Paul Kedrosky at Infectious Greed had a great quote that we should all get reprinted and put somewhere we can refer to time and time again. Here it is, but if you want the full impact you have to go to his site.
So the actions of people relying on history change history, and that is what people lose track of..
Tom Lindmark
Saturday, November 15, 2008
Auto Companies, Democrats And Tangled Webs
I'm on a Wall Street Journal kick today. Another good article on Friday by Kimberley Strassel dissecting the political game going on with the bailout provisions for the Big Three automakers. It's a wonderful example of how quickly campaign donations and promises can tie a party in knots.
Here are the players and the dilemma:
What do bleeding Detroit auto makers, Colombia and green groups have in common? Not a lot, unless you are Nancy Pelosi.
If there was a moment that highlights to what extent the Democratic Party has become captive to its special interests, this might be it. Mrs. Pelosi and Harry Reid have spent this week demanding that Washington stave off a car-maker collapse. What makes this a little weird is that Mrs. Pelosi and Mr. Reid are Washington. If they so desperately want a Detroit bailout they could always, you know, pass one.
Strassel is being a bit disingenuous as the Democrats still would potentially have to contend with either a Bush veto or a filibuster in the Senate. Both would be unlikely given political stakes, though. She goes on to recount how the Democrat's got cold feet as the financial crisis deepened and the car companies started looking shaky. Not wanting to get blamed for advancing money that might later get tied up in say a GM bankruptcy they hatched their plan.
The plan? Make it the Bush administration's responsibility to give Detroit cash -- namely by claiming after the event that the $700 billion rescue package for financial institutions was in fact a rescue package for auto makers. This was attempted with several hilarious "colloquys" -- pre-scripted dialogues between members that were quietly inserted into the Congressional Record after the vote, all aimed at rewriting the "intent" of the law. Say, this one, from Oct. 1:
Michigan Sen. Carl Levin: "As Treasury implements this new program, it is clear to me from reading the definition of financial institution that auto financing companies would be among the many financial institutions that would be eligible sellers to the government. Do you agree?"
Connecticut Sen. Chris Dodd: "Yes, for purposes of this act, I agree that financial institution may encompass auto financing companies."
Fun. Meanwhile, Democrats passed $25 billion in aid for Detroit, though under the careful guise of "green" funds to help it meet new fuel-efficiency standards.
It's not pleasant to see how these guys bobb and weave to get things done, is it? The article then notes that the whole apple cart was upset when Treasury Secretary Paulson dug in his heels and insisted that TARP was for financial institutions thus placing the party in what is beginning to look like a no win situation.
If that weren't enough, the administration has had the temerity to take Democrats at their legislative word, and demand the auto makers actually use that $25 billion in green funds for . . . green retooling. Which, needless to say, isn't going to help the Big Three CEOs pay their upcoming health-care bills.
And so Mrs. Pelosi has been landed with Detroit, again. The auto makers have staged a brilliant PR campaign, tying their misfortunes to today's financial mess -- never mind those decades of mismanagement. They've warned that the ripple effect of a crash could cost three million to four million jobs. Democrats have also undoubtedly been reminded by UAW President Ron Gettelfinger that those come from his union, which recently helped Mrs. Pelosi win an election.
The problem is how not to offend the other groups that just helped her win an election. The White House has intimated that its price for Democratic legislation in a lame-duck session would be the passage of the Colombia trade agreement. Yet Mrs. Pelosi has successfully sat on that deal for months at the demand of the broader union movement, which just spent hundreds of millions to increase Democratic majority.
Meanwhile, another trial balloon -- a proposal to loosen the rules governing the $25 billion in green money -- sent Mrs. Pelosi's environmental friends bonkers. They also just spent big helping Democrats, and insist the money go to building clean cars, not digging out Detroit.
The financial crisis might have well have tipped the scales in favor of the Democrats this election cycle. At the same time, the immediacy of the problems force decisions that in normal times would be worked out over months. The payback for Democrats is that their hand is getting forced while promises and money spent are very much on the minds of their supporters.
Tom Lindmark
Here are the players and the dilemma:
What do bleeding Detroit auto makers, Colombia and green groups have in common? Not a lot, unless you are Nancy Pelosi.
If there was a moment that highlights to what extent the Democratic Party has become captive to its special interests, this might be it. Mrs. Pelosi and Harry Reid have spent this week demanding that Washington stave off a car-maker collapse. What makes this a little weird is that Mrs. Pelosi and Mr. Reid are Washington. If they so desperately want a Detroit bailout they could always, you know, pass one.
Strassel is being a bit disingenuous as the Democrats still would potentially have to contend with either a Bush veto or a filibuster in the Senate. Both would be unlikely given political stakes, though. She goes on to recount how the Democrat's got cold feet as the financial crisis deepened and the car companies started looking shaky. Not wanting to get blamed for advancing money that might later get tied up in say a GM bankruptcy they hatched their plan.
The plan? Make it the Bush administration's responsibility to give Detroit cash -- namely by claiming after the event that the $700 billion rescue package for financial institutions was in fact a rescue package for auto makers. This was attempted with several hilarious "colloquys" -- pre-scripted dialogues between members that were quietly inserted into the Congressional Record after the vote, all aimed at rewriting the "intent" of the law. Say, this one, from Oct. 1:
Michigan Sen. Carl Levin: "As Treasury implements this new program, it is clear to me from reading the definition of financial institution that auto financing companies would be among the many financial institutions that would be eligible sellers to the government. Do you agree?"
Connecticut Sen. Chris Dodd: "Yes, for purposes of this act, I agree that financial institution may encompass auto financing companies."
Fun. Meanwhile, Democrats passed $25 billion in aid for Detroit, though under the careful guise of "green" funds to help it meet new fuel-efficiency standards.
It's not pleasant to see how these guys bobb and weave to get things done, is it? The article then notes that the whole apple cart was upset when Treasury Secretary Paulson dug in his heels and insisted that TARP was for financial institutions thus placing the party in what is beginning to look like a no win situation.
If that weren't enough, the administration has had the temerity to take Democrats at their legislative word, and demand the auto makers actually use that $25 billion in green funds for . . . green retooling. Which, needless to say, isn't going to help the Big Three CEOs pay their upcoming health-care bills.
And so Mrs. Pelosi has been landed with Detroit, again. The auto makers have staged a brilliant PR campaign, tying their misfortunes to today's financial mess -- never mind those decades of mismanagement. They've warned that the ripple effect of a crash could cost three million to four million jobs. Democrats have also undoubtedly been reminded by UAW President Ron Gettelfinger that those come from his union, which recently helped Mrs. Pelosi win an election.
The problem is how not to offend the other groups that just helped her win an election. The White House has intimated that its price for Democratic legislation in a lame-duck session would be the passage of the Colombia trade agreement. Yet Mrs. Pelosi has successfully sat on that deal for months at the demand of the broader union movement, which just spent hundreds of millions to increase Democratic majority.
Meanwhile, another trial balloon -- a proposal to loosen the rules governing the $25 billion in green money -- sent Mrs. Pelosi's environmental friends bonkers. They also just spent big helping Democrats, and insist the money go to building clean cars, not digging out Detroit.
The financial crisis might have well have tipped the scales in favor of the Democrats this election cycle. At the same time, the immediacy of the problems force decisions that in normal times would be worked out over months. The payback for Democrats is that their hand is getting forced while promises and money spent are very much on the minds of their supporters.
Tom Lindmark
TARP Aid For The Cities-A Few Thoughts
Last night in a post I noted the plea by several cities including my hometown of Phoenix for a piece of the TARP action. I want to follow-up with a couple of thoughts but before I do, let me update the story.
The city of San Jose has jumped on the bandwagon and wants some too. They suggested the nice round number of $14 billion. They figure they contribute 2% to the nation's GDP and thus deserve 2% of the pie. It might be overreaching a bit since their entire annual budget is $3.3 billion. If you don't ask you never receive.
Anyway, San Jose and the rest list three critical needs that cause them to come hat in hand to the TARP till. In no particular order it is immediate cash requirements, infrastructure spending and unfunded pension liabilities. Let's take a quick look at all three.
To the extent that a local governmental entity is out of cash, facing bankruptcy or whatever dire straits they might have gotten themselves into, I think it should be pretty much up to the state in which they happen to be located to work things out. Most if not all states have the ability to borrow substantial sums of money and it's in their best interest not to have their cities conducting going out of business sales. There is usually a pretty complex arrangement among states and cities with regard to how they carve up the tax revenue kitty, so let them rearrange the relevant shares and take care of their own business.
I could go on forever about infrastructure investment. Let me just do two things. One direct you to a good article in the Wall Street Journal on Friday that reminds once again that government spending for stimulus including infrastructure investment is a zero sum game. Government spending cannot create wealth, only the private sector can, so money directed to the cities for infrastructure projects only succeeds in rewarding the beneficiaries while some other part of the economy pays the price. In essence, Phoenix gets work for its unemployed while Omaha pays the bill.
Second, the cities have a propensity to allocate their infrastructure dollars, particularly the mega-federal type dollars, to marginal projects. Phoenix is a great example. We are about to open what amounts to no more than a demonstration light rail system. The project will serve a minute portion of the city yet the cost even with massive federal support is inordinately expensive. If history is any guide, operating it will only drain the city's finances more. This project was rammed through at the height of the housing bubble when Phoenix was awash in tax receipts. As we now know, it might have been wise to put some of this aside rather than investing in infrastructure.
The talk of needing TARP money to fund unfunded pension liabilities is both surprising and expected. Surprising, since for many years, local and state governments have vehemently insisted that their pension plans were in great shape while refusing to divulge the details needed to objectively verify that claim. It's expected because a number of experts have been asserting for some time that this is the issue that could cause a complete meltdown of a local or state governmental entity. San Diego has already demonstrated just how ugly it can get when overly generous benefits run up against funding realities. This is one huge problem that TARP can't solve. You might well throw the entire $700 billion at it and not make a dent. Besides, there is a vehicle that already exists at the federal level to solve these problems. It's called the Pension Benefit Guaranty Corporation.
In the WSJ today, Mark Sanford, the governor of South Carolina has an essay titled "Don't Bail Out My State." Among other reasons, here is one he cites as a reason for his opposition to directing TARP or any other type of federal aid to state and local governments:
Do you now have to be a financial "bad boy" to win?
Community bankers tell me that they are now at a competitive disadvantage for being careful about who to lend to, because others that were less disciplined will get a federal bailout. This is also true for states. Those that have been fiscally responsible will pay for or lose out to the big spenders. California increased spending 95% over the past 10 years (federal spending went up 71% over the same period). To bail out California now seems unfair to fiscally prudent states.
Was the economist Herb Stein wrong when he said that if something cannot go on forever, it won't?
Medicaid grew 9.5% annually over the past 10 years. That's unsustainable. But if Congress opens the checkbook now, there will be no reform.
At the very least, if federal money is to be thrown to the states and cities then at least let it come with strings attached. It should not be free and should be advanced in the form of a loan with a decent return to the federal government. Done in that manner, the borrowers will have to budget their expenditures in such a manner as to provide for repayment.
The city of San Jose has jumped on the bandwagon and wants some too. They suggested the nice round number of $14 billion. They figure they contribute 2% to the nation's GDP and thus deserve 2% of the pie. It might be overreaching a bit since their entire annual budget is $3.3 billion. If you don't ask you never receive.
Anyway, San Jose and the rest list three critical needs that cause them to come hat in hand to the TARP till. In no particular order it is immediate cash requirements, infrastructure spending and unfunded pension liabilities. Let's take a quick look at all three.
To the extent that a local governmental entity is out of cash, facing bankruptcy or whatever dire straits they might have gotten themselves into, I think it should be pretty much up to the state in which they happen to be located to work things out. Most if not all states have the ability to borrow substantial sums of money and it's in their best interest not to have their cities conducting going out of business sales. There is usually a pretty complex arrangement among states and cities with regard to how they carve up the tax revenue kitty, so let them rearrange the relevant shares and take care of their own business.
I could go on forever about infrastructure investment. Let me just do two things. One direct you to a good article in the Wall Street Journal on Friday that reminds once again that government spending for stimulus including infrastructure investment is a zero sum game. Government spending cannot create wealth, only the private sector can, so money directed to the cities for infrastructure projects only succeeds in rewarding the beneficiaries while some other part of the economy pays the price. In essence, Phoenix gets work for its unemployed while Omaha pays the bill.
Second, the cities have a propensity to allocate their infrastructure dollars, particularly the mega-federal type dollars, to marginal projects. Phoenix is a great example. We are about to open what amounts to no more than a demonstration light rail system. The project will serve a minute portion of the city yet the cost even with massive federal support is inordinately expensive. If history is any guide, operating it will only drain the city's finances more. This project was rammed through at the height of the housing bubble when Phoenix was awash in tax receipts. As we now know, it might have been wise to put some of this aside rather than investing in infrastructure.
The talk of needing TARP money to fund unfunded pension liabilities is both surprising and expected. Surprising, since for many years, local and state governments have vehemently insisted that their pension plans were in great shape while refusing to divulge the details needed to objectively verify that claim. It's expected because a number of experts have been asserting for some time that this is the issue that could cause a complete meltdown of a local or state governmental entity. San Diego has already demonstrated just how ugly it can get when overly generous benefits run up against funding realities. This is one huge problem that TARP can't solve. You might well throw the entire $700 billion at it and not make a dent. Besides, there is a vehicle that already exists at the federal level to solve these problems. It's called the Pension Benefit Guaranty Corporation.
In the WSJ today, Mark Sanford, the governor of South Carolina has an essay titled "Don't Bail Out My State." Among other reasons, here is one he cites as a reason for his opposition to directing TARP or any other type of federal aid to state and local governments:
Do you now have to be a financial "bad boy" to win?
Community bankers tell me that they are now at a competitive disadvantage for being careful about who to lend to, because others that were less disciplined will get a federal bailout. This is also true for states. Those that have been fiscally responsible will pay for or lose out to the big spenders. California increased spending 95% over the past 10 years (federal spending went up 71% over the same period). To bail out California now seems unfair to fiscally prudent states.
Was the economist Herb Stein wrong when he said that if something cannot go on forever, it won't?
Medicaid grew 9.5% annually over the past 10 years. That's unsustainable. But if Congress opens the checkbook now, there will be no reform.
At the very least, if federal money is to be thrown to the states and cities then at least let it come with strings attached. It should not be free and should be advanced in the form of a loan with a decent return to the federal government. Done in that manner, the borrowers will have to budget their expenditures in such a manner as to provide for repayment.
The G20 Outlind A Plan For Salvation
The G20 meeting to solve the world's economic crisis has concluded. No definitive word yet on whether or not we awaken on Monday to see that all is well again but what they accomplished can be found in this communique courtesy of the WSJ.
Now if you don't have time to read it let me tell you in a couple of sentences what they agreed upon. In general, they agreed that things have to be done and they have to talk to each other about the things that need to be done and they want their finance ministers to study the things that need to be done and get back to everyone later. They also announce that they had reached agreement on five key objectives during the conference. I found the first one to be the most profound. They reached a common understanding of the root causes of the global crisis. They chose, however, not to share this with any of us, so we are all left still wondering what went wrong.
They actually did agree, as much as you can at these sorts of things, on a few things that actually have some substance. They were:
Reject protectionism, which exacerbates rather than mitigates financial and economic challenges;
Strive to reach an agreement this year on modalities that leads to an ambitious outcome to the Doha Round of World Trade Organization negotiations;
Refrain from imposing any new trade or investment barriers for the next 12 months;
and
Reaffirm development assistance commitments and urge both developed and emerging economies to undertake commitments consistent with their capacities and roles in the global economy.
Sounds good but we'll see. If anything those goals either give Obama fits or provide him with cover to begin reneging on his wilder campaign promises. It certainly won't, however, please his friends in Big Labor or on the Left side of the party.
Tom Lindmark
Now if you don't have time to read it let me tell you in a couple of sentences what they agreed upon. In general, they agreed that things have to be done and they have to talk to each other about the things that need to be done and they want their finance ministers to study the things that need to be done and get back to everyone later. They also announce that they had reached agreement on five key objectives during the conference. I found the first one to be the most profound. They reached a common understanding of the root causes of the global crisis. They chose, however, not to share this with any of us, so we are all left still wondering what went wrong.
They actually did agree, as much as you can at these sorts of things, on a few things that actually have some substance. They were:
Reject protectionism, which exacerbates rather than mitigates financial and economic challenges;
Strive to reach an agreement this year on modalities that leads to an ambitious outcome to the Doha Round of World Trade Organization negotiations;
Refrain from imposing any new trade or investment barriers for the next 12 months;
and
Reaffirm development assistance commitments and urge both developed and emerging economies to undertake commitments consistent with their capacities and roles in the global economy.
Sounds good but we'll see. If anything those goals either give Obama fits or provide him with cover to begin reneging on his wilder campaign promises. It certainly won't, however, please his friends in Big Labor or on the Left side of the party.
Tom Lindmark
Friday, November 14, 2008
More TARP Beggars
A couple new supplicants turned up today at the TARP window.
Hartford Financial Services announced it is buying a thrift holding company, Federal Trust Corp, of Florida for $10 million in order to turn itself into a bank. As such it will then be eligible for a capital injection from the TARP slush fund. If you follow this, you can see that Hartford is going to part with $10 million and then have the government inject something on the order of $10 billion plus into the new entity. So all you have to do to become systemically important is evidently to buy a bank, no matter how puny, and then you can't be allowed to fail. Do you see the possibilities here for me and you?
If that leaves you breathless consider this. The mayors of Philadelphia, Atlanta and Phoenix sent a letter to the Treasury ask that a $50 billion portion of the TARP authorization be set aside to help cities. They suggest that the funds be used to cover infrastructure projects, fund short-term cash needs and help cover unfunded pension liabilities.
I happen to live in one of those cities, Phoenix to be specific, and I can assure you that the situation is dire. Sales tax receipts are cliff diving and an unimaginable $100 million budget shortfall that was projected in the middle of the summer has turned into a projected $250 million shortfall. I'd bet my last penny that's too small. The cuts that are going to have to be made and the sacrifices that the citizens will be called upon to bear are going to be draconian.
I will expand on this theme over the weekend. Cities, counties and states are going to slam into a wall that will devastate them. For the moment let me just observe that we are starting to get into an area that is fraught with two major problems. One, the Treasury of the United States might not have the wherewithal to bail out local governments without serious long term harm to the national economy. Two, the political friction that this will engender could be monumental as those areas of the country that have been fiscally responsible are asked to come to the aid of the spendthrifts. The restrictions that are likely to be attached to any bailout funds will likely be politically unpalatable.
Tom Lindmark
Hartford Financial Services announced it is buying a thrift holding company, Federal Trust Corp, of Florida for $10 million in order to turn itself into a bank. As such it will then be eligible for a capital injection from the TARP slush fund. If you follow this, you can see that Hartford is going to part with $10 million and then have the government inject something on the order of $10 billion plus into the new entity. So all you have to do to become systemically important is evidently to buy a bank, no matter how puny, and then you can't be allowed to fail. Do you see the possibilities here for me and you?
If that leaves you breathless consider this. The mayors of Philadelphia, Atlanta and Phoenix sent a letter to the Treasury ask that a $50 billion portion of the TARP authorization be set aside to help cities. They suggest that the funds be used to cover infrastructure projects, fund short-term cash needs and help cover unfunded pension liabilities.
I happen to live in one of those cities, Phoenix to be specific, and I can assure you that the situation is dire. Sales tax receipts are cliff diving and an unimaginable $100 million budget shortfall that was projected in the middle of the summer has turned into a projected $250 million shortfall. I'd bet my last penny that's too small. The cuts that are going to have to be made and the sacrifices that the citizens will be called upon to bear are going to be draconian.
I will expand on this theme over the weekend. Cities, counties and states are going to slam into a wall that will devastate them. For the moment let me just observe that we are starting to get into an area that is fraught with two major problems. One, the Treasury of the United States might not have the wherewithal to bail out local governments without serious long term harm to the national economy. Two, the political friction that this will engender could be monumental as those areas of the country that have been fiscally responsible are asked to come to the aid of the spendthrifts. The restrictions that are likely to be attached to any bailout funds will likely be politically unpalatable.
Tom Lindmark
Freddie Loses Big Bucks, FDIC Has A New Plan
A couple things on the housing front, neither surprising.
As reported by Reuters, Freddie Mac reported a loss of $25.3 billion today. This tidy sum puts Freddie in a negative equity situation thus necessitating a capital infusion from the Treasury. The company's regulator has already submitted an invoice to Treasury for $13.8 billion to get the company back to a positive number.
All of this begs the question as to why we are supporting two of these giant cash sucking machines. Why don't we get rid of one of them and reduce some overhead? They're mirror images of one and other so it's not like theirs some special expertise that one needs that the other doesn't have. Just a thought.
On a more amusing (sort of) note, Sheila Bair, Chairwoman of the FDIC, proposed her own mortgage modification scheme. Ms. Bair made no secret of her disdain for the plan rolled out earlier this week by Fannie and Freddie. Her plan would be modeled after the program she put in place at IndyMac. Among other things it would pay servicers $1000 for modification expenses and have the government share in 50% of any redefault losses. The IndyMac plan also calls for principal reductions which was not a part of the F&F plan earlier this week.
Ms. Bair has being beating the drum on modifications for at least nine months now. It's kind of hard to figure out what the motivation might be, though a cynical person might suggest she's angling for a bigger role in the Obama administration. So far her success with IndyMac's portfolio has been modest at best. Her report on results delivered a couple weeks ago indicated that only 3500 borrowers out of a pool of 60,000 who are eligible to participate in the FDIC plan have even bothered to respond to overtures.
I'll repeat a theme-probably not for the last time-that we have a bunch of people running around Washington absolutely no clue as to what to do save propose one program after another with no regard whatsoever for the ability of the country to pay for it.
Tom Lindmark
As reported by Reuters, Freddie Mac reported a loss of $25.3 billion today. This tidy sum puts Freddie in a negative equity situation thus necessitating a capital infusion from the Treasury. The company's regulator has already submitted an invoice to Treasury for $13.8 billion to get the company back to a positive number.
All of this begs the question as to why we are supporting two of these giant cash sucking machines. Why don't we get rid of one of them and reduce some overhead? They're mirror images of one and other so it's not like theirs some special expertise that one needs that the other doesn't have. Just a thought.
On a more amusing (sort of) note, Sheila Bair, Chairwoman of the FDIC, proposed her own mortgage modification scheme. Ms. Bair made no secret of her disdain for the plan rolled out earlier this week by Fannie and Freddie. Her plan would be modeled after the program she put in place at IndyMac. Among other things it would pay servicers $1000 for modification expenses and have the government share in 50% of any redefault losses. The IndyMac plan also calls for principal reductions which was not a part of the F&F plan earlier this week.
Ms. Bair has being beating the drum on modifications for at least nine months now. It's kind of hard to figure out what the motivation might be, though a cynical person might suggest she's angling for a bigger role in the Obama administration. So far her success with IndyMac's portfolio has been modest at best. Her report on results delivered a couple weeks ago indicated that only 3500 borrowers out of a pool of 60,000 who are eligible to participate in the FDIC plan have even bothered to respond to overtures.
I'll repeat a theme-probably not for the last time-that we have a bunch of people running around Washington absolutely no clue as to what to do save propose one program after another with no regard whatsoever for the ability of the country to pay for it.
Tom Lindmark
Thursday, November 13, 2008
Logic In Wonderland (AKA Washington)
A faint wisp of sanity wafted through our nation's capital today. The Office of the Comptroller of the Currency told the credit card companies and banks today that their proposal to defer their losses on credit cards was a non-starter.
As background, various big purveyors of credit card debt proposed that they write-off up to 40% of their credit card receivables and that the lucky recipients of their largess be excused, at least temporarily, of the need to pay taxes on this gift. In exchange for this gesture, the various creditors would not be required to recognize their losses until the remaining balances on the credit cards were paid off, assuming, of course, that ever occurred. Left unsaid was the rather obvious fact that the magic forty percent number is just about what they are going to have to declare uncorrectable regardless of whether or not their plan was approved.
The OCC saw through this subterfuge and in a letter today basically said, no way. Here is their logic:
"The OCC does not consider any plan that defers the timely recognition of loss as prudent, and any such proposal cannot be viewed favorably by us," wrote Timothy W. Long, the OCC's senior deputy comptroller for bank supervision policy. "Our long-standing policy is that banks are not allowed to attempt long-term recoveries while assets deemed uncollectible have not been accounted for as charge-offs and reported as losses. To do so compromises the integrity and transparency of financial statement reporting and public confidence in the banking system."
I rather suspect that the OCC will be brought to heel. Nevertheless, when we write the history of this period I hope their is at least a footnote that notes that at one point in time a regulator tried to cling to logic.
Tom Lindmark
As background, various big purveyors of credit card debt proposed that they write-off up to 40% of their credit card receivables and that the lucky recipients of their largess be excused, at least temporarily, of the need to pay taxes on this gift. In exchange for this gesture, the various creditors would not be required to recognize their losses until the remaining balances on the credit cards were paid off, assuming, of course, that ever occurred. Left unsaid was the rather obvious fact that the magic forty percent number is just about what they are going to have to declare uncorrectable regardless of whether or not their plan was approved.
The OCC saw through this subterfuge and in a letter today basically said, no way. Here is their logic:
"The OCC does not consider any plan that defers the timely recognition of loss as prudent, and any such proposal cannot be viewed favorably by us," wrote Timothy W. Long, the OCC's senior deputy comptroller for bank supervision policy. "Our long-standing policy is that banks are not allowed to attempt long-term recoveries while assets deemed uncollectible have not been accounted for as charge-offs and reported as losses. To do so compromises the integrity and transparency of financial statement reporting and public confidence in the banking system."
I rather suspect that the OCC will be brought to heel. Nevertheless, when we write the history of this period I hope their is at least a footnote that notes that at one point in time a regulator tried to cling to logic.
Tom Lindmark
Is Cit Dead Meat
Is Paulson's worst nightmare about to become real? Or to phrase it perhaps more appropriately,
will the next Secretary of the Treasury have to deal with the demise of Citibank?
The Wall Street Journal today paints a picture of a company engaged in meltdown in the executive suite. Board dissatisfaction with the Chairman, board dissatisfaction with the executive management team, finger pointing among management and all in all enough intrigue to keep any fan of Machiavelli happy for some time. Throw in a stock price at less than nine bucks a share and you have a pretty messy situation.
Felix Salmon wrote today that the stock is priced at a level which discounts a pretty high probability that it might go to zero. He also points out the dilemma facing the government if this behemoth does indeed start floundering. It's not just too big to fail, it's also too big to save. Layer on top of that the problems inherent in selling it off if it does crater and you have the makings of an Excedrin headache.
There is more than a fair bit or irony here. Citi and AIG are the poster children for financial institutions that own more than their share with what used to be called franchises. A mere two or three years ago, the players would have been lined up around the block to buy the assets that AIG has on the block and the assets that Citi may be putting up for sale. Today, you probably couldn't pay someone take them. No that's too harsh, they have great money making machines that someone should be bidding on but everyone's too broke to bid.
Even the oil sheiks are busy pouring their diminishing cash flow into their own banks to keep them afloat. Asia? Forget about it. They may have some cash here and there but after Morgan and a few other ill-timed investments discretion is the word of the day. Not even the vaunted vulture funds appear ready to pounce.
So what's at work here. For the time being I'll just suggest that nobody knows which way to go. Too much uncertainty about government actions (who wants to go into the insurance biz and have to go up against Uncle Sam?) and just pain old fear seem to be keeping everyone on the sidelines. I have a long post in mind for this but in the meantime if you have any ideas leave me a comment or email me.
Tom Lindmark
will the next Secretary of the Treasury have to deal with the demise of Citibank?
The Wall Street Journal today paints a picture of a company engaged in meltdown in the executive suite. Board dissatisfaction with the Chairman, board dissatisfaction with the executive management team, finger pointing among management and all in all enough intrigue to keep any fan of Machiavelli happy for some time. Throw in a stock price at less than nine bucks a share and you have a pretty messy situation.
Felix Salmon wrote today that the stock is priced at a level which discounts a pretty high probability that it might go to zero. He also points out the dilemma facing the government if this behemoth does indeed start floundering. It's not just too big to fail, it's also too big to save. Layer on top of that the problems inherent in selling it off if it does crater and you have the makings of an Excedrin headache.
There is more than a fair bit or irony here. Citi and AIG are the poster children for financial institutions that own more than their share with what used to be called franchises. A mere two or three years ago, the players would have been lined up around the block to buy the assets that AIG has on the block and the assets that Citi may be putting up for sale. Today, you probably couldn't pay someone take them. No that's too harsh, they have great money making machines that someone should be bidding on but everyone's too broke to bid.
Even the oil sheiks are busy pouring their diminishing cash flow into their own banks to keep them afloat. Asia? Forget about it. They may have some cash here and there but after Morgan and a few other ill-timed investments discretion is the word of the day. Not even the vaunted vulture funds appear ready to pounce.
So what's at work here. For the time being I'll just suggest that nobody knows which way to go. Too much uncertainty about government actions (who wants to go into the insurance biz and have to go up against Uncle Sam?) and just pain old fear seem to be keeping everyone on the sidelines. I have a long post in mind for this but in the meantime if you have any ideas leave me a comment or email me.
Tom Lindmark
Reliance On Consumer Generated Growth A Failed Policy?
Tim Duy had one of the better posts I've seen in some time at Seeking Alpha this morning.
I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.
Duy supports his thesis with well reasoned arguments pointing out that we are in for a difficult transition to an economy that will be less dependent on consumer spending. It's a short but powerful article.
Tom Lindmark
I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.
Duy supports his thesis with well reasoned arguments pointing out that we are in for a difficult transition to an economy that will be less dependent on consumer spending. It's a short but powerful article.
Tom Lindmark
Barney Frank Won't Help Liar Loan Borrowers
This one is from the dog lays down with cat genre. Barney Frank said today that he does have limits when it comes to loan modifications.
From Housing Wire:
Reducing the amount of foreclosures will play a key role in stabilizing the financial crisis, but the government should avoid giving a “free ride” to any borrower who could not have afforded a mortgage to begin with, said Barney Frank, D-Mass., chairman of the House Committee on Financial Services, at a hearing Wednesday. While the foreclosure situation might necessitate legislation, “there is, in my judgment, zero likelihood that taxpayer dollars will go to those who should never have had loans in the first place,” Frank said, according to a CNN article.
Now to be perfectly honest, I haven't seen the actual quote just the paraphrasing that I included above. Since it doesn't use the word never in the context of bailing out irresponsible owners we can't really hold him to it. Also note that he said there is "zero likelihood that taxpayer dollars..." should be used. Barney wouldn't be where he is if he hadn't long ago learned how to phrase things so that he can't be held to what he says. He didn't say he might not strong arm someone else into using their dollars to bail out the miscreants just that he didn't see taxpayer dollars being used. And since taxpayer dollars are flying all over the universe right now who can say if they were or were not used to bail out the evil doers.
I think we'll just add this to my list of BF's when I get a second. This guy hasn't had a scintilla of Fannie and Freddie muck stick to him even though he was in with them up to his neck. I doubt that we should put a lot of faith in this statement.
From Housing Wire:
Reducing the amount of foreclosures will play a key role in stabilizing the financial crisis, but the government should avoid giving a “free ride” to any borrower who could not have afforded a mortgage to begin with, said Barney Frank, D-Mass., chairman of the House Committee on Financial Services, at a hearing Wednesday. While the foreclosure situation might necessitate legislation, “there is, in my judgment, zero likelihood that taxpayer dollars will go to those who should never have had loans in the first place,” Frank said, according to a CNN article.
Now to be perfectly honest, I haven't seen the actual quote just the paraphrasing that I included above. Since it doesn't use the word never in the context of bailing out irresponsible owners we can't really hold him to it. Also note that he said there is "zero likelihood that taxpayer dollars..." should be used. Barney wouldn't be where he is if he hadn't long ago learned how to phrase things so that he can't be held to what he says. He didn't say he might not strong arm someone else into using their dollars to bail out the miscreants just that he didn't see taxpayer dollars being used. And since taxpayer dollars are flying all over the universe right now who can say if they were or were not used to bail out the evil doers.
I think we'll just add this to my list of BF's when I get a second. This guy hasn't had a scintilla of Fannie and Freddie muck stick to him even though he was in with them up to his neck. I doubt that we should put a lot of faith in this statement.
Wednesday, November 12, 2008
Is The Deflation Beast Nearby
An excellent article from Ambrose Evan-Pritchard in the Telegraph about the nightmare of deflation.
The curse of deflation is that it increases the burden of debts. Incomes fall: debts stay the same. This way lies suffocation. It was bad enough in the early 1930s when US farmers faced a Sisyphean Task trying to meet mortgage payments on their land as crop prices kept sliding. They suffered mass foreclosure and fled West, as recounted in John Steinbeck's Grapes of Wrath.
We forget, however, that overall borrowing was modest in the 1930s. The great credit bubble of the last 20 years has pushed debt levels in Britain, the US and other Western societies to unprecedented highs. UK household debt reached a record 165pc of personal income last year. This is almost 50pc higher than the burden at the onset of the recession in the early 1990s. Our sensitivity to debt deflation is therefore greater.
"It is going to be absolute murder in Britain if inflation turns negative," said Professor Peter Spencer from York University. "The big difference with past episodes is that we are now much more heavily indebted. Few people owned their own houses in 1930s. Debts were miniscule."
That's just an excerpt from the article. It's a short but poignant read. He ends by quoting monetary authorities who say that deflation is something that can be controlled. Their weapon of choice is to print money since there is no objective standard that regulates its creation. Let us hope that they are right.
Judging from the performance of economists and central bankers to date, I fear that their models and theories have somehow failed to account for the eccentricities of human beings.
Tom Lindmark
The curse of deflation is that it increases the burden of debts. Incomes fall: debts stay the same. This way lies suffocation. It was bad enough in the early 1930s when US farmers faced a Sisyphean Task trying to meet mortgage payments on their land as crop prices kept sliding. They suffered mass foreclosure and fled West, as recounted in John Steinbeck's Grapes of Wrath.
We forget, however, that overall borrowing was modest in the 1930s. The great credit bubble of the last 20 years has pushed debt levels in Britain, the US and other Western societies to unprecedented highs. UK household debt reached a record 165pc of personal income last year. This is almost 50pc higher than the burden at the onset of the recession in the early 1990s. Our sensitivity to debt deflation is therefore greater.
"It is going to be absolute murder in Britain if inflation turns negative," said Professor Peter Spencer from York University. "The big difference with past episodes is that we are now much more heavily indebted. Few people owned their own houses in 1930s. Debts were miniscule."
That's just an excerpt from the article. It's a short but poignant read. He ends by quoting monetary authorities who say that deflation is something that can be controlled. Their weapon of choice is to print money since there is no objective standard that regulates its creation. Let us hope that they are right.
Judging from the performance of economists and central bankers to date, I fear that their models and theories have somehow failed to account for the eccentricities of human beings.
Tom Lindmark
FDIC Now Backing General Electric Debt?
How far do we stretch this. GE announced that it will begin tapping a facility known as the Temporary Liquidity Guarantee Facility which is extended via the FDIC.
I hope there was a mistake I read in the WSJ article on this one. I wasn't even aware that the FDIC had this facility nor can I understand how they could have such a facility. If anyone out there can correct the article or help me out on this one I would appreciate it.
As far as I know, the FDIC is a GSE that insures bank deposits. It gets its funds from insurance premiums paid by the banks that are part of the program and enjoys a line of credit from the Treasury. To the best of my knowledge it isn't a part of the government and does not have the resources to support GE or anyone else of size.
That aside, why in the world is a triple A company like GE lining up at the government trough and why would anyone in the government tolerate it. This slope is not only slippery but we're sliding down it uncomfortably fast.
Tom Lindmark
I hope there was a mistake I read in the WSJ article on this one. I wasn't even aware that the FDIC had this facility nor can I understand how they could have such a facility. If anyone out there can correct the article or help me out on this one I would appreciate it.
As far as I know, the FDIC is a GSE that insures bank deposits. It gets its funds from insurance premiums paid by the banks that are part of the program and enjoys a line of credit from the Treasury. To the best of my knowledge it isn't a part of the government and does not have the resources to support GE or anyone else of size.
That aside, why in the world is a triple A company like GE lining up at the government trough and why would anyone in the government tolerate it. This slope is not only slippery but we're sliding down it uncomfortably fast.
Tom Lindmark
New Plans For TARP
Posting will be lite tonight as I am moving this blog to a new platform. Yes, for those of you who have followed me around, one more move. I need to get back to Wordpress and away from Blogger. Apologies in advance.
But, I can't go to work on that without first offering a thought or two on Treasury Secretary Paulson's announcement today. The Secretary said he was scrapping the plan to have TARP buy troubled assets of banks and instead would focus on getting more consumer credit flowing. He also mentioned that he plans to use some of the money to invest further in banks provided they match the investments with a like amount of equity. Here's a link to the WSJ which has an article as good as any on this whole sorry mess.
A couple of prominent bloggers, Felix Salmon and Yves Smith seem to sense some sort of conspiracy in all of this. I suspect that theory will take hold for at least 24 hours. Ms. Smith even took a last swipe at the Bush administration, opining that this was this abrupt about face was mendacious and of a piece with her perceived deception by Bush with regard to the Iraq War. I think the truth is much simpler and perhaps more dismaying. They haven't a clue as to what to do, so their actions become progressively more erratic.
A week or so ago I wrote a post that drew on an article by an economist at George Mason University (here's the link). He pointed out that the actions of this administration are eerily similar to what went on in Hoover and Roosevelt's administrations. Program after program was rolled out in a vain attempt to staunch the bleeding. Rather than restoring calm, the endless schemes only served to stop investment dead in its tracks as no one knew for sure what the rules would be on the morrow.
Human nature is to do something, anything in the face of danger even if that something may be counterproductive. It's a rare and valuable man that can step back and say let's take a deep breath and figure this out. Unfortunately, rare men seem to be in short supply in Washington right now. Bernanke knows the numbers and a lot more about the Depression but I'm not sure he knows a lot about the tendencies of human beings and how, if left unchecked, they can lead to the poorest of outcomes. Paulson is a doer by nature and so is not suited to thoughtful action. Bush is probably content to push this over to Obama and Congress is well Congress.
No there's no grand conspiracy here. Just a lot of tired men grasping at straws.
Tom Lindmark
But, I can't go to work on that without first offering a thought or two on Treasury Secretary Paulson's announcement today. The Secretary said he was scrapping the plan to have TARP buy troubled assets of banks and instead would focus on getting more consumer credit flowing. He also mentioned that he plans to use some of the money to invest further in banks provided they match the investments with a like amount of equity. Here's a link to the WSJ which has an article as good as any on this whole sorry mess.
A couple of prominent bloggers, Felix Salmon and Yves Smith seem to sense some sort of conspiracy in all of this. I suspect that theory will take hold for at least 24 hours. Ms. Smith even took a last swipe at the Bush administration, opining that this was this abrupt about face was mendacious and of a piece with her perceived deception by Bush with regard to the Iraq War. I think the truth is much simpler and perhaps more dismaying. They haven't a clue as to what to do, so their actions become progressively more erratic.
A week or so ago I wrote a post that drew on an article by an economist at George Mason University (here's the link). He pointed out that the actions of this administration are eerily similar to what went on in Hoover and Roosevelt's administrations. Program after program was rolled out in a vain attempt to staunch the bleeding. Rather than restoring calm, the endless schemes only served to stop investment dead in its tracks as no one knew for sure what the rules would be on the morrow.
Human nature is to do something, anything in the face of danger even if that something may be counterproductive. It's a rare and valuable man that can step back and say let's take a deep breath and figure this out. Unfortunately, rare men seem to be in short supply in Washington right now. Bernanke knows the numbers and a lot more about the Depression but I'm not sure he knows a lot about the tendencies of human beings and how, if left unchecked, they can lead to the poorest of outcomes. Paulson is a doer by nature and so is not suited to thoughtful action. Bush is probably content to push this over to Obama and Congress is well Congress.
No there's no grand conspiracy here. Just a lot of tired men grasping at straws.
Tom Lindmark
Tuesday, November 11, 2008
Bush Explains Tarp To Obama
I've never posted a comment I read on someone else's blog so if I'm violating any taboos, I apologize. This appeared on Naked Capitalism this evening. I found it cynical, disrespectful and totally amusing. I hope you enjoy it as well. (By the way, the post by Yves Smith on AIG is top notch as well.)
I wish I was a fly on the wall for the recent meeting between Bush and Obama:
Obama: "So that's all there is to it?"
Bush: "Yeah. It's crazy simple. You just tell the country that it's about to collapse, and scare the crap out of them. Get Congress to authorize you to give away $700 billion. Hell, none of those idiots had the slightest clue what was going on. I know you didn't
"Obama: "No, I just knew I had to be there to look like I was doing something.
"Bush: "Don't feel bad, Barack. None of your colleagues had a clue. Did you see the look on McCain's face in that meeting? He looked like an old man with amnesia who didn't even know his own name.
"Obama: "And then you just start spreading all this money out to your friends....
"Bush: "Yeah. Well, of course you have to make it a little complicated, but just keep the talking point on "We're saving the financial system.
"Obama: "Wow. This is great.
"Bush: "I really envy you. You're coming in at just the right time. The s*** hasn't even BEGUN to hit the fan yet. You'll be able to cause mass hysteria next year. You can get Ben to run the printing presses like mad, and funnel it to whoever you want. I assume you have people who you can trust to kick enough of it back to you.
"Obama: "I'm tight with ACORN, man.
"Bush: "There you go. Your base will love you for it. 'Community Redevelopment.'
"Obama: "Well, this has been an eye-opener. I actually had thought we were saving our financial system when we passed tarp.
"Bush: (laughing so hard that tears are running down his cheeks) "Man, we've even got the Wall Street Journal believing that!
"Obama: "I really underestimated you. So anyway, what's the best room for keeping a puppy that hasn't been housebroken?
"Bush: "I'd suggest the little one where Bill and Monica used to hide. We've sealed that one with duct tape and have never opened it."
I wish I was a fly on the wall for the recent meeting between Bush and Obama:
Obama: "So that's all there is to it?"
Bush: "Yeah. It's crazy simple. You just tell the country that it's about to collapse, and scare the crap out of them. Get Congress to authorize you to give away $700 billion. Hell, none of those idiots had the slightest clue what was going on. I know you didn't
"Obama: "No, I just knew I had to be there to look like I was doing something.
"Bush: "Don't feel bad, Barack. None of your colleagues had a clue. Did you see the look on McCain's face in that meeting? He looked like an old man with amnesia who didn't even know his own name.
"Obama: "And then you just start spreading all this money out to your friends....
"Bush: "Yeah. Well, of course you have to make it a little complicated, but just keep the talking point on "We're saving the financial system.
"Obama: "Wow. This is great.
"Bush: "I really envy you. You're coming in at just the right time. The s*** hasn't even BEGUN to hit the fan yet. You'll be able to cause mass hysteria next year. You can get Ben to run the printing presses like mad, and funnel it to whoever you want. I assume you have people who you can trust to kick enough of it back to you.
"Obama: "I'm tight with ACORN, man.
"Bush: "There you go. Your base will love you for it. 'Community Redevelopment.'
"Obama: "Well, this has been an eye-opener. I actually had thought we were saving our financial system when we passed tarp.
"Bush: (laughing so hard that tears are running down his cheeks) "Man, we've even got the Wall Street Journal believing that!
"Obama: "I really underestimated you. So anyway, what's the best room for keeping a puppy that hasn't been housebroken?
"Bush: "I'd suggest the little one where Bill and Monica used to hide. We've sealed that one with duct tape and have never opened it."
Loan Mods Get Kicked Into The Obama Administration
With trumpets blaring, the government announced Fannie and Freddie's new loan modification program. The message? Let Barack take care of it.
Here are the bones of the plan and skimpy they are:
Here are the bones of the plan and skimpy they are:
- Borrowers must be 90 days past due and owe more than 90% on their mortgage.
- The loan will be modified by reducing interest or increasing amortization and in some cases by deferring principal payments though the borrower is still responsible for paying all principal.
- The loans will be modified so that the borrower achieves a 38% debt-to-income ratio.
- The modifications will be done on a streamlined basis.
- The plan applies to only Fannie and Freddie mortgages
The plan does not address the issue of borrowers being substantially under water and its terms are unlikely to attract that much attention. The sad truth is that few even with an absurdly high 38% DTI are likely to qualify and someone who qualified by falsifying their income (lots of borrowers here) is not likely to give the government documents to prove their fraudulent acts. Note their is no moratorium on foreclosures either. What it will accomplish is to induce some at the margins to stop paying their mortgages so look for the roll rates to skyrocket.
What's really going on is political theater. The Congress and the Bush administration knew they had to do something but the Republicans aren't about to go on the hook for anything that is going to be controversial and I can't say that I blame them. The ball is being passed to the Democrats and the Obama administration. Senator Schumer gave a hint of the strategy likely to be employed in dealing with the issue.
Sen. Charles Schumer, D-N.Y., said the plan ignores the elephant in the room: Most of the troublesome mortgages are owned by large pools of investors, or have been securitized in a way that makes a modification impossible. "The only viable solution, and it is one we will take up under President-elect Obama, is to modify the bankruptcy code" he said.
To the extent they can, the Democrats are going to try and dump this on the judicial system. That will accomplish two things. One, if the courts are allowed to invalidate billions of dollars worth of contracts investors are going to demand credit card like rates of returns in exchange for purchasing mortgage securities in the future. Two, the court system will break under the weight of the sheer number of petitioners. The problem will literally take years to be sorted out.
The more the political class tries to "fix" this the more they are going to muck it up. Let the system work through it and devise another remedy for those who do lose their houses. Obliterating a functional mortgage market is a ridiculous price to pay.
Monday, November 10, 2008
Can We Find The Right Way To Bailout The Auto Companies
It's an exercise in futility to argue against a government bailout of one or more of the auto companies. Politically, nothing else can happen. Let's instead argue for the form of the salvation of Detroit.
Let's note from the outset that the political claims that the rationale for investing government money in any one or all of the Detroit auto makers is to save the U.S. auto industry is simply a blatant lie. The U.S. has a vibrant auto industry that doesn't stop at the borders of Michigan. Throughout much of the Southeastern part of the country auto plants are churning out quality cars and paying their workers wages comparable to those paid to the Big Three. Similarly benefits are as good or better as found in most other private industries in America.
Another reality that must be accepted is that the global auto industry suffers from over capacity. There are simply too many manufacturers for existing and probably future demand. Lost in the tornado surrounding the mortgage catastrophe is the fact that the auto industry was living in a bubble created by the same lax credit standards. Unit sales that approached 17 million vehicles a year were creatures of faulty lease assumptions and non-existent underwriting standards. Those artificial stimuli have disappeared, probably for some time, and the reality is that the natural market is probably closer to 12 million units per year.
If you are willing to accept these propositions then it is difficult in the extreme to argue that a government bailout makes any sense whatsoever. But we've already stipulated that something is inevitable so what is it to be?
First, any attempt to "save" the industry has to be one that extracts sacrifice from all of the stakeholders. As currently proposed, any bailout seems to leave the unions untouched. The legacy costs are a major part of the problem and as difficult as it might be they need to be erased. The unions have to accept the fact that the preservation of their workers' jobs is the most they can expect from the government. While this may be difficult, their option is disastrous and that reality has to be made impeccably clear.
Second, whatever remedy eventually ensues must succeed in downsizing the industry. The problem of too much capacity is not going to vanish. A government financed merger of perhaps two of the players with assistance given to the third to transition to a more logical product line might be one way. Other options will probably be advanced as well. So long as they address the problem of too many new cars it makes little difference what the temporary solution might be.
It's unreasonable to expect the political process to make these decisions. An alternative process needs to be found to work out the problem. Paul Ingrassia argues in the Wall Street Journal today in favor of a government receiver. Others suggest that Chapter 11 is the best method. The bugaboo has always been that these solutions are tantamount to liquidation as consumers won't purchase the product if they suspect the warranty won't be honored. There are ways around that via government guarantees, the government acting as the debtor-in-possession financier or similar ad hoc arrangements. In the end if this is to be anything more than an exercise in spending taxpayer money to preserve jobs that arguably should be lost, a arbiter with no axe to grind has to be found.
Regardless of the steps taken to address the problems of the Big Three, and rest assured that will be steps taken, this is best a decision left until after the new administration takes office. The stakes are high and whatever is done needs to be done by the Democrats not by a lame duck congress and administration. Any rescue efforts are going to have negative repercussions for other constituencies. Other car companies and their workers are going to be disadvantaged by government assistance. Those people deserve representation and a say in the debate. To slide any aid through at this time would deny them the fair hearing they deserve and relieve elected officials of the responsibility they need to shoulder for a decision of this magnitude.
I would personally prefer not to see this occurring. My preference is to let the market punish inefficient participants. I know that won't happen. So failing that resolution can we just try and do this one somewhat right. We shouldn't set ourselves on another AIG type road of serial bailouts.
Tom Lindmark
Let's note from the outset that the political claims that the rationale for investing government money in any one or all of the Detroit auto makers is to save the U.S. auto industry is simply a blatant lie. The U.S. has a vibrant auto industry that doesn't stop at the borders of Michigan. Throughout much of the Southeastern part of the country auto plants are churning out quality cars and paying their workers wages comparable to those paid to the Big Three. Similarly benefits are as good or better as found in most other private industries in America.
Another reality that must be accepted is that the global auto industry suffers from over capacity. There are simply too many manufacturers for existing and probably future demand. Lost in the tornado surrounding the mortgage catastrophe is the fact that the auto industry was living in a bubble created by the same lax credit standards. Unit sales that approached 17 million vehicles a year were creatures of faulty lease assumptions and non-existent underwriting standards. Those artificial stimuli have disappeared, probably for some time, and the reality is that the natural market is probably closer to 12 million units per year.
If you are willing to accept these propositions then it is difficult in the extreme to argue that a government bailout makes any sense whatsoever. But we've already stipulated that something is inevitable so what is it to be?
First, any attempt to "save" the industry has to be one that extracts sacrifice from all of the stakeholders. As currently proposed, any bailout seems to leave the unions untouched. The legacy costs are a major part of the problem and as difficult as it might be they need to be erased. The unions have to accept the fact that the preservation of their workers' jobs is the most they can expect from the government. While this may be difficult, their option is disastrous and that reality has to be made impeccably clear.
Second, whatever remedy eventually ensues must succeed in downsizing the industry. The problem of too much capacity is not going to vanish. A government financed merger of perhaps two of the players with assistance given to the third to transition to a more logical product line might be one way. Other options will probably be advanced as well. So long as they address the problem of too many new cars it makes little difference what the temporary solution might be.
It's unreasonable to expect the political process to make these decisions. An alternative process needs to be found to work out the problem. Paul Ingrassia argues in the Wall Street Journal today in favor of a government receiver. Others suggest that Chapter 11 is the best method. The bugaboo has always been that these solutions are tantamount to liquidation as consumers won't purchase the product if they suspect the warranty won't be honored. There are ways around that via government guarantees, the government acting as the debtor-in-possession financier or similar ad hoc arrangements. In the end if this is to be anything more than an exercise in spending taxpayer money to preserve jobs that arguably should be lost, a arbiter with no axe to grind has to be found.
Regardless of the steps taken to address the problems of the Big Three, and rest assured that will be steps taken, this is best a decision left until after the new administration takes office. The stakes are high and whatever is done needs to be done by the Democrats not by a lame duck congress and administration. Any rescue efforts are going to have negative repercussions for other constituencies. Other car companies and their workers are going to be disadvantaged by government assistance. Those people deserve representation and a say in the debate. To slide any aid through at this time would deny them the fair hearing they deserve and relieve elected officials of the responsibility they need to shoulder for a decision of this magnitude.
I would personally prefer not to see this occurring. My preference is to let the market punish inefficient participants. I know that won't happen. So failing that resolution can we just try and do this one somewhat right. We shouldn't set ourselves on another AIG type road of serial bailouts.
Tom Lindmark
A European View Of Obama's Economic Transition Team
While he might drive you up the wall at times, Willem Buiter never fails to entertain. His latest missive at FT.com takes on the Obama economic advisory team.
Buiter finds nothing to like about them, dismissing the whole lot because they are too old, there aren't enough serious economists, too many lawyers, they're trade protectionists and they all carry the baggage of past failures. Buiter is at his best when he goes after the lawyers.
Far too many lawyers! I count eight of them. America is held back and at times almost suffocated by an overgrown legal infrastructure and an overweaning legal profession, much in the same way that the UK was held back and almost suffocated by organised labour during the last years before Margaret Thatcher came to power.
Lest I be the target of a class action suit by the US legal profession, let me state here that (a) some of my best friends are (or were) lawyers and that (b) a limited quantum of lawyers is necessary to support the essential infrastructure of the rule of law. Unfortunately, in the US, the legal profession has grown to an astonishing size and has become a veritable succubus preying on the body politic and on the economic resource base of the country - the ultimate rent-seeking, wealth destroying profession. According to Legal Reform Now! there are 1,143,358 lawyers in the US, one for every 200 adults. The main problem is not that there are over a million socially unproductive lawyers in the US. The problem is that these lawyers are an essential component of a dysfunctional legal framework that has created the most litigious society in the world. The damage this dysfunctional legal framework causes must be measured not primarily by the direct cost of litigation, astounding though it is, but through the actions not undertaken and the creative and productive deeds not done because of fear of litigation. The first thing we do…
Except for a depressingly small minority among them, lawyers know nothing. They are incapable of logic. They don’t know the difference between necessary and sufficient conditions or between type I and type II errors. Indeed, any concept of probability is alien to them. They don’t understand the concepts of opportunity cost and trade off. They cannot distinguish between normative and positive statements. They are so focused on winning an argument through technicalities, that they no longer would recognise the truth if it bit them in the butt. If you are very lucky, a lawyer will give you nothing but the truth. You will never get the truth, let alone the whole truth. Things have degenerated to the point that lawyers and the legal profession not only routinely undermine justice, but even the law.
But the American political system is completely dominated by this largely socially unproductive and parasitic profession. Consider the membership of the House and the Senate (according to the Congressional Research Service 170 members of the House (out of 435) and 60 Senators (out of 100) are lawyers). Consider the professional training and background of past and future presidents (including Obama, 26 out of 44 presidents were lawyers) - and weep.
Buiter finds nothing to like about them, dismissing the whole lot because they are too old, there aren't enough serious economists, too many lawyers, they're trade protectionists and they all carry the baggage of past failures. Buiter is at his best when he goes after the lawyers.
Far too many lawyers! I count eight of them. America is held back and at times almost suffocated by an overgrown legal infrastructure and an overweaning legal profession, much in the same way that the UK was held back and almost suffocated by organised labour during the last years before Margaret Thatcher came to power.
Lest I be the target of a class action suit by the US legal profession, let me state here that (a) some of my best friends are (or were) lawyers and that (b) a limited quantum of lawyers is necessary to support the essential infrastructure of the rule of law. Unfortunately, in the US, the legal profession has grown to an astonishing size and has become a veritable succubus preying on the body politic and on the economic resource base of the country - the ultimate rent-seeking, wealth destroying profession. According to Legal Reform Now! there are 1,143,358 lawyers in the US, one for every 200 adults. The main problem is not that there are over a million socially unproductive lawyers in the US. The problem is that these lawyers are an essential component of a dysfunctional legal framework that has created the most litigious society in the world. The damage this dysfunctional legal framework causes must be measured not primarily by the direct cost of litigation, astounding though it is, but through the actions not undertaken and the creative and productive deeds not done because of fear of litigation. The first thing we do…
Except for a depressingly small minority among them, lawyers know nothing. They are incapable of logic. They don’t know the difference between necessary and sufficient conditions or between type I and type II errors. Indeed, any concept of probability is alien to them. They don’t understand the concepts of opportunity cost and trade off. They cannot distinguish between normative and positive statements. They are so focused on winning an argument through technicalities, that they no longer would recognise the truth if it bit them in the butt. If you are very lucky, a lawyer will give you nothing but the truth. You will never get the truth, let alone the whole truth. Things have degenerated to the point that lawyers and the legal profession not only routinely undermine justice, but even the law.
But the American political system is completely dominated by this largely socially unproductive and parasitic profession. Consider the membership of the House and the Senate (according to the Congressional Research Service 170 members of the House (out of 435) and 60 Senators (out of 100) are lawyers). Consider the professional training and background of past and future presidents (including Obama, 26 out of 44 presidents were lawyers) - and weep.
That is as fine a hatchet job as I've seen done in some time on the members of the bar.
Buiter does except Paul Volker from his almost universal scorn of the assemblage. Apparently, beyond a certain age, age does not matter anymore. Nevertheless it's an amusing piece and one which contains more than a few grains of truth.
Tom Lindmark
AIG: The Peoples' Insurance Company
As you might imagine, the AIG story raised the bile of a few bloggers. Yves Smith at Naked Capitalism did the best job analyzing and raging about the move and Felix Salmon at Portfolio.com also weighed in.
Contrasting their observations with the white wash that CNBC gave to this story via the appearance of AIG's chairman, Liddy, I once again thanked the stars for the phenomenon of blogging. Mr. Liddy actually did a bang up job of portraying the move as if it were a normal business transaction while Smith, Salmon and others painted it for what it is. A long term investment in the insurance business on the part of the government. I'm sure glad I'm not competing with Uncle Sam.
The potential for political misuse is enormous.
Tom Lindmark
Contrasting their observations with the white wash that CNBC gave to this story via the appearance of AIG's chairman, Liddy, I once again thanked the stars for the phenomenon of blogging. Mr. Liddy actually did a bang up job of portraying the move as if it were a normal business transaction while Smith, Salmon and others painted it for what it is. A long term investment in the insurance business on the part of the government. I'm sure glad I'm not competing with Uncle Sam.
The potential for political misuse is enormous.
Tom Lindmark
An Ugly News Roundup
Here's a quick roundup of some interesting bits of news.
The WSJ is reporting that the Fed has approved on an expedited basis a request by American Express to become a bank. The move of course is being taken to allow American Express access to the various Fed facilities. AmEx has been bleeding badly due to credit card losses and has warned that they will get worse. So now they just stroll up to the Fed window and trade the bad paper for a loan. As a sports broadcaster in Phoenix used to say when the Arizona Diamondbacks would botch a play, "Boy oh Boy."
Housing Wire reports that foreclosures and pre-foreclosure actions were down 7% in October from September. The number of REO properties nationwide also fell by 22% to 84,286 houses. That's the lowest number since May.
Experts say that the decline is most likely caused by local and state legislation as well as by lender actions to defer the foreclosure process. Massachusetts, for instance, instituted a 90 day right to cure ordinance in May and saw foreclosures drop precipitously. In September when the 90 day period began to expire, foreclosures soared by 460%. We can all hope the numbers mean something but odds are they don't.
Landamerica Financial Group, one of the largest title insurance companies in the country, announced a $600 million for its third quarter. The company which is merging with Fidelity National Financial has effectively said it can't go it alone. Now if they can just figure out a way to rationalize a banking license for the combined entity all will be well.
Speaking of nationalized companies, Housing Wire also reports that Fannie lost $29 billion in the third quarter. I recommend that you click through to the article for all of the nasty details. It's actually worse than you might imagine. Just to give you a taste, Fannie's non-performing loans reached $63.6 billion. At the end of the second quarter the number was $46.1 billion. Only a 38% increase in NPLs in one quarter. Ouch is much too mild a word.
So there you have it. Any ideas who will be left standing at the end of this?
Tom Lindmark
The WSJ is reporting that the Fed has approved on an expedited basis a request by American Express to become a bank. The move of course is being taken to allow American Express access to the various Fed facilities. AmEx has been bleeding badly due to credit card losses and has warned that they will get worse. So now they just stroll up to the Fed window and trade the bad paper for a loan. As a sports broadcaster in Phoenix used to say when the Arizona Diamondbacks would botch a play, "Boy oh Boy."
Housing Wire reports that foreclosures and pre-foreclosure actions were down 7% in October from September. The number of REO properties nationwide also fell by 22% to 84,286 houses. That's the lowest number since May.
Experts say that the decline is most likely caused by local and state legislation as well as by lender actions to defer the foreclosure process. Massachusetts, for instance, instituted a 90 day right to cure ordinance in May and saw foreclosures drop precipitously. In September when the 90 day period began to expire, foreclosures soared by 460%. We can all hope the numbers mean something but odds are they don't.
Landamerica Financial Group, one of the largest title insurance companies in the country, announced a $600 million for its third quarter. The company which is merging with Fidelity National Financial has effectively said it can't go it alone. Now if they can just figure out a way to rationalize a banking license for the combined entity all will be well.
Speaking of nationalized companies, Housing Wire also reports that Fannie lost $29 billion in the third quarter. I recommend that you click through to the article for all of the nasty details. It's actually worse than you might imagine. Just to give you a taste, Fannie's non-performing loans reached $63.6 billion. At the end of the second quarter the number was $46.1 billion. Only a 38% increase in NPLs in one quarter. Ouch is much too mild a word.
So there you have it. Any ideas who will be left standing at the end of this?
Tom Lindmark
Sunday, November 9, 2008
A Few Late Night Links And Thoughts
Here are a couple links to two good articles at Portfolio.com.
First, Felix Salmon leads off with an attempt to parse the second government bailout of AIG. I'm still thinking it through and he may be ahead of me but it makes for some interesting ideas. Anyway, the more you think about this the stranger it seems.
The second proposes that GM just go to the bankruptcy courts and straighten things out there. I had always been in the camp that said BK was the kiss of death for a company that sold an asset like automobiles, arguing that the warranty issue would torpedo sales. The author has some pregnant points and I may be coming around to her point of view.
It makes as much sense as more government money. After all, we are seeing first hand with AIG where that road seems to lead.
Tom Lindmark
First, Felix Salmon leads off with an attempt to parse the second government bailout of AIG. I'm still thinking it through and he may be ahead of me but it makes for some interesting ideas. Anyway, the more you think about this the stranger it seems.
The second proposes that GM just go to the bankruptcy courts and straighten things out there. I had always been in the camp that said BK was the kiss of death for a company that sold an asset like automobiles, arguing that the warranty issue would torpedo sales. The author has some pregnant points and I may be coming around to her point of view.
It makes as much sense as more government money. After all, we are seeing first hand with AIG where that road seems to lead.
Tom Lindmark
The U.S. Gets Deeper Into AIG
And you thought nothing was going down this weekend. Guess again. The government just got a lot deeper into AIG.
From the WSJ:
As part of the plan, the U.S. government is expected to roll back the length and interest rate of its existing loan, buy $40 billion in preferred AIG shares through the U.S. Treasury's Troubled Asset Relief Program, and cancel the bulk of its credit default swap agreements via a massive purchase of their underlying real estate assets. There is also a plan to backstop AIG's securities lending portfolio. In all, the U.S. will end up with total exposure of some $150 billion in investments.
The plan is a tacit admission that as AIG's 79.9% owner, the government now has a vested interest in seeing it thrive, rather than demanding punitive terms for its assistance. Yet the new plan also gives the government an unprecedented, and uncomfortable role as an actor in financial markets. The new government role is sure to draw greater scrutiny from lawmakers as they prepare to revamp the regulatory system for the financial sector.
The Journal goes on to describe the new facility and the additional assistance that will take some of the more troubled assets off of AIG's balance sheet:
Under the plan being finalized on Sunday night, the government would replace its original $85 billion loan with a 2-year duration with a $60 billion loan with a five year duration. Interest on the loan would drop from 8.5% plus three-month Libor interest-rate benchmark to 3% plus Libor.
In addition, the government would tap the $700 billion Troubled Asset Recovery Program to inject $40 billion into AIG in return for preferred shares. Those shares would carry 10% annual interest payments. The government's equity interest in AIG would remain at 79.9% following the changes.
Under the revised deal, AIG would transfer the troubled holdings into two separate entities that would be capitalized by the government.
The first such vehicle would be capitalized with $30 billion from the government and $5 billion from AIG. That money would be used to acquire the underlying securities with a face value of $70 billion that AIG agreed to insure with the credit default swaps. These securities, known as "collateralized debt obligations" are thinly traded investments that include pools of loans. AIG would seek to acquire the securities from their counterparties on the credit default swap contracts for about 50 cents on the dollar.
A second vehicle would be set up to solve the liquidity problems in AIG's securities lending business. The business involves lending out securities to short sellers or others and investing the collateral for gains. The strategy for many has lately backfired as once-reliable credit investments have seized up.
AIG has scrambled to unload illiquid assets in order to give back the collateral it accepted. AIG's exposure to this market forced it to seek a $37.8 billion lending facility from the government to cover its commitments.
Under the new plan, the government would inject about $20 billion into the securities lending vehicle and AIG would put in $1 billion. The vehicle would then buy the illiquid securities the AIG unit holds, known as residential mortgage-backed securities, for about 50 cents on the dollar. AIG would use the proceeds to shut down the $37.8 billion lending facility which is has not yet fully tapped.
So now we get an inkling of where we may be headed. It would probably be naive to assume that this is the last time we see a rework of one of the semi-nationalizized financial institutions. This isn't going to be unique to the U.S. and Lord knows where it ends. Probably with state control of the world's financial system. Will it ever be private again?
Tom Lindmark
From the WSJ:
As part of the plan, the U.S. government is expected to roll back the length and interest rate of its existing loan, buy $40 billion in preferred AIG shares through the U.S. Treasury's Troubled Asset Relief Program, and cancel the bulk of its credit default swap agreements via a massive purchase of their underlying real estate assets. There is also a plan to backstop AIG's securities lending portfolio. In all, the U.S. will end up with total exposure of some $150 billion in investments.
The plan is a tacit admission that as AIG's 79.9% owner, the government now has a vested interest in seeing it thrive, rather than demanding punitive terms for its assistance. Yet the new plan also gives the government an unprecedented, and uncomfortable role as an actor in financial markets. The new government role is sure to draw greater scrutiny from lawmakers as they prepare to revamp the regulatory system for the financial sector.
The Journal goes on to describe the new facility and the additional assistance that will take some of the more troubled assets off of AIG's balance sheet:
Under the plan being finalized on Sunday night, the government would replace its original $85 billion loan with a 2-year duration with a $60 billion loan with a five year duration. Interest on the loan would drop from 8.5% plus three-month Libor interest-rate benchmark to 3% plus Libor.
In addition, the government would tap the $700 billion Troubled Asset Recovery Program to inject $40 billion into AIG in return for preferred shares. Those shares would carry 10% annual interest payments. The government's equity interest in AIG would remain at 79.9% following the changes.
Under the revised deal, AIG would transfer the troubled holdings into two separate entities that would be capitalized by the government.
The first such vehicle would be capitalized with $30 billion from the government and $5 billion from AIG. That money would be used to acquire the underlying securities with a face value of $70 billion that AIG agreed to insure with the credit default swaps. These securities, known as "collateralized debt obligations" are thinly traded investments that include pools of loans. AIG would seek to acquire the securities from their counterparties on the credit default swap contracts for about 50 cents on the dollar.
A second vehicle would be set up to solve the liquidity problems in AIG's securities lending business. The business involves lending out securities to short sellers or others and investing the collateral for gains. The strategy for many has lately backfired as once-reliable credit investments have seized up.
AIG has scrambled to unload illiquid assets in order to give back the collateral it accepted. AIG's exposure to this market forced it to seek a $37.8 billion lending facility from the government to cover its commitments.
Under the new plan, the government would inject about $20 billion into the securities lending vehicle and AIG would put in $1 billion. The vehicle would then buy the illiquid securities the AIG unit holds, known as residential mortgage-backed securities, for about 50 cents on the dollar. AIG would use the proceeds to shut down the $37.8 billion lending facility which is has not yet fully tapped.
So now we get an inkling of where we may be headed. It would probably be naive to assume that this is the last time we see a rework of one of the semi-nationalizized financial institutions. This isn't going to be unique to the U.S. and Lord knows where it ends. Probably with state control of the world's financial system. Will it ever be private again?
Tom Lindmark
Does This Mean They Won't Buy Our Bonds
China announced a $586 billion stimulus package to try and lift the country out of the doldrums. The number is about 25% of China's GDP.
Bloomberg has the story, but the cliff notes version is that the money is going to be spent on housing, infrastructure, grain purchases and subsidies for farmers. Purportedly the program is meant to spur domestic demand.
There goes another source of funding for our trillion dollar deficit.
Bloomberg has the story, but the cliff notes version is that the money is going to be spent on housing, infrastructure, grain purchases and subsidies for farmers. Purportedly the program is meant to spur domestic demand.
There goes another source of funding for our trillion dollar deficit.
Obama And The Creative Class
Joel Kotkin has an interesting take on the winners in the wake of Barack Obama's victory. His contention is that the election marks the ascendancy of the so-called "creative class. The economic impact that he projects from this thesis is interesting.
He argues that Obama enjoyed immense support both in terms of voter turnout and, probably more importantly, financial support from the post-industrial sector of the economy. At the same time, Kotkin contends that the traditional economic power bases have lost their standing and power to influence events as a result of the economic catastrophe.
Today the traditional business leadership, like their Republican allies, present a spectacle of utter disarray. The commercial banks have been effectively nationalized. Many traditional manufacturers, notably automakers, also yearn to suck on the federal teat. Reduced to supplicants, these companies have surrendered their standing as independent players. At the same time, the traditional energy companies, long the whipping boys of Congressional Democrats, will be fully occupied trying to survive the onslaught of anti-carbon regulations now all but inevitable.
Hard to argue with that contention. But it is his extrapolation of the affects of the increased power of the creative class to its impact on the economy that is of interest.
What will this ascendancy mean in economic terms? Since the creative class deals largely with images, ideas and transactions, it's not likely to focus much on reviving the tangible parts of the economy: manufacturing, logistics, traditional energy and agribusiness.
On the other hand, the creatives are unlikely to be protectionist since they represent companies whose growth markets, and often suppliers, are located overseas. Heavily counted among the world's richest people, they are also likely to support some Bushite policies--like low interest rates and financial bailouts--that prop up their stock prices and drive money to Wall Street.
The biggest difference between the creative class and the old business types isn't on cultural issues--few traditional CEOs embraced the religious right's agenda--but on environmental policy. Executives at places like Apple, as well as opportunistic investment firms, have become enthusiastic jihadis in the war against climate change. Conveniently, their companies don't tend to be huge energy consumers and, if they make products, do so in largely unregulated facilities in China or elsewhere in the developing world. And youthful financial firms looking for the next "bubble" could benefit hugely from mandates for more solar, wind and other alternative fuels.
All this could prove very bad news for groups that produce tangible products in the U.S. or that, like large agribusiness firms, are big consumers of carbon. Also threatened will be anyone who builds the suburban communities--notably single-family houses and malls--that most Americans still prefer but that Gore and his acolytes dismiss as too energy-intensive, not to mention in bad taste.
Theoretically, there is opportunity for the Republicans--if they can somehow jettison the more primitive parts of their social agenda and come up with their own bold, environmentally sound energy agenda. The new hegemons could easily be painted as moralistic hypocrites who live the carbon-heavy luxury lifestyle of the super-rich while demanding ordinary Americans give up their cars, homes and even their jobs.
Kotkin is perhaps focusing too narrowly on the carbon issue. Granted it is going to be a profound argument in the coming years and the affects of decisions made are going to reshape the economy but I think that there are other factors which may lessen the power Kotkin sees flowing to the new group of power brokers.
The Democrats are deeply in debt to the unions. Their agenda differs markedly from that of the "creative class" and squaring that circle will be a challenge. Overriding this, however, is the issue that to my mind may well trump all others. Specifically the growing problem of income inequality.
I am a late comer to believing that this issue was anything more than Democratic sloganeering. A bit of reading and some research has convinced me that indeed it is an issue and one which might get much worse much more quickly than anyone imagines. The economic crisis and long term contraction of credit is going to pull one of the major props out from underneath the middle class. Heretofore, the availability of credit has served to mask the income gap and deliver to the middle class the goods that they have been led to believe they must have. Take credit and thus access to those things away and the starkness of the division becomes abundantly clear.
If the majority of the country finds itself on the outside looking in at a precious few who enjoy unfathomable wealth then that majority will become quite restive quite quickly. Obama and the Democrats will have their hands full if they don't move to address this issue.
Tom Lindmark
He argues that Obama enjoyed immense support both in terms of voter turnout and, probably more importantly, financial support from the post-industrial sector of the economy. At the same time, Kotkin contends that the traditional economic power bases have lost their standing and power to influence events as a result of the economic catastrophe.
Today the traditional business leadership, like their Republican allies, present a spectacle of utter disarray. The commercial banks have been effectively nationalized. Many traditional manufacturers, notably automakers, also yearn to suck on the federal teat. Reduced to supplicants, these companies have surrendered their standing as independent players. At the same time, the traditional energy companies, long the whipping boys of Congressional Democrats, will be fully occupied trying to survive the onslaught of anti-carbon regulations now all but inevitable.
Hard to argue with that contention. But it is his extrapolation of the affects of the increased power of the creative class to its impact on the economy that is of interest.
What will this ascendancy mean in economic terms? Since the creative class deals largely with images, ideas and transactions, it's not likely to focus much on reviving the tangible parts of the economy: manufacturing, logistics, traditional energy and agribusiness.
On the other hand, the creatives are unlikely to be protectionist since they represent companies whose growth markets, and often suppliers, are located overseas. Heavily counted among the world's richest people, they are also likely to support some Bushite policies--like low interest rates and financial bailouts--that prop up their stock prices and drive money to Wall Street.
The biggest difference between the creative class and the old business types isn't on cultural issues--few traditional CEOs embraced the religious right's agenda--but on environmental policy. Executives at places like Apple, as well as opportunistic investment firms, have become enthusiastic jihadis in the war against climate change. Conveniently, their companies don't tend to be huge energy consumers and, if they make products, do so in largely unregulated facilities in China or elsewhere in the developing world. And youthful financial firms looking for the next "bubble" could benefit hugely from mandates for more solar, wind and other alternative fuels.
All this could prove very bad news for groups that produce tangible products in the U.S. or that, like large agribusiness firms, are big consumers of carbon. Also threatened will be anyone who builds the suburban communities--notably single-family houses and malls--that most Americans still prefer but that Gore and his acolytes dismiss as too energy-intensive, not to mention in bad taste.
Theoretically, there is opportunity for the Republicans--if they can somehow jettison the more primitive parts of their social agenda and come up with their own bold, environmentally sound energy agenda. The new hegemons could easily be painted as moralistic hypocrites who live the carbon-heavy luxury lifestyle of the super-rich while demanding ordinary Americans give up their cars, homes and even their jobs.
Kotkin is perhaps focusing too narrowly on the carbon issue. Granted it is going to be a profound argument in the coming years and the affects of decisions made are going to reshape the economy but I think that there are other factors which may lessen the power Kotkin sees flowing to the new group of power brokers.
The Democrats are deeply in debt to the unions. Their agenda differs markedly from that of the "creative class" and squaring that circle will be a challenge. Overriding this, however, is the issue that to my mind may well trump all others. Specifically the growing problem of income inequality.
I am a late comer to believing that this issue was anything more than Democratic sloganeering. A bit of reading and some research has convinced me that indeed it is an issue and one which might get much worse much more quickly than anyone imagines. The economic crisis and long term contraction of credit is going to pull one of the major props out from underneath the middle class. Heretofore, the availability of credit has served to mask the income gap and deliver to the middle class the goods that they have been led to believe they must have. Take credit and thus access to those things away and the starkness of the division becomes abundantly clear.
If the majority of the country finds itself on the outside looking in at a precious few who enjoy unfathomable wealth then that majority will become quite restive quite quickly. Obama and the Democrats will have their hands full if they don't move to address this issue.
Tom Lindmark
Tone Deaf
This week's winner of the Tone Deaf award goes to the Maricopoa County Board of Supervisors. For those of you who are geographically challenged, Phoenix is located in Maricopa county.
Hours after learning that they were facing a revenue shortfall of $58 million this fiscal year and $99 million next year, the Board approved the expenditure of $2.3 million for gift cards to be distributed to the county's employees. The cards are given out to employees "...for giving exceptional consumer service, wrapping up a big project or offering good ideas..." In the past most of the 14,000 employees have received cards.
The gift cards are a piddling $25 a pop and looked at from that angle it doesn't seem like a big deal. Like everything in government though, the small becomes large due to the sheer size of the enterprise. Given the fact that most of the employees of the county have job security-a precious thing right now-it would seem that the county might have thought about foregoing this morale booster.
Appearances like size matter.
Hours after learning that they were facing a revenue shortfall of $58 million this fiscal year and $99 million next year, the Board approved the expenditure of $2.3 million for gift cards to be distributed to the county's employees. The cards are given out to employees "...for giving exceptional consumer service, wrapping up a big project or offering good ideas..." In the past most of the 14,000 employees have received cards.
The gift cards are a piddling $25 a pop and looked at from that angle it doesn't seem like a big deal. Like everything in government though, the small becomes large due to the sheer size of the enterprise. Given the fact that most of the employees of the county have job security-a precious thing right now-it would seem that the county might have thought about foregoing this morale booster.
Appearances like size matter.
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