Wednesday Night #1408

With Maureen Farrow, Peter Perkins  (see also Wednesday Night.com)

The President’s address to Congress and the nation
It struck a good tone of sobriety about the number of hurdles the country faces; he was very straightforward about the challenges, but it boosted confidence and he also did a reasonably good job of reestablishing his authority over the process as it moves forward … far better than the Inauguration speech and a stark contrast to Mr. Geithner’s incredibly poor performance of a couple of weeks ago and Ben Bernanke’s testimony on the Hill [on Tuesday].
Bipartisanship has not been working so far – however, the gradual (if reluctant) increase in the number of Republican applauding the address might be a hopeful ‘indicator’ of increased possibilities for bipartisan action. On the other hand, those Republicans may have decided that it looked better on television to be applauding the President who obviously has the people on his side.  Obama is possibly one of the most intelligent and articulate presidents we have witnessed. He not only can intellectually grasp the problem, but he is able to take ownership, explain the situation and  formulate a plan of action in language understood by small town Americans.  His message was clear: what happened?  What is the current situation?  What must be done? And – more important – it’s going to be painful, but we are going to get out of the mess we are in.

Banks – nationalization?
We must stabilize the financial system. Whether or not nationalization is the most effective way of doing so is a matter of debate. There has been a reaction in the country to the poor handling (and allocation) and enormous sums spent on the bailout of the banks. Somehow the public’s reaction of  line them all up against the wall and shoot them must be tempered more with reality than reaction. Explaining the complex financial system and  the need for the bailout to the public is extremely difficult. In its simplest terms, due to the chain of events  there is not sufficient money left to lend and any solution would require getting the questionable assets out of the way, a long, difficult process. There is no doubt that the banks’ loss of capital, the result of their own greed, has paralyzed lending.  This, as well as [much mentioned at Wednesday Night] unconscionable executive bonuses has aroused public anger and opposition to the bailout.  But without the necessary capital, the required loans would not be forthcoming thus prolonging the crisis; without capital, loans would vary from extremely difficult to impossible and so the government has swallowed hard and decided on a bank bailout.  Some experts believe that nationalization or “pre-privatization” of the banks (“the Swedish model“) is the only way to avoid a decade-long period of throwing ever-more money at the problem without a satisfactory resolution. nationalization of the banks in some manner.   This, too, could prove to be a very risky venture as 1) Americans are not comfortable philosophically nationalization by any name; they see it as an evil big brother, 2) because it has not worked in countries that have tried it and 3) because civil servants running the banking system would avoid taking necessary risks in an attempt at personal preservation  – one Wednesday Nighter cited the example of the devastating effects of nationalization of [healthy] French banks by the Mitterand government in the 1980s – [this however was a different situation as the action was taken as a matter of socialist ideology, not necessity, intending to keep the banks in the public sector].   Nationalization would also raise the thorny issue of the amount to pay shareholders, as well as who is going to run the banks. Both Mr. Geithner and Mr. Bernanke have emphatically declared that there will be NO NATIONALIZATION.

What keeps hanging over our heads is the lack of transparency in published asset valuations of at least some financial institutions. (See Japan!) That could be helped by taking the moral hazard away from the auditing operation, as well as from the bond raters.

In Europe, the situation is even worse.

The markets are declining. But there are opportunities, for stock pickers.  We are seeing the biggest economic collapse since the post Wold War II period. G.D.P. globally will actually be negative this year.  Exports are down 47% in Japan in January and Germany is in the same situation, the U.S. and elsewhere.  Pension funds have stopped automatic re-balancing and the effect on future pensioners remains a concern.  The result of the banking crisis has the potential for leading to rising social unrest. Arguably most central bankers today believe in zero rates and quantitative easing. It is clear that there is a lot of danger but zero visibility in this situation.

Investment in infrastructure appears to appeal to countries as a stopgap measure.  Although this may work in China as there are few if any ecological or other considerations there that would otherwise delay the process, even if it had its intended effect here, these would inevitably delay the intended benefit.

There is a true structural change taking place in the economy as well as a technical change.  Investors have, in the recent past, taken a return on their investment for granted, but that is no longer the case.  As inflation zeros out and deflation increases, the environment will change dramatically.  In a deflationary world, while other securities lose value, cash actually gains value as prices fall.  Stock will become a quicksand for investors as gains are short-lived as the trend continues downward.  Agricultural land is always a good investment as it continues to shrink  in size with increasing encroaching urbanization.

It would be reasonable to expect that the current downward trend in the economy would have an adverse effect on the cohesion of the disparate members of the European Union and on the Euro, but the reverse has occurred with Germany determined to hold the Union together by helping out more needy members.  It would appear that leaving the Union would prove much more difficult than joining it.

Inevitably, the financial crisis will come to an end, the economy will once again start to grow and India will take China’s current place in the world economy.

Green technology
While wind farms thrive in some countries like Denmark, experiences with Canadian applications have been less than happy. Provincial governments often maintain conflicting policies that inhibit wind energy development.

The ecological fallout from technology continues to be of concern to Wednesday Nighters.  Despite the economic importance to Canadians and despite government and industry denial, the Alberta tar sands are said to be the source of major pollution that defies correction at the current state of technology.  There are said to be little reliable data on the tar sands but as long as we remain dependent on fossil fuels, our preference will be to tolerate the fallout until reliable, cleaner energy sources are discovered.  Hydrogen is a possible alternative but requires a great deal of energy to produce; wind and solar power are intermittent, requiring traditional backup in order to maintain the grid, thus only viable where the price of fossil fuels is extremely high.  There appears to be an aversion on the part of the public to the only current alternative, namely nuclear energy, which is not suitable for transport and aircraft.  Ultimately, it would appear that we must either learn to live in a world with minimized energy consumption or face having our lifespan cut short and numbers reduced due to our disregard for the inevitable.

T H E  I N V I T A T I O N

Breaking News: (Bloomberg) Caisse de Depot Lost C$39.8 Billion on Sales, Debt
MONTREAL AND QUEBEC — How did it all go so wrong at the Caisse? One Wedesday Nighter comments: The clown before Rousseau, a Pequiste journalist by trade, used our money 1.to buy a fashion house in Paris, 2. to set up branches in Paris, Warsaw, Budapest, and Bangkok (he spent much time visiting these), and 3. to produce a huge overrun of costs building a new head office. He proved to be an embarrassment to the Landry government, so they brought in the loyal, but believed-to-be-able Rousseau. On balance, waste proved to be less expensive than imaginary competence.

We are unlikely to be able to duplicate what one of the participants referred to as the “cheerfully tumultuous” ambiance  of last Wednesday Night, however we are looking forward to an extremely informative evening in the company of Maureen Farrow who was last with us  just before the Obama election, on WN 1390 . It  may be worthwhile to compare where we were then and where we thought we might be now. And the President’s address on Tuesday evening to Congress and the country on the economy will be available for scrutiny. Peter Perkins may assume his familiar role as Mr. President, or possibly, Mr. Secretary (of the Treasury).

We had thought of being super-clever and aligning this week’s invitation with the Oscars, suggesting categories for our topics: Best supporting actor in a financial drama (that would have to be a tie between the automotive CEOs), Best foreign-language docudrama (now would that be “Sarkozy versus Separatists”?); Best villain (Dick Cheney, of course, with Robert Mugabe as a runner-up). However we ran out of ‘clever steam’. Suggestions would, however be welcome for future use.  Meantime, we revert to standard practice.

Among the recent events worth examining are the outcomes of the meeting between President Obama and PM Harper last Thursday – what was significant and what was not (where would we place the 30-minutes with Michael Ignatieff?). What was promising and what was simply not discussed. And what about the invitation to the Governor General to advise the Obama administration on Haiti?  Isn’t that a precedent? [Update: the Globe & Mail reports that “No one will talk about Michaëlle Jean’s supposed invite to Washington”, adding “Had Ms. Jean been invited, and accepted, she would have become the first governor-general to represent Canada in the U.S. capital since — as far as anyone can tell — 1927 when Viscount Willingdon went to Washington. Jules Léger, governor-general from 1974 to 1979, is thought to have been invited to the White House by president Gerald Ford. But that was a private visit.”] We thought the ‘connect’ between the two Heads of State warm, delightful and highly photogenic. CTV reportsthat the less warm and fuzzy PM has taken advantage of the impetus generated by the President to go to New York and raise Canada’s profile by, among other things, giving an interview to Fox News.

It’s all banks, all the time: Bad banks, Shaky banks, a Toxic Ban in Britain, Zombie banks, – and then there are Stanford banks .  Ownership, nationalization, regulation that the EU proposes to impose on “all financial markets, products and participants, including hedge funds and other private pools of capital which may pose a systemic risk”.
Feds explore taking bigger stakes in shaky banks
WASHINGTON (AP) The government on Monday moved toward dramatically expanding its ownership stakes in the nation’s banks _ with Citigroup, the struggling titan of the industry, apparently at the top of the list.
In Latest Plan for Banks, U.S. Could Demand Voting Stake
(NYT) In an unexpectedly assertive joint statement, the Treasury Department, Federal Reserve and federal bank regulatory agencies announced that the government might end up demanding a direct ownership stake in major banks after they undergo a tough evaluation of their strength, which is to begin shortly.
Banking on the Brink
What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree. … What we want is a system in which banks own the downs as well as the ups. And the road to that system runs through nationalization.
20 February
Schumer: Failed ‘Zombie’ Banks Should Be Nationalized
(HuffPost) Sen. Charles Schumer (D-N.Y.) believes that failed “zombie” banks, no matter what their size, should be taken over by the government, which should then wipe out shareholders, fire management, clean up the banks and quickly resell them into the marketplace. Such a move, he cautioned, should come only if the “stress tests” being conducted by Treasury Secretary Timothy Geithner determine a bank to be insolvent. (Bloomberg) Dodd Says U.S. Bank Takeovers May Be Necessary for ‘Short Time’

Meanwhile there’s an announcement from Ottawa that the Minister of Finance is launching scheduled public consultations across Canada on private pension plans. This should keep our favourite economist, Tony, very busy, along with a number of concerned citizens, led by Margaret Lefebvre (to whom we owe this news bulletin).

Should the topic of banks and pension plans be exhausted and there be a need for more gloom and doom, the geopolitical situation is begging for attention: The current issue of Foreign Policy offers The axis of upheaval including analyses of problems in Russia and Mexico along with more traditional basket cases like Somalia and Yemen. Israel’s political situation is forever dramatic with possible ramifications of all kinds. The relationship between Pakistan and India is a conundrum: IPS reports Signs of a Thaw while Bloomberg frets that “India’s 670 million voters may be about to set back President Barack Obama’s campaign against Islamic militancy in Afghanistan and Pakistan.”

Important piece on Japan’s ‘lost decade’ from Foreign Affairs
The Japan Fallacy
In periods of crisis, pundits and policymakers tend to scramble for historical analogies. This time, many have seized on Japan’s notorious “lost decade,” the decade of stagnation that followed a mammoth property bubble in the late 1980s. But this comparison is wrong. In Japan, the primary problem was pervasive dysfunction in the economy, which caused a banking crisis. In the United States, pervasive dysfunction in the financial sector has caused a deep recession in the economy as a whole. This financial dysfunction is not the result of structural flaws, as in Japan, but of grave policy mistakes. It is now being compounded by widespread investor panic.
The consequences of the 2008 U.S. financial crisis will be different from Japan’s slump in the 1990s for three reasons: the cause of the current crisis is fundamentally different, its scope is far smaller, and the response of policymakers has been quicker and more effective.