US Economy

[KingKikapu]

From the Economist.
http://www.economist.com/finance/displayStory.cfm?story_id=13240730&source=hptextfeature

Slash and burn

Mar 5th 2009
From The Economist print edition
Stockmarkets grapple with savage reductions in companies’ dividends


IT FELT like death by a thousand cuts. Already this month has seen plenty to rattle stockmarkets, from dreadful economic news to the continuing bloodshed at American International Group, an insurer. Commodity firms were given a reprieve on March 4th by hopes of a big stimulus package in China—though all they got was reaffirmation of the country’s 8% growth target. Meanwhile, a new fear haunts the markets: the mounting number of firms slashing their dividends.

That banks and insurance companies will chop their payments is now understood, but the pain has spread. General Electric (GE) has cut its dividend for the first time in 71 years, Dow Chemical for the first time since 1912. In Europe previously reliable payers like Telecom Italia and Anglo-American, a mining firm, have reduced their payouts, and even BP has said it cannot increase its dividend at today’s oil prices. Income investors were left to ponder Eurotunnel, the operator of the rail link between France and Britain, which will pay the first dividend since its creation in 1986. Its $9m may buy a few tissues for those mourning the loss of $9 billion of annual payouts from GE alone.

Based on experience since the second world war, investors had cause to be more optimistic. Although stock prices and earnings move up and down violently, dividends have been more reliable, typically falling from the peak of a cycle to its trough by only one-tenth in real terms. Furthermore, the share of American earnings paid out as dividends has declined from a post-war peak of almost two-thirds to about one-third in 2007, with many firms preferring stock buybacks (which have now ground to a halt). That should have given companies a bigger buffer.

Unfortunately other structural trends worked against income-lovers. Firms’ debt levels rose, increasing the volatility of earnings. And the quality of the profits fell. Financial companies contributed about one-third of the $736 billion of dividends paid globally by quoted firms in 2007. Standard & Poor’s, a rating agency, reckons that dividends in America could fall by about a quarter this year—the steepest drop since 1938. Even this may understate the decline. Financial firms’ payouts will collapse—even relatively well capitalised banks like JPMorgan Chase have reduced their dividends. And more of the industrial firms that make up the other two-thirds of total dividends will cut too. Pessimists point to 1931-35, when dividends per share in America fell by 45% from peak to trough.

For many firms dividend cuts are an unpleasant task that should not be shirked. There is no point in starving a business and endangering a firm’s balance-sheet in order to meet macho dividend commitments. The counter-argument, that cuts remove an important discipline on managers, hardly holds true today, when all firms are counting the pennies. That being so, when firms announced cuts why did their share prices slump? The reason has a lot to do with signalling.

A share’s value must be the present value of all future dividends—otherwise stockmarkets would be a giant Ponzi scheme. But in theory shareholders should not care whether dividends are paid out today or later. Just as taking money out of a cash machine does not make you richer, nor does extracting cash from a firm you own. Investors who need income to meet pension payments, for example, can raise it just as well by selling a small part of their holdings instead of receiving dividends. It is true that dividends, rather than capital appreciation, have provided a big chunk of long-term equity returns. But this partly reflects the choice of firms to pay out a big chunk of their earnings. Had they paid out less, capital appreciation would, in theory, have been commensurately higher.

The main reason why investors are worried is that dividends are a guide to managers’ views of when earnings might reach their trough: they do not want to pay the dividend out of borrowing, or worse, cut it again. Occasionally this floor is breached—in 1933 American earnings per share dropped below dividends. Today, GE has cut its quarterly dividend from 31 cents per share to ten cents. That is partly to reduce gearing, but also suggests managers’ low confidence in analysts’ forecasts for earnings of about 30 cents. Likewise if American dividends fall by a third from their recent peak, then—assuming they set a floor for profits—earnings would bottom out at about two-thirds below the level of 2007. That would be a drop on a par with the 1930s and far below most forecasts. An overblown scenario perhaps, but the scare over dividends suggests that many investors are still too optimistic.

 

[a_majoor]

More political malregulation:

"An Unaccountable Secretive National Hedge Fund"

Share Post  PrintMarch 10, 2009 Posted by John at 7:11 PM
A reader sent in this provocative observation by mathematician and economist Eric Weinstein:

Many of us who work in finance are even more horrified by what we see than the lay public appears to be. Some of us spoke publically for years about the dangers posed. Others published papers or books to spread the word. Curiously, however, our country's laws would not even permit average families to voluntarily invest in those hedge funds that profited from this crisis by, for example, shorting subprime mortgages.

Accordingly, we don't believe that citizenship in the United States should now hurriedly be converted into forced participation in an unaccountable secretive national hedge fund which buys lousy assets at inflated prices from banks mismanaged for personal profit by multi-millionaires, and makes non-consensual capital calls on uninformed, captive, financially unsophisticated families.

Oddly, that's not hyperbole. That's a description of what has taken place. It's the reality that's objectively outrageous.

We're all in this together does not mean we have to be shackled together too.....

 

[CougarKing]

An  interesting role-reversal?

China warns US against reckless spending
03/13/2009 | 09:44 PM

BEIJING - China's premier didn't say it in so many words, but the implied warning to Washington was blunt: Don't devalue the dollar through reckless spending.

Premier Wen Jiabao's message is unlikely to be misunderstood at the White House. It is counting on Beijing to help pay for its stimulus package by buying US bonds. China already is Washington's biggest foreign creditor, with an estimated $1 trillion in US government debt. A weaker dollar would erode the value of those assets.

"Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference Friday after the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

The appeal suggested the outlines of Chinese President Hu Jintao's stance when he meets with President Barack Obama at an April 2 summit in London of the Group of 20 major economies on possible remedies for the global crisis.

Wen gave no indication whether Beijing wants changes in US policy. But economists said his comments reflect fears that higher US budget deficits from Washington's $787 billion stimulus package could drive down the dollar and the value of China's Treasury notes.

"China is telling the US to be careful, not to overspend and keep an eye on the dollar," said Kelvin Lau, regional economist at Standard Chartered in Hong Kong. "There are risks that China cannot control, so they're depending on the US to maintain fiscal prudence and keep the dollar reasonably stable."

Analysts estimate China keeps nearly half of its $2 trillion in foreign currency reserves in US Treasuries and notes issued by other government-affiliated agencies.

"Inside China there has been a lot of debate about whether they should continue to buy Treasuries," said Frank Gong, chief China economist for JP Morgan.

Beijing is trying to increase its leverage at the London G-20 meeting by reminding its partners of its role in financing US spending, Gong said.

"Without China's buying (Treasuries) and continuing to fund US deficit spending, interest rates could have been much higher. That could be very destabilizing in this very recessionary environment," he said. "By attracting a lot of attention to this issue, China is already increasing its influence ahead of the G-20 meeting."

Finance officials from the G-20 meet this weekend. US Treasury Secretary Timothy Geithner is pressing for a new coordinated global stimulus. Japan is supportive but European governments are reluctant to make expensive commitments before they see how current plans are working.

Wen also offered an unqualified defense Friday of his government's policies in Tibet, ignoring questions about a massive security buildup in the Himalayan region.

Tensions have spiked ahead of two key anniversaries this week – the 50th anniversary of a failed Tibetan uprising that sent the Dalai Lama into exile and Saturday's one-year anniversary of violent anti-Chinese riots in Lhasa that sparked the largest protests in decades.

Asked whether the massive security presence pointed to failings in Beijing's policies, Wen said: "The situation in Tibet is on the whole peaceful and stable. The Tibetan people hope to work in peace and stability.

"Tibet's continuous progress (has) proven the policies we have adopted are right," he said.

Wen expressed confidence the world's third-largest economy can meet its official growth target of 8 percent this year and emerge from the crisis "at an early date." But he said Beijing is ready to expand its 4 trillion yuan ($586 billion) stimulus if needed.

"We already have our plans ready to tackle even more difficult times, and to do that we have reserved adequate ammunition," he said. "That means that at any time we can introduce new stimulus policies."

Communist leaders worry about rising job losses and possible unrest amid a trade slump that saw Chinese exports fall 25.7 percent in February from a year earlier. They have promised to spend heavily to create jobs and boost exports.

Chinese bank lending and power demand have risen, suggesting the stimulus is taking effect. But growth in retail sales is weakening, indicating it has yet to spur private sector spending and investment, which analysts say will be key to its success.

Private sector economists expect growth as low as 5 percent this year. That would be the strongest of any major country but could lead to more waves of job cuts.

"I really believe we will be able to walk out of the shadow of the financial crisis at an early date," Wen said. "After this trial, I believe the Chinese economy will show greater vitality."

Wen also said Beijing wants the G-20 summit in April focus on helping the poorest countries.

The premier said Beijing has met its own commitments to help developing countries by erasing a total of $40 billion in debt owed by 46 countries and giving out 200 billion yuan ($29 billion) of aid to developing countries."

"We must see to it that we show concern for developing countries," he said.

 

[a_majoor]

"Dear President Obama

As the holders of $1 trillion dollars of US Treasury bills, we have become somewhat concerned about the continued viability and value of our portfolio of assets. Your pronouncements and examination of your Stimulus package and Omnibus Spending bill does not inspire investors such as ourselves with confidence, and the continuing decline of the US stock market since the election results of last November seem to indicate a great many other investors think so as well.

Rather than waste time with recriminations or blame, we would prefer an asset swap instead. The Government of China will exchange your Treasury bills for ownership free and clear of the Bakken deposit and the oil contained within.

We believe this is a fair deal, given your stated opposition to fossil fuels and determination to impose a "cap and trade" carbon tax on Americans. As we have a desire to raise our living standards and are not burdened with such ideological drags on the use of energy in our economy, this would seem to be a win win situation for both our nations.

Please tell Secretary Clinton there is no need to bring clever "gag gifts" when she brings the deeds and title to the Bakken formation. Vladimir and Dmitriy were not very amused with their gift, and we would spare Secretary Clinton further embarrassment in favor of settling this matter in an efficient and business like fashion

Sincerely

Wen Jiabao"

 

[Yrys]

Madoff Had Accomplices: His Victims, NY Times, March 13, 2009

Standing in the security line Thursday morning, waiting to get into the federal courthouse in
Manhattan, I started chatting with the man behind me. He looked to be in his early 60s, and
though he was well dressed, he looked a little haggard. I asked him if he was a victim of
Bernard L. Madoff, who would soon be pleading guilty to masterminding the greatest Ponzi
scheme in history. He said he was.

Did he want to talk about it? He wasn’t sure, he said. I asked his name. “I’m not going to
give my name unless there is some benefit for me,” he said dourly. “I haven’t had too many
benefits lately.” How much had he lost? I asked. He grimaced. “I don’t really want to say,”
he replied, but conceded that it was a lot.

What was he hoping for today? He shrugged.

As we passed through security, I asked him what role he thought the government should be
playing. It was as if I had flipped a switch. Suddenly, his reticence fell away.

“The S.E.C.,” he said, referring to the Securities and Exchange Commission, which muffed
multiple opportunities to catch Mr. Madoff, “they played a big role in this. They have a lot
to answer for.” He said that the tax code should be changed so that Madoff victims can recoup
taxes they paid on profits that turned out to be illusory — no matter how far in the past those
taxes were paid. He thought the Securities Investor Protection Corporation, which tries to put
at least a little money in the hands of investors whose firms have gone under, should give
victims more than the current $500,000 maximum.

“I think there should be some legislation,” he said finally. What kind of legislation? What he
was hoping for, he said, was that the government would set up a fund for Madoff victims —
maybe give them 60 percent of their losses, he suggested.

We turned a corner, and saw a long line of people waiting for a spot in the courtroom — far
more people, it was obvious, than could ever fit in the chambers. (There was a large overflow
room, where I watched the proceedings.) Most of them were holding notebooks; this was clearly
the media line. “Is there a line for the victims?” the man asked the marshal.

“Are you a victim?” said the marshal. As the man nodded yes, the marshal said, “Come with me.”
He took the man to the elevator and whisked him upstairs and directly into the courtroom.


Rest of article on link

 

[a_majoor]

Putting AIG into perspective. As a bonus note, the AIG performance bonus payouts were specifically allowed for in the Stimulus package (I guess you really should read political bills before you vote on them):

http://directorblue.blogspot.com/2009/03/aig-execs-demand-senators-resign-or.html

AIG execs demand Senators "resign or commit suicide"

After reading this story, I fell asleep and had the following dream...

AIG Vice Chairman and Chief Marketing Officer Robert G. Krebs suggested that Senators Chris Dodd (D-CT), Charles Grassley (D-IA) and Rep. Barney Frank (D-MA) take a "Japanese approach" toward accepting responsibility for the collapse of Fannie Mae and Freddie Mac by resigning or killing themselves.

"In all candor, I don't know why they're so exercised by some bonuses. These pathetic excuses for politicians cost the taxpayers trillions of dollars and, worst of all, they're still in power."

"I suggest they ought to be removed," Krebs said. "But I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide. And in the case of the Japanese, they usually commit suicide before they make any apology."

"And, frankly, suicide would appear to be the only way to get these recidivists out of office," Krebs added.

"From my standpoint, it's irresponsible for unaccountable bureaucrats to allow themselves to receive raises when they're sucking at the teat of the taxpayer," AIG Senior Vice President James Sullivan explained.

Krebs noted that Frank, Dodd, Maxine Waters (D-CA) and a host of other Democrats were largely responsible for the entire mortgage meltdown through their decade-long fight against regulation of mortgage giants Fannie Mae and Freddie Mac.

"Recall that in 2004, Alan Greenspan warned of a systemic risk to the economy and, even earlier, the White House tried repeatedly to rein the GSEs in. But, no, B-B-B-arneys Fwank and Kwistopha Dudd were protecting their donors," Krebs said, mocking the portly Frank.

Sullivan continued to express his displeasure with the federal government that is adding trillions of dollars to the national debt for "non-stimulating stimulus, better known as pork projects."

He said Senators and Congress in general should not be rewarded for "running the country into the ground."

The executives' remarks added to a chorus of public outrage over the disclosure that Congress continues to rape the American people with pork projects and massive unfunded liabilities that are bankrupting the country.

and in case anyone thinks AIG did something wrong:

http://campaignspot.nationalreview.com/post/?q=MjM0YTg5ZWVhZTk1NTFmMjI4NGFmZTMzMTEwMTk5MzM

The Stimulus Bill Explicitly Guarantees Contractual Bonuses Executed Before February 11

Senator Chris Dodd's challenger, Rob Simmons, was just given a golden, golden issue to run on.

Who in their right mind would codify in law that bonus payments to executives at bailed-out companies could not be prohibited?

Well, Chris Dodd.

    From page H1412 of the Final Stimulus Bill, “SEC. 111. EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE:

    '(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.” 

    This amendment provides an exception for contractually obligated bonuses agreed on before Feb. 11, 2009, which exempts the very AIG bonuses Obama is condemning every single chance he gets. The amendment is in the final version and is law.

That's the amendment that Dodd got placed in the Obama stimulus bill. You know, the one that passed with no House Republican votes, and only three Senate Republican votes.

Way to go, guys.

UPDATE: A reader notes that right now, Jim Tedisco should run an ad saying that his opponent, Democrat Scott Murphy, would have voted to protect these bonuses... by voting for the stimulus.

 

[tomahawk6]

The bonus issue is intended to deflect attention away from AIG's channeling $58b of TARP money to foreign banks.

 

[a_majoor]

There are lots of reasons for the faux outrage, including the fact AIG contributed lots of money to these people...Now it is starting to unravel.

http://www.commentarymagazine.com/blogs/index.php/rubin/59141

Dodd Spills The Beans
Jennifer Rubin - 03.18.2009 - 7:34 PM

Sam Stein at the Huffington Post has been digging around, trying to find out exactly what happened to the amendment to the stimulus bill offered by Sens. Wyden and Snowe which would have nixed the AIG bonuses. Fingers were pointed at Senate Banking Chair Chris Dodd. But yesterday on CNN, Dodd was part of this exchange:

    CNN Producer: “There’s the suggestion today being made that you received more money from AIG than any other senator. And that you were responsible for the February 11th, 2009 date. Again, I just want to get — you’re saying you had nothing to do with . . .”
    Senator Dodd: “Absolutely not.”
    CNN Producer: “And there was nothing you were doing that was aimed at protecting AIG?”
    Senator Dodd:  “Not at all. Not in the slightest. . . . The point is when that language left the Senate I wrote, that was not included.”

Today, on CNN’s Situation Room, Dodd changed his tune and implicated the Treasury Department. He did not name Geithner personally, but neither did he say Geithner was unaware of the goings on. The bottom line: Dodd, after denying it, now admits he and the administration cooked up the language which afforded AIG some protection ( until the firestorm hit) to grant the bonuses. Geithner has been claiming a fair amount of ignorance — and certainly did not come clean on this.

TIME magazine adds in this:

    Although Treasury Secretary Timothy Geithner told congressional leaders on Tuesday that he learned of AIG’s impending $160 million bonus payments to members of its troubled financial-products unit on March 10, sources tell TIME that the New York Federal Reserve informed Treasury staff that the payments were imminent on Feb. 28. That is 10 days before Treasury staffers say they first learned “full details” of the bonus plan, and three days before the Administration launched a new $30 billion infusion of cash for AIG.

The ball is now in Treasury’s court once again. It seems testimony under oath is the only way this will all come out. And if  the Treasury Secretary lied or hid the ball, our modern day Alexander Hamilton certainly will be heading out the door.

 

[tomahawk6]

Treasury has begun buying T bills the goal is $300b- 700b. Gold responds by shooting up. Shades of Zimbabwe.

 

[Fiver]

The bonus issue is intended to deflect attention away from AIG's channeling $58b of TARP money to foreign banks.

Pretty much.
I'd like to share a reddit.com comment made by aGorilla about the present situation with AIG
http://www.reddit.com/r/business/comments/85nk2/spitzer_the_aig_bonuses_are_a_smokescreen/

About the current CEO:

    * He's being paid 1 dollar a year.
    * He gets no bonuses, either way.
    * He gets no stocks.
    * He didn't sign these contracts, he inherited them.

About the people who tanked AIG:

    * They are gone.
    * They were few.

About the people who received the bonuses:

    * They did not kill AIG
    * They were offered these bonuses last year, to stay for another year, and clean up the mess.
    * They reduced $2.7 trillion of shit to $1.6 trillion of shit.

About the bonuses:

    * They are less than .1% of the bailout money.
    * They were offered last year, to retain people until they cleaned up the mess.
    * They were NOT meant to retain people for next year.

What if we didn't pay them?

    * The people who are (successfully) cleaning up the mess, would leave.
    * Then, they would sue (rightfully so).
    * AIG would have to try to replace them, while trying to prevent losses on the suddenly 'unmanaged' accounts.
    * AIG might be forced into bankruptcy, for defaulting (aka: we lose).
    * AIG might survive, but take further losses, and need more help (aka: we lose).

Personal thoughts:

    * We should have let them fail, but we didn't, it would be idiotic to let them fail now.
    * The current CEO deserves nothing but respect, but instead, he gets death threats.
    * The people who stayed on, and cleaned up the mess, deserve to be well paid. They saved us a ton of money, and the bonuses are marginal in comparison.

Analogy:

The people from FP (financial products) are the burger flippers at McDonalds. The people who got the bonuses work the counter at McDonalds. The burger flippers made some seriously shitty burgers. They got fired. The counter crew has spent the last year trying to find places to safely unload those burgers (worm farms, bacteria labs, etc.) It was a dirty job, and Mike Rowe wasn't available.

Yes, I'm contradicting a post I made yesterday. I watched the full hearings on C-Span today, and learned a hell of a lot from them. Yeah, I changed my mind, but that's what I do when I learn that the facts don't match my perception.

 

[tomahawk6]

The dollar tanked. The UN wants a basket of currencies to replace the dollar as the world reserve currency.

In a surprise move today, the Bernanke Fed launched another shock-and-awe stimulus plan that will expand the Fed’s balance sheet another $1.2 trillion through the purchase of $300 billion in long-dated Treasuries, $750 billion in mortgage-backed securities (Fan/Fred), and another $100 billion in U.S. agency debt. The Fed also is launching its Term Asset-Backed Securities Loan Facility (TALF), which could go as high as $1 trillion when it’s all said and done.

 

[SeaKingTacco]

The fun is just beginning....

 

[Edward Campbell]

The dollar tanked. The UN wants a basket of currencies to replace the dollar as the world reserve currency.

The dollar is tanking because the US is trying to devalue it in order to protect US manufacturing - classic protectionism by the same gang who brought you the bailout of Chrysler and GM, the bonuses for AIG execs and so on. Smoot-Hawley was not sui generis; the US Congress is capable of all manner of stupidity in every generation.

 

[tomahawk6]

AIG bonus' is a strawman. Bonus' are common throughout industry. Congress naturally is ignorning the Fannie/Freddie bonus' its exec's got. What the Fed is doing by buying T bills is dangerous and has never been done successfully. The result if the Fed gets this wrong is hyperinflation and depression. If the US slides into depression the world goes into depression.

 

[Fiver]

the bonuses for AIG execs

Stop with the bonuses already, its what made the recipients stay with the company through the shit and reduce AIG`s financial derivatives from 2.7 trillions to 1.6 trillion.
I think most people think they are performance bonuses, while they are not. 

 

[KingKikapu]

Alright, lets cut just a bit of the bullshit being thrown around here.

The Republicans abstained from voting for political positioning ONLY.  Don't come in here saying they saw this a mile away because they didn't.  They merely wanted to stiff the Decomcrats with all of the blame should things go terribly wrong.

Have the Democrats muddied things up?  Absolutely.  No question!  They are no saints!

Neither are the Republicans.

 

[tomahawk6]

Bonfire of the Trivialities
By Charles Krauthammer
Friday, March 20, 2009; Page A19

A $14 trillion economy hangs by a thread composed of (a) a comically cynical, pitchfork-wielding Congress, (b) a hopelessly understaffed, stumbling Obama administration, and (c) $165 million.

That's $165 million in bonus money handed out to AIG debt manipulators who may be the only ones who know how to defuse the bomb they themselves built. Now, in the scheme of things, $165 million is a rounding error. It amounts to less than 1/18,500 of the $3.1 trillion federal budget. It's less than one-tenth of 1 percent of the bailout money given to AIG alone. If Bill Gates were to pay these AIG bonuses every year for the next 100 years, he'd still be left with more than half his personal fortune.

For this we are going to poison the well for any further financial rescues, face the prospect of letting AIG go under (which would make the Lehman Brothers collapse look trivial) and risk a run on the entire world financial system?

And there is such a thing as law. The way to break a contract legally is Chapter 11. Short of that, a contract is a contract. The AIG bonuses were agreed to before the government takeover and are perfectly legal. Is the rule now that when public anger is kindled, Congress will summarily cancel contracts?

Even worse are the clever schemes being cooked up in Congress to retrieve the money by means of some retroactive confiscatory tax. The common law is pretty clear about the impermissibility of ex post facto legislation and bills of attainder. They also happen to be specifically prohibited by the Constitution. We're going to overturn that for $165 million?

Nor has the president behaved much better. He, too, has been out there trying to lead the mob. But it's a losing game. His own congressional Democrats will out-demagogue him and heap the blame on the hapless Timothy Geithner.

Geithner has been particularly maladroit in handling this issue. But the reason he didn't give the bonuses much attention is because he's got far better things to do -- namely, work out a rescue plan for a dysfunctional credit system that is holding back any chance of recovery.

It is time for the president to state the obvious: This recession is not caused by excessive executive compensation in government-controlled companies. The economy has been sinking because of a lack of credit, stemming from a general lack of confidence, stemming from the lack of a plan to detoxify the major lending institutions, mainly the banks, which, to paraphrase Willie Sutton, is where the money used to be.

Obama has been strangely passive about this single greatest threat to the country. In his address to Congress and his budget, he's been far more interested in his grand program for reshaping the American social contract in health care, energy and education.

Obama delegates to Geithner plans for a bailout -- and Geithner (thus far) delivers nothing. Obama delegates to Nancy Pelosi and her congressional grandees the writing of all things fiscal -- and gets a $787 billion stimulus package that is a wish list of liberal social spending, followed by a $410 billion omnibus spending bill festooned with pork and political paybacks.

That bill, we now discover, contains, among other depth charges, a Teamster-supported provision inserted by Sen. Byron Dorgan that terminates a Bush-era demonstration project to allow some Mexican trucks onto American highways, as required under NAFTA.

If you thought the AIG hysteria was a display of populist cynicism directed at a relative triviality, consider this: There are more than 6.5 million trucks in the United States. The program Congress terminated allowed 97 Mexican trucks to roam among them. Ninety-seven! Shutting them out not only undermines NAFTA. It caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade coming out of 40 states.

The very last thing we need now is American protectionism. It is guaranteed to start a world trade war. A deeply wounded world economy needs two things to recover: (1) vigorous U.S. government action to loosen credit by detoxifying the zombie banks and insolvent insurers, and (2) avoidance of a trade war.

Free trade is the one area where the world indisputably turns to Washington for leadership. What does it see? Grandstanding, parochialism, petty payoffs to truckers and a rush to mindless populism. Over what? Over 97 Mexican trucks -- and bonus money that comes to what the Yankees are paying for CC Sabathia's left arm.

letters@charleskrauthammer.com

http://www.washingtonpost.com/...AR2009031903041.html

 

[Edward Campbell]

Here are two columns – opinion pieces, both reproduced under the Fair Dealing provisions (§29) of the Copyright Act, the first is from today’s Globe and Mail and the second is from the National Post.

The first revisits, for context, something about which I complained a couple of years ago: unearned compensation in business and the second looks a devaluing the US dollar.

-------------------------
http://www.theglobeandmail.com/servlet/story/RTGAM.20090321.wcoessay21/BNStory/specialComment/home
GLOBE ESSAY
When wealth became a character flaw
The greedy bankers are ugly symptoms of an age of inequality. Remind yourself of that when prosperity returns.

KONRAD YAKABUSKI

From Saturday's Globe and Mail
March 21, 2009 at 1:00 AM EDT

As we examine the entrails of Wall Street's still rotting corpse, it doesn't take the gifts of an augur to foretell our postcrash future. It will, at least temporarily, be one of asceticism. Conspicuous consumption is the new smoking. Wealth, and the desire for it, have become character flaws.

The bankers we want to see pilloried, imprisoned or disembowelled — a sentiment whose intensity, judging from the tabloids, appears to be inversely related to our incomes — have outdone themselves in their ability to make us hate them. And they just keep on outdoing themselves, as demonstrated by the $165-million (U.S.) that American International Group Inc., now a ward of the state, just paid out in retention bonuses to many of the same top executives who drove the insurance giant, and the rest of financial system, into the ground.

Even the most measured among us nod at headlines such as: "Not So Fast You Greedy Bastards." This outrage, like this financial crisis, is global. In Britain, it has found its whipping boy in Sir Fred Goodwin, who "retired" at 50 as the head of the Royal Bank of Scotland in November, claiming a full pension worth more than £700,000 a year. This is the same Sir Fred whose disastrous deal-making drove the bank to a £24-billion loss in 2008 — the biggest in British corporate history — forcing Gordon Brown's government to put up billions in bailout money. "Off with his Fred," The Mirror blared.

In Canada, where our banks' legendary lethargy has turned out to be their saving grace, the chief executives at the Big Six had the good sense to voluntarily forgo bonuses for 2008 lest they get us hankering for the return of capital punishment. Perhaps sensing the mob's appetite for blood, they also agreed — not all of them willingly, mind you — to submit executive compensation to non-binding shareholder votes. Giving investors a "say on pay" is, by the standards of Canadian banking, a revolution in itself.

A PRETEXT TO SOAK THE RICH

If U.S. President Barack Obama needed a pretext to soak the rich, the AIG executives and their ilk have certainly given him one. It hardly seems coincidental that such a progressive politician as Mr. Obama was elected on the heels of the most protracted rise in income inequality in the United States since the one that began with the Gilded Age in the late 19th century. That boom ended with the Depression, a cataclysm brought on in part by the same kind of financial speculation that created the current mess. Those who are still wondering why they didn't see this crash coming were probably just not looking at the right data. Instead of wondering whether stocks were overvalued, derivatives were ticking time bombs, or housing was in a bubble, they should have just looked at how skewed income distribution had become.

Just as the New Deal would likely not have been possible without the Depression as its catalyst, Mr. Obama's attack on income inequality would face a much tougher row to hoe were it not for AIG and all it represents. The era that spanned from Franklin Roosevelt to Lyndon Johnson was one of rising real wages that culminated in the most equal distribution of wealth in U.S. history. Is that history about to repeat itself?

"There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favour of so few," states Mr. Obama's proposed budget, tabled last month. "We need to remember that throughout our history, the United States has grown and prospered when all Americans have shared in the opportunities created by our economy … The past eight years have discredited once and for all the philosophy of trickle-down economics — that tax breaks, income gains and wealth creation among the wealthy will eventually work their way down to the middle class. In its place, we need economic opportunity to trickle up."

Mr. Obama proposes to raise the top two marginal rates on personal income, now 33 per cent and 35 per cent, to 36 per cent and 39.6 per cent, respectively, starting in 2011. The new rates would kick in at a household income of $250,000. The "rich" would also lose their ability to deduct interest on their mortgages. Dividends and capital gains would be taxed at 20 per cent instead of 15 per cent. Mr. Obama would keep the estate tax that the previous Republican administration had proposed to eliminate next year. The Wall Street weekly Barron's called the budget "bad news for investors and affluent individuals." Given the times, it will probably only make Mr. Obama more popular.

Mr. Obama's budget paints an ugly picture of what Ronald Reagan started and George W. Bush finished. Between 1980 and 2004, the portion of national income earned by the top 1 per cent of U. S. households doubled from 10 to 22 per cent. The combined net worth of the top 1 per cent was higher than the total for the bottom 90 per cent. In constant dollars, the average income of the top 400 U.S. taxpayers quadrupled between 1992 and 2004. The middle class in particular lost ground.

Canadians should save their indignation for their own governments. Income inequality, on both a pre- and after-tax basis, actually rose faster in Canada than in the United States in the decade between 1995 and 2005, according to an Organization for Economic Co-operation and Development study released in October. The growth differential was considerable in the latter part of the decade, a period characterized by large income-tax cuts by Ottawa and most provinces, declining real welfare benefits and tighter eligibility rules for employment insurance payments.
Still, overall, Canada has a somewhat more equal distribution of income, with a Gini coefficient (a statistical measure of income inequality) of 0.32 compared to 0.38 in the United States. We're not exactly Denmark, which registers a 0.23 on the Gini index. But we have proportionately fewer of the obscenely rich, and outside Alberta, a more progressive tax system.

If the Reagan-Bush tax cuts entrenched income inequality in the United States, how did the rich accumulate so much more pretax income in the first place? Two words: Wall Street. Much of the focus of activist shareholders' and anti-poverty advocates' wrath has been on CEO pay — noting that the average big boss now earns more than 350 times the salary of the average worker, up from 45 times three decades ago. But the real drivers of wealth accumulation in recent years have been the massive bonuses earned in the financial industry, according to a study by two University of Chicago professors, Steven Kaplan and Joshua Rauh.

Forget bank CEOs. Most of them were making whole lot less than the underlings who traded all those newfangled financial instruments. But even they were paupers compared to private-equity and hedge-fund managers, the top 50 of whom earned an average $588-million in 2007, according to the Institute for Policy Studies, a left-leaning U.S. think tank.

The bankers who underwrote subprime mortgages, packaged and peddled asset-backed securities and bought and sold credit default swaps might just be the modern-day incarnation of what the 19th- and early 20th-century economic essayist Thorstein Veblen called the "leisure class." Their "work" consisted of shifting around wealth, rather than creating it, much like the original leveraged buyout barbarians of the 1980s.

Barbarians don't produce anything. They just take things away from others. Then they show off their booty. That makes others envious. So, they try to emulate the barbarians, or at least try to look as rich as they are.

Veblen also reminds us of why any return of the pendulum, characterized by Mr. Obama's redistributive mission, is likely to be just that. Pendulums are always moving. Once the excesses are purged, and the United States feels sufficiently cleansed, the pursuit of happiness — a euphemism for property ownership — will resume. Conspicuous consumption, a term coined by Veblen, is not dead. It's just taking a breather.

"Ownership began and grew into a human institution on grounds unrelated to the subsistence minimum," he wrote. "The dominant incentive was from the outset the invidious distinction attaching to wealth, and, save temporarily and by exception, no other motive has usurped the primacy at any later stage of development."

OUR PREDATORY INSTINCTS

Our urge to keep up with the Joneses is almost primal. "The motive that lies at the root of ownership is emulation," Veblen asserted. "Property set out with being booty held as trophies of a successful raid. … As industrial activity displaced predatory activity, accumulated property more and more replaces trophies of predatory exploit as the conventional exponent of prepotence and success."

We can try to tame our predatory instincts, as Mr. Obama no doubt will do with his tax changes, but it will always be a bit like tilting at windmills. Veblen, who wrote during the Gilded Age, observed that the urge to redistribute wealth is not particularly a human trait. Or, at the very least, it is not a strong enough one to overcome "the desire of every one to excel every one else in the accumulation of goods."

Not me, you say?

Ask yourself that the next time, likely in 2010 or so, that you splurge on a new-generation wafer-thin organic light-emitting diode television, whose million-to-one contrast is wholly undetectable to the human eye. Ask yourself that the next time you salivate over that Miele W2839 washing machine. It's not because it will make your clothes any cleaner.

Mad at the bankers? Don't be. They are us.

-------------------------

Obama is half right: there is nothing wrong with making money; indeed there’s nothing wrong with executive salaries that are 350 times those of the average worker IF the executive has produced something like 400% better return on investment for the owners (shareholders) that did his predecessor who earned, say, a quite reasonable 87.5 times the average wage of the “line” workers in that industry.

But that’s not the real issue for Obama and the US Congress; income redistribution is their goal. Income redistribution is different from wealth redistribution – which is usually done through estate and/or inheritance taxes, as many countries (and several US states) do. (Some would argue that wealth redistribution is also done by municipalities through property taxes which may be quite onerous for a pensioner living on a small fixed income in a valuable family home.) Income redistribution – usually called progressive taxation – says that the more you earn (which means, generally, the more productive you have been in the past year) the more you must pay to support those who have been less productive or less fortunate or, maybe, just stupid and lazy.

There’s nothing inherently wrong with providing for those who cannot provide for themselves or who are victims of misfortune – it is a noble human instinct to help those in need. People as diverse as William Blake, Karl Marx, William Morris and Sidney and Beatrice Webb were driven to their socialist philosophies by the images (and occasional realities) of the “dark Satanic mills” of 19th century Britain. Their philosophising was married to Bismarcks’ social engineering and begat the modern nanny state.

There’s not even anything inherently wrong with the “welfare state” – in many areas the state is more efficient and effective than private charity. Public education, police and fire protection and public health are good examples. (Public health involves clean water, sewage, garbage collection/disposal – it is, mainly, an engineering function having little to do with doctors and social workers.) There’s nothing wrong until one attempts to provide social services using someone else’s money. Which brings me to the second column:

  -------------------------

http://www.nationalpost.com/opinion/columnists/story.html?id=cde736a6-8ea9-49b1-bdc7-bc3ea82d2bde

Worry about the Americans

Diane Francis, Financial Post

Published: Saturday, March 21, 2009

The Chinese are starting to switch from investing in U. S. Treasury bills to buying hard assets for stockpiling or acquiring corporations at bargain-basement prices. Others are buying gold.

This week, Washington surprised markets by mopping up 5% of its own treasuries, a form of printing money to finance deficits the rest of the world no longer wants to -- or cannot --finance.

It's inflationary, which is why the U. S. dollar tumbled about 3.5% on Thursday. But there are many more T-bill cannibalizations to come because deficits are going to reach the stratosphere until this bottoms.

Whatever the reason, we should be worried about the Americans. The new regime looks a lot like the old regime, only newer with the same old faces. Concern should be that United States' system of government may have reached its best-before date because, like its financial sector, Washington appears paralyzed and unable to deal with this crisis.

The problem now is the problem solvers, both financial and political.

The world as we know it ended because Wall Street, AIG and banks made bets to protect trillions in bond values -- bets they could not pay out if they were wrong. Massive fees blinded judgment, and a regulatory vacuum permitted recklessness.

Lacking anyone to mind the proverbial financial store any more, the board of directors is the executive and legislative branches in Washington.

It's a system of paralysis, through checks and balances and lobbyist corruption, that has been made worse by a two-year primary tangle for the presidency, partisan battles over the crisis and a succession of treasury secretaries and Federal Reserve officials, appointed by both parties, who don't get it or have conflicts of interest.

For instance, Republican appointee Alan Greenspan printed too much money for years. In 2007, the tipping point was reached and the response to the credit meltdown was when Henry Paulson, a Republican Treasury Secretary, rescued his old Wall Street firm, Goldman Sachs, plus AIG and others, but left some to go bust, such as his former rival, Lehman Bros.

Now we have Timothy Geithner, a Democratic Treasury Secretary, who has a conflict because he didn't see the trouble coming either when he was at the Fed with Greenspan.
Lots of opinions are out there, but here are a few of the more thoughtful ideas as to what the future holds:

- Gold is the safety play as the U. S. dollar slides. Some estimate gold may reach as high as US$1,500 an ounce in 2009.
- AIG and the others should be, and will be, put into a de facto, strict bankruptcy workout.
- China is concerned about the fact it holds US$1-trillion of the U.S. debt and is diversifying its portfolio as well as not buying more U. S. treasuries. Neither will the Saudis. In all, foreigners represent US$2-trillion of the total US$11-trillion in U. S. federal debt, but it is hot money that can flee in a click.
- Obama will -- certainly should -- replace Geithner, preferably with a European or Canadian or Asian team who get it and haven't got conflicts of interest on Wall Street.
- The U. S., and most of the world's, banking system may eventually have to be nationalized in order to systemically and fairly recalibrate the financial economy. This will also allow the Americans to write off 25% of all mortgages, subprime and others, to kick start the real economy again.
- Canada and everyone else will be dragged through this process, which will take as long as it takes for the Americans to admit they have to reinvent their systems.

dfrancis@nationalpost.com
-------------------------

What Francis calls the “new regime” isn’t new at all in the sense that it is the same old US Congress and it is vital for Canadians to remember that, in legislative terms, the US President is a weakling compared to a Canadian PM with a majority government or even a very strong minority. An American president, even the most fiscally responsible sort of US president cannot legislate in the face of a congress that is hell bent on having its way with e.g. rules to allow, indeed require subprime mortgages or protectionism or that require that “stimulus” be applied, willy nilly on “bridges to nowhere.”

But it isn’t just the congress. The Federal Reserve is, by buying up its own T-bills, doing itself what the US accuses China of doing: manipulating its currency – devaluing it – and, thereby, asking the US’ trading partners – Canada and China included – to pay for the sort of welfare state that the US cannot afford on its own. De facto Washington is doing what we (mostly) suspect Beijing does: use a mix of infrastructure projects (all those wonderfully spectacular buildings in Beijing and Shanghai), monetary policy and direct subsidies (trade protectionism) to “buy” social peace.

Pot: this is Kettle; over.

Subprime mortgages, per se, were not the problem. The US, indeed any country, could, as the US congress did, require its banks to make poor quality loans. The government (and its independent agencies like the Federal Reserve Bank) could have, as it is doing, create a “bad bank” to hold mortgages that went sour. The end effect of the subprime fiasco is that millions of Americans who would not, otherwise, have been able to buy a home did so and the vast majority of them will pay their mortgages, mostly on time, thus moving millions of Americans from the lower to the middle class at relatively little “cost” to the economy. It, forcing subprime loans, wasn’t very good fiscal policy but it has proven to be very just and, measurably, effective social policy. The real problem was with the way that the subprime mortgages – poor quality investments – were sliced and diced and repackaged and sold as something with value. There was no “real” value in them, just as there is no, or not enough, value in most of the derivatives that are out there being traded, still. The notional value “derived” in all those products now equals several times the “real” value of the global economy. All that false value has to be written down or even written off – much of it through your pension plans and mutual funds.

The fact that subprime loans could be repackaged and disguised as reasonable financial instruments indicates a major failure in the US financial and business regulatory regime going back, say, 35+ years – more than a whole generation and including the Carter, Reagan, Bush, Clinton, Bush and now Obama presidencies and the Republican and Democrat congresses that governed with them.

I do not believe that we see any  better sense of responsibility in the US administration and congress today that we have since the 1970s.

 

[Kirkhill]

Our urge to keep up with the Joneses is almost primal. "The motive that lies at the root of ownership is emulation," Veblen asserted. "Property set out with being booty held as trophies of a successful raid. … As industrial activity displaced predatory activity, accumulated property more and more replaces trophies of predatory exploit as the conventional exponent of prepotence and success."

Good to see you hitting your stride again.

If there is anything that causes me concern it is  to see the Globe and Mail, once the paper of what passed for the elite in Canada, sliding away from Kames and heading towards Proudhon.

Kames - "A relation is formed betwixt every man and the fruits of his own labour, the very thing we call property, which he himself is sensible of, and of which every other is equally sensible. Yours and mine are terms in all languages, familiar among savages, and understood even by children. This is a fact, which every human creature can testify.  "

Proudhon - "Property is theft".

In the current climate I fear that Proudhon has more friends than Henry Home.


On the US news this evening I saw a Really chilling site.  The names of the AIG execs that received bonuses had been publicized by none other than the Attorney General of Connecticut(??).

Shortly there after bus tours of "activists" and "community organizers" were organized to visit the homes of the named and shamed and then stage a photo-op demonstration on the lawn of a family home.

What is one to do when the "Organizer-in-Chief" is also "Commander-in-Chief"?  How do you handle "Ex-Parte" citizens, with a history of subsuming themselves in mobs to the whims of others, when the mobs are acting in support of the Boss?

John Stuart Mills' lone voice can get lost pretty quick.

 

[tomahawk6]

So much for the Privacy Act. :