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I
don't usually comment on other people's stuff, but this was so tempting I
couldn't resist. Joe Stiglitz, who won a Nobel Prize, if you can believe that
(he helped blow up Russia but said he was sorry afterwards) comes up with his
Five Points. I find this list to be pretty disappointing. It is a list that
could be made by a journalist, like Suze Orman if she had the poor judgement
to tread where she doesn't belong. For a "serious" economist to
come up with such weak and blatantly political arguments is surprisingly
mediocre even compared to my many-times-lowered expectations. On the other
hand, maybe he is pledging his eternal hackdom to the now-ascendant Democratic
Party. Even a Joe Stiglitz needs to pay the bills, and, hey, it works for
Paul Krugman!
Maybe
some people are wondering what I mean by a "hack." Being a hack
doesn't mean that you're incompetent. Many hacks are fabulously talented
hacks. It means that you volunteer to be a political spear-carrier. I liken
it to the Roman Catholic Church, or really any academic department. The Roman
Catholic Church, first and foremost, is an organization. If you decide to
hack for the Roman Catholic Church, at the basic parish level or as an
archbishop, you have to go along with the Roman Catholic program. You can't
say "I think St. Augustine was wrong about that one. The Buddha's
approach is much better." For your hackdom, you get a paid position, and
all the various perks and influence. The Roman Catholic Church may have
useful and correct attributes -- maybe that is what attracted you in the
first place. Or, maybe it is just the dominant organization. Who wants to be
a Sufi in Rome? But, if the Roman Catholic Church declares that the sun
revolves around the earth, then that is what you must preach. Ultimately,
that is what you must think
as well, because if there is too much dissonance between what you are
thinking and preaching, problems ensue. Thus, hacks are usually True
Believers.
My
comments are in red.
Vanity
Fair
The Economic Crisis:
Capitalist Fools
by Joseph E. Stiglitz
January 2009
Behind the debate over remaking U.S. financial policy will be a debate over
who’s to blame. It’s crucial to get the history right, writes a
Nobel-laureate economist, identifying five key mistakes—under Reagan,
Clinton, and Bush II—and one national delusion.
There
will come a moment when the most urgent threats posed by the credit crisis
have eased and the larger task before us will be to chart a direction for the
economic steps ahead. This will be a dangerous moment. Behind the debates
over future policy is a debate over history—a debate over the causes of
our current situation. The battle for the past will determine the battle for
the present. So it’s crucial to get the history straight.
What
were the critical decisions that led to the crisis? Mistakes were made at
every fork in the road—we had what engineers call a “system
failure,” when not a single decision but a cascade of decisions produce
a tragic result. Let’s look at five key moments.
No. 1:
Firing the Chairman
In 1987 the Reagan administration decided to remove Paul Volcker as chairman
of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker
had done what central bankers are supposed to do. On his watch, inflation had
been brought down from more than 11 percent to under 4 percent. In the world
of central banking, that should have earned him a grade of A+++ and assured
his re-appointment. But Volcker also understood that financial markets need
to be regulated. Reagan wanted someone who did not believe any such thing,
and he found him in a devotee of the objectivist philosopher and free-market
zealot Ayn Rand.
I always thought Volcker was sort of a conservative hero. He put
an end to the cheap-money policies favored by Democrats since the 1890s.
Since when was he a champion for regulation? The Volcker years during the
1980s stopped the 1970s trend of currency devaluation, but they were very
rocky and volatile. Greenspan did a better job of smoothing things out --
just look at the dollar compared to gold in the 1990s -- which did a lot to
help the economy under ... Bill Clinton! Clinton and Greenspan were always
good buddies. Didn't Clinton reappoint Greenspan? Oh yeah. But, now Volcker
is head of Obama's new economic advisory board! So all the hacks have new
marching orders. I like Volcker myself. Right or wrong, he is willing to
speak his mind. This article from (the lefty) San Francisco Chronicle gives a
little more realistic version of how Volcker was viewed in the 1980s.
Paul Volcker was reviled before he was revered.
President-elect Barack Obama named the 81-year-old Volcker to head a new
economic advisory panel Wednesday, citing "his sound and independent
judgment." But nearly three decades ago - when Obama was still a college
student - the towering 6-foot-7 Volcker was one of the most disliked public
figures in the United States.
As Federal Reserve chairman, he took an uncompromising stance
against inflation, jacking up interest rates as high as 20.5 percent.
Unemployment soared to 11 percent in the most painful recession since the
Great Depression. Volcker had been appointed by President Jimmy Carter in
1979, but his tough medicine likely contributed to the Democrat's failure to
win re-election in 1980.
According to Joseph Treaster's 2004 biography "Paul
Volcker: The Making of a Financial Legend," angry workers who had lost
their jobs flooded Volcker's office with mementos of their plight -
two-by-fours from carpenters unable to build houses; bags filled with
ignition keys from car dealers stuck with unsold cars.
One leading Democrat, Rep. Henry Gonzalez, D-Texas, called for
Volcker's impeachment. Another, Rep. Frank Annunzio, D-Ill., sputtered at
Volcker during a hearing: "Your course of action is wrong. It must be
wrong. There isn't anyone who says you are right."
Republicans were no happier during Volcker's eight-year
chairmanship. While Ronald Reagan remained silent as Volcker's policies sent
his approval ratings tumbling, Reagan's aides were eager to remove him. He
finally stepped down in 1987, to be replaced by Alan Greenspan.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/26/MNIV14D0BQ.DTL&feed=rss.news
Ummm, oh yeah. Kinda forgot about that, eh Joe?
Greenspan
played a double role. The Fed controls the money spigot, and in the early
years of this decade, he turned it on full force. But the Fed is also a
regulator. If you appoint an anti-regulator as your enforcer, you know what
kind of enforcement you’ll get. A flood of liquidity combined with the
failed levees of regulation proved disastrous.
Greenspan
presided over not one but two financial bubbles. After the high-tech bubble
popped, in 2000–2001, he helped inflate the housing bubble. The first
responsibility of a central bank should be to maintain the stability of the
financial system. If banks lend on the basis of artificially high asset
prices, the result can be a meltdown—as we are seeing now, and as
Greenspan should have known. He had many of the tools he needed to cope with
the situation. To deal with the high-tech bubble, he could have increased
margin requirements (the amount of cash people need to put down to buy
stock). To deflate the housing bubble, he could have curbed predatory lending
to low-income households and prohibited other insidious practices (the no-documentation—or
“liar”—loans, the interest-only loans, and so on). This
would have gone a long way toward protecting us. If he didn’t have the
tools, he could have gone to Congress and asked for them.
Of
course, the current problems with our financial system are not solely the
result of bad lending. The banks have made mega-bets with one another through
complicated instruments such as derivatives, credit-default swaps, and so
forth. With these, one party pays another if certain events happen—for
instance, if Bear Stearns goes bankrupt, or if the dollar soars. These
instruments were originally created to help manage risk—but they can
also be used to gamble. Thus, if you felt confident that the dollar was going
to fall, you could make a big bet accordingly, and if the dollar indeed fell,
your profits would soar. The problem is that, with this complicated
intertwining of bets of great magnitude, no one could be sure of the
financial position of anyone else—or even of one’s own position.
Not surprisingly, the credit markets froze.
Here
too Greenspan played a role. When I was chairman of the Council of Economic
Advisers, during the Clinton administration, I served on a committee of all
the major federal financial regulators, a group that included Greenspan and
Treasury Secretary Robert Rubin. Even then, it was clear that derivatives
posed a danger. We didn’t put it as memorably as Warren
Buffett—who saw derivatives as “financial weapons of mass
destruction”—but we took his point. And yet, for all the risk,
the deregulators in charge of the financial system—at the Fed, at the
Securities and Exchange Commission, and elsewhere—decided to do
nothing, worried that any action might interfere with
“innovation” in the financial system. But innovation, like
“change,” has no inherent value. It can be bad (the
“liar” loans are a good example) as well as good.
OK, Stiglitz was head of the CEA during Clinton. He was in
meetings with Greenspan. What did he do during these meetings? "We
didn't put it as memorably as Warren Buffett ... but we took his point."
Hmmmm. You "took his point." That means ... you weren't asleep?
Congratulations for not being asleep. Probably Greenspan thought of his role
as making the Fed's interest rate target go up and down, and blabbing incoherently
to Congressmen when they wanted to get him to say something that could be
politically useful. Regulation was for Congress, the SEC, etc. Greenspan
probably didn't think he had anything more to do with the process than
Stiglitz. Certainly the target-rate-up-and-down guy has other things on his
agenda than wondering if a certain bank's derivatives book is properly
priced, or if Fannie has too much leverage. Only the real oddballs, like
Buffett, would see the danger of derivatives and actually do something about
it, as Buffett did when he wound up the derivatives arm of Gen Re Securities
(at huge expense). But then, it was his own money on the line, more or less.
Which makes him rather exceptional, I figure.
No. 2:
Tearing Down the Walls
The deregulation philosophy would pay unwelcome dividends for years to come.
In November 1999, Congress repealed the Glass-Steagall Act—the
culmination of a $300 million lobbying effort by the banking and
financial-services industries, and spearheaded in Congress by Senator Phil
Gramm. Glass-Steagall had long separated commercial banks (which lend money)
and investment banks (which organize the sale of bonds and equities); it had
been enacted in the aftermath of the Great Depression and was meant to curb
the excesses of that era, including grave conflicts of interest. For
instance, without separation, if a company whose shares had been issued by an
investment bank, with its strong endorsement, got into trouble,
wouldn’t its commercial arm, if it had one, feel pressure to lend it money,
perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee. I
had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust
us: we will create Chinese walls to make sure that the problems of the past
do not recur. As an economist, I certainly possessed a healthy degree of
trust, trust in the power of economic incentives to bend human behavior
toward self-interest—toward short-term self-interest, at any rate,
rather than Tocqueville’s “self interest rightly understood.”
The
most important consequence of the repeal of Glass-Steagall was
indirect—it lay in the way repeal changed an entire culture. Commercial
banks are not supposed to be high-risk ventures; they are supposed to manage
other people’s money very conservatively. It is with this understanding
that the government agrees to pick up the tab should they fail. Investment
banks, on the other hand, have traditionally managed rich people’s
money—people who can take bigger risks in order to get bigger returns.
When repeal of Glass-Steagall brought investment and commercial banks
together, the investment-bank culture came out on top. There was a demand for
the kind of high returns that could be obtained only through high leverage
and big risktaking.
There
were other important steps down the deregulatory path. One was the decision
in April 2004 by the Securities and Exchange Commission, at a meeting
attended by virtually no one and largely overlooked at the time, to allow big
investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1,
or higher) so that they could buy more mortgage-backed securities, inflating
the housing bubble in the process. In agreeing to this measure, the S.E.C.
argued for the virtues of self-regulation: the peculiar notion that banks can
effectively police themselves. Self-regulation is preposterous, as even Alan
Greenspan now concedes, and as a practical matter it can’t, in any
case, identify systemic risks—the kinds of risks that arise when, for
instance, the models used by each of the banks to manage their portfolios
tell all the banks to sell some security all at once.
As we
stripped back the old regulations, we did nothing to address the new
challenges posed by 21st-century markets. The most important challenge was
that posed by derivatives. In 1998 the head of the Commodity Futures Trading
Commission, Brooksley Born, had called for such regulation—a concern
that took on urgency after the Fed, in that same year, engineered the bailout
of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus
failure threatened global financial markets. But Secretary of the Treasury
Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant—and
successful—in their opposition. Nothing was done.
LTCM mostly went bust on big leverage, not derivatives. I do think
the removal of the Depression-era regulations was a significant step. It
didn't "cause" the present situation to happen -- when people want
to be stupid, there is hardly anything that will prevent them from being
stupid -- but it allowed the situation to get more out of hand than it would
have otherwise. The 2004 SEC ruling on brokerage house leverage was also
important.
No. 3:
Applying the Leeches
Then along came the Bush tax cuts, enacted first on June 7, 2001, with a
follow-on installment two years later. The president and his advisers seemed
to believe that tax cuts, especially for upper-income Americans and
corporations, were a cure-all for any economic disease—the modern-day
equivalent of leeches. The tax cuts played a pivotal role in shaping the
background conditions of the current crisis. Because they did very little to
stimulate the economy, real stimulation was left to the Fed, which took up
the task with unprecedented low-interest rates and liquidity. The war in Iraq
made matters worse, because it led to soaring oil prices. With America so
dependent on oil imports, we had to spend several hundred billion more to
purchase oil—money that otherwise would have been spent on American
goods. Normally this would have led to an economic slowdown, as it had in the
1970s. But the Fed met the challenge in the most myopic way imaginable. The
flood of liquidity made money readily available in mortgage markets, even to
those who would normally not be able to borrow. And, yes, this succeeded in forestalling
an economic downturn; America’s household saving rate plummeted to
zero. But it should have been clear that we were living on borrowed money and
borrowed time.
The
cut in the tax rate on capital gains contributed to the crisis in another
way. It was a decision that turned on values: those who speculated (read:
gambled) and won were taxed more lightly than wage earners who simply worked
hard. But more than that, the decision encouraged leveraging, because
interest was tax-deductible. If, for instance, you borrowed a million to buy
a home or took a $100,000 home-equity loan to buy stock, the interest would
be fully deductible every year. Any capital gains you made were taxed
lightly—and at some possibly remote day in the future. The Bush administration
was providing an open invitation to excessive borrowing and lending—not
that American consumers needed any more encouragement.
Germany doesn't tax capital gains on equities at all. Nor does
Singapore or Hong Kong. Japan effectively didn't until very recently.
Claiming an "upper income tax cut" that moved the top income tax
rate from 39.6% to 35% caused some sort of bubble is not only plain wrong, it
is bizarre. Obviously a political ploy -- something you'd expect to hear from
a Michael Moore lefty. Does someone want to claim that capitalism doesn't
work if taxes are too low? Now, it is true that the rich got richer and the
poor mostly got poorer under Bush. That's a problem, if you ask me.
Certainly, some of those rich got richer basically by stealing. They're still
doing it right now, aided by their Man At The Treasury. Oligarchs were a big
winner during the Bush years. But, that wasn't because they paid a 35% tax
rate instead of a 39.4% one. Republicans also led a significant capital gains
tax cut in 1997. This introduced the Roth IRA and made the first $500,000 of
home value free of capital gains taxes. Seriously rich people don't give a
damn about Roth IRAs and a $500,000 deduction. It's irrelevant. You would
expect this sort of mishmash from a labor-oriented Democrat with no real
background in economics. It is supposed to be the role of a Nobel Prize
winner and former CEA head to straighten this stuff out.
Although I'm generally a low-taxes fan, nevertheless I think there
may be a role for taxes on higher incomes. The fact of the matter is, 19th
century capitalism was pretty ugly in many ways. This is part of what led to
the rise of socialism, unions and the urge to "tax the rich" around
the 1880s-1940s period. 1950s capitalism -- with unions, and rather high tax
rates on high incomes -- was not all that bad. I tend to think something like
essentially no income taxes for the great majority of people, but a 20% - 30%
or so tax on high incomes, might be a good compromise. By "high
incomes" I mean really high incomes. So, something like the first
$100,000 is tax free, and the 25% rate hits around $1 million. Capital gains
could be tax free up to $1 million or so a year, at which point they are
taxed as regular income (with a 25% top rate).
No. 4:
Faking the Numbers
Meanwhile, on July 30, 2002, in the wake of a series of major
scandals—notably the collapse of WorldCom and Enron—Congress
passed the Sarbanes-Oxley Act. The scandals had involved every major American
accounting firm, most of our banks, and some of our premier companies, and
made it clear that we had serious problems with our accounting system.
Accounting is a sleep-inducing topic for most people, but if you can’t
have faith in a company’s numbers, then you can’t have faith in
anything about a company at all. Unfortunately, in the negotiations over what
became Sarbanes-Oxley a decision was made not to deal with what many,
including the respected former head of the S.E.C. Arthur Levitt, believed to
be a fundamental underlying problem: stock options. Stock options have been
defended as providing healthy incentives toward good management, but in fact
they are “incentive pay” in name only. If a company does well,
the C.E.O. gets great rewards in the form of stock options; if a company does
poorly, the compensation is almost as substantial but is bestowed in other
ways. This is bad enough. But a collateral problem with stock options is that
they provide incentives for bad accounting: top management has every
incentive to provide distorted information in order to pump up share prices.
The
incentive structure of the rating agencies also proved perverse. Agencies
such as Moody’s and Standard & Poor’s are paid by the very
people they are supposed to grade. As a result, they’ve had every
reason to give companies high ratings, in a financial version of what college
professors know as grade inflation. The rating agencies, like the investment
banks that were paying them, believed in financial alchemy—that F-rated
toxic mortgages could be converted into products that were safe enough to be
held by commercial banks and pension funds. We had seen this same failure of
the rating agencies during the East Asia crisis of the 1990s: high ratings
facilitated a rush of money into the region, and then a sudden reversal in the
ratings brought devastation. But the financial overseers paid no attention.
Kind of a shotgun approach to "corporate malfeasance" in
general. Certainly, corporate malfeasance has been pegging the meter in the
last few years. The guys at the top really do jigger the numbers to stuff
their pockets, with little regard to the consequences to their companies or
shareholders or the economy in general. The rating agencies are whores. But,
didn't we always know that? I mean, who was actually buying a synthetic CDO-squared?
Or a CPDO? Crazy people, basically. We have seen the Stupid People, and it is
us!
No. 5:
Letting It Bleed
The final turning point came with the passage of a bailout package on October
3, 2008—that is, with the administration’s response to the crisis
itself. We will be feeling the consequences for years to come. Both the
administration and the Fed had long been driven by wishful thinking, hoping
that the bad news was just a blip, and that a return to growth was just
around the corner. As America’s banks faced collapse, the
administration veered from one course of action to another. Some institutions
(Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman
Brothers was not. Some shareholders got something back. Others did not.
The original
proposal by Treasury Secretary Henry Paulson, a three-page document that
would have provided $700 billion for the secretary to spend at his sole
discretion, without oversight or judicial review, was an act of extraordinary
arrogance. He sold the program as necessary to restore confidence. But it
didn’t address the underlying reasons for the loss of confidence. The
banks had made too many bad loans. There were big holes in their balance
sheets. No one knew what was truth and what was fiction. The bailout package
was like a massive transfusion to a patient suffering from internal
bleeding—and nothing was being done about the source of the problem,
namely all those foreclosures. Valuable time was wasted as Paulson pushed his
own plan, “cash for trash,” buying up the bad assets and putting
the risk onto American taxpayers. When he finally abandoned it, providing
banks with money they needed, he did it in a way that not only cheated
America’s taxpayers but failed to ensure that the banks would use the
money to re-start lending. He even allowed the banks to pour out money to
their shareholders as taxpayers were pouring money into the banks.
The
other problem not addressed involved the looming weaknesses in the economy.
The economy had been sustained by excessive borrowing. That game was up. As
consumption contracted, exports kept the economy going, but with the dollar
strengthening and Europe and the rest of the world declining, it was hard to
see how that could continue. Meanwhile, states faced massive drop-offs in
revenues—they would have to cut back on expenditures. Without quick
action by government, the economy faced a downturn. And even if banks had
lent wisely—which they hadn’t—the downturn was sure to mean
an increase in bad debts, further weakening the struggling financial sector.
The
administration talked about confidence building, but what it delivered was
actually a confidence trick. If the administration had really wanted to
restore confidence in the financial system, it would have begun by addressing
the underlying problems—the flawed incentive structures and the
inadequate regulatory system.
That TARP was always a channel by which bankers could steal from
the U.S. Treasury to fill in their gaping losses -- and pay themselves some
nice bonuses. This was obvious to a great many people, which is why it was
opposed (mostly by Republicans). The Democrats passed it largely because they
didn't want to get blame for whatever happened afterwards if it was not
passed. Nobody gets blamed for "Doing Something that Didn't Work."
Plus, after passing it, the Dems get a nice chance for criticizing TARP for
being what it always was from square one. The Dems could have just put
together their own bill, three pages if necessary, that undertook bank
recapitalization (or whatever their alternative was) under the aegis of
someone other than the bankers' Scammer in Chief Hank Paulson. They had that
option. But, that would require real leadership and understanding. Instead,
it was a lot easier to just pad out the bankers' present to themselves with
another $150 billion of handouts. Since it's Christmas and all. Thus far, the
TARP hasn't caused any problems, although the pattern of these giant mystery
bailouts will eventually have consequences I think. Incentives and regulation
don't solve the present problem, they prevent it from happening again, some
generations hence.
Was
there any single decision which, had it been reversed, would have changed the
course of history? Every decision—including decisions not to do
something, as many of our bad economic decisions have been—is a
consequence of prior decisions, an interlinked web stretching from the
distant past into the future. You’ll hear some on the right point to
certain actions by the government itself—such as the Community Reinvestment
Act, which requires banks to make mortgage money available in low-income
neighborhoods. (Defaults on C.R.A. lending were actually much lower than on
other lending.) There has been much finger-pointing at Fannie Mae and Freddie
Mac, the two huge mortgage lenders, which were originally government-owned.
But in fact they came late to the subprime game, and their problem was
similar to that of the private sector: their C.E.O.’s had the same
perverse incentive to indulge in gambling.
The
truth is most of the individual mistakes boil down to just one: a belief that
markets are self-adjusting and that the role of government should be minimal.
Looking back at that belief during hearings this fall on Capitol Hill, Alan
Greenspan said out loud, “I have found a flaw.” Congressman Henry
Waxman pushed him, responding, “In other words, you found that your
view of the world, your ideology, was not right; it was not working.”
“Absolutely, precisely,” Greenspan said. The embrace by America—and
much of the rest of the world—of this flawed economic philosophy made
it inevitable that we would eventually arrive at the place we are today.
So much of what has happened strikes me as a reflection of a Baby
Boomer mentality -- the thinking of people who grew up in the wealthiest
society the world has ever seen (certainly wealthier than the U.S. today),
with an invincible sense of entitlement, and who spent their youth doing lots
of drugs with apparently no consequences. Debt was their new drug, at the
individual and institutional level. Some of the institutions are learning
this has consequences, but the government hasn't yet. To this we add another
mentality, that it is right and proper to take as much as you can, by any
means possible, the more legal the better. These days I often think that
outcomes happen largely because people think they should be so. That, for
example, there was a broadening middle class in the U.S. 1950s or 1960s in
part because corporate leaders felt that it was good and proper that all
employees should benefit along with the growth and prosperity of a company,
rather than having top management benefit from griding down the employees as
far as possible. Not necessarily because of this tax rate or that regulation,
although those also reflect the thinking of the time. The Soviet system was
just as effective as the 19th century Capitalist system at producing a class
of entrenched elites above a sea of peons. Heck, 18th century French
feudalism produced the same outcome. This has arisen in no small part due to
the expectations of the peon class itself, which really is most comfortable
in the "I'll do what you say if you feed me" feudal format that has
characterized European culture since waaaay back. Domesticated animals can no
longer live in the wild, or at least they think they can't.
What we have seen is mass stupidity -- or cravenness, if you
consider that the top financial guys are still paying themselves bonuses. I'm
not sure that is an "economic philosophy." The outcome of mass
stupidity (or cravenness) is what it is. Simple cause and effect. We might
look back and see the present Democrat-led policy process as equally stupid
and craven. It sort of has the same flavor as I remember when I was first
getting my head around the housing and credit bubble in early 2004 or so.
"This sure looks like it is going to blow, and the outcome would
probably be messy. However, I'm not sure, because I've never seen one of
these blow before, and I've never seen the kind of outcome that I think could
happen if this did blow. And, everyone who thought this was going to blow in
1989/1996/2001 were wrong. Besides, everyone else seems to think it's
OK." Remember that feeling?
Is this really going to do what I think it could do? Or am I just
hallucinating? When I look at these mega bailouts, the government
market manipulation, and the Fed's money printing games (apparently they
really did go in and buy some GSE debt using the printing press last week), I
get that feeling.
* * *
Archangel
Metatron has released his second installment in the Soul Journey of Jeshua.
It is available here:
http://www.metatronminutes.com/soul_journey_of_jeshua.html
Archangel
Metatron is channeled by Carolyn Evers.
* * *
Famine
Watch: Seed shortage coming? I didn't really
think this was going to be a weekly item. But, hey, let's go with it!
Yesterday
afternoon, my Fedco Seed Catalog arrived - always my personal favorite. And
on page 6, what should I see but this, in founder CR Lawn’s description
of their situation:
And
now seed prices. I’ve ben 30 years in this business and these are the
highest increases to us I’ve ever seen. The ethanol boom diverting land
to corn production has ahd a tremendous impocat on farm commodity prices,
including vegetable seeds. Wholesale prices for pea and bean seed are up
30-50%, for corn and squash, 20% or more. Even so, wholesalers could not find
growers for all crops so several varieties are missing from our catalog.
Horrible growing weather this summer has exacerbated the shortage.
http://sharonastyk.com/2008/12/11/are-we-seeing-the-early-signs-of-a-seed-availability-crisis/
Remember,
I suggested that if people decide they need to grow their own food -- because
it isn't coming from Argentina anymore perhaps -- then they will need seeds.
And, if they need it, they are going to really, really need it. And, if
everyone needs it at once, it isn't going to be available. Apparently, most
of the seeds found in packets at your garden store are crap. To get the good
stuff, you have to mail order, and, if you want to grow meaningful
quantities, you have to get size. The link above has lots of good details.
* * *
UAW:
Good for you! Apparently the auto bailout deal stumbled
because Republican senators demanded big wage concessions by the UAW, and the
UAW said "no way." That makes perfect sense to me. Employees are at
the TOP of the BK food chain. They are senior even to banks and suppliers.
Why should they take the hit first? They're supposed to take the hit LAST.
First, the equity goes bye bye. Then, the bonds get marked down. Then, the
banks get marked down. Then, the suppliers get paid back. Then, and only
then, the employees make a deal. Actually, the employees will deal before
then, because they don't want to see the whole thing be liquidated. However,
I totally agree that it is time for the bondholders to take a bath. That is
why I suggested a prepack BK upfront. Makes sense. Realistically, GM isn't
going to be viable until the labor problems are worked out, which would allow
them to downsize meaningfully. (Update: apparently the UAW was willing to
deal, and the Republican senators come from states where there are factories
of foreign carmakers. Still, I think the bond guys should get whacked before
the UAW.)
I was
joking to a friend of mine: "Why is it that AIG gets $150 billion
no-questions-asked, when the auto guys have to beg for $15 billion? I figure
it's because Goldman has CDS on GM, and AIG is the counterparty." My
friend said: "Yeah, that's exactly the reason!" I'm just making
this up, but sometimes it really is that simple.
Hint
to the UAW: You might think of getting benefits in terms of things rather than
money. For example, GM could run some company hospitals and clinics, instead
of going through the healthcare/insurance system, which is a mega scam. Or,
instead of a pension per se, GM could provide company housing in certain
retirement locales, maybe even with some food provided in some way. I suppose
that after Americans' bad experience with the welfare housing projects of the
1960s, this doesn't sound like such a good idea. However, other countries
(especially Asian) have worker housing and even food, and it is fine. I
personally have eaten in corporate cafeterias regularly and vactioned at
corporate vacation resorts (both very cheap), and I have friends working in
high-level professional jobs for Mitsubishi-UFJ Financial Group, Toyota
Motors, Toshiba and Mitsubishi Heavy Industries that have lived in company
housing. (A lot of Japanese company housing was built in the 1950s and 1960s,
and is rather dingy today. They should upgrade it.) In an economic situation,
it is far better to have a thing
like an apartment rather than a bunch of financial promises. Economies
collapse, pension funds collapse, governments collapse, currencies collapse,
but apartments stay standing. This is a solicited contribution by doomer
Dimitri Orlov to the Harvard Business Review for their list of
"breakthrough ideas." HBR took it, and said that they would have
liked to give it more space. And for GM? You've got unused real estate
aplenty, conveniently located near the factories and offices. Construction
workers are working cheap. It's tax deductible.
http://cluborlov.blogspot.com/2008/08/when-all-your-best-employees-are-going.html
When
All Your Best Employees Are Going Broke
The
combination of skyrocketing food and energy costs, rising medical costs,
falling real estate values and stagnant wages is putting increasing numbers
of workers in financial distress. A distressed workforce can hardly be a
productive workforce, and companies must do whatever it takes to make it
physically possible for their employees to function. What can companies do to
remedy this situation? The obvious step of increasing wages not only puts
additional pressure on the bottom line, but can also fuel wage inflation.
Also, It may not be the most effective approach.
A
better approach is to treat the company and its employees as an economic
unit: a single household, with a common set of costs. These costs can be cut
very effectively by trading off slightly higher company costs against
significantly lower employee costs. Each additional dollar paid out in wages
is taxed as income, trimming it by about a third. It is then spent in the
retail chain, generating profits for retailers and service providers,
trimming it by another half or more. This same dollar can be stretched much
further if the company uses it to buy products wholesale and makes them
available to its employees either free of charge or for a nominal fee.
Many
families are struggling with rising food costs. To help them, the company
commissary can provide not just breakfast and lunch, but take-home dinners
for the entire family. Periodically, it can provide other take-home items
such as frozen chickens purchased in bulk, fresh organic vegetables from
local CSA (Community-Supported Agriculture) farms, or a basket of popular
foodstuffs purchased wholesale and assembled in-house.
Many
employees are finding that their daily commute is eating ever deeper into
their budgets because of the increasing price of fuel. In many cases, their
ability to relocate closer to work is complicated by the stagnant real estate
market and the higher price of housing closer to population centers.
Telecommuting can help, but is only feasible for certain types of work. Here,
the company can help by providing dormitories close by, which would allow
employees to commute every other day, or even just once a week. For the
younger, single employees, this may allow them to avoid spending money on
housing altogether.
There
are numerous other ways that a company can use its vastly greater negotiating
power to effect significant savings for its employees while incurring a
comparatively small additional cost. Examples run from directly providing
family medical care through a company clinic to providing vacation packages
at cost by renting out an entire vacation resort at a lower, negotiated group
rate.
But
perhaps the greatest opportunities for cost reduction lie in areas where
employees' own efforts can replace services or products they would otherwise
be forced to purchase, be it taking care of their elderly relatives instead
of putting them in assisted living, or spending time with their children
instead of paying for day care, or growing their own food in a community
garden instead of shopping at a supermarket. Here, the company has to be
willing to accommodate shorter working hours, trading off the slightly lower
efficiency of having more part-time employees against the resulting vastly
greater efficiency of the company community when it is viewed as a single
household.
There
is no need to couch such initiatives in purely negative terms of cost
containment. Here is how Eric Schmidt, CEO of Google, sees it: "The goal
is to strip away everything that gets in our employees' way. We provide a
standard package of fringe benefits, but on top of that are first-class
dining facilities, gyms, laundry rooms, massage rooms, haircuts, car washes,
dry cleaning, commuting buses - just about anything a hardworking employee
engineer might want."
If you
feel that such special treatment may be required for the pampered software
artists at prosperous Google, but not for your own employees, then take a
look at the long list of benefits enjoyed by the enlisted men and women of
the US Air Force, which includes 30 days a year of paid vacation and
unlimited free air travel. This is a fine example of making the best use of
what you have to make a difference for your employees: if what you have is
plenty of jets, then why not let your employees travel as much as they want?
Although
the results of such efforts may at first be difficult to quantify, should
they succeed, the resulting competitive advantage is likely to become
obvious. Let your hard-nosed competitors try to run their businesses with
distressed, disgruntled, overworked employees, while you reap the benefits of
loyalty, solidarity and ésprit de corps. In due course, this should
make your competitors attractive as acquisition targets.
One
ready objection that this proposal normally encounters runs along the lines
of “If everybody did this, the economy would collapse.” If it
were implemented across the board, this would cut retailers and the
government out of their share of your earnings, reduce both corporate profits
and government expenditures, shrink the overall size of the economy, making
it unable to sustain a large and growing national debt, and hasten economic
collapse and national bankruptcy.
But it
is clearly a mistake to consider it likely that this proposal would be
implemented by more than a handful of companies. Overwhelming numbers of
corporate executives would regard it as professional suicide, because
financial markets punish companies that put the interests of their employees
ahead of those of their investors. And it seems equally outlandish to think
that the actions of a few mavericks could significantly hasten economic
collapse and national bankruptcy. In short, the macroeconomic effects of this
proposal are not interesting. It is far more interesting to consider the
notion that it is possible to safeguard a company and its employees against a
continuously worsening economic environment, even onto complete economic and
political collapse. The steps proposed in this article can be regarded as
baby steps in that direction. The remaining steps are varied and far more
difficult, and are beyond the scope of this article.
* * *
A
short history of the Brazilian real/cruzero/cruzado: http://www.brazilbrazil.com/inflat.html
A
shorter version: 21 zeros in sixty years.
* * *
Why
ETFs aren't gold: a few details here:
http://www.runtogold.com/2008/12/a-problem-with-gld-and-slv-etfs/
It
doesn't matter until it matters, and then it's the only thing that matters.
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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