Wednesday, December 31, 2008


After a series of downbeat posts, it is good to close the year with kudos.

Kudos to Peer Steinbrueck. This German with a Dutch name is finance minister of the world's best-run large economy. He won't drink the Anglo-Saxon Kool-Aid. He said:

". . . we must make sure that a policy of cheap money does not lead to a new growth bubble founded on credit, as happened after September 11, 2001. It is therefore important that the focus . . . be on sustainable investments in infrastructure and less on consumer spending financed by debt."

Go, Peer: and stay sober! Even on New Year's Eve . . .

Kudos to the University of Michigan, which the NYT reports has been building for growth largely w/o state help. UM is my alma mater and has some of the best beer parties in the US. Not that I was ever into beer. Beer notwithstanding, UM has been a center of excellence in a state that has been in a state of decline for decades. Go Blue!

Kudos also to some of the best financial predictors on the Net. Mish has been prescient re deflation and numerous other topics. He also gets my "Best of the Net" award for his impassioned efforts against the TARP bailout bill and other horrors. Kudos also to Reggie Middleton, who through research detailed specific problems with banks, I-banks, REITs, and the like. And Prof. Roubini little needs praise from the likes of me. Wouldst he had less of a Big Gov solution for the problems he predicted with such amazing precision, however.

May 2009 surprise on the upside as much as 2008 did on the downside.

Uncreative Destruction

Joseph Schumpeter pointed out the importance of new technologies making existing products obsolete and irrelevant. His theories are much talked about. The PC displaced dumb terminals receiving instructions from a central computer. The cell phone is making land lines obsolete. The Internet is making ink on newsprint good for not much. And so on. This process of Schumpeterian "creative destruction" worked in tandem with the victory in the Cold War to enthuse investors to the Nth degree in the 1990s.

In this down-cycle in the economy and the markets, there is a clear problem. The destruction we see and read about involves no better product or economic/financial paradigm. All the financial firms that have been laid low this year fell because of old things such as mortgages and gambling/insurance products. There was no new better company that knocked them off their perch.

The homebuilders and retailers that have been flailing and failing did not fall from grace because of a surge in new types of homes (yurts, anyone?) or the massive success of Internet retailing. Autos have not been replaced by beaming people around town or individual jet packs a la the Jetsons. What happened was simple. Old production techniques produced more stuff and stores than people could afford. Now these are in excess and contraction follows. It's normal but it does not foretell a boom after the inventory and production adjustments are over.

What we are seeing is destruction without much creation. We are watching the agony of the ancien regime of a debt-based economy that needs propping up like the leaning Tower of Pisa. When the good doctor Bernanke prescribes a ZeBRa (Zero Bill Rate) for the ills of the economy, you know that it's the end of an important era.

The problem with creativity is that you can't hurry it. You can institutionalize progress, as with more durable and more functional artificial hips, but an economy-changing paradigm, a la the industry built in a hurry around the Internet, happens on its own pace.

Those seers who look to historical precedent to foretell the expected rebound of the stock market should be careful. This is a New Era. It is one of destruction without creation. What human activity does that sound like? It sounds like war. We ex-Hippie ex-Yuppies remember that war is bad. So for this economy and financial instruments such as common stocks of economically sensitive companies, this is a bad scene out of a bad trip. Caveat emptor.

Ring in the Old

With a sort of victory in Iraq (i.e., non-defeat) and a record collapse of oil prices, the New Year should be being greeted with optimism. Instead, the public mood is sour. Current and future economic conditions are adjudged terrible by consumers and business people alike. Why?

The problem is that there's nothing new and exciting. Record low Treasury borrowing costs are new, but not exciting. Neither is another refi wave, tonic though it may be for a while. Neither is, anymore, the digitalization of the world. The stock market is boring. Stocks are Old Economy, manipulated, and suffer from prices that are a decade old. Old institutions such as broker-dealers are despised, but nothing new is apparent to take their place. Large companies that own banks also own lots of their own bad loans and have sucked the life force out of the economy. The result is that an equally old industry, retail, has received no government largesse and is collapsing. An old but less old industry, automobile assembly, has maxed out and is in at best a no-growth state in the industrialized world. Margins have nowhere to go but down. The war in Afghan-land is old, boring and depressing. That there is steady progress in medical therapy is marvelous, but we take it for granted and so is no longer new or exciting on a big-picture basis. Even our very safe country, with the fear following 9/11 faded, is (happily) boring.

The newest new thing, a President with an African father, is proposing a very old solution to our economic problem: build and repair roads. One can imagine a Roman emperor prescribing the same remedy. To keep people off the streets, put them to work on the streets. The problem is that unlike in FDR's time, or even Jimmy Carter's, the US Gov is itself financially over-leveraged. It beggars common sense to believe that what is wrong with America's economy is insufficient well-paved roadway. It therefore beggars common sense to believe that borrowing and printing money to improve the quantity and quality of roadway will fix our problems. More likely, it will just lead to more traffic delays. Motorists will be treated on a larger scale to viewing lots of heavy equipment by roadways with no one working, or perhaps a road crew here or there. So this new President hasn't yet proposed an exciting solution.

And it is hardly worth mentioning that the current crew in DC hasn't come up with anything new or exciting. Even though an economically dysfunctional Executive Branch is leaving, a dysfunctional Congress remains, and a dysfunctional Fed continues to bail out no one you know. The three most important Cabinet posts in the Obama administration are going to: Clinton's last Treasury Sec'y, Clinton's wife, and the current President's Sec'y of Defense. This is not change anyone can believe is change. It's not new and it's not exciting. It is at best competency/experience and at worst evidence of the thinness of our "bench" and/or of Obama's real lack of zest for change.

We would love to put old bad things behind us. The problem is that there is no new new exciting big thing visible. And so we slouch toward the new year that feels like the old one.

Tuesday, December 30, 2008

SEC - and You Should Be Able to Find Out

Re SEC Report on Mark-to-Market Accounting

The SEC's Staff has released recommendations regarding fair-value accounting. The Executive Summary is worth reading in its entirety. The press release is a good quick read as well.

A top-down comment: probably all independent bloggers I have seen will breathe a sigh of relief that mark-to-market is supported. What happens to these recommendations, and what commentary and explication there are of the details, will be interesting to observe. The report makes explicit that SEC as a whole does not necessarily agree with this report.

For now, I will keep to big picture comments.

1. Level 3 assets are, to put it politely, BS. If a financial institution wants to be publicly owned and wants to have Level 3 assets, let it disclose them in detail. If competitors see what they have, let them be envious of the high quality of these assets! If a company doesn't want competitors or investors to see what's there, there should be two alternatives: go private, or don't have these "assets" in the first place (or sell them; or give them away to charity!)

2. Market valuation can be manipulated. Goldman and Morgan Stanley can do a trade or two between themselves of CMOs or whatever assets they want at prices that are really fictional. So this gets back to point 1 above. A systemically important public company has no business owning highly illiquid securities and if it wants to own this sort of asset, it should disclose it so regulators and the company's owners (i.e., shareholders) can perform independent assessments of value. "Trust me" financial institutions are now oxymorons.

3. Market values of illiquid assets can change rapidly and drastically. Consideration should be given to the proposition that depository institutions should not be owned by companies that own Level 3 assets, whatever their level of disclosure. (This would imply at least a partial repeal of the 1999 repeal of Glass-Steagall.) Bank runs can be caused by threatened failure of the holding company that owns a subsidiary that is a depository institution: no Northern Rocks wanted here.

4. Everything said above re Level 3 assets should be considered for Level 2 stuff as well. Unpriced securities that are "like" other, priced securities but are different are . . . well . . . different. Thus their prices may be . . . different!

5. Page 4 of the report states that "fair value accounting did not appear to play a meaningful role in bank failures occurring during 2008". So all the apologists for Bear, Lehman and others should . . . apologize.

Good for GM

"For years I thought that what was good for our country was good for General Motors, and vice versa."
-Charlie Wilson, President of GM, in a hearing to become Pres. Eisenhower's Sec'y of Defense.

Well, here we are now. What is good for GM? Is it the same as what is good for the US?

Compared to the gargantuan sums that have been and are being thrown at financial firms, it would seem that only a piker could begrudge GM and GMAC some crumbs. And perhaps as Mish hypothesizes, there are ulterior motives to this bailout.

I went to college near Detroit. Anyone who talked to anyone knew that management despised labor, and labor hated management. Detroiters knew to fear Monday/Friday cars: those assembled either on Monday, when workers were hung over from the weekend, or on Friday, when their minds were on the upcoming weekend.

One observed over the decades an endless succession of WASPS: Roger Smiths, other Smiths, now the aptly named Wagon-er, all clueless. When GM announced an initiative this year to respond to the high price of oil (then about $115) with some innovative something-or-other, I stated to anyone who would listen that when GM talks, people listen and then go in the other direction. Mere weeks later, oil began a $100/bbl plunge.

In any case, what's most egregiously wrong with GM has nothing to do with the UAW.
It has to do with GM's decision to become a financial firm that happened to make cars. Anyone who watched CNBC probably saw incessant ads during the housing bubble days for Ditech. Ditech, a GMAC company, was one of the worse offenders in making loans to humans and humanoids with pulses but perhaps empty purses. Inflicting the fat cross-dressing spokesman innumerable times upon CNBC viewers is cause enough for corporate death, and an agonizing one at that!

In the bigger picture, the disaster with GM/GMAC and the US-based auto industry comes back to the financialization of America. If people believed in owning their own cars rather than renting them, and in truly owning their own homes rather than in essence renting them with a call option to sell if the price moved up enough, then the current financial and economic troubles simply would not be.

American industry has stretched too far too long to keep prices affordable by selling for too low a price and making it up on the interest; and then when things really fell apart, they started losing money on financing, too. There is no there there anymore for this game. The "good jobs" in auto mfg are largely gone for good. The sooner Bush, Paulson and Obama act accordingly, the better.

To answer my earlier question, there is really no good answer. GM is dying. It deserves to die. Whether it should die a natural death or continue on life support is up to the doctor (US Gov't) and the family (society at large). There is no right or wrong. There's simply a terminal patient.

The larger issue is whether GE and Amex should be rescued if this financial crisis continues as Prof. Roubini predicts. These guys are not as terminally stupid as GM has been for decades, but they're catching up fast.

Monday, December 29, 2008

More Krugman

By coincidence, Mish ( has a post today debunking Dr. Krugman's attempt at arguing that busts don't have to follow booms. For a blogger like Mish to destroy in argumentation a Nobel Prize-winner is like David slaughtering Goliath. But so it goes. So often the MSM just can't get it right.

This unfair fight that should have been unfair in the other direction is perhaps an example of what's wrong here in America. The brilliance and common sense are out of power. The Nobel for Peace (!) goes to a politician after a decade in which the globe has cooled; the Nobel for Economics goes to a left-wing op-ed writer who is still pining for FDR's solutions to a situation that is tres different from the Grrrreat D. People like Dr. Krugman really can't wait for the Big One to reappear so that they can impose Big Solutions. So they have to ignore the obviousness that this is just another economic cycle that will do what others do- run their course.

As physicians say, "Treat a cold, and it will last seven days. Leave it alone, and it will last a week." So with the economy. But in Obama-Krugman-land, building lots of roads with borrowed or printed money is the "doing something" that does more damage than an unnecessary course of antibiotics for a viral URI. But it sure is good for Big Gov and its hangers-on.

After a frenzied five or six years, the global economy simply needs a rest. The last thing it needs is an artificial "stimulus".

Krugman Loses It

In his NYT op-ed today, "Fifty Herbert Hoovers", Prof. Krugman has demonstrated that receipt of a Nobel Prize can addle a brain.

He believes that it is not enough that the Federal Government is financially imprudent. Somehow 50 states are governed by
"Herbert Hoovers"- whatever that means- because they are following their Constitutions and recognize that in general, expenses need to be cut when revenues fall.

The number of misstatements is almost too many to catalog. California is going to run out of money by February. Somehow it is a giant act of panic to halt construction outlays. Earth to Krugman: the contractors can't be paid with scrip!

He then sets up a straw man and even gets that wrong. He asks: "Is America less able to afford help to (society) than it was one or two years ago? Of course not."

When you ask and answer a question, it should be a no-brainer that you get it right. News flash: America is in fact less able to help whomever or whatever than 1 and 2 years ago. Clearly Dr. K believes that America can borrow vast amounts of money and print the rest, and that this will "help" the infinite number of needy recipients. No matter that when America needs help and money-printing fails and lenders won't readily lend, those recipients won't bail the US out.

He plaintively asks, "Why can't we keep doing good things?" Right ought of the Woodstock generation. And Kumbaya.

He then goes on to use the usual inflammatory language: "shredding the social safety net"; "plunging" state revenues, etc. He should check his facts about 2008 GDP vs 2007 GDP, and 2008 state revenues vs. 2007 revenues. And he's wrong that investors "are refusing to buy anything except federal debt". Investors are reacting to overspending by the governments that can't print money and buying the debt at lower prices than a year ago. That they are likely overpaying for federal debt is a different problem.

The rest of the post is an impassioned plea for the apparently omnipotent central government to take on more and more unfunded liabilities- Medicaid, education, infrastructure.

He forgets that the US is a Federal system. The States created the Federal Government, not the other way round.

What you realize when you read this op-ed is the true face of Obama-ism. With essentially total control of the Executive and legislative branches, there's no more need to pretend. The liberal conscience leads to an authoritarian central government that will do "good things" that the nasty (and sometimes "stupid") state governors just won't do for their citizens. He doesn't realize that out amongst the People, the phrase "We're the Government and we're here to help you" is a derisive one. He really believes it. Hold on to your wallets, you fifty state governors. The Feds are so determined to borrow and spend our way to prosperity that you should redouble your efforts to be fiscally responsible. And let Dr. Krugman know that you won't call him "Nowhere Man" (i.e., a Utopian) if he won't call you all Hoovers.