Legal Aspects of The People v. Brock Turner

Many non-lawyers do not know what an in limine is (pronounced in limnay). From the Latin, it literally means "at the start", or, "on the threshold". It is a motion, discussed between judge and counsels, outside the presence of the jury, to request that certain testimony and/or evidence be excluded. Chanel Miller, in her own words, is conflicted about her narrative, torn between the facts of evidence and her own feelings. She was in a walking blackout state from 11:50 to around 12:30, when she passed out. Her feelings of violation depended on complete reconstruction of events, once she woke up around 4 AM in the Emergency Room. Until then she was unable to form any memories. It is likely she agree to press charges in order to save face, to send a signal it was not consensual. And yet, even she could not rule out this posssibility, as she stated in the police report. In the People v. Brock Allen Turner, Turner (age 19) was found to be twice the legal alcohol limit (BAC .17) and Chanel Miller (age 22) scored a Blood Alcohol Content (BAC) of .23-.26 (3 times the legal limit). We know from the Police Report that Chanel Miller admitted that she could not remember anything after 11:50 PM. We also know there was a lot of activity after 11:50: several phone calls were made...up until the time of 12:30 AM. She admitted (in the police report) to having started drinking around 8:30 PM . She later changed this version of events to 10:00 PM when cross examined on the stand. In the Police Report, she admitted to a long history of binge drinking, saying “I've never had any problems before.” Neurologists define her condition as alcohol-induced anterograde amnesia, essentially a walking blackout drunken state. Seemingly normal, conversational, often dancing, speaking in a relatively coherent fashion...yet unable to form short-term memories of anything taking place. A large body of expert analysis exists on this. Blackout is a different condition than pass out. Once Chanel fell into unconsciousness (sometime after 12:30 AM), she remained in a coma-like state for some 4 hours beyond that. We also know there were many discrepancies between the People's Complaint narrative and the Police Report in multiple ways, but also with respect to Chanel's confidence in police and other first responders. Before trial, the prosecution crafted the “People's Motions In Limine”. Of particular interest is the 13th in limine, for without it, there would have been sufficient reasonable doubt to question proceeding with the prosecution. By her own admission, Chanel Miller could not remember whether or not she might have consented (to going back to Turner's dorm room). The prosecution used the John Z. standard of “No means no”. This could not have applied in this case given that Chanel Miller was passed out, could not remember, hence could not rule out, her possible consent. The 13th in limine served as the core building block for the manufacture of the People v. Brock Allen Turner. Citing a 1976 case, the People v. Kelly, prosecutor Alaleh Kianerci, wrote in the 13th in limine, The People specifically object to Dr. Fromme's testimony because it has not been established that alcoholic blackouts are generally accepted in the scientific community. From the year of this case (2015) and the 1976 cited case there is much consensus in the scientific community involving alcohol-induced blackout. The key here is, the prosecution needed this in limine granted just to have a case. Prosecutor Kianerci further explained, citing a 1956 case (People v. Cole), “The decisive consideration in determining the admissibility of expert opinion evidence is whether the subject of inquiry is one of such common knowledge that men of ordinary education could reach a conclusion as intelligently as the witness, or whether...that opinion of the expert would assist the trier of fact.” The medical inference was simply that Doe's blood alcohol level was between .23-.26 at the time she passed out. The prosecutor further says that these facts would prejudice the jury and shame the victim. Really? This would likely have eliminated this case. According to the Police Report, Brock Turner waived his Miranda rights and confessed that he and Chanel Miller were in mutual agreement, about returning to his dorm room. It was late, around 40 degrees outside, both were legally drunk. To him, he sincerely believed that everything that occurred was consensual. And so, to clear up this misunderstanding, he voluntarily spoke openly to the questioning officer, Detective Mike Kim. Why would Turner be so open and waive his rights unless he sincerely believed it was consensual and that he was innocent? The prosecution's use of the 7th in limine turned his full admission and testimony to the officer against him, and then deemed it hearsay evidence, thereby inadmissible. The jury never saw this. The 7th in limine also converted Turner's immediate drunken confession to the interrogating officer Kim to hearsay, weapon used by the prosecution. And, given his .17 Blood Alcohol level，he was in no condition to confess absent counsel especially to Detective Kim (who ultimately was acting as a D.A. Investigator), which should have waited and insisted he have counsel present. So, Turner waives his Miranda rights (without counsel), thinking that this entire event was consensual and he simply wants to explain, to clear up any misconceptions. Instead, his drunken honesty is immediately turned against him. So, nothing he voluntarily admitted (unfiltered) could be admitted toward his defense. He was hamstrung. Here he was speaking openly, after waiving his Mirandas, and nothing that he says is allowed to be admitted into trial evidence. His trial defense failed to challenge any of this strategy. Let's move back to the 13th in limine to examine just how insidious and how flawed it was. We know from the police report that there was insufficient evidence to charge rape. The scheme then became to charge attempted rape. And yet, both Turner and Emily Doe were so completely intoxicated that neither of their recollections were allowed as evidence in court. Instead, the prosecution would rely instead on witness testimony that began at 12:55 am, at least 25 minutes after she had passed out. Between 12:30 and 12:55 am, there is a total blackout. No cameras, no phone activity, no witnesses. Moreover, Emily Doe, upon awaking fours later at an emergency room believes she was at a Stanford Campus recovery “Drunk Tank”. Her expectation was that she had been found drunk, unconscious and had been removed to a recovery site. A number of questions arise: Why didn't the Police and D.A. treat this like any other ordinary campus drunken frat party hook-up gone wrong? Were other underlying political motivations possibly at work, behind the scenes? Why did Emily Doe need to make a phone call to answer Det. Mike Kim's question (Do you want to ask for a rape charge?). Who did she call? Why wasn't her cell phone record for that call introduced as evidence? The details of this call disappeared. It is unclear, even after Emily Doe's phone call before answering the police officer's proffer, that she herself understood the vast impact of what her saying yes would mean. She could not have anticipated the roaring machine of Michele Dauber's minions that were soon to be unleashed. It also raises the question of why Officer Mike Kim asked this question so early in the process before other evidence feedback had come back into the loop. Was there a motive? The 13th Motion in Limine initially denied by Judge Persky, was soon answered by the prosecution with a request for a 402 “Daubert” hearing, wherein the expert was formally challenged, before being able to face the jury. (TT #8) Kianerci asks: “From the the beginning, Ms. Does reached sufficient levels of alcohol intoxication to blackout due to alcohol. But she would not have reached the level of alcohol intoxication typically associated with passing out or losing consciousness. Aren't these two inconsistent?” Dr. Kim Fromme: “No, they're not...” (pg. 37, TT#8) Still prosecutor Kianerci kept hammering away at this argument, to confuse the non-expert jury. She sought to frame this case as some exception, to discredit Fromme by applying a rigid chart definition. BAC of .30 or above equals pass-out; less than this is blackout. She tried to blur the lines. Alcohol blackout is not observable at the time it occurs. It can only be inferred retrospectively based on corroborable observances and activities such as phone calls, purchases, sexual relations, etc. that are not remembered. There is a large body of expert literature that covers this, in all aspects of living situation. One's history of alcoholism is a major contributing factor to blackout. Hence, supporting evidence would be one's history of drinking and blackout. Chanel Miller's prior history was excluded using in limine #11. Although this referred specifically to sexual history, it also included previous drinking and possible blackout episodes. Quotes from the Trial Transcript: ..."timeline followback." It's considered the gold standard in the alcohol field for being able to study the effects of higher doses of alcohol.(TT #8, pg. 126) Kianerci: “And you would agree that seeing her would help you make an assessment about whether she's in an alcoholic blackout or not?” Fromme: “No. There's no observable evidence that someone is in a blackout. So having -- if I saw her, I -- that would not help me make that decision, no.” (pg. 128)(Note: the prosecution failed to prove that Turner, given his .17 BAC, could have known Chanel was in a walking blackout state.) Kianerci: “You have no way of knowing when somebody goes from an alcoholic blackout to becoming unconscious. Isn't that true?” Fromme: “That is true.” (pg.128) Kianerci: “You have no idea or you cannot tell us at what point someone goes from a blackout to a passout?” Fromme: “No, ma'am, I cannot.”(page 140) Armstrong: “You were asked a question by Ms. Kianerci as to whether you could determine whether any person at a particular moment went from a blackout to being unconscious, right?” Fromme: “Yes.” Armstrong: And you said you couldn't determine that; correct? Fromme: That's correct. No one could. Armstrong: To your knowledge, with all the knowledge you have in this field, is there anybody that could determine that? Fromme: No, not to my knowledge. Armstrong: Have you spoken with other experts in the field -- your field of alcohol and its effects on memory and those kinds of things -- about whether they testify as experts and what their fees are in relation to yours? Fromme: Yes, I have. (Pg. 141-143) Key questions remain: Why did Mike Armstrong—-Turner's defense counsel--focus primarily on Chanel's .245 BAC? Why not more emphasis on Turner's .17 BAC? It would have changed the defense from a Possible Consent case, to a Voluntary Intoxication case (which would have eliminated the intent to rape, intent to commit sexual assault, etc.). Why did the trial court fail to raise this matter, either in pre-trial and during jury instructions? The Trial Transcipt is very clear: this subject was never voiced. The court has no sua sponte duty to instruct on voluntary intoxication; however, the trial court must give this instruction on request. (People v. Ricardi (1992) 9 Cal.App.4th 1427, 1432 [12 Cal.Rptr.2d 364]; People v. Castillo (1997) 16 Cal.4th 1009, 1014 [68 Cal.Rptr.2d 648, 945 P.2d 1197]; People v. Saille (1991) 54 Cal.3d 1103, 1119 [2 Cal.Rptr.2d 364, 820 P.2d 588].) Although voluntary intoxication is not an affirmative defense to a crime, the jury may consider evidence of voluntary intoxication and its effect on the defendant’s required mental state. (Pen. Code, § 29.4; People v. Reyes (1997) 52 Cal.App.4th 975, 982–986 [61 Cal.Rptr.2d 39] [relevant to knowledge element in receiving stolen property]; People v. Mendoza (1998) 18 Cal.4th 1114, 1131–1134 [77 Cal.Rptr.2d 428, 959 P.2d 735] [relevant to mental state in aiding and abetting].) The parties bringing this rush to judgment: did they have an agenda going in? Turner's Title IX case was sealed by Stanford. And it's a key component because technically Stanford had a duty to conduct its own independent investigation of this incident. Remaining Issues: (1) Even assuming there was no evidence tampering, there still was a lack of evidence to bring this case. (2) Given the pretrial prejudice, Why did Armstrong not motion of a change of venue? Why did the D.A. withhold DNA evidence that went unchallenged by the defense? (3) Motions in Limine: why was his testimony to police deemed hearsay? Why was her testimony to police deemed hearsay...without objection? (4) The 402 Daubert challenge (TT#8): afterward, why didn't Armstrong ask that the challenge itself be entered into evidence for the jury to see? (5) When the two rape charges were dropped at the October 2015 preliminary hearing, why wasn't the 29.4(b) raised to get the remaining 3 charges dropped/consolidated? (6) Could this have been entered as a jury instruction, in terms of finding lesser charges? (7) What reversible errors did Persky make in light of Armstrong's error? Both Persky and Armstrong knew this would go to appeal. (8) What liability does Stanford have for the Title IX failure? Did Michele Dauber's direct involvement with the D.A. while a Stanford employee, create residual liability for Stanford? (Note: all the emails)

Wealth Inequality Misunderstood...

There is a constant drum beat having to do with "Income Inequality". The policy solutions typically are...better training and education for the poor. Early childhood ed, pre-natal care, etc. are all great goals and should become standards. Unfortunately, this will not solve the long-term systemic problem. The problem stems from the fact that wealth is fundamentally created by asset appreciation (business, real estate, capital portfolio, copyright/patents, etc.). The vast majority of income earners do not participate as investors in IPO, Mergers & Acquisitions, Patents or Hedge Fund appreciation. The vast majority lack the talent of professional artists and athletes.(Many hedge funds as Real Estate Investment Trusts own large apartment complexes all over the nation. Their investors tend to be in the top 9% of earners using their surplus income (often pension monies)--over and above maintenance costs--to invest and pool their monies. I've owned businesses. I've contributed to them and have been reimbursed, sometimes without drawing salary out. Too many loopholes still exist for the super-rich. Capital Gains (15%) versus Income Tax/Fed-State (29+%): Rate Differentials: Home ownership for parents should be a singular focus for policy makers...which also means keeping people in their homes and not allowing predatory lending.Pay day lending should be banned. Asset ownership, and the market value appreciation it affords, is the key to building wealth. For non-homeowner wage/salary earners, their only way to save is through retirement planning which includes payroll contributions and after tax savings (which for the most part is not there). And in this highly expensive housing environment (nationally), wealth building is extremely difficult unless one is a highly trained/highly skilled knowledge worker within a tech start-up or the medical industrial complex, etc. Knowledge workers are in all industries. Still the argument is...let's teach STEM and produce knowledge workers capable of working at start-ups, soon to go public (IPO) and thus create wealth. It's idealistic, given so many start-up failures. Asking everyone to become entrepreneurial is unrealistic. The Green New Deal holds promise because it potentially means jobs for knowledge workers entering the workforce. Yet who actually harvests most of the wealth from such start-ups? Answer: It's the Private Venture and Vulture Capitalists that take the lion's share of the gain once a stock IPO's. None of the current candidates (absent Yan) have even started to really drill down on this. E. Warren wants a wealth tax, but that will be hard to calculate, especially with hedgefunds that have anonymous LLC investors. Bernie sees abuse in most private sector vertical integration. (Forget Medicare For All without a gradual phased transition.) What's the real solution? Recirculation of capital is key. Capital must flow (like water) from the top to the roots of the tree, like a recirculating fountain, even though risk is greater there. Such funds must be allocated and dispersed enough to mitigate risk, perhaps in Public-Private Trust partnerships, among other technical models. It's out there folks. We have the brains on Wall Street and Academia to solve these problems. Can we find a coordinating principal to drive this. We can bring the folks at the bottom up and make them stakeholders in society. But it does involve reforming modern capitalism, whose efficiencies are so excessive that the results even overwhelm public funding mechanisms.

For-Profit Healthcare & Debt: A Bad Combination "A hospital bed is a taxi standing still with the meter running."

--Groucho Marx

Since when did the term "free" come to be associated with "affordability"? It happened formally when then Presidential candidate Romney tried to link the term "affordability" with "free-loader."

Years ago when Tenant, Columbia, HCA and others were building out their networks, they purchased hundreds of local community hospitals, which were viewed as undervalued assets. These large health conglomerates issued bonds to finance their acquisitions, and the first post-acquisition step was to sell the land the community hospital was on to one of their (Real Estate Investment Trusts) REIT. The community hospital then began paying rent to the REIT, and that in turn ultimately financed the acquisition. Community hospitals were effectively refinanced and mortgaged, instead of being free and clear of debt burden. No longer did the community hospital operate as an entity standing on fully paid for/self-owned land. This, in turn, introduced unit-based pricing for each hospital bed (which also became alligned with Medicare Part A & B reimbursement rates). Historically, before the massive re-consolidation by Wall Street's Financialization push, Community Hospitals paid no rent, were Community owned and run, and were not for-profit, generally. Why is the Graham Leach Bliley Act (and De-Mutualization) so important to understanding current financialization?

It turns out the biggest beneficiaries of Medicare (and Affordable Care Act-ACA) are Tenant, HCA, private hospital owners, physician groups, et al. How can it be--with vacancy rates so high in hospitals--that healthcare costs also remain extremely high? It seems that the rules of supply and demand do not work when it comes to hospitals. What's behind this?

Consider 'capacity utilization.' Without debt, excess capacity poses no problem. Indeed, only with the addition of debt is capacity commoditized. Example: Consider a local fire department. Paid staff resides at stations 100% of the time, regardless of emergency conditions. 100% state of readiness. Payroll and basic operating expenses are ongoing, as a relatively minor percentage of total tax revenues collected. Now imagine if local tax revenues diminished and the fire station had to pay a mortgage: it would then be forced to convert it's unused (excess) capacity to a cost, and in turn focus on raising revenues to support its excess capacity, in addition to these other basic costs. This is exactly the case with hospitals (and many other large U.S. businesses). Also, consider the corollary to "excess capacity," which is under utilization. Basically, there are costs whether or not the system is accessed. In a wartime scenario a field hospital at times is fully utilized. Other times, it's dormant. We really should not treat these assets in the same way that we treat typically operating plant and equipment.

Over the past 50 years nearly all Wall Street wealth has resulted from leveraged debt and tax loopholes: paying for corporate re-financings using interest deductions and phantom loss carry forwards. In addition to the mortgage securitization debacle, we soon may realize--from a greater, long-term public good standpoint--how misguided Wall Street's use of securitized debt has been. Despite various rationales about "unleashing pent-up equity" and applying it to good uses, the public policy implications of Wall Street's actions are in many respects criminal. We've mortgaged our basic infrastructure, and it has become a real national security issue.

Consolidation in virtually all industries was financed by securitized debt. And indeed, without such debt many businesses are profitable and cashflow positive--they're able to generate a profit in excess of operating and payroll expenses. (Debt-free health, by the way, should no longer be a pass to pirate a company's equity.) All of our industries are and have long been suffering from too much debt and unfortunately, there currently exists no mechanism to put entire industries into Chapter 11 restructuring. (Even if California or the Big Three U.S. Auto Makers should require restructuring, there's currently no "easy" way to do this.)

Much of said restructuring would have been unnecessary had Wall Street not squandered/risked valuable equity. (Perhaps a Council of Financial Reconciliation should seek return of ill-gotten gains?) Which leads us back--from predatory lending--to hospitals and health care in general. The rationale that drove consolidation were scale efficiencies...the ringing out of redundancies via mergers and acquisitions. Such "efficiencies" have not been without problems. Yet, diminishing redundancies via merger/acquisition still leads to reduced competition. Should for-profit be allowed when such competitive narrowing ensues?

We have two interesting extreme cost points with regard to capacity utilization; (1) insureds that never use the system (yet pay premiums); and (2) uninsureds that never use the system. Between these two extremes we have a system that has varying degrees of utilization. How rational are pricing systems for services throughout the system? How is pricing set? (A practical example: a few years back my wife was in hospital for three days. Our bill was $22,000. Our insurer paid $9000, and we paid $1500, which was our deductible amount. The participating provider hospital charged off the balance and my guess is the hospital could also apply this write off against its taxes. The hospital took its aggregate cost--including its debt payment, and divided it by its total number of beds and applied that daily sum multiplied by 3 days. Yet consider all the empty beds. Absent the debt service, no way the charges would be so high.)

Consider the analogy of a small town fire department. Since it cannot afford to pay full-time salaries to a staff of firefighters, many towns resort to part-time volunteer staffs. This is one way of dealing with excess capacity. This would not work in the health care field, but if we look at towns and cities throughout the state of California, many have too many "professional" full-time police and fire fighters...more than the economy can support (especially CalPers pension contributions, which is making may cities virtually bankrupt). How to transition these excess workers to part-time, on-call, as-needed? With respect to health care, reorganization can both bring down costs and unveil the current waste (as excess capacity) within the current system. A team approach may require fewer workers or better dispersed distribution.

The Health Care system overall needs find more rational ways to make the prepayment for care--which to a large degree insurance is--affordable. As it stands, medical costs include too much debt service--not just charges for basic labor and materials. Not everyone uses the system all the time. So, what exactly determines fees for service rates? How much of it is debt service? Competition hasn't worked well due to over-consolidation--which is why now a public option is needed. Also, in terms of ethical justification, the U.S. must invest in its people, for national security, dominion, and sovereignty. Extreme individualism and laissez-faire market-determinism have harmed our industrial base. China's Industrial Policy has sent America a vital message.

Prescription: Health care for all is a moral ought. It's because demand for health care, like for housing, is inelastic. Practically, it's about society's committed investment into each of its members. We do this with public education, not as moral imperative, but as practical guidance. Social wealth is enriched by contributions of its individual members, and public investment is key. Health care is no different.

Finally, when healthy people pay insurance premiums they are not accessing the system but are paying for future capacity that will be there if and when needed. A good place to start would be $100 per month for each adult, and $50 per month for those under 21. Add to this small co-pays and a small annual deductible. Make it a baseline mandatory coverage and add in subsidies for those unable to pay. (Note: prior to Anthem's purchase of Blue Cross from Well Point, we were paying $4800/yr.--family of 4--with a $5000/yr. annual deductible. Now, the rate is $7200/yr. with a $12,000 annual deductible. 2009)

Alas, we require a system designed around wellness, with incentives to patients only to use the system when necessary. Massive debt restructuring must be part of any economic stimulus package (and health care reform bill)... massive debt write down and/or conversion of debt to equity. A stimulus should focus on technology infrastructure, debt elimination and possibly downsizing or eliminating insurance carriers from the equation. Also, given the nature of medical capacity, fee for service may not be the optimal approach. Do we need to reduce/remove much of the [institutional] debt service from health care, and place a moratorium on debt financings pertaining to expanding health care capacity? If we limit the private profit from the issuance of public debt, will we be taking a step to slow corporate welfare for institutions (and the folks that run them)? The answer is unclear. Yet considering the serious impact of debt default by large institutions it's time for society [and heretofore sleepy regulators] to take an interest in these private business behaviors. The Corker proposal for the automakers [back in November] turned out to be prescient and may have broader applications in the future. Will specialists be forced to join groups? We'll see.

The bottom line is...5% of patients use 95% of capacity. Hence, build ample capacity to cover growing demand, and get rid of fee for service. Operating costs, less debt service equals affordable health care. Today, laissez-faire has resulted on a virtual monopoly with 5-6 major providers nationally.

Also, hospitals are open 24/7 regardless of traffic. My two kids do--at most--a couple of well-visits a year. Why must our family pay $12,000 per year for this? Makes no sense. Yet this is exactly how the system now works. Not-for-profit vertical integration could change this. The private for-profit system--a result of milking Medicare--now incorrectly charges for capacity distribution, and actually penalizes those who are well. They can only profit by building in systemic short-term memory loss and billing for new procedures all the time, many of which are unnecessary. This for-profit system caters to the total basket cases. The fact is, there is currently excess capacity in the U.S. Health Care system due to gross inefficiencies (having to do with too many specialized discoordinate private practice physicians) that must excessively outsource for too many of the services that should be able to be offered in-house...and could be offered in house were they in a group. So many atomized doctors, each paying rent, a staff, etc. Why? Why not more consolidation? Indeed, absent Medicare the private practice would have long ago become extinct.

The Gramm-Leach-Bliley Act ended Glass-Steagle, which ushered in a new era of demutualization. Premiums ultimately skyrocketed. This ultimately made the Affordable Care Act necessary. Medicare For All: Healthcare demand is inelastic: growing demographics mean that demand will always outpace capacity. Medicare is not free. It carries deductibles such that Medigap coverage is needed. Insurers like Humana, United Healthcare, Blue Shield, etc...occupy this space. How would Medicare for All be funded? Well, Medicare operates as a public insurer within a for-profit and non-profit environment. The key is, how to ween the private sector from a for-profit model, both insurers and hospital systems? The process, of necessity, must be gradual, which means a good first step is to expand the public option through the Affordable Care Act. Also, oddly enough a big chunk of healthcare costs have to do with debt service on real estate. How to reduce this? How to move large for-profit hedge funds out of the healthcare facility business? We know the necessity of profit for businesses: profit lets them retool and upgrade capacity and technology. But to what degree? This is what the real debate should be all about.
Nov. 2019

Orig. 9/2009

Is America Bankrupt?

(FYI: America is bankrupt...but is unable to acknowledge it yet, and has no systemic way to address this fact. Chapter 9 of the Bankruptcy Code is not appropriate for the scale. It will occur in pieces.)

Following Enron's [and Worldcom's] demise Congress enacted Sarbanes-Oxley (SOX) to ensure the transparency of management practices for public companies. Enron's financial engineers had created off-book derivatives that worked just like an off-shore toilet: they would dump all their "phantom" debt there, but unfortunate for Enron's executives, the flusher didn't work. The debt was actually real. Enron was able to hide its debt so long as its energy revenues were growing. Once that stopped the house fell down.

Whether it be SOX, GAAP or FASB, many if not most mortgage-backed securities have not been reported or posted through any central clearing, so that no one knows for sure how much of this debt there is, actually. Also, their valuations carry heavy future value and discounting to net present value is not a clear exercise. There's no central regulatory clearing for much of this paper. Which in large part has led us to this current crisis. And so we ask whether such unregistered securitizations amount to "fractional reserve banking." Fact is, "money" is only created when there's an interest rate yield...I loan you $1, you repay me $1 ten cents. When short terms rates are 0%, as they are right around now, no money's being created, and most importantly...no one's making any real money. It's high time we question the practice of mortgage securitization itself.

The global system, as exceedingly nuanced and complex as it is, could do with more accountability rules and transparancies. The very nature of securitization itself is to create "off balance sheet" leverage. Hence, many of these securities never found themselves registered on any publicly accessible balance sheet anywhere, hence by some estimates there's an estimated $62 trillion of CDOs, CDSs, SIVs and other variants of such securities floating around the globe's pensions and in other institutional portfolios (thanks to the Gaussian copula formula). Indeed, subprime mortgages showed the highest rate of default (followed by the Alt-As), and these were largely made by non-traditional lenders that entered the market just after 9/11 and practiced asset-based (versus income-based) lending. They were able to do so when the Fed lowered interest rates dramatically after 9/11. The result was a now infamous asset bubble...cheap dollars flowing into highly demanded/short supply assets. (Absent the asset bubble thanks to cheap dollars, might Iraq never have happened?) The Fed in essence simply post-poned the day of reckoning, which is now upon us. (One wonders if securitization itself is the problem, and needs to be reconsidered and its process redesigned.)

Now, many mortgage banks and lending institutions are reluctant to "take the hit" and seriously write-down these over-priced assets still on their books. California Congressman Darrell Issa believes such institutions should be forced to write down the values of these over-priced assets, albeit gradually. This is one variant of "mark to market," which with behemoth institutions is likely a better policy than relying on yield curve determinations made by private investors. He suggests that servicers and mortgage holders be compelled to allow short sales to the current default borrowers now living in those homes, perhaps by amending current bankruptcy law. FDIC head, Sheila Bair agrees. "Modify and issue 1099's for the difference," she suggests. Obama appointee, Professor Elizabeth Warren concurs with Issa that "there be a change in the bankruptcy code--it will force a wake up call," she says. One in 7 mortgages are soon to be in default, according a recent GAO Report. The bottomline is, carrying non-performing overvalued assets on the books--hoping for a market rebound--is denial, wishful thinking, and delaying any recovery.

Opponents say such steps will pose a moral hazard and give incentive for good mortgagees to default. They say default borrowers shouldn't be rewarded, no matter what. Yet is there really any intelligent alternative? We are living in 'Chi-merica' (Chindifying America). America's manufacturing supply chain for many industries is now in China. And many services are now being outsourced to India. Here, all the tax dollars spent on public roads and bridges over many years don't show up as off-sets on any grand balance sheet--instead, they've been expensed. (Which explains why conservatives over the years have been so eager to 'privatize' public assets.) Our global capitalist system has over-relied on asset appreciation--not real net earnings--to support inflated pension schemes and current levels of debt service. Hedge funds and unrestricted foreign ownership of U.S. assets have exposed vulnerabilities. Debt issuance rationales have typically relied on future earnings projections, which in a flattening earnings global scenario cannot and will not pan out. In China, all businesses must have a domestic partner--and only citizens can own real estate, which even so operates on a 100 year land lease. Mexico has a similar policy.

Yet, in the final analysis, America's paper is not worthless so long as willing ambitious American workers have steady jobs (to repay U.S. treasuries...IOUs). The real wages of U.S. workers, I submit, have been "Chinafied." In other words, a well-trained knowledge worker in China earns the equivalent of about $300 U.S. dollars (8 RMB/yuan = $1 U.S. dollar) per month. Why should a business analyst in China earn $300/mo., while a business analyst in the U.S. earns $5,500/mo.? (Indeed, it is an apples-to-oranges comparison given the many government subsidies in China that allow for the payment of lower real wages to workers, and also their near zero legacy/benefits costs.) In the U.S. many once privately held liabilities have been transferred to the public sector (i.e. Pension Guarantee...). For the most part, there's no real qualitative or productivity discrepancy, but rather "distortions" in the earning/price indices, which are now being "played out" and will continue until assets values (and overall debt) adjust to real net wage levels (resulting from globalization). Is there a global bottom, in this high volume, low margin world? Is there such a 'reality' as global equilibrium? The oceans have their tidal schedules...how about global capital flows? The distortions, largely, are a function of credit and excessive cost of money.

Two of 5 jobs until recently were connected to the real estate industry. This explains in part high recent unemployment figures. Many workers wonder: How does the stock market impact present and future employment? Many employees of public companies are just now realizing that as share prices of their companies drop, the debt-to-equity ratios of their companies goes up. In other words, leverage increases as share prices drop. Companies tend to borrow in relation to their net worth, not unlike home borrowers that refinance. Equity [and value] tend to be market-driven. (Home prices--like shares--are a function of demand, which equals cost/ availability of money and credit, job security--which is a global phenomenon nowadays--and comparative factors, i.e. supply of qualified buyers, inventories, etc.). Hence, diminishing share prices increases the likelihood of lay-offs. Indeed, as the equity side of companies drifts downward, proportionally more dollars are required to service existing debt. Which is another reason why consumers lack confidence to go out and spend. They're concerned about pink slips in January of next year. Globalization and outsourcing have indeed brought downward pressure on wages of U.S. workers. And the current account deficit (another all-time record high) affirms the fact that America as a service economy must re-examine its ability to generate real wealth. Many services have been reduced to commodity status. How about design and innovation?

If a large chunk of America's treasuries--held by China--were to end up near worthless paper (never mind the small amount of remaining gold in Fort Knox), China is in deep trouble. In fact, the entire global fiat money system is based on faith. Given China's diminishing surplus it's able to buy less U.S. paper. The fundamental question, given our excessive debt, is: what, really, is 'money' nowadays...in our era of fiat money? (The Economics 101 definition of M1, M2, M3, M4 no longer seem to be entirely accurate.) Is money a function of 'time,' i.e. $300=x/hrs. of labor? Think about it, after a $700+ billion bail-out (with more on the way) what is 'money'? What is 'securitized debt,' really? (It's an entirely different question than...what is the nature of money/securitized debt...? The CBO estimates that interest on the national debt will soon reach $750 billion per year by 2019. We're now in what amounts to a "liquidity trap," without sufficient real earnings, hence demand. The corollary of our debt debacle is...the very credit system itself. Are there viable alternatives to a credit-based system (and our global credit issuing institutions)? For years many analysts have pointed to "interest" as the root of all imbalance...the interest charged by the Fed to the Treasury in exchange for issuing currency. Is this a rational point? And, finally, to account for the asset base of public sector: how much, say, is a federal highway worth...on some balance sheet, when it's not revenue producing? (We haven't really valued these public assets as offsets.)

One thing's for sure: the "Laffer Curve" of supply side economics--once hailed as "voodoo economics"--has proven itself to be fundamentally flawed. It postulated that markets self-equilibrate. But they don't. And there's an additional, serious question: are neoclassic economic models up to addressing our current woes? A market is simply a clearing: it reconciles supply with demand. It does this based on various rule sets, as perameters. The deregulation that began in the Reagan-era gave rise to laissez-faire and Enterprise Zones, and they really haven't worked. Why? Because they're "top-down," disconnected big business approaches. People dream of becoming rich, but they must eat and feed their families first. Altitude has a way of blinding the elite, just as too much wealth can dull one's sense of urgency needed for entrepreneurship. These approaches generally don't properly seed things, and instead rely on various "magical" mis-conceptions of entrepreneurship, as though wealth is created from ideas alone. Recall monetarism and the Chicago School in Argentina? It didn't work there because it suggested that incentives alone motivate, which is not entirely correct. Wealth and capital formation have tended to stay at the top with these approaches, benefitting large and mid-cap enterprises. (Perhaps micro credit will become part of the solution, even in wealthier states where there are huge wealth disparities.)

Should today's policy solution be more in line with addressing Keynes (aka "Liquidity Trap") or Fisher (aka "debt deflation" or now stag-deflation)? Goal: to restore purchasing power (aggregate demand)--to create both jobs and community reinvestment pools to create local "bottom-up" capital formations--by reducing dollars now going toward debt service is one method to be considered. The community credit union model--not just a redevelopment agency--would be another innovative approach. Extreme conservatives will view this as "socialism," but in fact, markets like people are imperfect and prone to disequilibria and require periodic major recalibrations. America should likely have implemented an industrial policy years ago, like China, Japan and Europe did. Such strategies have not exempted them from business cycles, but many of their industries now require less retooling than ours do. (Let's not forget Vice President Cheney's infamous secret "Energy Policy Meeting" with Ken Lay and others back in 2002. Some of such policy--or lack thereof--is responsible for Detroit's woes today.) And also, America's current account deficit is proof that outsourcing, NAFTA, and WTO cause system-wide problems when "fair" trade is not in fact "fair"--indeed, America needs reciprocity in terms of honoring and abiding by "fair" trade agreements. Hyman Minsky and Irving Fisher come to mind, in their analyses.

Extreme conservatives, like former U.S. Senator Phil Gramm, have long thought that private managements of publicly traded companies "knew better." Now taxpayers are faced with serious consequences of these "private" mis-managements, accountable only to their shareholders. Serious consequences such as a looming inflationary depression. "Too big to fail," has too often meant "unable to coordinate an entire industry for radical restructuring." By the way, where is Big Oil in terms of the auto industry? Silent, to be sure. At the 2008 World Economic Forum in Davos, Switzerland, George Soros called for a "Global Sheriff" (aka a Currency Board) to monitor various inefficiencies in financial markets. He was laughed at for suggesting such--never mind the IMF's bleak performance record in recent years. As it turns out, however, he was prescient, and correct in his analyses starting as long ago as 12 years. In reference to re-examining assumptions, he says, "I contend that financial markets are always reflexive and on occasion they can veer quite far away from the so-called equilibrium. In other words, financial markets are prone to producing bubbles."

In his book "Financial Darwinism," Leo Tilman suggests we need "greater risk transparencies." Will any of us be surprised if the State of California is the next "shoe to drop"? A pre-packaged repudiation /bankruptcy-like scheme [managed by the Feds] may be the only way to mitigate its huge CalPers and Ballot Initiative legacy costs. That, or a referendum to renegotiate with more realistic actuarials in mind. Some huge major bankruptcies loom...due to unfunded pension liabilities and excessively high debt service requirements. And tough choices will be made...between funding for schools and other present services, versus excessive public pensions.
As Hyman Minsky noted, not all debt is equal. Hence, it may make sense, as the treasury issues new debt, to refinance and replace some of the older legacy debt. Debt, unlike dividends, is tax deductible. Still, a major debt-to-equity conversion is needed (which China must help with) if any stimulus package is to work. Once again, we need to restructure debt, seriously, even if it means discharging and repudiating a great deal of it. Debt holders will need to be willing to accept equity in replacement of their debt, no matter how painful. This, in order to avoid total default.

We rely on debt financing for everything, and FMV usually determines ratios. Example; 80/20 mortgage financing, but 80/20...of what? Perhaps FMV-based ratios are not prudential enough.
Perhaps "Cost-plus" methods should replace FMV-based ratios?

(We've proven that as a civilian socius, we are unable to run ourselves. Perhaps the military will be needed to run things. Or else, perhaps we'll descend into a Balkanization rules by gangs, not unlike a prison hierarchy.)

Economic Stimulus

During the Clinton years much was said about "bridging the digital divide." On Charlie Rose recently Leo Apotheker, CEO of German software giant SAP referred to enterprise-wide computer networks as a "nervous system." In listening I drifted back to the time just before the event of 9-11. What if government computers (at C.I.A., F.B.I., etc.) had all been able to "talk" and share/ analyze/ intelligate aggretized data? What if there had been an interchangeability and exchangeability? Aren't these largely the kind of "hi-tech" public works projects we need in today's economy? (Many have warned of the negative impacts of excess efficiencies with respect to excessive automation, largely a result of internet and related technologies. But America is desperate.) Government bureaus and agencies are no different than subsidiaries of large corporate holding companies: getting systems to interact and share intelligence creates greater efficiencies. During the Bush years, a huge emphasis on guns, versus butter. A lot went into defense, but not necessarily aimed at the high-tech/DARPA/technology transfer side.

We need hi-tech projects--i.e. more government contracts--as part of the stimulus. More computer literacy and training, perhaps a coupon for a laptop for every family, bundled with varying levels of training. (Is there non-combat training the military could do more of with our young people?) We need more intra-agency network communications that are seamless. And we need policies that hire U.S. workers here in the U.S. to do this hi-tech retrofitting and implementation. We need most of the heavy lifting to come from U.S. plants. We can't borrow Chinese inflows simply to turn around and pay U.S. workers to then go to Best Buy for Chinese-made goods.

The much touted Resolution Trust (Aggregator) Bank may ultimately take all the toxic debt now on bank balance sheets and it may issue 30-50 year bonds. Similar to the Resolution Trust Corp. for the American S&L's back during the Reagan era. Or, nationalization may happen. The key is solvency, and having banks that are NOT too big to succeed. We'll see.

In light of California's deficit, Gov. Schwartzenegger has announced an initiative to consolidate redundant state agencies, in hopes of increasing efficiencies, thereby reducing costs. (At the Federal level, Obama is doing the same.)

The systemic contradiction is that greater efficiencies promote more layoffs. Our ultra-efficient tech age has translated into Chinese factories that at half-capacity can out-produce world consumption rates three-fold. One wonders: is war (or recession) the only means to diminish excess systemic capacity (and hence raise scarcities)? Fact: we have too many people...too many mouths to feed--homo sapiens has been too successful.;-) See:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

The Hidden Cost of Globalism

Despite what the Cato Clowns claim, the U.S. Trade Deficit tells the real tale. Housing is a symptom. It's not just about capital inflows to an attractive, stable U.S. market. It's about real value creation, which is what design and manufacturing are all about, and which today is mostly carried out in Asia. When a $15/hr. job in the U.S. is transferred to a lower cost $3/day zone--and its product later reimported back to the higher cost zone--a net liability is incurred. (The entire supply chain is also off-shored when a job is transferred.) Consider the differential in terms of buying power distortion. Someone making the product in the $3/day zone should be buying it there. (The imbalance occurs when there's inter-zonal trading. It's not a bad thing, but it does create imbalance.) The higher cost zone is effectively borrowing, not buying, the so-called "savings," booked as profit by the private enterprise. The public sector absorbs/realizes this net liability, and accordingly profit is posted in the private entity that transferred the higher production cost to the lower cost zone. Our public liabilities show up proportionate to China's surplus (and indeed, it's more complicated because we're dealing with a global system that includes trade with other nations and includes petro dollar transfers, too). But the fact remains that--for accounting reasons--goods should remain in the zones they are produced in to avoid imbalance. Is this practically feasible? For the most part, no it is not. Hence, a global trade adjustment factor (i.e. an algorithm, deflator or multiplier) is needed to offset imbalances as they occur--at the point when trade exchange crosses zones. Not so much resembling an actual tariff, but a data adjustor in terms of global accounting metrics. Not unlike--in theory--the way a graduated lock system in say, the Panama Canal Zone, works. It's designed to prevent major flooding and offset the sea level differentials. (The increasing trend toward outsourcing cannot be blamed on unions only--it has affected all industries, even non-union service industries. Adding a surcharge to all undocumented or outsourced labor is a similar strategy...but it is basically a tax.)At the very least, outsourcing due to cheaper labor costs off shore has served to reduce real wages here at home--and I submit this is key to understanding the housing problem.

(Indeed George Soros has discussed this surcharge mechanism rather extensively, and has been talking about it for years, primarily as a trade-only currency adjustment metric. See the Balassa-Samuelson Theory, wherein purchase power parity=exchange rate.) The fact is, China's trade surplus is in large part a result of various accounting. And, our excessive trade deficit is also largely the result of accounting inaccuracies, in the way trade (and inflows, outflows, currency differentials, etc.) is measured. (Also, see the Big Mac Index for reference.)

Again, the policy key is to avoid a liquidity trap. The aim is not just to reflate, but to create knowledge worker jobs (and long-term sustainable wealth) from the bottom-up. Tax cuts are great, sufficient taxable income is first needed for folks to be paying taxes. Wiping away consumer credit card balances would only mask the underlying problem. Simply driving new consumer purchases--by rebate checks--sends dollars back over to China, and really does not promote capital formation here in the form of new investment. The big box stores are a huge contributor to our problem right now. Even large capital projects benefit primarily union trade labor, and service workers only secondarily. Wealth creation originates with innovations financed at a ground base level, often through localized incubators. Much of the "top down" financial engineering innovation from Wall Street--aimed at automation and cost reductions--didn't work, and resulted in more debt and exported jobs. We need a new approach. M&A alone does not create value. And alas...we need an entirely new mortgage paradigm...with variabilities on each side of the ratio...more shared risk and fluidity all the way around. Perhaps loan balances that float with resale prices?

According to Harvard Professor, Niall Ferguson, "The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments currently propose to do." Hence, we--the collective 'we'--shall see what is in store.

An Ode to George Bush

A boy once lived in the land
of giant dreams and giant dreamers.
He felt very small.

Big dreams would come and go,
appear then vanish. Most dreams
had to do with becoming
'King of the Rat Race.'

The big dreams were like
huge balloons...when launched
people claimed they would
fly forever, with no end in sight.

As they climbed higher and higher
they became smaller and smaller, until...
they disappeared.

--G. Hall

Walking With Grandpa

"Walking With Grandpa" by Uncle Greg -AS FEATURED in Chicken Soup For the PreTeen Soul, October 12, 2000

When a young boy playing baseball with his friends hits a rock through a neighbor's window, he and his friends all run away. Walking home, the boy visits Grandpa and they talk. Afterwards, the boy realizes what the right thing to do is. The story, "Walking With Grandpa," uses a Socratic method of Question and Answer to reach a conclusive moral decision. The finding it suggests is that Honor is its own reward. It reaches this conclusion by suggesting that the human ability to empathize, which we all share, can guide us in gaining a sense of how others feel and are impacted by the consequences of our actions.

Uncle Greg's Commentary:

The field of ethics today is complex, in our globalizing world of comparative cultures and moral relativism. For me, ethics (despite all of the academic gymnastics) falls into two broad camps: fear-based and exchange-based. (Note: I am not referring here strictly to rules, legitimate authority, etc...but more about situation-based decision-making.)For example: a kid finds a wallet on his way home from school. He sees that no one is around and that there is money in the wallet. Does he return the wallet? If so, why? What is his motivation? He doesn't have to return it, since no punishment will follow if he doesn't. So, he won't lose anything by keeping it. (Thus, in this case, fear-based ethics do not apply.) If he returns it, he may or may not get a reward, which if he did, would likely be equal to or less than the money in the wallet. (So, the exchange-based set does not make him any better off or motivate him, assuming a right decision could be purely quantified.) Is there perhaps (conceivably) a value in returning the wallet, which cannot be quantified, according to the typical fear/exchange scenarios? The story, "Walking With Grandpa," using a different situational example, suggests that doing the right thing, for its own sake, is intrinsically priceless, in terms of the self-esteem value it yields. Motivation outside of the customary loss/gain paradigm? Living up to what we aspire to and hope for is the greatest reward of all.

G.Hall (2000)

What Came First?

If, in the Present,
I attribute the cause of the Present
To an earlier Past...
Then is the Past
The result of the Present?

And if a parent is closer
To the beginning of time,
Why do we say that
The parent is older than the child?

G.Hall (2003)
p.234
FOURTH INTERNATIONAL ANTHOLOGY
ON PARADOXISM
FLORENTIN SMARANDACHE
(editor)

Sets Again

As a whole,
the set containing all future possibles
Is itself logically impossible,
Since it cannot be proven to follow
From a prior possibility.
The set cannot be proven
To follow from its contents,
And since the set is all-inclusive,
There are no apriori/aposteriori
Possibilities exclusive of it. However,
conditioned by temporal irreversibility,
The set containing all future possibles
Can be said to follow from prior possibility.
And since the set containing all sets is uncontained,
It is indeterminable.

Without boundaries
There is no in-between.

G.Hall (2003)
p.234
FOURTH INTERNATIONAL ANTHOLOGY
ON PARADOXISM
FLORENTIN SMARANDACHE
(editor)

Self-Attribution

‘I am I’
is a statement of non-coincidence,
for without verb and predicate
‘I’ cannot refer to myself.

The Eternal Self-Replication
Of the Origin is itself
the Origin (as Self-Differentiation
Of the Undifferentiated).

G.Hall (2003)
p.233
FOURTH INTERNATIONAL ANTHOLOGY
ON PARADOXISM
FLORENTIN SMARANDACHE
(editor)