onto "troubled" assets get the notion that the Feds are not going to come to the rescue, the quicker the credit markets will thaw on their own.

The worst unsaavy risk takers (and I'm beginning to think Goldman Sachs has a heavier stake in this than they've let on) will go bankrupt. The article explains why that's actually good. Shareholders in firms going BK will be hammered, and that's good (there are no guarantees in stocks, when you invest, you take on the risk the firm you're buying into might be retarded, and you accept that for the prospect of a nice return). Creditors claim the solvent business units and residual assets.

I think the author is dead right on his point that the freeze is occurring because Wall St. believes a taxpayer-funded rescue is on the way. And of course they'll try to scare the bejezus out of you, me, gov't, and anyone who'll listen, because it means they'll be saved from their bad trades.

If I make a bad trade in my stock portfolio and get wiped out, there's no bailout for me. I knew that going in, and it's top-of-mind when I decide what and how to trade. I want to try and make some money, but I also don't want to be wiped out. So, I try to be careful.

Frozen, because why sell your crap at market prices when you can hold out for the Treasury, who might just buy at 50 to 80 cents on the dollar, rather than settling for 20. Take Treasury off the table, and the market will naturally reliquify.

I'm a big fan of Investors Business Daily. I also generally enjoy CNBC, and I love the can-do optimism of Larry Kudlow, host of Kudlow & Company. He frequently writes in the op-ed pages of IBD and makes a lot of sense to me.

In the 30-SEP-08 issue, page A11, Kudlow makes the case for the bailout plan and urges us and congress to calm down and come back to the table and get it done. Once in place, we'll all be the better for it. By the end of his argument, he calls the idea a, "win-win-win-win," claiming a likely windfall for taxpayers.

I have heard this line of reasoning from a number of folks, not least of all Treasury's Paulson and the Federal Reserve's Bernanke. But I am always left to wonder in plain country-bumpkin logic: If these troubled assets would be such a great thing for taxpayers to finance, likely to yield profit down the line, why isn't private money stepping right up all over the place to buy?

I think the answer is just what the author of the article states. Other sources I've been listening to also warn that we're not just talking about bad mortgages here. Treasury would be buying "mortgage backed securities" and "collateralized debt obligations" (although hashes of the failed bill and of the reformulated bills yet to come to a vote would expand Treasury's power to buy other types of securities than simply the mortgage backed paper defined at the plan's unveiling...sheesh).

I'm learning that a lot of fraud has been going into these securities. The allegation is that lenders would take a helping of junk debt, say auto and consumer loans, credit card debt, etc., and fashion it into a new security, but to make sure the security was rated highly by the investment rating agencies, a couple of mortgages would also be attached.

So we're not only dealing with troubled mortgage debt, but also the types of junk debt that is typically even more risky than mortgages! How likely would the taxpayers be to make back their money on that? I think Wall St. knows how likely, and that's the real reason the market pricing on this paper is so low.

Also developing: The Chicago Mercantile Exchange is hammering out a standardized and regulated exchange for trading credit default swaps, another exotic security tied to this mess.

CDS's "swap" a stream of payments from the buyer of the CDS to the seller, in exchange for a payout of the face-value of the CDS by the seller to the buyer, in the event that a credit default event occurs on the debt to which the CDS is tied. It is like a form of insurance that a firm can purchase to hedge exposure to risky debt.

These have become very popular among the superbanks issuing all this crap mortgage paper. However, unlike stocks and bonds and commodities, which trade on exchanges with explicit rules and standards, CDS's trade between parties "over-the-counter". The parties basically just negotiate a CDS contract and deal. But, because of the economic downturn, a problem has developed. Some firms having written and sold a lot of CDS's to debt holders looking for protection, are popping because they can't make good on the payouts. The chance that a party with whom you trade doesn't hold up his end of the bargain is called counter-party risk. It's booming, and is part of the reason credit markets have frozen.

The CME's new idea of a regulated exchange for CDS's solves this problem. Strict standards would screen parties to insure parties will abide by their obligations. Once screened and approved for trading, the exchange becomes the counter-party to all trades. This adds confidence. By acting as "seller to all buyers" and "buyer to all sellers", the traders of CDS's would have security in the knowledge that their trading partner has been vetted and approved, like they, and in the rare event a party did fail to deliver (necessarily so because the CME wants to stay in business and limit its own risk, ergo the strict standards to be approved for trading) the CME would make good for the counter-party.

Hey! This is the market fixing its own problems! Another reason to keep gov't on the sidelines. We need to give private enterprise the space to work out solutions like this.

Coming back to Larry Kudlow and CNBC in general: their anchors have made so much hay about pushing this bailout through that I'm starting to wonder if there isn't an agenda behind it all. It may only be a rather subconscious result of the workplace culture. It is GE who owns the NBC empire and is responsible for all their jobs, and GE had spread into banking and finance big time over the last few years. Heck, I used to offer GE credit cards to every customer I did business with at my last retail job. GE likely has skin in this game. For some of the anchors and hosts, it's come down almost to the level of insulting the intelligence of anyone who has appeared on the channel with a dissenting view of the bailout.

Finally, I'll close up this post by touching on the safety of your own checking and savings accounts. Much fear-mongering has been made about this as well. Jim Cramer's said that if this doesn't get done, we're headed for Great Depression II, and you'll one day head over to your neighborhood ATM and it won't have any cash.

Even President Bush had made similar comments about the availability of your checking and savings funds at your local bank during his address on prime time TV last week. You know, I thought our top leaders' jobs were partly to offer calm and confident leadership during crisis events. But I found Bush's comments truly scary! You mean, I will walk up to my bank soon and my money might be gone?!

For shame! Put the gun down. Stop pointing it at us, we're the ones you're supposed to be concerned about protecting!

The truth is, our everyday checking and savings accounts are perfectly safe. They're of course insured by the FDIC to $100,000 (if you're fortunate enough to have more, don't be silly and make sure it's spread around). What bank failures (and I'm talking about depository banks here) we have seen so far have been largely triggered by fear on the part of the depositors. WaMu was the most recent notable example. They were shaky and likely would have failed anyway, but depositors' money was never in danger. The mass exodus of depositors' funds just helped speed up the process. Those caught unawares experienced only a name-change as the deposits were later bought up by JPMorgan Chase. After a weekend of important paperwork, it's business as usual. The ATM still has cash to give you.

The rise of large corporations has led to a consolidation of banking. Espcially in the larger cities, you might have your everyday accounts at a superbank with national and even global exposure. These have turned out to be the riskiest banks because their large size meant they could do more toxic subprime mortgage business.

Those folks who are or were scared about their money and pulled it from a superbank, what are they now doing with it? In today's modern economy, hard cash just doesn't work. You need to be able to write checks or more likely, swipe some plastic to pay for things. So, these fearful folks are turning to smaller local and regional banks and credit unions and the like.

These banks are small enough that during the housing boom, what mortgage business they may have originated, they later probably sold that debt to a superbank eager to have it. So, the small local banks have the cleanest balance sheets.

With such fearful depositors streaming over, we are now and will continue to see depository capital moving away from the superbanks and into the locals. There the increased reserves will mean credit for business and individuals will be frozen, rather it will just come from a different bank.

You could make the case that this might be better. Your local bank is probably more likely to know who you are personally, and know about your business. Risk can be more appropriately judged.

So...all this fear-mongering of the past couple of weeks has, for me, become a side-show. I am now more convinced than ever that this is an effect of the fat-cat folks in Wall St. manipulating their levers of influence to try an engineer a bailout for themselves and their own bad trades, at the expense of us all.

Keep the pressure on your representatives, and use the article linked up top and musings like my own to justify your position. If you get pushback, get your representative to justify his or her view in a way that makes sense to you at least.

As the article advocates, the next bill to come up for vote should not be to bailout, but rather to dismantle the faulty government policies and entities which disconnected risk from reward to get us here. And that's all. Free markets were not to blame, because they were being distorted. And as I hope you might be able to see a little bit now, free markets are already beginning to steer us out.

The Bailout Plan - Who blocked the Reform?

Wow... It looks like the proposals to restructure the mortgage system, and specifically Fannie and Freddie, were all made before... back in 2005. Even then some of our legislators recognized how these organizations were leading us toward crisis, and wanted to take action then to limit risk.

GovTrack.us. S. 190--109th Congress (2005): Federal Housing Enterprise Regulatory Reform Act of 2005, GovTrack.us (database of federal legislation) (accessed Sep 24, 2008)

The bill was introduced by Senators Chuck Hagel (R-NE), Elizabeth Dole (R-NC), John McCain (R-AZ), and John Sununu (R-NH).

It addressed such things as risk, appropriate capital levels, reporting transparency, and even executive golden parachutes!

Talk about prescient!

It was introduced in January of that year, but rather than being debated or voted upon, it was sent back to Chris Dodd's (D-) banking committee. It never got back out of that committee.

On May 25, 2006, an accounting scandal perpetrated by Fannie's management to the tune of $10.6 billion came to light, and Sen. McCain used the news as an opportunity to reiterate to the Senate the risk to taxpayers of these entities and the need for reform, calling for action on Hagel's propose bill.

The response? The Democrat controlled Senate forced the bill to "go-away" by a procedural rule. Dodd's banking committee demanded the bill be returned with an amendment late in the 109th congress. The action was a delaying tactic as the 109th congress then closed session, which meant the bill would be swept off the books. Dead.

It was later (April 2007) re-introduced by Sen. Chuck Hagel, Dole, and two other Republicans in amended form in the current 110th congress, as S. 1100. This revised bill provides for even more reform, including reporting on fraudulent loans, and measures to detect and eliminate conflict-of-interest lobbying.

This bill was read out twice and sent back over to Sen. Chris Dodd's committee, where it again languishes.

GovTrack.us. S. 1100--110th Congress (2007): Federal Housing Enterprise Regulatory Reform Act of 2007, GovTrack.us (database of federal legislation) (accessed Sep 24, 2008)

What can we say now in retrospect? Well, it would seem to me that Republicans in the Senate at least had some inkling about what trouble we were steering toward and tried (in vain) to wake up Democrat leadership to get action taken before it was too late.

It's too late.

I've said previously that Fannie and Freddie are key lynchpins which fostered the climate which lead to this crisis, and were instrumental in disconnecting the risk feedback mechanism which would have caused originating lenders to demand higher credit standards from potential borrowers.

As the Senate and House debate now on the merits of the administration's bailout proposal, just keep it in mind that it was Sen. Dodd's committee which blocked earlier efforts for reform to head off just such a disaster. He helped to break this system and now he is trying to represent himself as your man to champion its fixing. To that I say, bollocks! If it weren't for him, we might have had the reform needed to halt the bubble's growth before it popped. That would have been saving the taxpayer!

For shame. Resign sir, that is the only way for you to preserve any honor.

A check of related bills shows that the House of Representatives a mixed record on the fundamentals of this crisis. To Democrat credit, it seems Rep. Barney Frank (D-MA) was key to spearheading a bipartisan bill to get some Fannie and Freddie reform done. His bill was debated and passed. Republicans largely voted nay, as the bill contained in the opinions of many dissenting, unneccessary earmarks (notably for ACORN, the Democrat voter registration drive organization alledged to have committed certain past frauds) and directed the GSE to set asside $3 billion in funds, creating an effective tax on prospective homebuyers.

But later, Rep. Maxine Waters (D-CA) introduced a bill which sought to greatly expand the GSEs ablity to provide credit to greater numbers of citizens who would fall into the "subprime" category. A horrible bill, debated and passed, perhaps helped to exacerbate (it provided for alternatives to borrowers unable to provide sufficient credit histories, for example) the type of shameful lending practices which have got us here.

GovTrack.us. H.R. 1852--110th Congress (2007): Expanding American Homeownership Act of 2007, GovTrack.us (database of federal legislation) (accessed Sep 24, 2008)

That bill was passed with strong bipartisan support. Only some (less than half) Republican representatives objected and voted nay.

It can be said that while both parties' hands are dirty in this mess, only a brave few Republicans had the fiscal sense to oppose the very type of market distorting policies which got us here.

Keep this sort of thing in mind. Elections are coming.

The Bailout Plan - Fleshing out some Detail

I dropped in on the TV coverage of Senate Banking Cmte. hearing with Treasury's Paulson, Fed. Reserve's Bernanke, SEC's Cox, and OFHEO's Lockhart. The dialogue concerned the administration's bailout/stabilization plan and its details, effects, benefits, pitfalls.

I previously spoke out vehemently against this type of action, feeling it to be an unjust socialization of the risks taken by entities almost completely beyond taxpayers' influence, and an affront to free market capitalism.

While my foundational opinion hasn't changed, paying close attention to the hearing, the discussion has brought me to understand how the plan might help. There exists a crucial linchpin in this that will determine if this risk socialization effort ultimately becomes a taxpayer burden: the fundamental value of various securitized assets backed by mortgage debt and the requirement that these exotic securities be market-to-market.

Before I start a wordy train of infinite digression, I've heared some financial pundits talk about simple spension of the mark-to-market requirement for valuing these exotic securities as a relief from this crisis. Bernanke's argument is that this will not enhance, but likely erode confidence in their true worth.

I cannot say if a solution involving suspension of mark-to-market requirements would be better or worse in the end, but my inclination is that it would only be of help on a very short timeframe. But since housing is not likely to bottom soon, Bernanke's notion sounds logical to me. It could be at the heart of why no formal exchange was ever created to trade these exotic products in a standardized way. Late stage in the boom there was likely a desire to conceal risk.

The overall scope of this issue is truly vast, but I feel like I now have a grasp of it in toto.

The bailout plan is only one portion of the total issue, and centers around the problem of asset valuation really in a system which grew more clever (innovative) than its mechanisms of regulation could comprehend and feedback into. The real "innovation" was the disconnection of risk from reward, and I feel that while government policy was not directly responsible for the market's action, its policy ultimately distorted the market, and from their the market behaved perfectly normally, in its own self-interest.

As I understand it many of the big Wall St. firms presently under fire hold vast quantities of complex securities whose value is ultimately tied for the most part to real estate.

As the credit boom neared its apex, to keep the wheels turning and make more credit available to the real estate speculators and the general public, firms began to take their debt piles and issue security shares backed by the future value of their pile of debt. As time went by, firms purchasing those securities began lumping them all together and issuing their own securities backed by the value of the securities they had bought. This process of abstracting the original debt fed on itself for many levels and caused leverage by holders to expand, while at each step turning the window on the the original debt and its condition increasingly opaque.

The securities became too abstract to value directly (a clear warning), but with an understanding that they were ultimately backed by real estate (going gangbusters) investors were willing to assent to their represented worth without question.

A modest economic slowdown just slows the growth of real-estate early-on, but this is enough to trigger some minor mortgage delinquencies, and some begin to wonder if the securities they hold will pay off as promised, since payoff is predicated on the boom continuing.

The financial firms holding the securities need to value them on their balance sheets so we all can know the total value of the firms' assets. This is a normal and critical part of determining how much firms can lend, or their ability to make good on their own debt to other firms, or to secure new credit.

In a case like that of AIG, as an insurance company claims are paid by company assets and a certain minimum ratio must be maintained to assure that ability.

If AIG had spent too much of its revenue from premiums on exotic debt securities (in the hopes of gaining a high return and higher net worth) and those securities are now in doubt, would it still be able to make good on policy claims?

With the housing slowdown, the market for the exotic securities dried up as buyers began to realize they might not be buying sure things and their true value was too opaque to assess.

When demand dries up, prices must fall. This is bad for the affected firms, which have to mark-to-market these pieces of paper of increasingly unknown real worth. If firms marked-to-market, the balance sheets would accordingly show a now much lower worth. This would affect operations as it is this worth which guarantees their obligations to others. An effective margin-call is the result.

The Federal Reserve earlier pumped money into these firms in direct and indirect ways, shoring up their balance sheets for the short term and preventing a need to mark-to-market until liquidity returned.

The hope was that housing would rapidly turn back around, and the implied values of the exotic securities would be sufficient to bring back buyers (like soverign wealth funds and hedge funds).

With bids in the market to mark against, balance sheets would reinflate, short-term Fed debt could be repaid, and life would again be grand.

This did not happen, because housing continued to fall and begain causing trickle effects in the broader economy (as too many of us unwisely overspend against the over-appraised value of our homes).

The bailout plan then seeks to create a somewhat contrived market for the exotic securities. To work, it must buy these things off firms above present "fire-sale" prices. This is so because the fire-sale price is what firms have to mark-to-market against now, and is too little to prevent insolvency for too many firms.

Bernanke today spoke of a "hold-to-maturity" price for the exotics. This price would be the true value when all the debt backing the security is paid and foreclosed losses deducted. This value will remain in flux as it is still unclear how much foreclosure will ultimately occurr, and how many folks will dutifully pay their mortgage.

His idea that current fire-sale prices clearly don't reflect the exotics' intrinsic worth, but are a result of the difficulty in discovering their present valueas they are too abstracted from the original debt.

By using some mechanism to pay a middle price (TBD, but a reverse auction, in which firms wanting to sell submit bids and Treasury sweeps all at a specified bid, has been suggested), a market will spring into existence with a fair price to mark against. Balance sheets re-inflate for all those firms not selling, and the solvency problem is eased. In the Treasury, a buyer for the exotics is always at hand if a firm should encounter a need to sell to raise cash later.

The novel hope is by doing this the Treasury will cause a secondary market to soon be spurred for these exotics, whereupon further future sellers can get a better price. Fast forward and as the debt underlying the exotics matures and default risk eases, this market for these exotics will be liquid enough that private buyers will want to purchase the exotics which Treasury has accumulated.

Treasury trickles them back out, and the gov't pockets any profits on the sales (which if present, will certainly fund gov't programs and not be used to reduce the tax burden on the public).

However... all this presumes that the slowing in the underlying real economy and specifically housing begin to level off soon.

My previous comments still stand on the measure, however. The Treasury would, in setting up a contrived market to buy these exotics, make us all stakeholders in essentially a huge new hedge fund. Much money would be spent to buy the exotics. A fair buy means that it would all come back to the Treasury later, and taxpayers would be out nothing. We could possibly even see a gain.

But, if Treasury pays too much (and this price is so very hard to know, again due to the opaque nature of these securities), we are all on the hook for the losses. Tax hikes could result, but more likely in my view, the Federal Reserve would just print sufficient money to make up the difference, depressing the value of the dollar and its buying power.

The resulting additional inflation would be the tax on me and you for your neighbor who fancied himself a big-shot property speculator, or simply made some bad choices and bought a home he couldn't really afford in the first place. Would that make you feel good? Risk was transferred from the dealmakers to you.

The counterargument is that doing nothing at this stage would be far worse. Too many financial firms bought up too much exotic mortgage derived securities and the failure of these firms would translate into an inability to lend to even legitimate business and personal interests, bringing the economy to a halt...period. Jim Cramer even suggests that failure to act as the administration now has, would have meant your local Bank's ATM wouldn't spit out any cash when you slide your card to access your savings or checking.

Excesses beget these exotic mortgage-backed securities. They were inherently less liquid and more risky because no ordered market existed on which to foster their transparent exchange.

*Sigh*

I'm listening to these points. But I remain skeptically open-minded about it. This doomsday scenario could be accurate (and sad if so), in which case what real choice do we have but to go along and hope for the best in the execution of the bailout.

I do not believe the characterization, however, that this problem was a showcase of the failure of free markets. An argument for something "less-free" for the good of all of us.

Freedom and risk go hand-in-hand. The most freedom entails the highest risk, but the greatest opportunity for the greatest reward. The principle that free markets are self regulating stems from the notion that fear of too much risk will keep decisions in some rational bounds.

This crisis did not result from a free, deregulated, market. The housing industry is at the core of all this, and at the core of housing is Fannie Mae and Freddie Mac. Through the practices of these two government-backed entities, risk became disconnected from reward. As housing became frothy in the bubble's final stages, folks entered into deals to continue to lend aggressively to ever lower-income and higher-risk buyers at ever lower rates, with the notion that if it all went south, the government would back them up. The scope of the problem became "too big to fail."

Conservative pundits will blame liberal Democrat policies for the mismanagement of Fannie and Freddie and also for the overabundance of cash generated by a Federal Reserve under Alan Greenspan which kept interest rates too low for too long. I believe there is stock in these arguments, but blame does not rest solely there.

The Bush administration also deserves some blame for its part in also leaning on Fannie and Freddie to keep the cash flowing to lenders. The President himself has spoken about his great desire to great an "ownership society" and promoting expansion of low-rate mortgage options to help more Americans get credit to buy homes.

These housing markets were not free to begin with, but manipulated with considered government policy. Some may argue to great benefit: making homes affordable to more Americans through the greater availability of credit. Bzzt! Wrong. Homes were not made more affordable. The policy manipulation only caused more credit availability, which lowered monthly payments enough to get risky people to buy in. Homes only became more expensive, inflated, as these extra risky buyers (and well-heeled speculators) drove up demand. All fueled and driven by easy access to credit.

In believing in a government backstop, risk became blunted by policy, leading to outsized risks being taken, and it's that which we are reeling from now. Capitalism, hijacked.

In a free market, Adam Smith style, risk and reward are closely linked. You only take on as much as you can handle, because you know there is no safety net for you, no government backstop. The risky low-income home seeker earning $30K annually probably cannot afford a $250,000 home. As a financial firm, if I cannot afford the consequences of his default, I judge him too risky and don't make the loan.

But in our manipulated market, Fannie and Freddie, spurred on by Clinton and Bush, and also by their management (keen on inflating revenue figures to secure bonus pay) was always there to buy the shaky loans in exchange for cash now for more lending. Originating lenders turned into mere brokers for Fannie and Freddie, profitting on the deal getting done, rather than on the future value of the loan. This is one element of how the risk became disconnected.

Just keep this in mind when you evaluate your government leadership. Subsidy, whether outright, through a well-intentioned government program, or in the form of a special deal for a favor, distorts free markets.

Free markets do work. Distorted markets do not. Socialism creates the most distorted of all markets by moving the majority of wealth to the government for patronage according to its own self-interest. In so doing, it can not only disconnect the risk-reward relationship, it also removes the fundamental incentive to productive work. Why try harder, why risk, if your reward will be confiscated and distributed amongst those who haven't risked?

In needing regulation, what we really need are standards which are enforced. Government regulation reduces efficiency and capital will naturally flow toward the most efficient market. But standardization can foster efficiency by creating a level playing field in which all the actors know what to expect and can have assurance in the parties which whom they trade.

Any regulation to come out of this crisis should be viewed in this respect. We need to remove the levers of subsidy which distort an otherwise free market, and then foster standards which promote confidence among the parties, and assure a measure of smooth and efficient trade. That's all.

If you're still reading... *whew*

-Andrew

My PGP Public Key

This page is obsoleted by my new page, here.

Because I don't want to use a keyserver, and gmail doesn't provide finger.

If you received a business card from me with my PGP key's fingerprint, you can verify the fingerprint of the key you import from here against the fingerprint also listed here, and against my business card. They will all match. If they do not, then the key you imported was either bad, damaged, or does not actually represent me. In that case be careful! If all fingerprints match, then you are assured of actually having my key, and that it is undamaged and secure for your use. Yay!

If you use OpenPGP, I am available to verify and sign your public key, and would request reciprocal service. Send me your request via encrypted mail with your public key attached, and I will contact you to initiate a remote verification procedure and exchange of signed keys.

My public key, listed below, is updated here as necessary (however the datestamp of this post will remain fixed).

At this time, I do not respect the use of keyservers to distribute my public key. If you obtained my key from a keyserver, regard it with suspicion unless its fingerprint matches the fingerprint of my key here and on my business card, if you received one from me. Never trust sending me secure data using a public key which you have not verified is actually mine.

24JUN09	Assigned new expiration date. Revised key prefs to prefer RIPEMD160 hashes, AES cipher, and BZIP2 compression. With FireGPG release 0.7.6, this Firefox plug-in's author advised deprecating SHA1 use, given that the security of SHA1 has been weakened and may soon break the same way that MD5 has now been badly compromised. I could confirm that at least as of 2005, a high-resource attack seemed to have reduced SHA1 security to 2^63 from 2^80. A BOINC project is searching for SHA1 collisions. According to Wikipedia, NIST has plans to phase-out SHA1 use by 2010.
23NOV09	Updated to include new signature.
16JUN10	Updated to extend expiration another year.

pub 1024D/6B451035 2008-07-22 [expires: 2011-06-24]
Key fingerprint = DFB9 A806 8605 9B60 A480 66B8 4533 630A 6B45 1035
uid Andrew Skretvedt (Google)
uid Andrew Skretvedt (Midco)
uid [jpeg image of size 5081]
sub 2048g/EBF5BDFB 2008-07-22 [expires: 2011-06-24]

-----BEGIN PGP PUBLIC KEY BLOCK-----
Version: GnuPG v2.0.12 (MingW32)

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-----END PGP PUBLIC KEY BLOCK-----

OpenID

This blog may become something worth your visit at some point, but for now, this is a placeholder. I've created this blog for the moment to access the OpenID tied to it. I am investigating OpenID as more web services are employing it.

First to explore, Laconica and Identi.ca and army.twit.tv.