Archive for February 2009

Looking Back

February 28, 2009

If one looks back over the last 8 years, the seeds of today’s deep recession can be seen.  To be fair, the Clinton Administration presided over the earliest seeds, the dot-com bubble.   In many ways it set forth the “faux business model” that would thrive during the Bush years.   

As you may remember the “dot-com” fade grew from the wild west of the new internet age.  Company after company set up shop using a web address as their mailing address.  These companies offered everything from medical advice to books.  The one thing most had in common was that they themselves did not make anything, they only sold the goods or service.  But the scam of dot-coms was not just that their business model was unsustainable (they were selling something that someone else made), it was the attempt to take the start up companies public through an IPO.

Market conditions were ripe with plenty of liquidity and a thirst by investors (some not so savvy) to make a quick profit.  The cheaters offered IPOs with big promises and little history of their companies performance.  For sure there were plenty of promises (and plenty of sizzle) but very little data.  A second group of cheaters pushed to get in line and obtain an initial block of stock from the IPO.  This second group were the predecessors to today’s “flippers”.  This group bought the IPO stocks and then timed a sale when the stock had risen sufficiently.  This game was so good for a short time that, believe it or not, some investors even borrowed money to buy these IPOs.  (Sound familiar?)  When finally investors began to think through what was going on, experience was showing that many of these dot-coms were not living up to their promises.  Suddenly the dot-com bubble burst.

Enron, MCI, and Adelphia were the poster child of the next generation of scam thinking.  The companies that “cooked their books” and are remembered for that crime.    All these companies had business plans that relied on growth of revenue to outdistance costs and in the process dazzle investors who in turn would buy more company stock (sending the stock price through the ceiling).  The leaders of these companies syphoned off their loot by selling stock options at huge profits.

With these two examples of “free enterprise gone wrong” fresh in Government officials’ minds, one would have expected the Government to be much more vigilant. Instead the Republican mantra was laissez faire.  The grand daddy of all schemes grew symbiotically with the growth in new house construction.  From all appearances this looked like healthy growth and certainly stimulate wide swaths of our economy.  

Soon the banks were doing a great business and recording excellent earnings.  Then investment firms and hedge funds saw an opening.  They could attract a lot of liquidity by promising untraditionally high returns (10-20%).  The stage was set perfectly again.  The public, through investments and 401k’s, wanted the attractive returns and chose not to ask how it was possible or that the senior executives of these firms were taking their cut first and their cuts were mind boggling huge.  

With the collapse of the financial services sector, this game has ended.  There should be criminal indictments but only time will tell.  Even with indictments it is hard to predict whether any lessons have been learned.

During this entire time frame another phenomena has been taking place.  There has been a steady exodus of manufacturing jobs and a disinvestment in math and science education.  Math and science represent hard work and manufacturing has come to represent less desirable work.  Of course the truth is that so much of Americas manufacturing base moved off shore, restarting the US economy is going to be very difficult and will require hard work.  

“Looking back” can not change today’s problems.  “Looking back”, however, can help guide us to both the short term and longer term fixes.  Laissez faire is ok as long as there are rules and the sherif is honest and around.  There is no substitute for hard word and real value production.  The American dream can be revived if we simply use common sense and perform the necessary hard work.

Predictable Yet Surprising

February 27, 2009

Presidential candidate Barack Obama told the American people what he intended to do if elected President.  He was elected President by a very large margin.  Yesterday he announced a budget that contained all the major initiatives he had promised during his campaigning in an open and transparent submission.  Republicans howled and tripped over themselves to point out something wrong with Obama’s proposal.  But what else is new?

The budget proposal gains its credibility by including all know elements of spending and uses reasonable (and conservative) projection to predict the out years.  This methodology has been missing for the past 8 years.  The one major short coming of what Obama presented is that there is no projection for balancing the budget and of course, no projection on reducing the size of the national debt.

Arguably one could say that there is no reasonable way to know how that would be accomplished today.  When Bill Clinton generated surpluses, he did it with higher tax revenues in a robust economic period.  Obama’s team most likely decided to wait and see how quickly and strongly the economy recovers before taking any “high fives”.  There can be no doubt, however, that Obama’s economic team knows it will be impossible to run forever deficits and maintain a reasonable standard of living.  

Republican leaders are quite pregnant when they criticize the deficit and increase in the national debt.  Republicans not only presided over the doubling of the debt from 2000 to 2008 but can only show a failed foreign policy and the largest economic recession in 75 years for their efforts.  It is also clear that Republicans have not performed a “root cause analysis” on why they lost so many seats in Congress as well as the White House.  Republican leadership is dead against the programs proposed in Obama’s budget and act almost surprised to see these initiatives in financial terms.  Like the lemmings, they continue their rush to the cliff.

President Obama has said where he wants to take the nation.  He has now laid out a time line and cost.  This should have been predictable (from what Obama has promised) yet surprising (since Obama is a politician too).   

The Fogged Out Foggy Bottom

February 26, 2009

The US State Department is often referred to as “the foggy bottom” because the Washington DC neighborhood in which it is located was first referred to as foggy bottom.  It seems in the 19th century when this area was being developed it was noted for fog and mist in the air, in other words an area where it was difficult to distinguish anything with clarity.

The State Department took another step into the fog yesterday when it released its 2008  report on human rights.  While the report was primarily drafted during 2008, Secretary Clinton signed off on it and made it a statement of the Obama Presidency.  The report outlined human rights abuses around the world but zeroed in on China.  The pot stood there calling the kettle black.

I question why there is ever a need for the US to point critically at other countries (let Time or Newsweek do that) but at times like this it is totally out of place.  Consider this

  • China is a land of about 1.5 billion people with a huge percent uneducated and very poor.  The country has been modernizing at a rapid rate and peaceful evolution of a society like this is not easy.  While the situations cited in the State Department assessment are most probably true, the question is so what?  They are all internal issue for China and do not represent crimes against humanity.
  • The United States, on the other hand, still occupies Iraq (after initiating an invasion and occupation that has cost Iraq several 100 thousand of dead.  The US still holds over 200 detainees, most for as many as 7 years, without charges in Gauntanamo Detention Facility.  The homeless population in the US is one of the highest in the world and there are more citizens imprisioned in the US than any other country in the world.

The question is simply, “with so much dirt on our own hands, where do we find the room to call someone else out?”  The question is not whether China can do better towards Tibet or regulating the news media or the internet.  Obviously they can. Anyone who takes the time and studies China will see a trend which is progressive (admittedly slow) that favors stability while bringing ALL its citizens into modernity.  This is a huge task and will take much time.

Looking at this from a pragmatic viewpoint, the world is in a recession and history is replete in examples of countries flying apart or becoming aggressive towards neighbors during times of great economic unrest.  The role of responsible Governments at times like this is to (1) put their own house in order, and (2) if so motivated, speak in private with other countries whose behavior is offensive in some respect.   I guess the State Department is just fogged out.  

Where Is Mike Huckabee?

February 25, 2009

Last evening President Barack Obama gave his first address to Congress (and the nation) and by most accounts it was what the doctor ordered.  It was clear, positive, and promising that life will get better.  What more can a President say.

The next steps are up to President Obama in following through on his plan.  The combination of time, confidence, and a little stimulus is a straight forward formula and one we can keep our eye on.  The Republicans do not see it that way and Governor Bobby Jindal, in a somber and serious looking demeanor,  got to play the part of Scrooge (or “logic challenged” depending upon how you see it) and gave the rebuttal speech directly following President Obama’s address.  No one needed to listen since the Republican play book is already public knowledge but Governor Jindal gave his talk as if it was the first airing anywhere.

President Obama inherited a $ 1.2 trillion deficit from George W Bush but Jindal said that the $787 billion Stimulus Package would all be borrowed money that would have to be paid back by our children.  It is not clear what Governor Jindal thinks about the deficit which must also be covered by borrowed money and will be need to be paid back in the future.  During the the George W Bush (republican) Administration the national debt doubled, increasing by almost $5 trillion, all that must be paid back in the future.

You would think that no sensible person would propose tax cuts under these circumstances and if you did it would be targeted tax cuts to increase consumer demand (which should increase business activity… and jobs).  When Obama announced he would let the Bush tax cuts for those earning over $ 250,000 per year die, Republicans howled.  I think I can read between the lines… if you have money, we the Republican party will help you keep more of it.

As in the Clinton years, the Democratic proposal is all about raising all boats (including those earning more than $250,000).  Obama is using the Stimulus to invest in programs Republicans simply do not like and can not find a logical argument why they should not be tried.  Republicans prefer to spin the subject and appeal to fear.

Some say that Jindal’s speech was not to the American people but aimed squarely at the Republican base that will pick the 2012 Presidential nominee.  The rustling sound one can hear in the background is Mike Huckabee dusting off his bible and getting ready to put his 2 cents into the Presidential race.  The tax cut field is already too crowded, so Mike must hope to call God off the bench and see if the big guy can help him.  Both approaches, I think, make very little sense but at least Mike has a great sense of humor.  

Don’t Blink

February 24, 2009

Last week Senator Christopher Dodd, chairman of the Senate Banking Committee, suggested that conditions might dictate that the Federal Government “take over” for some interim period one or more of the largest, “can’t fail” banks.  When that news broke, the stock market tanked.  Yesterday, the Wall Street Journal reported that the Government and Citibank were in discussions where the Feds might dump some more cash into Citi and in return receive about 40% share of ownership.  Yesterday the market tanked again.  What’s going on?

News reports tell us “investors” (whoever they are) are fearful of “nationalization” allegedly because the Government is not suppose to know how to run banks and that there was a good chance that current shareholders might lose what little is left of their share holdings.  I have no idea whether that is the cause and effect answer or whether these fears are true but unrelated to the market drop.  I do know that no one else has suggested what these banks should do to regain their strength unless there was a way to turn back time to the pre-CDO days.

Our Government needs to (1) keep the largest banks from failing, and (2) the very largest need to be put back in shape where they can justify their size and existence as a vital part of our economy.  We do not need a large national bank but at the same time we do not need big banks that are large holders of cash and pay exorbitant remuneration packages (and make poor risk judgements).  Most of the companies that saw their stock prices drop yesterday (banks excepted) were not fundamentally different that the day before.  The selling of their stock was the result of herd mentality (coupled with greed driven speculation) and does not reflect these companies long term value.

Time, confidence, and some positive impact from the stimulus package will right the basic economy.  As that begins to happen, we need a banking system that has been repaired and has gone back to using banking basics in the conduct of their businesses.  The country can not afford to blink to the bullies of Wall Street. 

What Recovery Will Need

February 23, 2009

President Obama’s Economic Stimulus Package has just passed and the plan to help mortgage holders from further foreclosure is still being read for understanding.  Today rumors were reported that the Government would invest further in Citibank, taking as much as a 40% stake.  All this action in so short a time is a huge accomplishment.   However, the media and press’s reaction is, “is everything fixed yet?”

Admittedly it is probably a weaker story to report these programs and then tell the readers or listeners to relax for 9 months to a year and a half before they will see results.  What, pray tell, will the media and press report during that time?

Recovery is going to require time and most importantly, the restoration of confidence.  Confidence applies to both the outlook one has for oneself as well as the political leaders and major institutions one sees around them.  Bank and investment firms leaders (or any other large corporation) who pull down obscenely high remunerations, do not instill confidence.  Political leaders who waffle from one path to another, or those who project no support for Government actions (and worse offer no credible alternative) stamp down any confidence the average person might have in his government.  The 24/7 news cycle where each news outlet is fighting to steal one more piece of market share will hype most anything if they think it might work, regardless of the impact it might have on confidence.

Fortunately, President Obama has set out on a course that is reasonably transparent.  He has further conducted himself and his policies beyond the economy in a similar fashion.  It is my bet that over time the American people will begin to gain real confidence in his leadership, not just a “favorable” opinion (re: current polls).  The more that Americans can see their government acting rationally and in an open manner, the more Americans will feel a confidence in their future.  History will probably record that the elements of the Stimulus Package can not be traced directly to the recovery but rather the Stimulus was critically important to slowing and eventually stopping the erosion of jobs and therefore set the stage for a renewal of confidence.  It is unfortunate that several Republican Governors can not see this possibility and instead prefer to play politics in criticizing the Stimulus.  These Republicans will be seen as part of the problem and not part of the solution.  The “recovery” does not need this type of leader.

North Dakota New Fame

February 20, 2009

The North Dakota House of Representatives, apparently with nothing else to do or worry about, voted in favor of a bill that provides legal rights to a fertilized egg.  So there is no confusion, this egg must be from a humane.  This bill which is in direct opposition to “Roe v Wade”, puts North Dakota at the head of the dunce class and takes a giant step backwards from modernity.  

Enforcement measures were not spelled out in the bill (which will undoubtedly be challenged in both the court of common sense and the Federal Courts).  Here are some provisions North Dakotans must consider.

  • Registration of all conceptions (including virgin ones).  Without registration, there can be no payments made to the fetus or its parents.
  • Regular medical check ups where certified health officials review the health and life style choices of the “carrier” (often called mother).  It is well documented that smoking, drinking, rough play, heavy labor, and too few calories are unhealthy for the fetus.  Pregnancies ending from any of these causes will result in criminal prosecution of the carrier.
  • Home visits by social services experts.  Trained social workers will need to inspect the home and confirm that the “mother to be” is listening to soothing music, reading wholesome books, and watching non-violent shows on television.
  • Preventive detention procedures must be employed.  Once registered, the fetus and “carrier” must be restricted to only local (meaning in State) travel.  This procedure is intended to prevent anyone from leaving the State and obtaining an abortion in another State.  (It also serves to protect (or at least mitigate the charges against) the “carrier” from prosecution should there be a spontaneous abortion.  Out of State travel will be viewed as proof of intent where as staying in State could be viewed as “God’s will” (whatever that is).
  • Bedroom surveillance and spot checks.  In order to ensure compliance with registration, there will be a massive effort to spot “cheaters” (those who have sex, conceive, and then take a contraceptive pill).  Citizens can avoid the intrusive spot checks by simply calling a hot line telephone number and “self reporting” ones intent to have sex.  The individual will receive a identification number and can call back (or check in on line) with confirmation on whether copulation did occur.
  • New North Dakota State Government Department.  A new State department of pregnancy protection (NDDPP) will be created with an enforcement arm named the pregnancy protection police (PPP).  The symbol worn by these public servants will be a blue shield showing a pile of burning books lying on top of a flat earth map.

The Country is in the midst of a recession heading full steam towards a depression.  We have over 40 million Americans without adequate or any health care insurance and the entire social security and medicare system is projected to implode in our children’s life times.  With these enormous problems, North Dakota finds time and energy to fix something that is not broken.

Going Off the Deep End

February 19, 2009

CNN reported yesterday that Pope Benedict and House Speaker Nancy Pelosi meet on Wednesday in the Vatican.  According to press releases by Speaker Pelosi and the Pope, there seems to have been two different meetings.  Pelosi said it was a fine meeting where they discussed poverty and global warming (perfectly appropriate subjects).  The Vatican released the following: “His Holiness took the opportunity to speak of the requirements of the natural moral law and the Church’s consistent teaching on the dignity of human life from conception to natural death” . The Pope’s statement leaves little doubt that he is a man of the past and totally out of touch with modernity.

  • This is the same Pope that questioned the teaching of Darwin and gave a qualified ok as long as they did not lead someone to reject the existence of God.  What is he thinking?  Darwin’s view of evolution is either true or it is not, and it’s correctness certainly does not depend on a belief in God.  And if it did, which God should it be based upon?
  • This is the same Pope that reinstated the Latin mass that contains explicit prayers for the conversion of the Jews.  What is he thinking?  Was he asleep during the ecumenical years?  
  • This is the same Pope that rescended the excommunications of four Priests, one of which maintains that the holocaust did not occur.  What is he thinking?  

The Pope probably does not have too much to worry about for now.  Most Catholics have always been Catholic and probably always will be (read will give money to the Church, the only criteria the Church is interested in).  Despite the Church’s anti science views, most educated people consider the threats from poverty and global warming to dwaft the societal concerns around abortion or assisted suicide.  The Church is stuct in the wrong grove, in too many ways, for example, no woman priests, no married priest, too many pedofiles, no openly gay priests (even though the priesthood has an estimated 20-30%), and its huge hang up on woman’s rights.  But that is their problem.  My concern is that the Pope going off the deep end does not influence the US Government.  I hope Speaker Pelosi had her itunes playing and did not hear the Pope.

Why the Center Should Be the Friend of the Right and the Left

February 18, 2009

Since President Obama has taken office, Republicans in Congress have sounded like citizens who have spent the last 8 years on a desert island and simply can not accept that their party is responsible for the mess America faces today, both home and abroad.  Republicans simply return to the failed policies as if they could make them different by just repeating the mantra.   At the same time, the progressive side of the Democratic Party is appalled at the initial performance of the Obama Administration.  Where are all the actions Obama promised (or strongly hinted) he would do once in office.  But for those who think of themselves as centrist or moderate, President Obama is off to a great start.

It is difficult to paint the Republican Party with a single broad brush but I think it fair to say they would claim they were for “fiscal discipline”, laissez faire governance, and a strong proactive military.  If you look at the actual conditions in the US, one must conclude that either the Republicans are in self denial since it was their policies that have lead us into the worst economic messes since the Great Depression, or they simply do not possess the vision for how to extricate the US from the current recession/depression.  On top of this, red, white, and blue Republican rhetoric carries no credibility today.

The Progressives or Left Wingers see things quite differently.  They feel compassionately about the unemployed, the healthcare uninsured, those poorly educated, housed or fed, and those who would take civil and human rights away from anyone.  Everything can be done at once and the world will be safe (for ever) once the Government acts are the thoughts of the left.  

In between lies the vast area of practicality and time to consider future ramifications.  The $787 billion stimulus package is for sure necessary but is no free lunch.  How will this borrowed money be repaid, and by whom?  What will the Government do for an encore?  When the unemployment payment extensions run out again and people are still unemployed, what will Government do?  What will cause people to seek work, any type of work, just to survive, and wait for the “perfect job” to come in time?  And spending $787 billion will involve a lot of people administering this cash deluge and you can bet some of it will be spent poorly or criminally or wastefully.  

The answer is not to do nothing, and the answer is also not to do everything at once.  The answer must lie in a more moderate, somewhat progressive approach.  An approach where data and pragmatism are emphasized.  An approach where if it becomes clear the “king has no clothes”, then a new and different approach must be taken.  That can be be achieved from the center and not at the extremes of right or left.  Over time the heart of Republican and Democrat beliefs can be injected, in moderation, and embraced based upon successful performance.  Only from the center can one get this flexibility.

GM to the Wire

February 17, 2009

General Motors is now feeling the “love” generated with the UAW over the past 20-30 years during which GM screwed the union when ever it could and then agreed to soft, ridiculous contracts and even sillier work rules at various GM plants.  There are few, if any, more dysfunctional relationships than GM and its union (read Ford and Chrysler also).

Now on the verge of bankruptcy, General Motors is seeking additional Federal bail out loans intended to tide GM over until the level of new car purchases pick up.  The deal is that GM must produce a “turn around” plan that convinces Congress that their loans are for a sound reason.  GM’s plan must include sizable changes in its size (read less UAW labor per car) as well as large reduction in the cost of pay and benefits (read less earnings for UAW members, and of course, less dues for the UAW union leaders).  It appears that as usual the negotiations is following the hardball path.

GM, of course, holds the Chapter 11 trump card but is very reluctant to play it.  Under Chapter 11, GM could efficiently recraft its union contract with the protection of a Federal court.  GM could also alter its franchise agreements with its dealers at a bargain cost.  Why would this not be a preferred course of action?

The answer may lie in what would likely happen to stock and bond holders.  Under Chapter 11 there would be a great deal of pressure for GM to restructure its existing debt, possibly forcing bond holders to accept new stock (equity) in exchange for their more secure debt.  For existing GM stock holders, it could mean a “wipe out”.  General Motors management knows that if it screws its debtors, they will have much less favorable terms should they ever try to float bonds or seek credit again.  And for the stock holders, GM could say good-bye to its cozy board of directors.  The union knows this and hence the eye ball to eye ball negotiations.

As I have written before, this is the time for Rick Wagoner to really lead with the full knowledge that he will resign once GM is secure or by the end of this year in any case.  The question before the house is whether he will lead.