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.
Seeing around corners – is the end in sight? April 27, 2009
Posted by wonderingin in Business, Financial Markets, The Economy.add a comment
One of the great surprises of the current economic crisis is that few saw it coming, and worse yet, the first wave of investors jumping in to help (think sovereign wealth funds which invested in the big banks) were brutally savaged by the continuing market decline.
Now comes Wilbur Ross with a plan to invest $1 billion in troubled assets through the government’s new Public-Private Investment Partnership.
Mr Ross is neither the timid sort, nor is he inexperienced in dealing with troubled or distressed assets. In fact, that’s how he made his fortune. He also made a lot more money through the rationalization of the steel and textile industries.
What does Mr Ross see that no one else sees? Maybe, just maybe, he can see around corners. If he can and if he is right, that would be a very good sign for the rest of us.
We are in the eye of the storm April 17, 2009
Posted by wonderingin in Banking, The Economy.add a comment
“We are in the eye of the storm. The worst is behind us for housing. For commercial real estate and corporate lending, there is still a big dark cloud.”
- GERARD CASSIDY, a banking analyst.
http://www.nytimes.com/2009/04/17/business/17bank.html?th&emc=th
Everyone should pay income taxes April 14, 2009
Posted by wonderingin in Politics, The Economy.add a comment
Ari Fleischer says everyone should pay taxes – my sentiments exactly.
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.
Making Banking Boring (again) April 10, 2009
Posted by wonderingin in Banking, Financial Markets, The Economy.add a comment
Paul Krugman may have it right this time.
“Thirty-plus years ago, when I was a graduate student in economics, only the least ambitious of my classmates sought careers in the financial world. Even then, investment banks paid more than teaching or public service — but not that much more, and anyway, everyone knew that banking was, well, boring.
“Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.”
Pining for some ‘Animal Spirits’ April 9, 2009
Posted by wonderingin in Financial Markets, The Economy.add a comment
Where have all the ‘animal spirits’ gone?
John Maynard Keynes briefly used the term in one paragraph when discussing what motivates people to invest and speculate.
In a new book, Animal Spirits, George Akerlof and Robert Shiller describe five categories of spirit:
- Confidence
- Fairness
- Corruption / bad faith
- Money illusion
- Stories
None of these are easily quantified which may explain why economists and bureaucrats who just focus on the numbers so often miss the mark.
People are first led by stories about the successes of others and the possibilities for good in the world. Their eyes often glaze over when you start spouting numbers; stories they get.
The stories build confidence that they too might achieve some modicum of success assuming that:
- the rules of the game are fair,
- the bad guys will be kept in check and that
- the government will maintain a stable currency – not too much inflation and not too much deflation, but just right.
The return of ‘animal spirits’ will take some time.
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
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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.
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.
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?!!
