Distracted

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. That’s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses).

The Big Takeover – Rolling Stone

Still Fit For The Job

“There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. [Prime Minister] Haarde, though, is a trained economist—just not a very good one.”

Wall Street on the tundra, by Michael Lewis – Vanity Fair

On Thin Ice

“…we arrive at the 101 Hotel, owned by the wife of one of Iceland’s most famous failed bankers. It’s cryptically named, but instantly recognizable: a hip Manhattan hotel. Staff dressed in black, incomprehensible art on the walls, unread books about fashion on unused coffee tables—it’s the sort of place bankers stay because they think it’s where the artists stay. Bear Stearns convened a meeting of British and American hedge-fund managers here, in January 2008, to figure out how much money there was to be made betting on Iceland’s collapse. (A lot.)”

Wall Street on the Tundra, by Michael Lewis – Vanity Fair

Saving Defense Jobs

Lockheed Martin is in the middle of a big P.R. push to keep the F22 Raptor program funded and running. Their data indicates that continuing government funding of the program would save 100,000 jobs from being cut over the next year or two.

Obama’s appointees aren’t fans of the aircraft and the big spending required to keep the assembly line churning:

Secretary of Defense Robert M. Gates and other officials have voiced skepticism over the F-22 program in the past, and disagreements over the future of the plane led to a shake-up in Air Force leadership last year.

Here’s a solution: certify the F22 for export to NATO members and other friendly forces. Australia, Japan, and Israel all want to procure the F22, but export has been banned under federal law. If the United States doesn’t want to buy its own air-superiority fighter, why not sell it to those air forces that do? Robert Gates has indicated that he has no objection to sale of the Raptor to Australia, but Congress would have to change the law.

This is a quick fix to saving American jobs, and I’d like to see Barack Obama come through on his promise of being a pragmatist and make F22 export a reality.

Lockheed lobbies for F-22 production on job grounds – LATimes

F22 Raptor: Export Ban – Wikipedia

Australian minister says he wants option to buy US F-22 Raptor – IHT

Is The White House Battling Deflation?

Most economists are against the stimulus bill. One of their reasons is that the bill relies on federal deficit spending, which is thought to have 1/2 to 1/3 the effect of a similarly sized tax cut. In addition, the spending will cause inflation, eating away at our savings.

Is inflation the Democrats’ objective?

After all, with the slowing economy, the consumer price index is indicating that we’re dangerously close to experiencing deflation. Perhaps the Dems are going on a crazy spending spree to fight recessionary deflation while stimulating the economy at the same time.

Personally, I’m not against deflation. It means that the money in our bank accounts, earning 0% interest, actually gains in value (relative to the goods it can buy).

However, if you are afraid of deflation, you might want to applaud the Democrats’ wild spending.

Just a thought.

Bad Timing For Unions

I think labor unions are unnecessary, except when working conditions are poor, or when workers are being mistreated. In 2009, that means that labor unions really have no place in our society. Their only function seems to be blackmailing management, and going on strike, which disrupts our society and hurts us all.

Case in point, in 2008, some 27,000 Boeing assembly workers went on strike, asking for higher wages, more benefits, and less use of non-union contractors in work that was traditionally union-dominated. They went on strike during an economic recession. In an economic environment in which they should have been happy to have employment (especially such well-paid employment), they chose to follow their greed and strike. This disrupted Boeing’s assembly and delivery of the 777 and 787. Their selfish decision to strike led to painful disruptions across the globe:

[Richard] Branson expressed anger at the cost of the Machinist strike to V Australia, the new international unit of his Virgin Blue airline in Australia. His passengers were left stranded because V Australia’s new 777-300ER [...] wasn’t available for the peak holiday travel season down under, Branson said. “It was a horrible mess that Boeing was on strike. We messed up tens of thousands of passengers over Christmas,” he said. “We had to buy tickets on other airlines and scramble to get seats which weren’t available. The financial damage in an industry where the margins are minute is catastrophic.”

The strike inflicted considerable damage to Boeing’s reputation as a reliable manufacturer. “We’re already thinking there’s another lot of planes we want to order. Do we give it Boeing or should we go to Airbus, which doesn’t go on strike? ,” Branson said. “We have a choice. Do we have to come back to Boeing? If there’s a danger of ever having another strike, we won’t.”

Really, right now is NOT the time for unions to strike.

Boeing’s top customer predicts big production cuts – Seattle Times

Stocks Chart Scores

Stock charts turned into music using Microsoft Songsmith. Some of the songs are pretty catchy.

Protectionism and Crack Cocaine

Dallas Federal Reserve President Richard Fisher warned on Monday against “Buy America” provisions in a proposed fiscal stimulus law and said it could lead to devastating trade protectionism.

“Let me just be blunt. Protectionism is the crack cocaine of economics. It may provide a high. It’s addictive and it leads to economic death,” Fisher told C-Span television in an interview for its “Washington Journal” program.

Reuters, via DealBreaker.

Frat-boy and French fromage

The departing frat-boy president, George W. Bush, did something odd in the last few days of his presidency.

He slapped a 300% import duty on Roquefort cheese.

His administration did it in retaliation for an EU ban on imports of US beef containing hormones.

The measure was completely legal under WTO rules.

Bush War on Roquefort Raises a Stink in France – Washington Post

Wen blames America

Vladimir Putin and Wen Jiobao have blamed the worldwide economic recession on the United States. The financial crisis, said Mr. Wen, was “attributable to inappropriate macroeconomic policies of some economies and their unsustainable model of development characterized by prolonged low savings and high consumption; excessive expansion of financial institutions in blind pursuit of profit”.

At first glance, his statement seems to be relatively accurate, referencing the low savings rate and consumption powered by excessive borrowing that were characteristic of the United States from 2003-2006. However, the root causes of our economic are more complex than that, and, ironically, may have came from Mr. Wen’s home country and not irrational spenders in North America.

China has maintained a massive trade surplus, and America a massive trade deficit. Much of China’s income or surplus was invested in foreign currency reserves like the dollar, and specifically, Treasury bills. This had the dual purpose of paying interest on their cash haul, and, more importantly, weaking the yuan with respect to the dollar (by purchasing Treasury bills, demand is created for the Dollar, strengthening it, and selling yuan for dollars puts downward pressure on the yuan’s value). This cycle of using China’s trade surplus to buy Treasury bills ensured that the flow of Chinese goods came cheaply to American consumers. Also, it ensured that interest rates in the United States were artificially low, led down by low yields on Treasury paper.

The excess boom of debt fueled by low interest rates in the United States was partly to blame for irresponsible borrowing, which blew up in our face as banks failed when borrowers couldn’t pay back their loans.

China is just as much to blame for the financial crisis. Their economic policy of maintaining a weakened yuan by continually buying Treasury securities inflated the US economy with easy money.

I’m not trying to deflect blame from the American consumer to the Chinese government. What I’m trying to say is that in our dynamic and complex economy, we cannot rely on the primitive and simple cause-and-effect relationships that Wen and Putin have pointed to. The truth is that many factors are responsible for our current economic malaise, and even those factors were caused by phenomena years ago, and also share the blame.

Wen, Putin Slam U.S. Economic System – WSJ

Government’s role in stopping job losses

It seems that every day that goes by, another large corporations or two announce that they’re laying off tens of thousands of workers. This process (cutting costs) is absolutely necessary to ensure that our businesses are viable and creditworthy. However, cutting workers isn’t the only option.

One avenue that has been largely ignored in this labor market is cutting salaries for a entire company’s workforce. Clearly, this would be negative for the workforce’s morale, but many employees would prefer a pay cut rather than risk being laid off. This is an option that MUST be put into practice in all cost-cutting efforts to stop the tsunami of layoffs.

Now, I’m not usually one for more government regulation, but I think the government should urge or potentially even require businesses to attempt to cut compensation before they reduce their headcount. Businesses should have an incentive (a tax incentive?) to do so.

Massive layoffs create a positive feedback loop that promotes recession. Layoffs need to be attacked immediately with a common sense solution. Unemployment is spiraling up and will soon be in double digits (it already is, depending on who you ask).

We can’t just spend our way to permanent jobs. We can surely create temporary ones with a massive infrastructure spend, but in the end, tax cuts have shown to create 3 times as much prosperity as government spending, so why attempt to spend public money it’s known that such an attempt is only a stopgap solution?

Obama already failing to live up to hype

More of the same…

Barack Obama, who ran on a promise of post-partisanism and pragmatism, is already showing that those were just slick marketing slogans. Already, he’s decided that he will give few or no concessions to house and senate Republicans with regard to his bloated, trillion dollar-plus economic stimulus package. Just because you can act with disregard toward the minority party does NOT mean you should. Clearly, Republicans have some good ideas about reforming the stimulus package — they want to get the legislation right. GOP Whip Eric Cantor of Virginia argues that Obama’s stimulus bill does not focus enough on job creation, and he’s right.

The stimulus bill, as it’s presently written, is a flaming ball of pork. Politicos know that it will be easy to pass the legislation, considering the economic situation, and so they’re loading the bill with pork that they might not have been able to insert into bills of their own.

The other problem with the stimulus bill is that its effects will not be widely felt for years. Just 20 percent of the stimulus will actually be spent in the next 8 months, and over one-third of it ($291 billion) will kick in at least 21 months from now.

We need something timely, and waiting so long for the proposed stimulus to kick in will not work.

What should congressional Democrats do instead?

They should decide what the top three or five problems with the economy are (or will be) and write individual, comprehensive bills to cure those ills. A bill for small businesses, a bill for employment, tax cuts, the financial system, real estate, et cetera. They should work with their colleagues across the aisle to ensure that spending doesn’t get out of control, and that each provision really targets a problem and uses a method that has either worked in the past, or logically shows promise as a solution superior to past methods. In that way, each problem will be tackled individually, and the opportunity for injecting pork spending into the bills will be lessened, because the bills will be more focused in nature.

Timely? Temporary? – Arnold Kling

Stimulus Now, Stimulus Tomorrow, Stimulus Forever – Reason

Interest Expense: Bailout Edition

Rep. Paul Ryan (R-Wisc.) got curious about the costs of borrowing all those hundreds of billions in stimulus bucks. He had the Congressional Budget Office crunch the numbers:

The debt service alone from the stimulus will cost about $347 billion over the next 10 years.

That’s more than $3,000 per American household.

A Little Something to Stimulate Your Interest – Reason

Geithner: Force is Prudence

The tragic history of financial crises is a history of failures by governments to act with the speed and force commensurate with the severity of the crisis. If our policy response is tentative and incrementalist, if we do not demonstrate by our actions a clear and consistent commitment to do what is necessary to solve the problem, then we risk greater damage to living standards, to the economy’s productive potential, and to the fabric of our financial system. Senators, the ultimate costs of this crisis will be greater, if we do not act with sufficient strength now. In a crisis of this magnitude, the most prudent course is the most forceful course.

-Future Treasury Secretary Tim Geithner

Well put.

Via Felix Salmon.

In an unlikely place, an economy

        Maria Luz Ochondra lives on one of the world’s largest garbage dumps, a place incongruously called the Promised Land, just outside Manila in the Philippines. No one knows exactly how many people live on and around the Promised Land, but at least a couple thousand desperately poor adults and children spend their days picking through the garbage looking for anything useful. Father Joel Bernardo, a Catholic priest who works with the residents, notes that they are the “leftovers” of the world, the poorest of the poor. Another resident, Paz Calopez, describes conditions in the Promised Land this way: “There’s always smoke, there’s always fire, even when it rains. The garbage is glowing, even at night, and you hear popping sounds. We think it’s batteries exploding. It smells worse than a bathroom, especially when the bulldozers come through.” Tragically, during July 2000, weeks of monsoon rains soaked and loosened the mountain of garbage, causing it to suddenly collapse, killing more than two hundred people and two of Mrs. Ochondra’s sons.
        It is hard to believe that in this most hellish of places on earth, populated by some of the most desperate people imaginable, there is a sophisticated and, one could even say, vibrant economy. In 1994, the Philippine government closed a large dump in another location, greatly increasing the amount of garbage going to the Promised Land. Almost as soon as the Promised Land began to fill up, its economy sprang to life. At the base of the Promised Land economy are the scavenger families who live on the dump and spend their days picking through the garbage, looking for scrap metal, plastic bottles, rubber tires, and other useful materials. Sometimes they find discarded appliances, pieces of furniture, clothing, children’s toys, even edible food. The scavengers keep some of the material for their own use, but sell most of it to middlemen, who are the next link in the chain. the middlemen tend to specialize by type of material and have relationships with recyclers and manufacturers that purchase the metal, plastic, and rubber that the middlemen consolidate from the scavengers. Some middlemen even have recycling contracts with large companies and hotel chains. These contracts allow the middlemen to hire scavengers on a piecework basis to pick through their clients’ garbage first, culling the choice material before the trucks tip it into the general dump. The middlemen enjoy more efficient access to better materials, and their client companies are charged reduced tipping fees.
        At the next level of the economic chain are the various businesses that have sprung up to service the scavengers, middlemen, and their families. Various shanty shops sell products ranging from soap to shoes, bicycle parts, ice cream, and school supplies. Although the scavengers have a very difficult, unhealthy, and dangerous existence, the dump nonetheless provides a relatively steady income that keeps the majority of its residents from starving–an all-too-real risk in a country with 74 million people who earn less that one dollar per day. As Father Bernardo observed, “It’s raw capitalism working here. And it really generates money. Millions of pesos revolve through here every day.”

Excerpted from

The Origin of Wealth by Eric D. Heinhocker. Page 79.