Paul Farrell's 7 Reasons Why America Needs A "Good Depression" Now...Or Face A Great Depression Later

1: Capitalism’s now a lethal soul sickness, needs a reawakening

What’s the real problem? Not the economy, not markets, nor even politics. Yes, our economic pains are real. But they’re just symptoms. Something’s structural wrong. Since 2000 endless bad news: Greed, deceit, stupidity, corruption, unethical behavior, lack of moral conscience.

The real problem’s deep in our character, the “mutant capitalism” Jack Bogle warned of in “The Battle for the Soul of Capitalism.” Sadly, that battle was lost. With it we lost our soul, our moral compass. America’s character is measured by our net worth.

2. We’re already in the early stages of a Great Depression

Comparing today with the Great Depression is common sport. In a Newsweek special “Seeing Shades of the 1930s,” Dan Gross wrote: “Wall Street, after two terms of a business-friendly Republican president, self-immolated on a pyre of greed, incompetence and excessive optimism.” Today’s “new normal” economy means high unemployment for years, inflation driving prices, rising interest rates, more debt, chaos.

We are destroying ourselves from within. Former U.S. Comptroller General David Walker warns that “there are striking similarities between America’s current situation and that of another great power from the past: Rome.” Three reasons “worth remembering: declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government.” We are becoming more vulnerable to external enemies.

3. Good Depression exposes our self-destruct bubble-thinking

Before the 2008 crash, “Irrational Exuberance” author Robert Shiller warned in the Atlantic magazine that “bubbles are primarily social phenomena. Until we understand and address the psychology that fuels them, they’re going to keep forming.” Housing inflated 85% in the decade: “Historically unprecedented … no rational basis for it.”

Bubble thinking is an toxic virus that infected everyone. Shiller warns of another coming: “We recently lived through two epidemics of excessive financial optimism … we are close to a third episode.”

4. Good Depression will stir outrage, force real reforms

Writing in the Wall Street Journal, Jim Grant, editor of the Interest Rate Observer, wrote: “Why No Outrage? Through history, outrageous financial behavior has been met with outrage. But today Wall Street’s damaging recklessness has been met with near-silence, from a too tolerant populace.” Grant worries that Wall Street will run “itself and the rest of the American financial system right over a cliff.”

But we only went to the edge in 2008. Today, a rebellious “throw the bums out” hostility is blowing a new kind of bubble: Three years ago we did not have Tea Party, union fights, the Arab Spring and Greek austerity riots, all signs of an dark angry future sweeping across America.

5. Good Depression forces Wall Street to think outside the box

In a powerful Bloomberg Markets feature, “No Easy Fix,” we’re told Wall Street’s “profit formula has hit a wall.” Their “money-making machine is broken and efforts to repair it after the biggest losses in history are likely to undermine profits.”

Even Mad Money’s Jim Cramer openly admits hedge fund managers are pocketing megaprofits at capital gains rates while laughing at the stupidity of a broken political system that gives hundreds of billions in tax breaks to the richest, then takes taxes off the table as our middle class is dying under massive unsustainable deficits. Soon angry mobs will “fix” Wall Street.

6. Good Depression will deflate America’s warring soul

The American economy is a “war economy” driven by a egomaniac. I saw it firsthand as a U.S. Marine. Americans love being king of the hill, world’s cop, the global superpower. Why else spend 54% of our tax dollars on a war machine, 47% of the world’s total military budgets.

Why? Our war machine generates such “spectacular profits that many people around the world” are convinced America’s “rich and powerful must be deliberately causing catastrophes so that they can exploit them,” warns Klein in “Shock Doctrine.” No wonder the GOP takes military spending, like tax cuts for the rich, off-the-table: The war industry is a major political donor.

7. Good Depression now … avoids a far bigger depression later

In “The Price of Liberty: Paying for America’s Wars,” Robert Hormats, undersecretary of state and a former Goldman Sachs vice chairman, traces America’s wartime financing from the Revolutionary War to present wars. He warns that today we’re “relying on faith over experience, hoping that sustained growth will erase deficits and that the ballooning costs of Social Security, Medicare and Medicaid will be manageable in the coming decades without difficult reforms.”

Absent a brutal reset, we are on a historically predictable course says Kevin Phillips, Nixon strategist and author of “Wealth & Democracy:” “Most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out.” Yes, burned out, unprepared.

So pray for a Good Depression earlier rather than later. Choose now and we can be prepared for whatever comes. Or a Great Depression will hit later, when we’re least prepared, the problems bigger, our faith weaker … don’t raise the debt ceiling.

Totally predictable: No Black Swans in 2000, 2008 … nor in 2012

Yes, all was predictable: The events of the past few years were well known in advance. In fact, the events of the entire decade were predictable. The rich got richer off the backs of the middle class and the poor. Why? “There’s class warfare all right,” warns Warren Buffett. “But it’s my class, the rich class, that’s making war, and we’re winning.”

And they are also blind and deaf to the havoc their free-market Reaganomics policies are creating, selfishly undermining America, the world’s greatest economic power.

Lessons learned? Zero. Why? Wall Street, Washington and Corporate America are focused on one narrow-minded short-term strategy: Economic g-r-o-w-t-h, bull markets, megabonuses, tax cuts. In good times they tout “free markets.” But when greed bombs, they throw free-market “principles” under the Reagan Revolution bus and unleash their mercenary lobbyists to go whining to Congress for huge taxpayer bailouts and access at the Fed discount window, to siphon off more taxpayer money. And they’ll do it again soon,

Wall Street and their cronies are doing such a miserable job, America needs a new strategy: First, stop “kicking the can down the road.” Let a good old-fashioned Good Depression do the job that our hapless, happy-talking leaders refuse to do. Take our medicine. Let a new depression clean house and reawaken Americans to core values.

Trust me folks, it’s either a Good Depression now … or a Great Depression 2.

Absolutely spot on. Yet it will be completely ignored - the status quo's steamroller will not be denied: after all just think of all those insolvent entitlement and cheap, cheap credit that Joe Sixpack stands to lose if July 4th was a day of true independence from debt slavery...

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John Paulson Needs To Go Austrian

By Jeff Harding of The Daily Capitalist.

John Paulson, the hedge-funder who made a personal fortune of $5 billion in 2010, is now seen as a goat rather than as the “top kid” on the hedge fund block because of recent big losses.

Paulson suffered a huge loss on his firm’s investment in Sino-Forest Corp, a Chinese tree plantation grower. Reports of balance sheet fraud caused the stock to tank. It is difficult to assess the loss, but estimates from the press range from $750 million to $150 million. In a Forbes.com article:

“Paulson initially said it had lost around $750 million as a result of pulling out its 30 million shares from Sino-Forest. That loss may be smaller, maybe closer to $150 million, Paulson said in a conference with investors in Paris this month, based on Sino-Forest’s stock price in 2007, when the firm began buying the shares, according to The New York Times.”

I like Paulson a lot, mainly because he makes big contrarian bets that have performed very well for himself and his investors in the past. He called the bust correctly with bets in subprime securities. He’s also a major investor in gold. But these kinds of comments make you wonder what he’s doing at his $37[?] billion fund. The fact that he got suckered by an accounting scam at Sino-Forest was bad enough, but when he can’t pin down his losses, it raises serious questions about his firm. Here is what they said about it:

“Paulson reviewed both sides’ written materials, asked questions and engaged in further independent research, including conversations with the chairman of the special committee about the scope and process of their investigations. Although Sino-Forest steadfastly denies the Muddy Waters allegations … and maintains that there is no fraud, we believe significant uncertainties exist and we made the determination to sell our full position and await the results of the independent investigation. Even if Sino-Forest’s special committee investigation clears management and supports the public disclosures and financial statement, the stock may remain depressed for an extended period of time.”

The next thing that makes me wonder about him are his big bets on Citigroup (C) and Bank of America (BAC). Last year he wagered on a “V”-shaped economic recovery and loaded up on bank stocks. It was reported Friday that he dumped a large portion of his 124 million shares (1.2% of the float) of BAC, during the past two months, prior to the announced settlement between Bank of America and the customers of Countrywide’s RMBS.

Paulson made it big in 2007 and 2008 on correct bets on subprime securities. Then he had another big year in 2010. This gives him a lot of credibility. In the financial world success is the only measure of credibility. Lose money, and what do you know?

He’s a poster boy for Nassim Taleb’s ideas on randomness in the investment world. The way Mr. Black Swan sees the world is that successful investors are probably lucky. Looking on a scale of probabilities, if you plot the performance of the world of investment advisers on a scatter graph a very few investors are going to be at the upper end of the investment performance scale, but most are right around the middle. The funny thing about the performance scale is that it looks just like any other random pattern of behavior. That is, the performance results of all of the managers in the world on a scatter graph looks like any random event similarly plotted.

What does that mean for Mr. Paulson? It raises the question: is he smart or just lucky?

The answer is that I don’t really know and neither does Mr. Paulson. I’d like to think he’s smart and lucky.

Here is an obvious question with a seemingly obvious answer: if he’s so smart how come he loses money? Well, nobody is always right. If that is the case, then how do you determine whether or not his results were based on luck or brilliance? Please refer to the sidebar.

If he were an adherent of Austrian theory then I would say he is brilliant. Why? Almost all of his investment moves have been based on decisions that an Austrian theory economist/investor would make. For example, in 2007 and in 2008 he correctly shorted subprime securities, foreseeing the bust which many Austrian theory investors/economists saw coming. Others (not Austrian) made this same bet and won and then lost it again (three months later for Peloton Partners; they had luck, and then bad luck)

The acquisition of large positions of gold by Mr. Paulson would also be something an Austrian theory investor would make. He started accumulating gold in 2009, a dead-on call in terms of the gains he made. In the Fall of 2010 he turned negative on the economy and started to pull back on equities. But then, curiously, he turned around and called a V-shaped recovery, and that’s when he bet on the banks... and lost again.

As an Austrian theory investor/economist, I and others like me have been forecasting stagnation and inflation since last year and my forecast has been holding up to this point. It seems logical based on Austrian theory and the actions the Fed and the Administration have taken. I’m not claiming prescience, but rather what a close look at the data tells me in light of Austrian theory. Yes, it works.

I am saying that Mr. Paulson has been mostly lucky in the Mandelbrotian-Talebian sense. He should start reading Mises.

This article originally appeared in The Daily Capitalist.

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Why Facebook Needs Sheryl Sandberg

Facebook HQ: Sandberg in the user operations department. Facebook plans to move into Sun Microsystems' old campus later this year Photograph by Robyn Twomey

By Brad Stone

On a Tuesday afternoon in late April, 30 managers of Facebook's various business units come together to discuss a matter that preoccupies its famous founder: how to keep their rapidly growing little company from getting too big. The meeting, organized and led by the second-most-famous person at the social network, Chief Operating Officer Sheryl Sandberg, focuses on how to solve the problems of users, advertisers, and partner websites by using automated systems rather than bringing in thousands of new employees.

One by one, the managers stand and present their progress on new productivity-generating tools. A service called social verification offers a way for Facebook members who get locked out of their accounts to have friends verify their identity. Another new system intends to scare away creators of fake profile accounts by displaying their locations on a map and asking if they really want to continue.

Sandberg, sitting with one leg tucked underneath her, the other folded over the arm of the chair, listens intently and responds with a mix of positive feedback and disarming camaraderie. "That is a huge accomplishment," she says when an international manager talks about new efficiencies in the Hyderabad office. "Whoever worked on this, you guys should feel great. It took us four years at Google to do this." The success of an automated tool that eliminates duplicate profiles on the service evokes an "awesome."

Sandberg hopes the new procedures discussed at these meetings will allow the Palo Alto company to maintain a moderate pace of hiring. She believes that other booming Internet companies that doubled and tripled their staffs during similar periods of unchecked growth—Google (GOOG) has more than 26,000 employees—eventually came to regret the innovation-killing bureaucracy that resulted. Facebook has only 2,500 employees. A new headquarters under renovation one town over in Menlo Park, on the former Sun Microsystems campus, currently maxes out at about 3,600. "We think one of the best ways to stay small is just to stay smaller," Sandberg says later.

As the meeting winds down, a product manager shows a slide that nearly makes Sandberg jump out of her seat. The chart displays Facebook's advertising revenue and volume—both lines are tilting upward. It also shows the number of man-hours spent on support operations, a line that holds steady. "This is a beautiful chart. I might frame it on my wall," Sandberg says. "Guys, this is the difference. This is about, how big do we want to be as a company?"

Ever since Silicon Valley started turning out companies with beautiful growth charts, entrepreneurs and their investors have talked about the need for "adult supervision"—a seasoned executive who can take over a startup from its inexperienced founders, guide it through the hazards of hyperkinetic expansion, and convert a great idea or breakthrough technology into a bona fide business. Today, however, young founders generally want to remain at the helm of their companies, and there's a new shorthand for the kind of leader who's willing to serve as a second-in-command, complementing without overshadowing the wunderkind entrepreneur: a Sheryl Sandberg. As in, "we're growing, but God knows how we'll make money. What we really need is a Sheryl Sandberg."

No one needs a Sandberg more than the company that currently has her. In the three years since Sandberg, 41, defected from Google and joined Facebook as its COO, she has helped to steer the company to previously unimaginable heights, devising an advertising platform that's attracted the world's largest brands and forging a remarkably trusting partnership with Mark Zuckerberg, its imperious 26-year-old founder. (He turns 27 on May 14.)

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