lalalalalalala

I was reading Wall Street Journal reporter Paul Ingrassia’s latest piece about the never-ending bailouts of Detroit automakers.  Halfway down, he wrote this:

So why were these problems allowed to fester, when smart people recognized them all along? The answer is that the solutions were painful, requiring not just brains but considerable amounts of courage. UAW officials weren’t brave enough to risk re-election defeat by agreeing to curtail the 30-and-out plan. Detroit executives weren’t about to take on the union and risk a strike that could cost them billions. GM likewise felt hamstrung on Saturn and Saab by state dealer-franchise laws, especially after they spent $1.3 billion to shut down Oldsmobile a few years ago.

Perhaps the best analogy, and one that Washington will understand, is Social Security. Everybody in Congress and the White House has known for years that it’s a ticking time bomb, thanks to actuarial trends and inadequate funding. But when President George W. Bush tried to reform the system early in his second term, he was handed a crippling defeat.

We are a nation of political cowards.   No one wants to pay the price consequences of real honesty, especially once they’ve ascended to power. Whether it’s a political office, or a CEO position, or the presidency of a labor union; whether we’re talking about a Democrat or a Republican; the underlying cause for the meltdown we’re experiencing now, and the meltdowns soon to come is cowardice.

Not just fear of taking a stand.  Our leaders have conditioned themselves to be afraid to speak the truth.  They pay millions to PR helpers for assistance in drilling them within an inch of their lives so they won’t accidentally acknowledge certain problems, because acknowledging something implies the requirement to act.

An enduring pop-culture joke of our times — a tiresome one by now — is the guy who is about to be given some information for which he doesn’t want to take responsibility for knowing, who sticks his fingers in his hears and shouts, ” No! I can’t hear you, la la la la la la la la la la la. Earmuffs!”  Everyone can relate to that guy.  Knowledge is power but sometimes it is just too powerful, sometimes it is a threat to your existence, if your conception of existence includes a prominent position that entitles you to rewards and respect.

Reading Ingrassia’s piece, he points out all the people who knew almost 40 years ago that the U.S. auto industry would end up on its knees, bleeding money in the form of outrageously generous benefits to people who stopped working in their 50s.  Rather than pulling the plug on these unsustainable commitments, each CEO and each UAW president pushed the problem onto their successors.  The problem grew, and now it threatens to capsize a critical industry.  So critical that the automakers and the unions have shown up at the taxpayers door and said, in essence, honor our ridiculous promises or we’ll fail and take the US economy down with us.

We are still a wealthy nation.  There is no reason why taxpayers with depleted 401(k) plans shouldn’t be able to cough up a few thousand more bucks in additional taxes to keep a retired autoworker living comfortably for another ten years.  That’s just the price of our cowardice, which we always expect someone else to pay.

Eventually, telling people they’re entitled to something they haven’t earned, and making promises you can’t back up catches up with you. For some, it already has, but I suspect the meltdown has only just begun.

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn’t have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

Not like I’m missing the Henry Paulson Show or any other remnants of the last administration.  However, you don’t have to be a raving right-wing talk show host to be increasingly alarmed by the Obama Administration’s capabilities with respect to managing the economy.

Instead of having his team write a stimulus plan, they outsourced it to House Democrats — a group that, as a whole, is not known for fiscal acumen.  News reports made it clear that Speaker Pelosi’s methodology for crafting the one shot we have at avoiding a Depression was to ask fellow Democrats, or at least the ones not in her doghouse to send her their wish lists.  The bill was somewhat improved by the legislative process, but it is not “temporary, targeted and timely,” the original criteria laid out by Assistant Treasury Secretary Larry Summers.

Now this.

By Wednesday, Feb. 4, Geithner was leaning toward a different approach that his former colleagues at the Federal Reserve had developed months earlier, the source said. This involved a joint public-private fund to buy up the assets. Private investors, likely hedge funds and private-equity funds, would put up capital, and the government would loan money to the fund. If the private investors made wise decisions about which assets they bought, they would be able to pay back the government and make money for themselves.

For the policymakers, the chief appeal of the public-private partnership is that it solves the problem of how to price assets. The private money managers who provide capital for the fund would decide which assets to buy, and at what price, taking government bureaucrats out of that difficult task.

Moreover, the private contribution lowers the total amount of money the government would need to put at risk. Also, the government would require private investors to incur any losses before the government does, reducing taxpayers’ exposure to potential losses (but also potentially depriving them of any windfall profits).

But there were multiple complications: How much government financing would be needed? What other incentives would be needed to get private firms on board? Where would the government get the money? What assets would the fund buy? Would the government have a say in which banks they’re bought from? Might there be more than one fund?

The clock was ticking. But Geithner wasn’t ready to share his thoughts with senior government officials outside his narrow circle. He and his team worked on the plan through the weekend, with some of his staff working until 4 a.m. The team grew to about 20 officials, including lawyers, finance experts and public affairs staff.

(snip)On Saturday, Feb. 7, the officials won a slight reprieve when the White House asked that Geithner’s speech be postponed from Monday to Tuesday to allow Congress to focus a little longer on the on the massive economic stimulus package still pending.

But there still was not enough time to sculpt the detailed plan that the financial markets expected. In the end, Geithner and his colleagues decided that it would be better to take flak for being vague than publicly offer half-formed details that might later have to be revised. And ambiguity, the officials concluded, would make the plan an easier sell on Capitol Hill, as congressional leaders could be brought into the discussions of details rather than be presented a detailed plan as fait accompli.

Right.  Maybe Pelosi should write it.  No point in trying to tell Congress what to do — let them tell us.  That seems to be the worrisome approach of the early days of the Obama Administration.

“Roubini was intellectually courageous, and he called the shots correctly…. He gained credibility, and he deserves it.”

Is Frenkel saying that others, including himself, knew at some level that Roubini was correct, but were afraid to say so?

Roubini claims he wants to forecast a recovery, but in all honesty, he can’t.

Roubini remains more pessimistic than economists elsewhere. The IMF forecasts global growth of 0.5 percent this year and bank losses from toxic U.S.- originated assets of $2.2 trillion. By contrast, Roubini sees the global economy shrinking this year, and banks writing down at least $3.6 trillion — compared to the $1.1 trillion disclosed so far.

While the U.S. government is resisting nationalizing its biggest banks, Roubini says it will have no choice because they are now “effectively insolvent.” And the outcome may be even worse than even he anticipates if governments fail to take aggressive steps to recapitalize banks and revive their economies, he says: “The risk of a near-depression shouldn’t be underestimated.”

Roubini, who’s now working on a book about the crisis, says he takes no particular pleasure in his role as Dr. Doom or the attention it brings him.

“I’m not a permanent bear,” he says. “I’ll be the first to call a recovery, but I just don’t see it yet, and it’s getting uglier.”

This downturn will be marked in history as the time where many of the business models built in the industrial era finally collapsed as a result of being undermined by the information age. Its creative destruction at work. It’s painful and many jobs will be lost permanently. But let’s also remember that its inevitable and we can’t fight it. Technology and information forces are unstoppable and they will reshape the world as we know it regardless of whether or not we want them to.

Investors have the luxury of acknowledging the inevitable.  Politicians do not.  So, the next few years will be all about shoveling money to stop the “unstoppable.”

Happy New Year!

Andy Stern

Some in the labor movement are sensing nostalgia for a distant decade as they try to combat a concerted business push to derail the Employee Free Choice Act, a.ka. “card check.”

“We’re looking to restore the law the way it was in 1935,” Service Employees International Union President Andy Stern said in a recent meeting with reporters, referring to the current card-check debate.

Did any of SEIU’s lobbyists or PR people take a survey about how the public thinks about 1935?  Most of us think of 1935 as one of those grim years of the 1930s before the Great Depression ended.  And if Stern is saying labor law went to hell after 1935, he’s overlooking the fact that labor’s glory days were, by most estimations, in the 1950s — despite labor’s bugaboo, Taft-Hartley.

Another way to argue for card check that doesn’t seem too bright is to argue that black is white:

But James Galbraith, an economist at the University of Texas at Austin, said “unionization and competitiveness are not incompatible.” He cited the aerospace and oil industries as examples where the two coexist. “You can’t say the decline of the auto industry is due to the strength of the UAW,” he added.

You can’t?

One of the weirdest, most perceptually jarring things about the economic crisis is that everything looks the same. We are told every day and in every news venue that we are in Great Depression II, that we are in a crisis, a cataclysm, a meltdown, the credit crunch from hell, that we will lose millions of jobs, and that the great abundance is over and may never return. Three great investment banks have fallen while a fourth totters, and the Dow Jones Industrial Average has fallen 31% in six months. And yet when you free yourself from media and go outside for a walk, everything looks . . . the same.

Everyone is dressed the same. Everyone looks as comfortable as they did three years ago, at the height of prosperity. The mall is still there, and people are still walking into the stores and daydreaming with half-full carts in aisle 3. Everyone’s still overweight. (An evolutionary biologist will someday write a paper positing that the reason for the obesity epidemic of the past decade is that we were storing up food like squirrels and bears, driven by an unconscious anthropomorphic knowledge that a time of great want was coming. Yes, I know it will be idiotic.) But the point is: Nothing looks different.

You don’t even need to free yourself from the media.  Just stay away from the news media and financial media.  Especially stay away from CNBC and the Wall Street Journal. You would hardly know anything unusual was happening at all.  If you’re watching football, or network prime-time offerings, or anything non-news on cable, you might get the occasional knowing topical reference, but that’s all.

The main way entertainment viewers are exposed to the economy is through advertising, and advertising hasn’t changed.  We’re still flocking to the malls, these ads tell us, and hauling back a bounty for Christmas morning.  We’re told to expect Big Savings For a Limited Time Only, but that’s nothing new.  We’ve had pre-Christmas sales routinely for years.  The results from Black Friday’s post-Thanksgiving retail sales apparently weren’t too bad. The biggest story to emerge from the official kickoff to Christmas buying suggests consumers are in a frenzy to spend.

Why isn’t the meltdown making its presence known more dramatically?  Noonan cites an unnamed economist who gives her the good news, then the bad news:

I asked an economic expert a few weeks ago if a second Great Depression would come to look at all like that, like a catastrophe, and he said no, not at all. In 1930 we had no safety net. Unemployment benefits, food stamps, welfare, an interlocking system of city, state and federal services—these things will keep it from being so bad.

But in tough times we will surely expand unemployment benefits, and welfare, and food stamps and housing assistance, which will mean more and greatly accelerated spending, which will mean bigger and steeper deficits, and higher taxes, with the one feeding on the other, which may mean an economic death spiral comparable to, say, Britain in the decades after World War II, its economy mired and held down by government control and demands. It continued more than a quarter century, until the change of economic thinking encapsulated in the phrase “the Thatcher years.” Is that what this will be?

Today’s Great Depression, Noonan says, exists “mostly in conversations between wives and husbands, in families and among friends, about selling, about digging in, about layoffs, and not taking chances, and reduced income, and fear.”  Decisions that arise from such conversations are the stuff meltdowns are made of.

Peter Orszag (first the 's' then the 'z')

The newly-announced director of the Office of Management and Budget, Peter Orszag, blogged while he was director of the Congressional Budget Office, I found out today.   So, quick, before it’s scrubbed, go read it.

Here is a link from the blog to Orszag’s slide presentation on climate change.  He’s not a skeptic, but he doesn’t sugarcoat the costs of addressing it, and thus buttresses the skeptics’ case.  If you’ve got about a half-hour, it’s worth your time to follow how he attacks the problem.  He recognizes the cost burden will inevitably fall upon those least able to afford it, so his attempt is to see what formula would spread the burden more fairly.  The conclusion I take away is, we need to be very sure that increasing CO2 emissions are a serious problem for future generations before imposing these kinds of costs on people alive today.

Here is a link to the slides from a talk he gave at Harvard called “New Ideas on Human Behavior in Economics and Medicine.” He’s very taken with the placebo effect.  Wonder if he thinks the placebo effect would be useful in alleviating global warming.

And here is an interesting observation about the tendency of people to overinvest their 401 (k) savings in company stock:

Many participants in retirement plans appear to be taking on unnecessary risk by investing in individual stocks rather than a diversified portfolio. The result is that those workers assume excessive risk for which they do not receive a higher expected return. (Those workers may feel they have inside information or insights that will allow them to outperform the market with particular investment choices, but the evidence suggests that unless you’re Warren Buffett, trying to outguess the market usually doesn’t work.)  Investing excessively in one stock that also happens to be your employer’s stock is even riskier — if the company runs into trouble, both your retirement assets and your job may be in danger.

In Orszag’s world, we are ridden with misperceptions. Some hurt us, and some work in our favor.  The role of government is to clarify matters for some, but use psychology  He’s going to be an important intellectual force in the Obama Administration.

At the New York Fed, Mr. Geithner has been one of the ringmasters of this year’s serial bailouts. His involvement includes the as-yet-unexplained flip-flop in September when a read-my-lips, no-new-bailouts policy allowed Lehman Brothers to go under — only to be followed less than two days later by the even costlier bailout of the American International Group and last weekend by the bailout of Citigroup.

It is still unclear what Mr. Geithner and other policy makers knew or did not know — or what they thought they knew but didn’t — in arriving at those decisions, including who exactly is on the receiving end of the billions of dollars of taxpayer money now flooding the system.

Confidence in the system will not be restored as long as top officials fail or refuse to fully explain their actions.

But who will demand such explanations?  The Senate?  Right, they can all apologize together.

Perhaps I was prescient. When TV news started showing the Dow Jones Industrial Average live while the president and president-elect hold press conferences, tracking market movements up or down as a verdict on whether what was being said was wise or foolish, it became pretty obvious that once again, as Calvin Coolidge once said, “the business of America is business.” And our portfolio is getting fatter:  Citibank and soon, perhaps, the Big Three automakers. But we hardly feel like Captains of Industry, do we?

So, after taking a vow of blogging silence for a few weeks while I pondered whether this little venture should continue, it hit me that, more than ever, we are residents of Marshall McLuhan’s global village, all in our separate tribes but joined in watching this phenomenon, to use another 1960s term, this “happening” — the meltdown.  As individuals, families and communities, the ground under our feet might be solid right now, but we all have to watch it give way in other precincts knowing ours might be next.  And we can capture it all in real time.

So that’s what this blog will be all about: Chronicling the meltdown, from an unsafe distance.

President-Elect Barack Obama's News Conference Monday

There are some who believe our current political class, up to and including President-elect Obama, is not capable of managing the crisis.  Moreover, there are many who think popular history and partisanship has inflated the roles played by past presidents who inherited crises, Franklin Roosevelt and Ronald Reagan. Their policies, some say, either made things worse (FDR) or deserve no credit (Reagan).  But at this point, we can be a little naive, a little hopeful.  Cynicism at this moment would be unearned although we might achieve it.

Today’s scorn should be apportioned to those who stuffed several successful business models into a thing called Citicorp, and proceeded to wreck it:

While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. Earlier this year, the Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup.

The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.

Citigroup insiders and analysts say that (former CEO Charles O. Prince III) and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

And since joining Citigroup in 1999 as a trusted adviser to the bank’s senior executives, Mr. Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another.

Citigroup was ensnared in murky financial dealings with the defunct energy company Enron, which drew the attention of federal investigators; it was criticized by law enforcement officials for the role one of its prominent research analysts played during the telecom bubble several years ago; and it found itself in the middle of regulatory violations in Britain and Japan.

For a time, Citigroup’s megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading.

But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses.

To some, the misery at Citigroup is no surprise. Lynn Turner, a former chief accountant with the Securities and Exchange Commission, said the bank’s balkanized culture and pell-mell management made problems inevitable.

“If you’re an entity of this size,” he said, “if you don’t have controls, if you don’t have the right culture and you don’t have people accountable for the risks that they are taking, you’re Citigroup.”

That was in Sunday’s paper.  In Monday’s, we found out that Obama’s new economic team is a Robert Rubin “constellation.”

An emerging political issue for 2009 and beyond will be whether pension promises will be kept, and what keeping those promises will cost everyone else. The problems shrinks the more the stock market goes up. And, according to Brian Sullivan of Fox Business, a down market means a lot of us will have to put off retirement:

(M)any Americans and politicians have an erroneous view that stocks are for “rich people” and not them. Wall Street remains a mysterious world, operated largely behind closed doors by mad scientist math wizards. The pension problem proves nothing could be farther from the truth. The teachers, cops and other government workers who trust their retirement to companies such as CalPERs (California’s pension fund) may suddenly take a keen interest in equities.

The other reality is that many Americans will have to work longer than planned. Companies and governments may not have the ability to cover costs for people retiring at 62 and living another twenty years. The math of early retirement + living longer / awful stock markets simply will not add up.

Actually, I think Sullivan might be selling Americans short. Compared with the last prolonged bear market in the 1970s, I suspect the political tolerance for a slacker Dow Jones will prove to be very low. The expectant retiree facing having to work an additional 8-10 longer than planned are about to become the nation’s most potent force.