Jamming the Banks – Part 2 May 13, 2009
Posted by wonderingin in Banking, Financial Markets, Regulation.add a comment
The Chrysler squeeze on the banks was just the warm up in the Obama Administration’s plan to re-make the economy.
It turns out the the compensation choke hold so far applied only to those banks receiving TARP money will be expanded to an industry wide system for all of financial services. (U.S. Eyes Bank Pay Overhaul – WSJ)
Senator Charles Schumer’s proposed legislation to require stockholder votes on executive compensation among a list of other new requirements would set the stage for the extension of the coming banking rules to the rest of corporate America.
Stay tuned – democracy in action is a wonderful thing!
Jamming the Banks May 11, 2009
Posted by wonderingin in Banking, Regulation, The Economy.add a comment
“You don’t need banks and bondholders to make cars,” said [an Obama] administration official. WSJ, 5/11/09
The evidence continues to mount that President Obama and his cadre are intent upon re-making the American economy in their own image. We are entering an era of government industrial policy making unlike anything we have ever seen. Mr. Obama knows very little about business and cares even less. Fasten your seat belts for a very bumpy ride.
The banks and other financial intermediaries have played right into the hands of those who desire a more subservient European style capitalism. It’s the reverse of the old trope “You saved my life and now I owe you” as in
“we (the government) saved your bank and now we own you.”
Stay tuned for continuing episodes of As the World Turns, better known as Capitalism Roasting on a Spit.
Banking utilities – Part 2 May 6, 2009
Posted by wonderingin in Banking, Financial Markets, Regulation, The Economy.add a comment
In earlier posts, we spoke to the notion that regulators may be forced into rationalizing the biggest banks as banking utilities – essential players in the economy whose future scope of action will be constrained by regulators’ views about what is good for the economy as a whole rather than just the interests of the banks’ shareholders.
Now the fight is on as The New York Times reports that the private equity community is pushing to allow P/E firms to control as well as invest in big banks – a step in the opposite direction.
Bank managements currently work for shareholders with an eye over their shoulders for the regulators. The utility approach would likely require banks to operate more directly in the interests of the economy while they are allowed to earn a “reasonable return on their capital”.
The dilemma – banks need capital and the P/E firms have a lot. But I do not see the Federal Reserve backing down on the shift toward utility status. The economic stakes are too high and bank managements are already too difficult to control before one considers the predilections of the P/E players.
On the other hand, vultures play a useful role in nature – cleaning up messes. And vulture capitalists, er P/E firms, can play a similar role in cleaning up the current economic mess.
Banking utilities are coming, but the Federal Reserve will ultimately wiggle enough to let the P/E guys help clean up the banking system albeit without the unilateral economic control to which they are accustomed.
Black carbon gives the lie April 16, 2009
Posted by wonderingin in Environment, Regulation.add a comment
… to the environmental left’s histrionic certainty about global warming and its causes.
According to scientists, including Dr. Veerabhadran Ramanathan, one of the world’s leading climate scientists, black carbon accounts for 18% of the planet’s warming and likely represents an even greater cause of glacial melting around the world. And black carbon arises primarily from poor cooking stoves in developing countries.
Black carbon was not even mentioned in the 2007 summary report by the UN Intergovernmental Panel on Climate Change that pronounced the evidence for global warming to be “unequivocal.”
So much for all the certainty…. Let’s get the facts straight before we wreck our economy.
The dark cloud on the horizon April 10, 2009
Posted by wonderingin in Business, Regulation, The Economy.add a comment
… is the shadow of our coming economic decline.
U.S. Climate Envoy Warns Against High-Carbon Investments
The Financial Times (4/8/09, A1, Harvey) recently reported,
“Businesses must not sink money into high-carbon infrastructure unless they are willing to lose their investments within a few years, the US lead negotiator on climate change has warned. In the Obama administration’s starkest rebuke yet to industry over global warming, Todd Stern, special envoy for climate change at the state department, said ‘high-carbon goods and services will become untenable’ as the world negotiates a new agreement to cut carbon emissions.” The Times quotes Stern as saying, “How good will the business judgment of companies that make high-carbon choices now look in five, 10, 20 years, when it becomes clear that heavily polluting infrastructure has become deadly and must be phased out before the end of its useful life?”
President Obama’s recent remarks (the well off will still be well off after I increase their taxes) continue to confirm the strange belief of the Democrats that American business is their perpetual money tree.
Do they think the money to fund their dreams (and our nightmares) is endless?
Apparently so.
Brushing up on “Rules for Radicals” April 3, 2009
Posted by wonderingin in Politics, Regulation, The Economy.add a comment
“[Saul] Alinsky’s 1971 book, ‘Rules for Radicals,’ is a favorite of the Obamas. Michele Obama quoted it at the Democratic Convention.”
- The President is ‘Keeping Score’, WSJ
By now, most people who read the papers or watch the news have realized that President Obama is fully intent on re-making the American economy and the government’s role in it as he promised during the campaign.
The velvet glove of the President’s hopeful rhetoric apparently covers an iron fist as Congressman Peter DeFazio is quickly learning after he voted against the stimulus bill.
Reasonable people will always differ on the manner and nature of government and economic policy. Democracy is a messy system and the full and open debate of important matters is essential if the country as a whole is to accept significant changes over the longer term.
The great risk to American capitalism in all of this is the growing sense of individual entitlement – everyone wants something to be paid for by someone else!
Where is the sense of personal responsibility?
Who will invest to create the needed jobs if incentive is rewarded with higher taxes and greater regulation?
Maybe the rest of us should be reading ‘Rules for Radicals’ to figure out what we are up against. I’ve ordered my copy.
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.
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.
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.
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.
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.
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?!!
