The Obama Industrial Policy March 30, 2009
Posted by wonderingin in Business, Regulation, The Economy.add a comment
General Motors Chairman & CEO Rick Wagoner just became the newest poster boy for the Obama Administration’s new industrial policy – let’s call it whack-a-mole. Or as the Queen of Hearts proclaimed, “Off with their heads!”
The auto industry problem is very complex with many causes and few obvious solutions. Here are just a few of the challenges:
- Even before the recent sales downturn, there was a growing glut of car manufacturing capacity around the world. Every developing country sees manufacturing as its path to prosperity and auto makers are at the top of the list because of the potential for large numbers of high-paying factory jobs and the long supply chain needed to support the industry. Absent massive state-sponsored protectionism, the younger, leaner and more efficient companies will usually win.
- The UAW’s pattern bargaining technique whereby all of the Big 3 have been forced to accept the same labor terms is a legal monopoly. Like all monopolies, the UAW continuously seeks to maximize its own profits. Their goal is to preserve the largest number of jobs with the best possible pay and benefit packages for as long as possible. Even worse are the numerous restrictive work rules which limit management’s flexibility to re-allocate work among different factories and individual workers. Shareholder returns are not their concern as long as the car companies have a pulse.
- Auto company management, especially at GM, has been weak and feckless for many years regularly failing to make the hard decisions. But after a while there is good no alternative other than yielding to the UAW’s choke chain – a company wide strike could put the company out of business. But the management problems run deeper – poor product development choices, a lengthy and costly product development cycle, too many brands and models, insensitivity to labor concerns, and poor and ineffective relations with Washington policy makers among others.
- State franchise laws have protected local dealers to the detriment of the car companies. Few industries can long survive profitably with so little control over their distribution channels. The Big 3 have long had far too many dealers relative to their market share and smaller dealers are ill-equipped to compete with the better capitalized mega dealers. GM’s closure of the Oldsmobile brand cost the company over $1 billion in compensation payments to local dealers. That’s not a great incentive for rationalizing one’s brands.
- Congressional mandates on fuel economy, emissions, and safety issues have simply added to the burden. Politicians have the great luxury of not having to worry particularly about costs as long as someone else is paying for them. There is no free lunch, however; sooner or later someone has to pay. In a free market, that gives the advantage to the lowest cost producer.
In the end, nothing lasts forever: empires unravel, people die, and companies go out of business. And in most cases, the end comes by way of a long bout of chronic and debilitating illness rather than the acute pain of a sudden death. The auto industry is on life support with a terminal case of hardening of the arteries. And while most people would privately agree that the end of the industry as we know it today is inevitable, no one can quite bring themselves to pull the plug.
A sign of things to come? March 26, 2009
Posted by wonderingin in Financial Markets, The Economy, World affairs.add a comment
Kevin Chau, a currency strategist for IDEAglobal, when ask whether the U.S. is declining as a political and financial power:
“Eventually, but that will take time. You will see the emergence of China and the emergence of India eventually. Those are primarily export-driven countries. Once they start to develop a more-domestic economy they’re going to pull more weight. But that will be 10 to 20 years from now. It’s clear to see that the Chinese yuan will be the world’s reserve currency in the future. Many currency experts believe that the U.S. will not be No. 1 in the world in the future; it will share the No. 1 spot with China.”
Economic dominance drives military dominance drives political dominance. The U.K.’s 19th century empire gave way to the U.S. in the 20th century, and we will eventually give way to someone else, most likely the Chinese.
Nothing lasts forever.
Topping a tree stunts it’s growth March 24, 2009
Posted by wonderingin in Business, Politics, The Economy.add a comment
During his prime time press conference this evening, President Obama was asked whether he regretted his budget proposal to eliminate itemized deductions for mortgage interest or charitable contributions:
“No because I think it was the right thing to do,” he said, [noting] the provision only affects 1% of the American people. “I think this was a good idea, I think it was a realistic way for us to raise some revenue,” he said, “It’s not going to cripple them, they’ll still be well to do.”
President Obama apparently still does not understand that topping a tree stunts its growth. Most of the people in the top 1% or 5% are in the top bracket because they earn the money and generate the wealth in this country. Take away their incentives and why should they work so hard?
In addition to reducing incentives for work, Mr. Obama also seems to think that the top 1% or 5% can solve all of the nation’s financial problems. There is only so much money there and eventually the well will run dry.
It’s time to draw the line on government spending and the Proposed Budget for Fiscal 2010 would be a good place to start.
Clearing the housing market March 23, 2009
Posted by wonderingin in The Economy.add a comment
The Wall street Journal reported today that existing-home sales rose 5.1% in February while the median price fell 15.5% year over year. Almost half (45%) of these sales were foreclosures and short sales (outstanding mortgage is greater than the sales price).
This is very good news – the market is working. Neither housing nor the larger economy will recover until we work off the growing inventory of foreclosed properties and under water mortgages.
There is no short-cut cure for a hang over, despite the railing of politicians and the whining of activists. Just as the liver requires many hours to eliminate alcohol from the body, the market will need months if not years to do its job of removing the housing junk from the economy.
Calming the howling mob March 23, 2009
Posted by wonderingin in Regulation, The Economy.add a comment
Having last week stoked the fire of the howling mobs calling for blood (ruinous taxation), President Obama this week is expressing some doubts as to whether the House passed excise tax on AIG bonuses is constitutional.
Lynch mobs are a bit like grass fires. They are so easy to set but can quickly burn out of control when whipped higher by strong winds.
The President is playing with fire and he should know better. We will suffer the consequences.
The Bonus Tax Train Wreck March 20, 2009
Posted by wonderingin in Financial Markets, The Economy.add a comment
The bonus claw back excise tax legislation hurtling through Congress this week will be an economic train wreck at warp speed. It will:
- severely hamper the financial industry’s ability to clean up the mortgage mess
- decimate the ability of banks receiving TARP funds to recruit top drawer talent
- embolden Congressional, labor and other anti-business groups as they try to dismantle the economy’s wealth creating engines
I am just as unhappy about the AIG retention bonuses as anyone, but the proposed excise tax legislation is a legal version of a lynch mob.
If Congress does this to the bankers and traders, no one is safe.
AIG Bonuses – a dangerous distraction March 19, 2009
Posted by wonderingin in Banking, Financial Markets.add a comment
The hue and cry about the AIG retention bonuses is a dangerous distraction on several fronts. Here are two:
The real question is how much money are the Feds going to put down the rat hole and will it really make a positive difference for the economy?
To paraphrase Ross Perot’s famous line, “There is a giant sucking sound” coming from AIG headquarters as the company vacuums up ever more taxpayer dollars.
What’s needed to unwind the mess? Talent. Talent must be paid or it leaves. Draconian claw back taxes and limits on compensation are a sure way to drain the banks of their top talent. This is not a good precedent for the financial services industry or the American economy.
Better to regulate the products and reward the talent.
AIG – When Principles Collide March 16, 2009
Posted by wonderingin in Business, Financial Markets, Politics, Regulation.add a comment
The mess at AIG represents a colossal conflict between two almost sacred principles of a free market democracy – the sanctity of contracts and accountability for taxpayers’ money.
Contracts – The insurance industry, more than most businesses, rests squarely on the sanctity of its contracts. In return for their premiums, policyholders literally receive nothing but a contractual promise from an insurance company that lawful claims for damages will be honored (and paid) by the company. Indeed, the very foundation of our financial and commercial markets rests on the reliability of contractual arrangements and customary business practices among companies and their suppliers and customers.
Taxpayer Accountability – On the other hand, the screaming about where the AIG bailout money went and the bonuses proposed to be paid hits raw nerves everywhere. People expect companies and individuals being helped by the government to comply with a higher standard including that they sacrifice themselves by not taking advantage of taxpayers.
How this conflict gets resolved will inevitably set a dangerous precedent. Contracts will either become increasingly vulnerable to involuntary politically motivated modification or abrogation, or growing taxpayer cynicism about bailouts will lead to taxpayer demands for a dramatic increase in government regulation of the markets and the economy.
Neither outcome will be good for the American economy in the long run. In hindsight, bankruptcy might have been a better choice.
Ratings Agency Rope-a-dope March 14, 2009
Posted by wonderingin in Banking, Financial Markets, Personal Finance.add a comment
The ratings agency downgrades of Warren Buffet’s Berkshire Hathaway after the company recently reported some large paper losses for 2008 remind me of the old joke about the job of an auditor -
he’s the guy who comes in after the battle to shoot the wounded.
Throughout the financial crisis, the ratings agencies (Fitch, S&P, Moody’s) have been more than a few days late and a lot of dollars short. They have been just one more cog in Wall Street’s investment banking black box.
That banking black box has worked much like the chicken pie machine in the children’s movie, Chicken Run (“chickens go in; pies come out”) until the machine broke down and its owners had no idea what to do to fix it.
Ratings and default insurance have allowed investors to avoid doing their own homework much to their current dismay. If you don’t know what you are buying and why, you are a chicken waiting to be plucked.
Cap and trade really means Crumple and Trounce March 13, 2009
Posted by wonderingin in Energy, Environment, Regulation, The Economy.add a comment
Two of the things which never cease to amaze me about the climate warming theocracy are their scientific certitude and their omniscience when telling other people what to do.
Scientific certitude – Having been raised in a religiously conservative setting, anyone claiming that their way is the only way is always suspect from my vantage point. Saying something does NOT make it so. And regardless of what Al Gore thinks or says, the scientific debate about global warming is not over. The history of science is rife with examples of widely accepted theories which were ultimately proven to be incorrect (the world is flat, the Earth is the center of the universe). The current theory about the existence and effects of global warming rests on imprecise data, numerous modeling assumptions, and a careful selection of time periods to support a pre-determined outcome.
Coastal regions versus the Heartland – It is also interesting that most of the intellectual class (along with a majority of the population) live in the country’s coastal regions while energy production and manufacturing tend to be concentrated in the Heartland. The burden of responding as the theocracy wishes to climate change will fall disproportionately on people living in the Heartland areas (see below) despite the intellectual class’ reliance on those areas for many of the factors which support their life styles.
“. . . ultimately the incidence of a carbon tax depends on how the revenues it takes from the public are redistributed back to the public. Yet Congress, being Congress, is incapable of designing even a marginally efficient system — and given environmental politics and state carbon realities, the losers will be concentrated in noncoastal regions that rely most on coal and manufacturing.
” . . . Not only does cap and trade tax at the point of production (even if some of those costs are ultimately borne by consumers elsewhere), but it also shifts economic activity away from those industries. The states that produce the most emissions are going to see the strongest ancillary declines in income and increases in unemployment. The top carbon states — in absolute, not per capita, emissions — include Ohio (No. 3), Pennsylvania (No. 4), Indiana (No. 7) and Michigan (No. 9).”
- Who Pays for Cap and Trade? — II, WSJ
I am all for improving the environmental quality of our planet. We have made great strides in that direction over recent decades in this country, and we should continue to do so – but not at the cost of economic penury.
Real change or just Mea Culpa for the moment? March 12, 2009
Posted by wonderingin in Banking, Financial Markets.add a comment
“The events of the past months have shaken the foundation of our global financial system … And they’ve made clear the need for profound change to that system. At Morgan Stanley, we’ve dramatically brought down our leverage, increased transparency, reduced our level of risk and made changes to how we pay people…. We didn’t do everything right. Far from it. And make no mistake: as the head of this firm, I take responsibility for our performance.” – John Mack, CEO of Morgan Stanley before a Congressional Hearing, February 2009
John Mack has been one of the few banking CEOs to publicly acknowledge that his company’s business went off the rails in recent years. CEOs of failed firms (Bear, Lehman, Merrill) continue to deny that any of the problems were their fault- it was a tsunami in the market! Certainly the remaining solvent firms have declined to take any responsibility.
Maybe real self-directed change only comes about through a near death experience. After all, Morgan Stanley is the only investment banking firm which has come close to failing without actually doing so.
Financial market success is like doing drugs – the longer the fat profits continue, the more bankers and traders seem to think that the good times will never end. And the current generation of players has never experienced the pain of withdrawal – until now.
Wall Street could benefit from Andy Grove’s advice – Only the Paranoid Survive. Unfortunately, a high proportion of addicts forced off drugs cold turkey eventually revert to their former habits.
The new normal – like it or not March 12, 2009
Posted by wonderingin in Personal Finance, Regulation, The Economy.add a comment
“The business landscape has changed fundamentally; tomorrow’s environment will be different, but no less rich in possibilities for those who are prepared. … We are experiencing … a restructuring of the economic order” – Ian Davis, Managing Director at McKinsey
It’s time to fasten the safety belts (if you have not already been thrown from the roller coaster)!
Just as the current economic turmoil is unprecedented since the 1930’s, Davis anticipates major shifts in the structure of the U.S. economy:
- Less financial leverage – consumer and business
- More government involvement
- Lower levels of consumption resulting in lower economic growth
- Global economic growth increasingly centered in Asia
- Continuing technological innovation
While there will continue to be significant opportunities for individual economic advancement, the rising tide of overall economic growth has shifted to other shores.
The Great Consumer De-leveraging Picks Up Steam March 10, 2009
Posted by wonderingin in Personal Finance, The Economy.add a comment
The great de-leveraging of household balance sheets is in full swing according to Vince Farrell at Soleil Securities:
“Despite surging unemployment, the latest stats show the consumer re-liquefying his/her balance sheet at a rapid pace. The savings rate this time last year was essentially zero. In January it hit 5% which is the steepest rate of ascent since they started keeping records. Savings has averaged about 7% over the very long haul but in the 1970’s and 1980’s it averaged over 9%. It is probably a good bet it will move towards that level and very quickly. While that will impact GDP negatively (money saved is not money spent) it is a necessary part of the restructuring that the economic/financial landscape has to undergo.
“The savings rate is soaring and the consumer is paying down debt at the same time. The Globe and Mail reports that the number of people behind on their credit card (“behind” defined as 90 days past due) fell by 11% in the last quarter. Also, a category called “non-mortgage interest” paid by consumers fell 13% last quarter which is apparently the first time it has declined since 1948 when they started keeping track. Paying less interest indicates less debt outstanding.
“That idea is borne out by the stats on consumer credit which fell $20.6 billion in the fourth quarter. And that is the largest decline since 1943 when this particular item was first observed. The danger is the consumer retrenches too much or permanently and we get a stagnant economy even if we solve the toxic asset issue. I look forward to worrying about getting the consumer to spend after the savings rate reaches higher single digits and sanity returns to the consumer balance sheet.”
With consumers in full retreat, and the investment banks shrinking under regulatory pressure, Uncle Sam looks to be left holding the bag – he will be sending you a capital call for your share in the very near future.
President Obama is betting against the American people. March 9, 2009
Posted by wonderingin in Politics, The Economy.add a comment
President Obama’s recently released budget blueprint proposes to dramatically increase the government’s share of spending and decision-making in the economy. He thinks he knows better than the people at large what’s good for them.
And yet, our economic strength as a country has always been driven by the collective self-interested actions of millions of business owners and workers. The economy works best when people are free to make their own choices and pursue their own interests.
Our economic success is also driven by the wisdom of crowds. Under proper conditions, large groups of people make much better decisions than individuals.
President Obama may have won the election by 53% or so of the vote, but the other 47% of the electorate knows a shell game when they see one.
Cap (your income) and trade (your assets) March 8, 2009
Posted by wonderingin in Energy, Environment, Politics, Regulation, The Economy.2 comments
President Obama’s cap and trade proposal for reducing greenhouse gases is a tax pure and simple. Anything that generates $500 – $600 billion for the government to spend on other things by definition has to be a tax.
Cap and trade really means: “I am going to cap your income and force you to trade down your standard of living because I need that money for other things.”
Never mind that:
- the underlying climate science is still subject to debate,
- Obama proposes to launch an untested scheme of dubious merit on a large scale without prototyping or testing, or that
- creating a giant new revenue source for politicians is begging for irresponsible behavior of the worst sort.
Business leaders are finally beginning to wake up to the danger.
Where are the rest of you?!!
Damming the flood of foreclosures March 7, 2009
Posted by wonderingin in Financial Markets, Personal Finance, The Economy.add a comment
Much is being written about slowing the mortgage foreclosure crisis and “keeping people in their homes.” According USA Today, 50% of the foreclosures in 2008 occurred in 35 counties (mostly in CA, AZ and FL), and just seven counties accounted for 25% of the foreclosures.
But many of the proposed government programs amount to little more than damming up the river after the flood has begun – the water still has to go somewhere.
“Why can’t the government find the right way to bail out the financial system and the housing market? Historian Tom Woods has a provocative answer: it’s a fruitless war against reality. No matter what steps we take, prices will fall to their market levels. What’s worse, all the attempts to prevent this are just making things worse by creating chaos in the markets,” writes John Carney at the Business Insider.
Maybe the better answer would be to let the flood wash through and then clean up the mess. Declare the worst counties disaster areas, focus the federal aid there, and let housing in the rest of the country proceed in the normal fashion.
Incentivizing attitude adjustments March 6, 2009
Posted by wonderingin in Financial Markets, The Economy.add a comment
“What Wall Street and the markets need is an attitude adjustment [says Todd Thomas]. Thomas is the founder of organizational consulting firm Impact Consulting & Development and a former DaimlerChrysler executive who oversaw the car maker’s organizational and executive development for 10 years. He says executives, particularly at Wall Street firms, were too focused on meeting financial goals at any cost. In the process, not enough were focused on old-fashioned integrity, consistency, honesty, treatment of employees, transparency, self-awareness and accountability.”
Read the interview in Deal Journal.
Attitude adjustments are notoriously difficult to bring about. Compelled change is not lasting change. Only when the target of the change decides that change is in his or her best interest does real change occur.
On that score, incentives tend to be more effective than penalties – either creating incentives for proper behavior or reducing the incentives for unacceptable behavior.
Regulators should take a page from Parenting 101. One mother regularly bribes her small children to be good during extended car trips. It’s a lot easier than threats and punishments, and the “bribes” also serve as the trip money. The kids can spend or save the money as they wish but are not allowed to ask the parents to buy other stuff in the stores.
Shorting Obamanomics March 4, 2009
Posted by wonderingin in Financial Markets, The Economy.add a comment
Wall Street is shorting President Obama’s economic plans:
“The more investors have learned about the state of the economy and Obama’s plans for it, the less they rate the stock market’s prospects.
Obama’s higher taxes and antibusiness policies have shaken investor confidence. And Wall Street hasn’t found his budget credible. Unemployment cresting at under 9%? GDP growth of more than 3% next year? Wall Street thinks not.”
Read Evan Newmark’s Mean Street.
President Obama won the election largely by promising to fix everyone’s problems but without providing any details. Now he is providing those details, and he is in fact planning to turn the economy upside down just like he promised during the campaign.
The good news – unlike many people running for public office, he appears to be who he said he was.
The bad news – you’re not going to like the results and neither does Wall Street.
The stock market is generally seen as a leading indicator of where the economy is going to be six to nine months into the future. By this point in a typical recessionary cycle, we would expect to see the stock market making the turn.
But capital is on strike, and it will likely stay on strike for awhile. With a 30% decline in stocks since the beginning of the year, the roller coaster ride is about to get nasty.
Easier credit is a mirage March 2, 2009
Posted by wonderingin in Banking, Business.add a comment
“A couple of years ago, banking was all about leveraging capital and growing [earnings per share],” says Michael Reinhard, CFO of National Penn Bancshares, a community bank with $9 billion in assets. “Now it’s about generating capital and preserving it.”
Read the Big Freeze at CFO.com.
There are two realities which need to be recognized:
- The currently frozen credit markets will take time to thaw.
- When they do thaw, the rules for borrowers will be different: tighter scrutiny and covenants and lower banker appetites for the riskier deals.
And that’s before we get to any new financial regulatory framework to be imposed by the government “to make sure this never happens again.”
The worm has indeed turned.
A Worthy Mission March 1, 2009
Posted by wonderingin in The Economy.add a comment
Chris Thompson is on a Mission:
“Over the last several months, I have noticed a very disturbing trend. In nearly every conversation I have, whether it’s personal or business related, the person I am conversing with brings up something related to the economy. Whether it’s their fears, their experiences or their concerns, it always comes up. It never fails.”
“… I am asking you to join me on a mission with like-minded business professionals who refuse to let the negativity continue to spread. It is a mission in which we acknowledge the serious economic situation we are in, but refuse to let that situation control our attitudes and lives.”
Read Chris’ column from February 22nd.
This is a worthy mission in which we can all join.
