Friday, October 31, 2008

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).

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).

Tuesday, October 21, 2008

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!

Tuesday, October 7, 2008

FireGPG test

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 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 and it
> recommends It has been suggested that this server is old
> and broken. Is this the case? 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, which has
been patched to not mangle keys; however, it drops photo IDs.

The one PKS server at, the old LDAP keyservers (only one is still
on the 'net and it's unsynchronized, ldap://, and
the SKS servers handle v4 keys correctly. The new LDAP PGP Universal key
server at ldap:// 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

The current platform of choice is known as the Synchronizing Key Server
(SKS). It is written to fully comply with OpenPGP specifications. is a round-robin DNS lookup of four servers. Three SKS
servers and the server at

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

For my own use, I use 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)
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?"
Version: GnuPG v1.4.3-cvs-3911-2005-10-14 (Windows 2000 SP4)
Comment: When cryptography is outlawed, b25seSBvdXRsYXdzIHdpbGwgdXNlIG
Comment: Be part of the £33t ECHELON -- Use Strong Encryption.
Comment: It's YOUR right - for the time being.
Comment: Using GnuPG with Mozilla -


Hash: SHA1

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.
Version: GnuPG v1.4.7 (MingW32)


It would also be nice to have some type of hotkey or mechanism to temporarily disable FireGPG's mangling of page content.

Wednesday, October 1, 2008

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.