Will Wonders Never Cease.....

One of my long-time favourite irks is the position of the rating agencies for whom the catch phrase "heads I win tails you lose" could be their byline. So it was quite surprising that I read an article about the recent ratings review of Citi, Wells and BofA by Moody's and found it to contain useful/interesting comments.

In affirming the long-term and short-term ratings of Bank of America, Citigroup and Wells Fargo Moody's noted that due to the recent passage of the financial reform legislation that they were changing the outlook on the three from stable to negative.

Imagine, the rationale of the rating agency was that the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is "a law that, over time, is expected to result in lower levels of government support for U.S. banks."

The review went on to state "Since early 2009, Bank of America, Citigroup and Wells Fargo's ratings have benefited from an unusual amount of support...the intent of Dodd-Frank is clearly to eliminate government-i.e. taxpayer-support to creditors."

I don't want to sound too partisan, but I seem to recall that one of the major reservations of Republicans was that Dodd-Frank would create big government and would stifle business with regulation. And yet here is Moody's clearly stating that the major effect of the bill will be to remove government support-and replace it with oversight.

Indeed, Moody's sees the law as an attempt to strengthen the ability of regulators to resolve complex financial institutions and to reduce the probability that they will need to be resolved in the future.

Imagine my continuing surprise about the comments of the CEO's of a number of major U.S. banking institutions in describing their company's recent performance. None of them focused on the new legislation directly although many mentioned that there will be losses of revenue associated with them. These "costs" are essentially crackdowns on fees banks currently charge which will reduce bank's profits, to the benefit of their clients.

The CEO's generally painted a picture of an economy that is fragile, but, in a wonderful example of American optimism, they all discussed the potential just around the corner. None of them blamed the government. They all espoused hard-headed business acumen. The basic sentiment was that they are poised to take advantage of opportunities when the uncertainty in the economy dissipates.

U.S. Bancorp even spent money to make money-and produced some of the best results. Maybe there is a message to those commentators who continue to blame the government for industry's unwillingness to invest.

The Blindness of Ideology

I just read an article lambasting Obama's policies from the Opinion pages of the Pittsburgh Tribune-Review. This is part of a media group owned by Richard Mellon Scaife who with $1.2 billion is a principal heir to the Mellon Banking and Industrial Estate. Mr Scaife is a major funder of conservative and libertarian causes.

Given Mr Scaife's background it is not surprising to read conservative editorials and given the fact that truth and objectivity are no longer journalistic prerequisites I take everything I read from his media empire with a huge grain of salt.

So I was not surprised to see an article published yesterday decrying Democratic red ink and more dependency on government checks. The writer, a certain Ralph R Reiland is an associate professor of economics at Robert Morris University, and a local restaurateur.

He decided to berate the extension of unemployment benefits and to focus on Massachusetts in general, and just happened to pick Nantucket as his specific target. I don't know if his figures are correct and I certainly have no idea out of what context they were snatched. I have to assume that the amount you draw is somehow related to the amount you earned so the national average is probably a good starting point.

In Mr Reiland's example he stated that the average national unemployment check is $309 a week, but in Massachusetts the top benefit is $943 per week. His focus is that if you get the top benefit in Massachusetts than you have no incentive to work. He does seem to ignore the fact that the average is $16,068 a year-he doesn't discuss the mean, doesn't address that this is an extension up to 99 weeks (it's not forever) and that the real problem is that there are not enough jobs.

I surmise that there is quite probably a concern on the part of the Administration that we could kick along at relatively high levels of unemployment for a while and what they are trying to buy is time. Mr Reiland has decided that the reason that the jobless rate has increased in 2009 is because Obama has created "an increasingly hostile environment for investment and job creation".

Of course he doesn't mention that unemployment was 4.7% when GW entered the White House and increased to 6.0% and then declined back to 4.6% in 2007 only to start to clime again leaping to 9.3% as Obama entered the White House. He also declines to mention that it peaked at 10.1% and is now back down to 9.5%.

This might be because it doesnt sit wel with the Republican mantra that "Investing and hiring new employees is too risky if business sees a plethora of higher taxes and more regulatory costs." I love it. The Bush Tax Cuts that are being reinstated are now being trumpeted as one of the largest tax increases in US history. That would make sense given that they were one of the largest tax CUTS in US history.

The Republicans are always accusing the Obama Administration of not understanding economics. Well I just wonder if the reason that investment and hiring are not taking place is because the captains of industry don't see an opportunity to make money. I am sure that where there are good opportunities there is investment and hiring taking place. It's just much easier to blame someone else for the lack of growth in the economy-especially at a time that corporate profits are going through the roof.

Do We have an Industrial Policy or what Price Stimulus?

In a Bloomberg report today the announcement was made that due to a concentrated effort on the part of the People's Republic of China (PRC) that the cost of solar energy is nearing grid-parity.

Grid-parity means that the cost of solar energy is as cheap as the retail price of grid-delivered electricity. In Europe there are forecasts that have parts of Italy, Spain and Germany achieving this in stages by 2015. There are also reports suggesting that parts of the USA will achieve this by 2013.

So far, so good. But how is this being achieved?

In the last six years Chinese manufacturers captured 43% of the global photovoltaic-panel market. Their pricing is as much as 20% cheaper than European offerings. This has been achieved by a cut in prices by as much as 50% by some Chinese producers over the last two years.

Now most commentators who choose to only see the cost-side of the equation for solar and other renewable energy sources will focus on the fact that the PRC has subsidised the production of Chinese solar panels to the tune of $24 billion in 2010 alone. Their argument is that this "hides" the true cost of solar energy.

I say who cares. The USA has subsidised alternative energy producers with over $18 billion through its' fiscal stimulus funds so far in 2010. That the state is subsidising renewable energy and thereby obscuring the true cost is irrelevant. If that's what it takes to promote these new sources of energy.

But what worries me is that the US government is also subsidising the installation of solar panels manufactured in China. We keep talking about employment opportunities in new industries. Producing solar panels is a relatively high-tech undertaking. Why aren't we subsidising our own domestic producers, or charging import tariffs to foreign suppliers to support our own industries and thereby putting America back to work?

I am not advocating selling our products to China. I couldn't be happier if the PRC subsidised the production of solar panels and installed them in China. What could be better for the environment than to have China, which has now overtaken the USA in energy consumption to focus on renewable energy sources? And would it be so bad if the PRC created a virtuous circle of production and consumption in its' own economy?

China is constantly being shown as the growth engine of the future. State subsidies through state-owned banks their are certainly playing a large "stimulus" role there. Conservative commentators in the West still argue about the value of stimulus as the US economy stalls, and China continues to chug forward.

Maybe they should reflect that an employed populace tends to be a happy populace. The Chinese are certainly aware of this.

All in the Name of Competition

I just finished reading a book on the Civil Rights movement written by Diane McWhorter who did an excellent job of recording the history of segregation and the struggle to grant equality to all Americans.

Recently there have been reverberations from the book with the recent sham surrounding Shirley Sherrod's recent resignation "under White House pressure" from the US Department of Agriculture (USDA). For those of you her are unaware of the story the FULL video (43:14 minutes) can be found on YouTube.

It is worth watching just to get an idea of what it was like to be black in the 50's and 60's and to be frank just how far we have come as a nation. But moving along the real story that she was telling was not that it was a black/white world, but much more a rich/poor, or in her terms, " have/have not" reality.

Now the real point of my post today is not her case as such-and challenges of racial discrimination should and must be investigated be they in the Tea Party, or the New Black Panthers. Racism is racism. No further discussion required.

But this was not a case of Racism per se. This is much more about the systematic destruction of the quality of information provided for through the FCC. It begins with repeal of the Fairness Doctrine in 1987 under President Reagan by the then FCC Chairman Michael Fowler. It was compounded by the decision of President Clinton to sign the Telecommunications Act of 1996 lifting the limit on the number of stations a single company could own which had previously been 40.

This ushered in a consolidation of radio stations such that a Clear Channel Communications owns over 1200 stations in all 50 states. Unsurprisingly the attack on the quality and breadth of information available to the general public was continued under President GW and his FCC Chairman Michael Powell. He allowed broadcast networks to increase their ownership of TV stations across the nation from 35% to 45%.

Furthermore he lifted a ban that prevented a media company from owning both a newspaper and a TV or radio station except for in the smallest markets as well as making some other changes depending on the size of the market.

Just about the only thing he kept was the ban on mergers amongst the four biggest networks. When asked why he was pushing for these changes Mr Powell said that "the fact that only five or six corporations dominate US media doesn't worry him". "In fact", he went on to say, "that represents more competition than exists in many other areas of industry and commerce".

This of course was in line with the false mantra of the right that competition is good, and that regulation is bad.

Now why do I care about this. Well the video that cost Ms Sherrod her job was an edited version, first put on a conservative blog associated with the Tea Party, and then still in its' edited version was picked up by Fox News.

Fox News' rise to (in)fame and glory goes back to the repeal of the Fairness Doctrine. The Doctrine essentially held that the coverage of controversial issues buy a broadcast station be balanced and fair.

The combination of the removal of the Fairness Doctrine and the continuing consolidation of Public Media/Broadcasting means that the average member of the public is now almost totally subject to the demagoguery of the monarchy of money.

Congress tried to move the Fairness Doctrine from the offices of the FCC and enshrine it in law under Reagan-he vetoed it, and under GW, he too vetoed it.

The Obama Administration should lead the charge to enact this legislation and perhaps the policy of misinformation, subterfuge and outright lying currently being practiced in the media, whatever the format, could be rolled back and we could move the political discussion onto a more enlightened plane.

"The Only Thing You Can't Hedge is Fraud"

Despite my many years in the financial industry I am still amazed at the amount of fraud that permeated the US markets, especially when it came to accounting-thank you Mr Lay, Mr Kozlowski and Mr Ebbers.

So when I reflect that one of the biggest con men, Bernie Madoff was elevated at one point to be Chairman of the NASDAQ and was the third largest OTC stock trader in the United States I am dumbfounded by anyone who still promotes the idea that self-regulation works.

So it was with total disbelief this morning that I read that only now are California mortgage brokers coming under closer scrutiny as the state adopts a federal law in an attempt to halt the fraud and abuse that helped destroy the housing market. And get this, the federal law was only enacted on July 30, 2008-after the horse had bolted!

So the guys providing sub-prime mortgages will now be required to pass criminal background checks, credit checks, and oh horror, licensing exams. As of January 1, 2010.

Now these rules were developed after investigators learned that there was rampant lending to people who either couldn't afford to repay their loans, or never intended to. Now there will even be Broker ID's so that authorities and borrowers will be able to track their lending histories.

All of this makes sense. What I don't understand is what the regulators were thinking before all this happened. It is nice that Senator Dianne Feinstein, (D) California, a co-sponsor of the federal legislation has recognised that the federal and state rules were essentially non-existent. But why does it always take a crisis to put in simple rules?

I also wonder what Ms Feinstein and her co-sponsors were thinking when they decided that federally regulated lenders i.e. banks won't require testing for mortgage brokers? Her answer was that brokers at banks are exempt because they are "already regulated and overseen by a number of federal agencies". Well now I can sleep at night given the record of the federal regulators.

The regulator overseeing the federal regulations would also like to impose licensing requirements for employees handling loan modifications for homeowners struggling with their loan burden. Not surprisingly the Mortgage Bankers Association and banks in general oppose this legislation-"it would slow hiring...."

When the CDO's of ABS-basically pools of mortgages sliced and diced into the CDO structure were all the rage the equity or first-loss piece of a pool of AAA mortgages engineered into a CDO yielded over 20%. It seemed like shooting fish in a barrel so I asked the head of CDO origination what the real risk was. "Fraud" he said. "We can look at all the loans, even the documentation, but if fraud is involved, we're screwed".

I didn't buy the equity piece.

Was it Roosevelt or the Germans?

Recently there has been a lot of doom and gloom about the risks of a double-dip recession. Most commentators from the right choose to compare the policies of FDR, essentially summed up as big government, social spending and anti-corporate with that of the Obama administration.

This of course is due to the ongoing fight about the size of the budget deficit. Funny how the Republicans clamour about the fact that it is far to high and that social spending is the cause. They will go on to cite how Roosevelt's New Deal and his "attack" on corporate American combined to throw the USA back into recession in the late thirties and that Obama is using the same medicine.

Well yesterday Mr Paul Krugman took the wraps off the hypocrisy of the Republicans whose concerns appear to be much more about either lowering or keeping taxes low for the wealthy then about the size of the deficit.

Mr Krugman quoted the second ranking Republican in the Senate, a Mr Jon Kyl. His answer, in response to a question on what should replace the $650 billion or more lost revenue in the coming decade if the Bush Tax Cuts were made permanent exposed the beauty of Republican subterfuge. "You do need to offset the cost of increased spending. And that's what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans."

The math in this is great. $30 billion in aid to the unemployed is too expensive, but $650 billion in tax savings to the wealthy isn't?!

Now the other day I mentioned that the Democrats need to learn how to sell their successes. Maybe they should take a page out of the Republican's book. Obama's stimulus and the TARP got the USA through the worst of the crisis and all that people seem to talk about is the deficit!

The doctrine of "Shock" has earned a bad name since Naomi Klein made it a dirty word. But if you read Mr Krugman's blog-"Redo That Voodoo" he basically foreshadows it in his comment that the Republicans plan to slash revenue with tax cuts and then demand spending cuts is to "...deliberately create a fiscal crisis, in the belief that the crisis can be used to push through unpopular policies...."

Yes perhaps that is what Obama has done with Health Care and Finanial Reform. But he didn't actively create crisis, just took "positive" advantage of it.

But back to the Germans in today's title. Most of the (Republicabn) comparisons with the Great Depression focus on Roosevelt's policies. They all seem to forget that the second largest economy in the world at the time, Germany, defaulted. They also don't mention that the Fed raised interest rates to the roof to prevent a gold outflow, and although price levels are soft, they are not plummeting.

Still I would like to look to the Germans. Out of the midst of a crisis a demagogue emerged promising rebirth, regeneration and perhaps most importantly, employment.

The wealthy generally can weather a recession, even a depression. The poor cannot, and nothing like unemployment to assure poverty in the absence of social spending.

Much of populism is predicated on mistruths or outright lies. Just look at Sarah Palin. And the majority of the population is easily misled. We are at a critical juncture and have to ensure that the current surmountable budget crisis doesn't morph into a full-scale Republican revival-for that would be a true crisis.

The History Just Below the Surface

As some of you have noticed I don't write my blog when I am travelling. This is primarily due to a lack of technology-I don't have a notebook and writing a blog on a blackberry is a step to far for me.

I say primarily, as the trips I take, though certainly under the general title of vacation, still tend to be focused first on relatives, and then on the history/culture of the location, which doesn't mean work, but is not without structure.

I have a strong interest in history and am of the generation in which treaties, wars, victories (and defeats)and the rise and fall of empire form the basis of my historical understanding.

My wife is much more interested in the cultural history, how economics fit into the picture and how this is reflected in the architecture and society of a place.

These two interests combine almost perfectly in 20th (21st) century Europe where the history of the last 200 years and the creation of Nation States culminates in the World Wars-or the 30 Years War of the 20th century as I like to describe them-and the cultural, economic and architectural impact that left in Europe today.

This means that one way or another the role of Germany in Europe gets brought to the fore. With the passage of time I grow somewhat ambivalent about Germany's past.

We shouldn't forget the horrors, but we need to recognise that we are into the thrid post-war generation and not all the old cliches hold true.

So, after a trip to Germany and Poland in June it was very interesting to take a quick trip to visit my sister in the Normandy.

The entire area is full of reminders of the past. Streets named after British or American Regiments; empty concrete gun emplacements from the German defenders; barbed wire and rusted out tanks on the landing or "embarquement" beaches as the French call them; and the reconstruction, be it the planned of Le Harvre and Caen, or the un-planned of Lisieux juxtaposing the past and the present.

My sister's 80 year old mother-in-law remembers going to Honfleur and looking across the Seine estuary and watching the "fireworks" of the British bombing of Le Harve-while I reflect that it is my wife's great-uncle, a DeutschNational, who as Commandant of Le Havre negotiated with the British, unsuccessfully, to spare the city.

As an aside, I went to my octogenarian German-Jewish GP and we somehow got into a discussion of my travels. When we "got to" Weimar she kept saying what an absolute beautiful city it was. How much culture and intellect. She paused for a moment though, and said slowly, "you know it's 15 minutes with the streetcar to Buchenwald from the center of town....and they said they didn't know...".

We reflected for a moment, and then she said, "But you know, if it weren't for the anti-Semitism we would have all been Nazis! It was a rebirth! A feeling of purpose and destiny!.

Sitting there as she took a blood sample I was totally confused. If even she could see that there are at least two sides to the German enigma, what did the rest of Europe think.

Back in Normandy there was an animated discussion on/against Sarkozy. Then they hammered the 35 hour week and the politicians who introduced it. I then asked, given their dislike of Sarkozy, what they thought of Frau Merkel.

"She only cares about Germany!" was the first comment quickly followed by "and if she is a European, it's only if Germany runs Europe!". I hazarded to ask who they thought should run Europe. To be fair, they mumbled about a German/French partnership. But when pressed admitted that it was extremely difficult to work with Sarkozy, let alone trust him. The only thing that was clear that La France would not be led by the Germans.

I suggested that maybe the Germans were efficient, and that might be why Frau Merkel was re-positioning Germany for more of a leadership role. The word "efficient" caused consternation and some national pride and simmering anger threatened to disrupt our picnic.

Then they all agreed if Madame Royal looked more like Frau Merkel than she would have won the election and the French/German partnership would be stronger than ever. I wasn't quite sure to whom this was the greater insult, or compliment! It certainly took the bite out of the discussion and we quickly moved on to a less emotive subject.

The World Cup!

I Think It's Called Focusing on What's Important!

I just returned from a long weekend in the Normandy in France amongst a cacophony of my sister's in-laws where very interesting political views on France, Sarkozy and Europe were discussed. Just to throw the cat in amongst the pigeons I asked how the "French"-the representation went from Le Pen to the Far Left-viewed Frau Merkel. That will be the subject of another post but suffice to say there are still some rivalries to be overcome in the creation of a United States of Europe!

No, my subject today, after catching up on my reading is back to the USA. The great news of the passage of the Financial Reform Package-even thought the devil will be in the detail. The discussion surrounding the fate of Fannie Mae and Freddie Mac- Privatize or Nationalize!-and the red herrings that are thrown up around it. The criminal behaviour around payoffs to second-mortgage holders, and my favourite, the "friends" in the Senate and/or Senate Employees who received loans under a controversial (i.e. immoral)lending program by which Former Countrywide Chairman Angelo Mozilo made over 30 loans.

Starting from the latter, I will be interested to see how the distinguished Senator Bob Bennett from Utah,(R), Ranking Member of the Senate Rules Committee, Member of the Senate Energy and Natural Resources committee, and wait for it, Member of the Banking Committee deals with the fact that over a dozen of the loans received went to people in his office!

I then moved to the discussion on the under-the-table payments the holders of second mortgages are demanding in order to allow the "short" sales of negative equity homes. So here we have the holders junior liens trying to jump the line and take money away from the first mortgage lenders. You have to be amazed at the illegal actions these guys come up with. At the same time they are now complaining about the "logistical nightmare" that Fannie Mae is creating by suggesting that lenders "refresh" credit reports before they make the loans.

Sure it's a statistical nightmare-especially when you take into account that many mortgage lenders are only concerned about taking there fees and selling the mortgage to Fannie! What a pain to have to really care about the credit quality of the borrower.

Moving on to the restructuring of Fannie and Freddie. My favourite quote comes from Mr Jay Diamond, a Managing Director at Annaly Capital Management Inc., a New York Real Estate Investment Trust (REIT) who says: "What you call them is actually a very critical component"!

Now granted, many investment companies name Freddie and Frannie specifically in their investment guidelines, and a name change would require a change to their guidelines, but this is not the first, nor the last time that guidelines have to be changed.

What I don't understand, and Mr Diamond is not alone, is where they stand on the subject. Discussing the "massive re-engineering" required to implement a name change seems very much beside the point to me.

Perhaps the most impressive action while I was away was the passage of the Financial Reform Bill. Of course this is just the first hurdle and certainly there will be many attempts to circumvent it-but every journey starts with the first step.

First Health care, now Financial Reform-sounds like Obama believes in the 3 'R's': Ruthless, Remorseless, and Relentless!

Even the Best Ideas need a Sales Pitch

In a recent poll conducted by Selzer & Co. of Des Moines, Iowa I was shocked at how poorly the Obama Administration has "sold" it's performance in the last 18 months.

Not unsurprisingly the biggest concern of those polled was the economy- 70% said the economy is mired in recession. Equally unsurprising was the view cited by 7 out of 10people that the top priority was to reduce unemployment. To me, however, what was interesting was that over 50% thought that the deficit was "dangerously out of control".

The US budget deficit is scheduled to reach a record $1.5 trillion-around 10.5% of GDP. That the public is concerned about the size of the budget is clear-but what the deficit really means, and how to go about reducing it appears to be narrowed down to a binary understanding of the problem.

Spending is good, or spending is bad, and the ancillary of this, big government or little government.

The poll revealed that the public was apparently skeptical of the administration's stimulus program and more spending in general. After a year of economic growth led by an increase of first quarter corporate profits up more than 33%, an increase in the S&P 500 of over 36% there were still some 71% that felt the economy is in recession.

Indeed, 63% felt the government was on the wrong track. Well my question is what track do they think we are on? They were unhappy with the $862 billion economic stimulus package, the bailout of General Motors and somehow now two thirds of the respondents felt that the Troubled Asset Relief Plan (TARP) that Congress passed in 2008 to stabilise the financial system was described as an "unneeded bailout" as opposed to "necessary".

If the banks had not been bailed out we would be in a Depression- no question. It is very easy to forget how bad things were in 2008. The world was teetering on the edge of total meltdown. The TARP, ugly as parts of it's implementation were, combined with massive downsizing across the entire economic spectrum stabilised things to a point that we could stop worrying about the patient dying and start to think about life after the crisis.

And that is where we are today. The battle lines have once again been drawn on partisan lines with the average Democrat advocating social spending to jump start the economy and the average Republican decrying the size of the budget deficit and the socialism of the Obama Administration.

The real problem is employment. Everyone agrees we need to encourage employment growth. But no one seems to really want to discuss it. On the one side we have the Democrats struggling with the budget deficit and trying to stimulate employment and on the other hand the Republicans harping on, hoping for Obama to fail so they can introduce austerity budgets and tax cuts.

I think the fact that the successes in the economy are not registered by the mass of the public is because their top priority is employment. Profits flowing into corporate coffers that don't translate into business investment/increased employment reflects the dichotomy of our society.

The Obama Administration inherited much of the mess we have today, and are starting to build some of their own. They should do a better job of highlighting their successes. Things are getting better-it's just that the person in the street that is either worried about keeping their job, or worse yet doesn't have a job can only see their predictiment.

Obama has to move the argument from Democrat or Republican to a discussion of an industrial policy that is focused on employment in America at the expense of short term corporate profits if necessary. This is not spend or don't spend. It's not big government or little government. It is government working in the interests of all its' constituents whose first concern is their livelihood.

The Monarchy of Money

I am a capitalist and a democrat-the former describes my approach to economics, and the latter my belief in the democratic form of government. I don't see these two to be mutually exclusive although I think it is important that a democratic government maintain a sharp vigilance on the activities of it's capitalists.

For that is where I think we have gone wrong. We have allowed the titans of industry with their catechism of free trade, little government, deregulation, competition and the "invisible hand" of the market to create new kingdoms in which their economic might has muted if not outright circumvented the democratic practice.

We have replaced the absolutism of monarchy with the absolutism of wealth. Unfortunately the only way, other than revolution, to combat this tends to be through the mechanism of populism. I don't have a problem with the concept of populism in a vacuum because it is a form of democracy. In practice however, even when begun from the left-it tends to start out from a social/communal aspect-it generally ends up on the right under the manipulation/direction of the "invisible hand" of vested interests.

So I am not promoting populism. I am promoting responsible government which frees itself from the dictates of wealthy special interest groups. Government which develops an industrial policy which is focused on ensuring that there is an industrial policy dedicated to an environmentally aware industrial platform whose primary interest is the welfare of the people it represents.

This does not mean that we pursue a beggar-thy-neighbour policy. This does mean that we don't pursue a beggar-thy-self policy in the pursuit of profits for the few at the expense of the many.

I am aware that the (American)titans of industry- and finance is an industry, perhaps the most powerful and therefore the most insidious of industries-honed their skill and power in the United States, and have now transferred their experience to the global stage. That is why I am extremely cautious about recommending protectionism/isolationism in the USA if all that were to achieve is narrow the playing field but keeps the same "players".

When I reflect on Eisenhower's warning of the dangers presented by the Military-Industrial Complex I am terrified to see how right he was-the privatisation of the military for one-but I don't think he ever envisaged the damage that would be done to the USA by the American multinationals with Finance in the vanguard.

This Monarchy of Money must be tempered if the entire planet is not to become a third-world country, the USA included, where there is an oligopoly of the super-rich, a collapse of the middle-class, and a sea of destitution for 98% of the world's population.

The Decline of the West?

In a response to one of my posts my attention was brought to an article entitled "The Decline of the West" although I believe a more relevant title would have been "The End of the Nation-State and the Rise of the Criminal Entrepreneur".

Specifically I was asked to comment on the article, so here goes.*

The article ends with three choices, the last of which is: "Or finally, you can build something new. Resilient communities and independent economic networks based on freedom, prosperity, and a new moral compact".

This is the (only) real choice, and although from a much less social/communal angle than it is perhaps advocating I agree wholeheartedly.

I don't believe that the world of free markets is necessarily a better world, and certainly not for the United States. Somewhere back in the sixties in an era of maximum egoism the USA came to the conclusion that they somehow had a monopoly on intellectual creativity and that we would keep all the high-tech "intellectual" jobs and ship out the "manual" work to cheaper providers.

That might have worked at one point in time, but that train has long left the station. We are now developing technologies and having them manufactured somewhere else thus creating the "eggshell" nation that I encountered in a trip from Boston to Toronto through a swathe of Up-State New York highlighted by the blighted towns of Schenectady, Renssalaer, Albany, Oneonta, Binghamton, Corning, Olean and that beacon of despair Buffalo.

These were the birthplaces of American engineering. Their populations have halved in some instances are down over 65%. There is no work, and there is no real hope for work. This has been repeated across the nation.

I advocate a form of isolationism which is aimed at putting Americans to work. The new and innovative industries that President Obama wants us to build have to be more than a fountain of intellectual capital. We need to develop the ability to take our new industries and recognise that innovation is the start, and that it must lead to manufacturing.

We need to recreate the ability to take prototypes and to scale them into manufacturing companies domiciled in the USA, or more specifically NAFTA.

I would accept being called protectionist to re-create this environment. I would entertain levying taxes on the product of offshore labor and on products whose beneficial pricing is predicated on FX manipulation and working conditions and laws that undercut our own pricing.

We need to recognise that first and foremost our goal has to be to create/maintain the industrial base upon which the society whose adaptability and stability we desire is based.

Yes we need to change our industries and the energy sector upon which our society is so reliant. Not by "drill baby drill", but by innovation and a recognition that the environment is an important aspect of our society, not a natural resource to be exploited and cast aside.

The whole world can't be like we are-we would require six earths. We can't stay as we are-using 25% of the earth's resources. We can and must change our industrial base. Perhaps we must focus on home and for a while let the others take care of themselves.

*http://globalguerrillas.typepad.com/globalguerrillas/2010/05/the-decline-of-the-west.html

Is Optimism Dead?

Everywhere I look I see the soothsayers of doom be it on the left, or on the right. The fears of a double dip recession fill the blogs and headlines and accordingly the markets drift sideways with rampant bouts of collapsing prices only to be pushed up for a couple of days before the next onslaught.

What is strange to me is that although the left and right both seem to agree that we are in grave danger, they don't appear to be able to look over their own castle walls and discuss things.

Now I read from a Brit in America writing for the BBC that the problem is that the USA is caught in a quagmire of pessimism. According to some commentators, this is a reflection of the intense political polarisation that has permeated the land.

What is especially galling is now all of a sudden the Right claims it is Obama that is polarising the land! Do they all suffer from collective amnesia or do they forget Newt Gingrich, Karl Rove and GW?! (Not to mention Sarah Palin and her Tea Party cronies!)

And what about those on the Left that thought he could solve everything with his eloquence who are now also attacking him? He inherited two wars and a financial crisis that threatened to become the Great Depression Part II. We had a massive deficit before the credit crisis hit. Certainly getting out of this mess would require some patience.

I for my part, despite my living abroad am slowly becoming an isolationist. I have to believe that a NAFTA economy, which already has a customer base which in the past was the world champion in consumerism could create jobs and new industries which would essentially be self-sufficient.

Yes this flies in the eye of globalism-but I am not convinced that globalism is actually in the national interest. It is certainly in the interest of multinational companies and a lot of them are indeed American, but recent history would suggest to me that the pursuit of corporate profits and the creation of American jobs are not very well correlated.

If the USA were to focus on alternative energies and build products predicated on these new technologies we would put people to work, and thereby create a customer base with the money to purchase the goods.

No, I don't think optimism is dead. I think we need to rethink what it is that we are trying to achieve. And somehow that starts with putting America back to work.

Notes on the World Cup-The End of the Fairy Tale

In addition to trying to manage my own portfolio-it has been a rough ride since May-travelling to Germany/Poland and sort of "dream walking" through history I have been an avid follower of the World Cup.

My family gets very excited around football championships and the World Cup is essentially the pinnacle so in the background of political and financial analysis we had two bets, a Pool- blind draw 4 teams each, and a Hearts and Minds competition.

The Pool was a conglomerate of family and friends in London, Belgium, New York, Toronto, Vancouver and Montreal. It was interesting because you suddenly found yourself taking an interest in a team to which you had no affinity, indeed sometimes even a dislike!

The Hearts and Minds allowed everyone, and here we broadened our net to include, Binghamton, Leipzig, Hannover and Berlin and, although not officially, St. Gastien de Bois. Here everyone chose the team of their "heart", and then the team that they actually thought would win.

After the final games of the group stage, and in some instances before, we had a ritual of crossing out the teams that fell by the wayside. It was always interesting when a Heart or Mind team played a "draw" team, as well as when your own Heart played your Mind.

We tended to watch the games in German as the commentators are more objective and because there were quite a few German Hearts, and one German Mind.

Last night my daughter had her Heart,Germany, lose to her Mind, Spain. It was interesting to watch as her dislike of Spain increased with every foul they committed, or worse, when they let themselves fall as if there were a sniper in the stadium.

Two members of the betting syndicate were travelling, and so we got desperate texts from Vietnam-power cut at 02:30! and the same from Moscow where in the Bavarian Restaurant the power first went out, and then came on just in time for Spain's winner!

To be fair, Spain was the better team on the day. Germany lacked the confidence they had demonstrated against England and Argentina, and so the Germany-Holland Final we were all hoping for wasn't to be.

My Mind team is Holland, so I have a horse in the final. The fairy tale of Germany has ended-but look out for this young team in the next European (2012) and World (2014) Cup.

As luck would have it, our Hearts and Mind competition has a twist: Heart trumps Mind and wouldn't you know it someone has Holland as their Heart!

The Next Twist: Stimulus Borrowing

In my search for a rational dialogue on the spending question I have come across a variant which is new to me, although I have to admit I don't quite get it.

In a recent article by a Harvard economics professor Edward Glaeser who is also grappling with the question of stimulus spending versus austerity budgets he came up with the idea to give tax breaks to the lower-income workers who have just become unemployed.

Now I might be missing something here, but I didn't know unemployed paid payroll taxes so I don't see how this helps. Professor Glaeser does shed some further light on the subject by suggesting that instead of increasing unemployment benefits (i.e. government spending) decreasing payroll taxes would incentivize lower-income unemployed workers to find work.

Aha, we see that he doesn't want to increase spending, but by offering the unemployed incentives such as lower payroll taxes the government will be borrowing instead of spending. Confused? I am. Not to mention that the 7 million American workers who lost their jobs since 2008 didn't make an active decision to take unemployment payments rather than go to work.

They were made redundant.

Professor Glaeser is against a modern Works Progress Administration (WPA) and yes some of the big infrastructure projects are "bridges to nowhere" and as such are wasteful. But our friend Professor Glaeser also includes public spending on projects such as high-speed rail networks in this "enormously wasteful" pot.

He goes on to discuss the capital costs of rail networks and even goes so far as to look at environmental savings. Unfortunately, this is where he loses me. It is the root of the problem for environmentalism. As long as environmentalism has to compete on a cost basis, it will fail-unless taxes on non-green activities are jacked so high that green is the only solution.

Now maybe that's what he is suggesting. Lower the tax burden on those who "value a dollar" and cut the deficit by taxing non-green industries.

Somehow I don't think so.

Eggheads

The battle lines between Government Spending and Austerity Packages seem to be drawn across the globe with both sides stridently accusing the other of being ideologically driven and either anti-business or anti-government.

It makes me think of Gulliver's Travels and the War of The Wrong End of the Egg. My problem is that whereas I don't think it really makes a difference which end of the egg you put in the eggcup, I think it does make a difference if you spend or cut-but I don't believe anyone really knows which is the right answer.

That is why the discussion so quickly falls into ideological camps seeking examples from history which prove-or disprove-the positions being taken.

This gets me into serious difficulties with friends from the left and the right as I try and find a rational solution to what has become tenets of faith. What is frightening is that I do believe they are all serious in their beliefs that they are right, and the others are wrong.

Indeed, I have seldom seen such passion and partisanship and an unwillingness to even contemplate an understanding of a different position, let alone actually engage in a true dialogue.

All of which leaves me feeling quite queasy as I can't shake the feeling that these are really interesting times requiring a measured and cooperative effort and I don't see that happening.

I seem to remember in Lilliput it ended in war...

Goldman Sachs, Again....

Just a quick note on the oracle that is Goldman Sachs. I see that in their marketing material for the ill-fated Hudson Mezzanine they stated "Goldman Sachs has aligned incentives with the Hudson program". You just have to respect the chutzpah of these guys.

The statement is absolutely correct, although completely misleading! The assumption of the investor- and it would appear that investor, Australian hedge fund Basis Capital made a lot of assumptions which doesn't bode well for their investors-is that Goldman's interests were the same as Basis's.

That turned out to be very costly assumption. Goldman's incentives were certainly aligned with the program, although unfortunately in an inverse manner.

I can only once again suggest to all investors to listen very closely to what they are told by their advisers and make no assumptions!

Marking to Market-When there isn't One.

So Goldman Sachs is back in the hot seat in front of the FCIC. This time it is for allegedly aggressively marking down the prices of assets they had shorted which in turn would also have increased the value of the credit default swaps they held on AIG.

I like the way people now start to discuss the idea that valuing "esoteric" securities might be more art than science. Well, the answer is a resounding yes, especially if you consider that economics is certainly not science, and, although many will disagree, neither is modern accounting.

It starts with something as simple as do you use your models to value securities-or the market place. Well, when you issue them, it's always your model. How else can you take 6-8 points out of a trade? But once you've sold them, the bid is surprisingly more a reflection of the "market" rather than the model. To use the model on the bid would mean giving back the points you took out on the original sale.

But let's look a little more closely. BNPParibas suspended trading in three of its funds holding Asset Backed Securities (ABS) because they couldn't evaluate them! No, because to use the model the funds would have been in meltdown, and to use the market, well, the funds would have been in meltdown! They could have valued them, but it would have been devastating to have done so.

And this as in August of 2007. Goldman's valuation problems were taking place in July and August. This was on securities they had sold (and shorted the collateral) in April-which just coincidentally was the same time that Deutsche Bank was recommending selling mortgage related products, especially in the sub-prime area.

Stranger still, this was at the time that Mr Paulson was shorting the very securities they were selling as Abacus.

So if you were to ask me if I thought Goldman were deliberately marking down assets that they were short I would actually answer not necessarily. If you were to ask me if Goldman were deliberately marking up securities they wanted to sell-my answer would be unreservedly in the affirmative!

They just needed some time to allow the market to "catch up" with their positions, which often is strangely three months-regardless of the firm. Clients don't like it when positions they bought on Monday at 100 are marked down to 92 on Tuesday. Three months later it is an easier disusssion to have with a client.

So the question of mark-to-market becomes moot, when the dealers determine the price in the first place...

The Election of the German President

Frau Merkel has managed to avoid any number of problems in her time as chancellor although she might have played one power-politics card too many with her presidential candidate choice.

Everyone assumes she chose him to sideline him as far as internal party politics are concerned, which would be par for the course under normal conditions.

These however are not normal times. Perhaps the effort she has had to expend trying to manage her own "little" coalition between the CDU and the CSU, on top of the chicanery of managing the FDP has left her over-exposed in the middle of an ongoing European crisis.

The irony of it all is that Joachim Gauck would be an excellent president. But then again so would the current Minister for Labor Ms von der Leyen have been. Strange but true,the problem for her candidacy was that it would have meant that the two most important posts in Germany would have been woman. Equally strange, part of the problem being muted with Mr Gauck is that if he were president, than the two most important positions would be held by politicians from the "neue Bundeslaender".

Now why two woman causes problems while two men doesn't shows we still have some prejudices within that area. It is also strange that the "East German" brand, 21 years after the fall of the wall, kicks up some serious questions as well.

In this case it is bizarre that the Linke Party which is essentially the re- incarnation of the SED- former ruling party in the DDR- doesn't support Mr Gauck as his previous work was to investigate the Stasi files thus "outing" supporters of the Linke.

So now we have an election run-off between Gauck and Wulff. If Wulff doesn't win, and in the first vote he was short 23 votes, despite the government's 44 vote majority, it could cause serious problems for Frau Merkel.

Germany doesn't need that. Europe doesn't need that. Perhaps the world doesn't need it.

The German Presidency Part II

As I wrote the first post on the German Presidency last night before the second and the crucial third vote I did not know what the final result would be.

In the end Mr Wulff won which was a much needed result for Frau Merkel's government even if it highlighted tensions between the FDP and the CDU/CSU.

As mentioned earlier, true to their undemocratic values the Linken demonstrated their retroactive view of politics and history and did not switch their votes in the third and final round to Mr Gauck which would have secured his election. I am pleased they did not for the stability of the German government and still somewhat surprised at how they completely discredited themselves.

On a slightly different note I went to hear a lecture by Andrew Ross Sorkin at the LSE in the Sheikh Zamed Theatre on his book "Too Big to Fail".

Interesting, or should I say entertaining book- it is going to be a movie which trivialises the crisis in my opinion, but so it goes. The strange part is that it very obvious that Mr Sorkin is a journalist, and as such tells a great tale, but he is essentially a reporter of events. He did make a stand and defend the actions of the Fed in bailing out the banks and AIG after in his opininon failing to do the right thing with Lehman Brothers.

I found this strange as he didn't want to engage in the discussion of Moral Hazard and the risks associated with it in the Lehman case. It was also odd that despite his obivious access to the corridors of power he claimed to have been surprised that as early as April '08 the Fed and the treasury were making plans to salvage the financial system with actions like TARP which made me wonder what he was doing in August of '07 when the writing was clearly on the wall.

He did harp on on compensation and that the lack of personal liability on the part of (incompetent- my editorial comment) CEO's of major financial institutions has to change. Somehow I think the very clever Mr Sorkin doesn't understand the concept of Stock Companies and the sanctity of the role that limited if not outright freedom from liability plays in the development and execution of Capitalism.

On a personal note I found it galling that the lecture was named after one of the donors (10% of the total), the late Ruler of the UAE who was a committed anti-Semite and Holocaust denier. He tried the same trick at Harvard which after some investigation returned the donation.

Something to be said for political correctness after all I guess.