Friday, December 05, 2008

The Detroit Pigs Return To The Washington Trough

On Thursday, I wrote this post on my companion political blog discussing those aspects of the current drama being played out on Capitol Hill involving the US-based auto makers.

After I wrote that post, there was still plenty of drama occurring, both in the Congressional hearing room, and outside, as all parties rushed to appear before cameras on CNBC and Fox to attempt to add weight and urgency to their positions.

In this post, I want to address the economic aspects of what was said, and not said, yesterday in testimony and various post-hearing interviews.

Perhaps the most outrageously insidious and disingenuous 'witness' at the hearing was the UAW chief, Ron Gettelfinger.

This union chief stopped at nothing to save his hide, and, parenthetically, his union, too. To hear Ron's view of the world, filing Chapter 11 is unacceptable, because it would cause GM to cease to function.

Of course, that's a lie. But what else can Gettelfinger say? The truth is too awful for him and his union members.

Gettelfinger kept banging away on the theme that millions would become unemployed, national production capacity would be lost, and cars would be unbuilt if GM, Ford and Chrysler file for bankruptcy. And that no consumers would buy a car from a producer in Chapter 11.

Trouble is, Gettelfinger's source on that last contention was hopelessly biased and suspect.

But, listening to the UAW chief, you'd think that filing Chapter 11 was somehow less efficient than having a giant pow-wow, before a filing, in which everyone magically sits down and negotiates in good faith, once you and I have agreed, through Congress, to write checks totally some $30B to the three failed auto makers.

The truth, of course, is that Chapter 11 is crucial to force such negotiations. Gettelfinger is scrambling to hold out for pre-bankruptcy negotiations, because, in bankruptcy, his union will have its benefits and wages slashed unilaterally.

In fact, one Democratic Senator explicitly accused, but not by name, some Republicans and pundits for using Detroit's problems to break the UAW. But the UAW is doing that all on its own. It doesn't need help.

Perhaps the most sickening aspect of the presentations by Wagoner, Mulally, Nardelli and Gettelfinger were their simultaneous claims of two mutually exclusive positions:

-If GM, Ford and Chrysler are not rescued, their failure will mean untold damage to the US economy, so dire is their current predicament. And this predicament, by the way, is only the result of the recent financial crisis, not the woeful mismanagement of the three firms and the UAW for decades.

-If GM, Ford and Chrysler are bailed out, they will magically become the best-managed, most eco-friendly, well-run, successful American companies you ever saw.

Actually, both positions are probably lies.

First, Chapter 11 filings by all three firms would allow them to operate under a Federal bankruptcy referee, who would assist in the pruning of loss-making operations, reorganization of the three firms into fewer, stronger firm(s), and/or sale of attractive operations to other car makers.

Further, shuttering Ford, GM and Chrysler, as we know them now, does not preclude Federal assistance to formerly-employed UAW workers, as citizens, though, not UAW members. Shareholders and creditors may suffer, as they should, but employees need not be totally cast adrift.
Too, if GM, for example, is truly within a month of failure, then it's way too late to claim that a few billion in cash will magically solve all its ills.

Also, the three CEOs attempted to con the Senators at the hearing into believing that it is natural and acceptable to forecast 18-30 month timeframes until which these firms will show a profit again.

No private investor would stand for this. No bank would lend on these terms. But the CEOs could offer no case for rescue, in this situation, other than trying to cause a fear of massive unemployment and national economic ruin, should they fail.

Simply put, the CEOs, and Gettelfinger, all of whom are culpable in having brought the firms, and the US-based auto making sector to this point, attempted to evade responsibility for ruining the three firms, but threaten to make the nation's taxpayers pay a high price for the mistakes of these four leaders, and their predecessors.

The second contention of the four leaders, that, if bailed out, they will magically become better-managed companies, is silly on the face of it.

Without significant change in management, union contracts, and various other vendor arrangements, these companies will never survive to repay the 'loans' they claim to want.

You have to ask yourself, how will GM, Ford and Chrysler, which mismanaged themselves to this point, magically change just by the infusion of tens of billions of dollars of taxpayer money?

They won't.

Finally, there is a lot of emphasis on various surveys purporting to claim that, if in bankruptcy, these firms will lose customers, because, 'nobody will buy a car from a company in bankruptcy proceedings.'

These surveys are, when you carefully evaluate them, specious. Gettelfinger and Wagoner never actually cite the details of the 'survey' on which they rely.

Today, on CNBC, economic misfit Steve Liesman cited the network's own poll as showing that 52% of those questioned would buy a car under those circumstances.

Then the economic idiot claimed he had reversed his own numbers, and the correct value was a lower number. 37%, I believe, with the balance, some 11%, were undecided.

The flaw, of course, in Liesman's figures, is that one would need to carefully consider the sample makeup. To me, the most reasonable universe for these surveys would be current buyers of each company's cars. With such a small market share now, GM is really only worried about current customers, since most car buyers wouldn't take a GM product if you gave it to them.

Thus, it's probably a good idea to totally discount these 'surveys' purporting to show that the firms can't....just can' in bankruptcy, or they will sell no cars.

Finally, the CEOs, and supporters, including the Governor of Michigan, would have us believe that, without GM, Ford and Chrysler, valuable non-carbon-based car technology will lapse, and we'll be at the mercy of foreign producers of alternative-fuel vehicles.

Again, this is a red herring, and nothing could be further from the truth. If these technologies are so promising, why would not either other car makers with plants in the US, or simply other companies, buy these patents, technologies, or operations, in order to continue perfecting them?

It's not the assembly of something like GM's oft-heralded, but far-off Volt, that is crucial. It's likely the battery and drive train technology. Parts that a supplier could easily buy and finish developing.

In general, any parts of these companies that are valuable will be preserved and transferred, in Chapter 11, to a better, stronger parent. So will employees needed for ongoing car operations.

In summary, the cases made by Wagoner, Mulally, Nardelli, Gettelfinger,, are deeply flawed, specious, and devoid of merit.

We should all hope that Congress only extends a debtor-in-possession loan to any of the three US auto makers which choose to enter Chapter 11, and then offers focused assistance packages to displaced employees.

To do more would be folly and insanity. Throwing our good taxpayer money after bad, lost shareholder and creditor money.

Thursday, December 04, 2008

Goldman's Online Banking Plans

Yesterday's Wall Street Journal accorded the lead article placement in its Money & Investing section to a piece entitled, "Goldman Considers Online Bank."

It's not April 1st, so I guess we have to take this seriously.

These two recent posts, here and here, discuss my thoughts on how successful Goldman Sachs is likely to be in commercial banking. Yesterday's news doesn't change my thinking.

Yes, an online banking unit would not 'change the culture' at Goldman, per Lloyd Blankfein's self-expressed criterion.

But exactly what is the hook for consumers? I don't even do online banking constantly now. If I did, it would be for DDA account management, not to buy CDs or just place deposits.

In fact, this sort of business inevitably becomes very price-competitive. Hardly the image one has of Goldman, is it?

I don't understand how the Goldman Sachs management team could be so blind as to believe that simply by opening and online facility to take deposits, their long term worries over funding structure have ended.

Just the whole idea of a Goldman Sachs consumer bank strikes me as, well, ridiculous. It's as if they don't see any competition whatsoever in this area when, in fact, many commercial banks have been in this product/service space for years.

It also doesn't change the fact that, even today, Goldman remains an over-levered hedge fund with a bank charter or two. It's only a matter of time before they have to slim down their assets even further to meet either Federal or New York state banking requirements.

With the firm's first-ever quarterly loss reported this week, it hardly bodes well that future earnings will have to come on a smaller asset base amidst a slower market for the firm's main non-trading businesses, M&A and underwriting.

If this is the best Blankfein's team can come up with for Goldman's new operating environment, I feel sorry for the firm's current shareholders.

Tuesday, December 02, 2008

Reality TV: Detroit Auto CEOs' Return To Washington This Week

Having been chastised by members of Congress, as I wrote in this post, for using private jets to travel to Washington for last month's hearing at which the CEOs of GM, Ford and Chrysler came begging for public assistance, it appears all have learned their lesson.

Comically so.

Reports have Alan Mulally tooling his way across the Eastern US in a Ford hybrid. Hapless GM CEO Rick Wagoner is doing something similar in one (or more) of his company's newer models.

Chrysler's Bob Nardelli had not, as of yesterday, disclosed his travel mode, other than to assure one and all that it certainly would not be a private jet.

The Detroit Three's second Congressional appearance has now taken on the character of a very bad reality television program.

Next, we'll hear that Mulally's car breaks down, or can't be recharged en route. So he misses the meeting because of frequent gas stops to fill the car's small tank.

Or that GM's Wagoner, inept as always, manages to lose his way and winds up in West Virginia, instead of Washington, D.C. Even his OnStar navigation system will fail him, to the embarrassment of all concerned.

Then Chrysler will reveal that Nardelli, not to be outdone, actually hitchhiked his way to the Congressional hearings. Unbeknownst to him, Mulally will have picked up Nardelli on I-70, south of the Breezewood exit, thinking him to be a drifter in an old, beat up suit, carrying a battered nylon courier bag.

Once before the Congressional panel, the three CEOs will be unexpectedly interrogated regarding their choice of lodging on the trip.

When it is revealed that Wagoner chose a Radisson, angry murmurs will sweep through the gathered lawmakers.

Mulally's selection of a Hampton Inn will be more favorably received, but only because the chain offers a plentiful, self-serve buffet breakfast.

But the assembled Members will rise to cheer and applaud when Nardelli reveals his audacious gamble in setting out for the Capitol on foot, staying overnight in a youth hostel in the Pittsburgh area.

Far from being insulted with the ex-Home Depot CEO's grimy, soiled and unshaven appearance, several Democrats will laud him as having finally gotten 'in touch' with the real spirit of 'hard working Americans' everywhere.

On a more serious note, though, I read yesterday's Wall Street Journal's Marketplace section's lead article, which depicted Alan Mulally's mug beneath the title, "Ford Will Speed Green-Car Launches."

What we are now seeing, sadly, is a group of struggling, near-dead companies offering to engage in whatever product and business strategies a group of equally-inept businessmen and women- Congress- demand of them, in hopes of securing some $30-40B of taxpayer-financed loans which are unlikely to ever be repaid.

Nothing good comes of a situation in which publicly-owned, private corporations set aside their own business plans and strategies, and, instead, simply agree to do public bidding, outside of, perhaps, wartime production agreements.

In this case, Ford and GM are touting what they believe Congress wants to see- a sudden rush to produce and market 'green' cars. No matter that the infrastructure for most of these is still non-existent. Or that they don't actually make economic sense for consumers to buy, if they are priced to make a profit.

By the way, look, next, for Congress to demand fairly rigid, low profit margins on 'green' cars, the better to speed their adoption.

Won't that result in the Detroit-based auto makers jumping from the frying pan of current, unprofitable vehicle manufacture, into the fire of newly-introduced, equally-unprofitable 'green' cars demanded by the Feds?

Probably so.

Simply put, why would anyone think that cars which the public doesn't seem to want in sufficient volume to make them profitable, will suddenly be popular just because a few Democratic members of Congress think, in their infinite wisdom as seasoned business experts, that our nation needs 'green' cars.

In my opinion, whatever happens next to Mulally's Ford, Wagoner's GM and Nardelli's Chrysler is appropriate justice which they will richly deserve. By turning over product planning to Congress, which last was seen architecting the spectacular collapse of Fannie Mae and Freddie Mac, as well as many commercial banks whose mortgage lending practices followed Congressional directives, these CEOs are abdicating what little chance of survival their firms have to a bunch of short-sighted politicians.

In short, Ford, GM and Chrysler are about to make a Faustian bargain with the devil, Congress. By suddenly pushing largely-unwanted, unproven 'green' cars, in exchange for tens of billions of dollars of loans, they will merely become more and more inextricably dependent upon the public trough.

It reminds me of the folly of Walter Wriston and David Rockefeller, then CEOs of Citibank and Chase Manhattan Bank, in the late 1970s. At that time, in the wake of the first oil price shock and Arab embargo, these two bankers were lauded by the Federal government for their vaunted 'recycling' of billions of 'petrodollars' from the Gulf to various third-world countries in need of loans.

The problem was that Walter and David forgot to mark up the interest rates on the resulting flood of 'sovereign loans' to unstable, poor (a/k/a "developing") countries around the globe, and, particularly, in South America.

Thus, only a decade later, in the late 1980s, many of these sovereign loans became non-performing, forcing the largest US money center banks to write off several billion dollars of these loans.

The thanks that Citibank and Chase Manhattan shareholders received for Wriston's and Rockefeller's bad loan and pricing decisions was a sudden loss of value in their investments in the two banks.

So much for private enterprise doing the bidding of government, instead of looking out for their shareholders' welfare and interests.

What happened to the US banks in the late 1980s is probably going to be repeated in Detroit in the next few years. Don't be surprised when the three American-based auto makers end up either as wards of Washington, merged at gunpoint, or on permanent Federal life-support.

Citigroup's Bob Rubin Surfaces At Last

Saturday's Weekend Edition of the Wall Street Journal featured a front-page, below-the-crease article examining Bob Rubin's self-defense of his role as Citigroup Chairman.

I've written six posts mentioning Rubin, the latest and most relevant of which are found here and here. In my second linked post, I closed with,

"It's nice, when you've capped an already-impressive career with an essentially part-time job earning you more than $100MM over about a decade. To be so philosophical about presiding over Citi's $40BB in losses and dramatic loss of shareholder value, though, seems to me to border on reckless.

It's as if Rubin grew bored with the mechanics of 'managing' things and people, but relished the opportunity to pretend he was gambling at the tables at Monte Carlo, or maybe Rick's American Cafe in Cassablanca, with Citigroup shareholders' money. You can almost imagine him turning to Claude Rains after being wiped out on one spin of the roulette wheel, and wistfully intoning, as Rains laments Rubin's total loss of other people's money,

'It'll be what it will be, Claude, like everything in life.' "

The Journal article begins with this paragraph,

"Under fire for his role in the near-collapse of Citigroup Inc., Robert Rubin said its problems were due to the buckling financial system, not its own mistakes, and that his role was peripheral to the bank's main operations even though he was one of its highest-paid officials.

"Nobody was prepared for this," Mr. Rubin said in an interview. He cited former Federal Reserve Chairman Alan Greenspan as another example of someone whose reputation has been unfairly damaged by the crisis."

Personally, I would not choose this moment in time to use Alan Greenspan as someone with whom to compare myself and claim I was innocent. It might cause people to fetch a bucket of hot tar and some feathers.

The next few lines of the piece neatly encapsulate, and restate my own prior writing concerning the case against Rubin,

"Mr. Rubin, senior counselor and a director at Citigroup, acknowledged that he was involved in a board decision to ramp up risk-taking in 2004 and 2005, even though he was warning publicly that investors were taking too much risk. He said if executives had executed the plan properly, the bank's losses would have been less.

Its troubles have put the former Treasury secretary in the awkward position of having to justify $115 million in pay since 1999, excluding stock options, while explaining Citigroup's $20 billion in losses over the past year and a government bailout of at least $45 billion."

So there you have it. Rubin counseled the bank of which he was chairman to increase risk levels, while simultaneously speaking in public that market investors were taking too much risk. For his part in Citi's demise, Rubin took home $115MM in less than ten years.

Rubin's reply?

"Mr. Rubin said his pay was justified and that there were higher-paying opportunities available to him. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said. He turned down his bonus last year, telling the board the money could be better spent elsewhere.

Asked if he had any regrets, Mr. Rubin said: "I guess that I don't think of it quite that way," adding that "if you look back from now, there's an enormous amount that needs to be learned."

Mr. Rubin's effort to salvage his reputation comes just after Chief Executive Vikram Pandit appeared on PBS's Charlie Rose show. Mr. Pandit, too, blamed the overall financial crisis, not Citigroup, for the problems that led the government to decide to inject money into the bank for a second time this fall.

"This was something that was bigger than Citi," Mr. Pandit said. "It was about confidence in the financial system. It was about stability of the financial system." "

So Rubin looks at everything in monetary terms. No matter he was paid an outrageous amount for a non-executive chairman of one of the nation's then-largest banks. He claims it was okay, because he was worth it, in that he could have easily earned more each year elsewhere.

Bob, can you spell "mercenary." It's like he's saying,

'Hey, Citigroup shareholders, I'm sorry that I helped ruin your bank. But, you know, you were/are lucky to have me as your chairman. Someone else would have gladly paid me more in each of the past nine years to work for them. You should feel fortunate that I helped blow a $20B+ hole in Citi's balance sheet. And chose an inexperienced new CEO, too.'

Pandit, now taking his cue from the guy who handed him the plum job in banking, now also claims he had nothing to do with anything bad at Citi. It was all 'bigger than Citi.'

In attempting to deflect criticism over his role in shaping risk management at Citi, the Journal article reports,

"Mr. Rubin said it is a company's risk-management executives who are responsible for avoiding problems like the ones Citigroup faces. "The board can't run the risk book of a company," he said. "The board as a whole is not going to have a granular knowledge" of operations.

Still, Mr. Rubin was deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth, according to people familiar with the discussions. They say he would comment that Citigroup's competitors were taking more risks, leading to higher profits. Colleagues deferred to him, as the only board member with experience as a trader or risk manager. "I knew what a CDO was," Mr. Rubin said, referring to collateralized debt obligations, instruments tied to mortgages and other debt that led to many of Citigroup's losses.

Mr. Rubin said the decision to increase risk followed a presentation to the board by a consultant who said the bank had committed less of the capital on its balance sheet, on a risk-adjusted basis, than competitors. "It gave room to do more, assuming you're doing intelligent risk-reward decisions," Mr. Rubin said. He said success would have been based on having "the right people, the right oversight, the right technology."

The decision has been blamed in part for Citigroup's problems, including the growth of its CDO holdings amid signs the mortgage market was unraveling. Mr. Rubin doubts that's true. "It was not an inflection point," he said, but "I just don't know what would have happened" if the decision had been different.

At the time, Mr. Rubin was saying in speeches that most assets were overvalued. He would quote a noted investor he knew as saying that "the only undervalued asset class in the world is risk."

But it wouldn't have been right for the board to act on his concerns, Mr. Rubin said in the interview: "I wouldn't run a financial institution based on someone's view about what markets would do." He noted that the stock market kept rising for more than three years after Mr. Greenspan, in late 1996, wondered aloud about possible "irrational exuberance." "

I'll bet these remarks are a big surprise to Citigroup shareholders. After all, for just what was Rubin being paid more than $10MM per year? If Rubin's sense of global risk in asset prices wasn't worth being followed by Citi, why have him on the board to begin with? Perhaps more importantly, if Rubin is and was so humble regarding his feelings about risk, for what did he think he was being paid over $10MM per year?

It's simply amazing that, every time Rubin's detractors get him cornered on a topic for which Rubin clearly failed his company and shareholders, he turns zen and utters some unfathomable line about not knowing what else might have been, were Citigroup to have acted on his hunches, rather than Rubin letting management soldier on with no comments from him.

The Journal article closes with this passage,

"With Citigroup shares at $8.29, the stock is down 86% from its all-time high about two years ago and 70% since Mr. Rubin came aboard. The recent stock collapse "was a systemic problem of which Citi was a piece," said Mr. Rubin, who added that one cause was short sellers ganging up on the stock, selling borrowed shares in the hope of driving the share price down.

Asked about what he feels he's accomplished, he responded: "It's a funny way to think about it. I think I've been a very constructive part of the Citigroup environment. That has become particularly manifest since August '07. I have been very involved." "

The last quote of Rubin's is just hilarious, isn't it? This guy almost single-handedly led his bank into overly-risky positions in the riskiest asset going, CDOs, and still has the chutzpah to claim he has been a "very constructive part" of the firm's management, even as he contributed to its current ruination.

Further, he has been "very involved" in Citigroup's near-death experience of the past few years. If that's not a self-admitted indictment of failure and culpability, what would be?

Monday, December 01, 2008

Current Economic Disagreements: Recession & Stimulus

Today's statement by the NBER that the US entered a recession at the end of 2007, based upon a consistent pattern of monthly job losses.

On CNBC this afternoon, Larry Kudlow clarified the NBER definition of a recession. As echoed in this article,

"According to the NBER, a recession is "a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade". Those are the four measures it will be examining forensically as 2008 progresses, and it puts employment data at the top of its list of influences since it is the broadest monthly indicator."

Therefore, today's announcement by the NBER conflicts with a quarterly-GDP-based measurement of a recession, but is, evidently, within the NBER's own definitional framework.

As such, this weekend's article by Amity Schlaes, entitled "The Krugman Recipe for Depression," has become much more relevant. With an official seal of approval on the current recession, political powers that be, or will be, are sure to demand more and larger stimulus packages.

Ms. Schlaes begins her piece by noting,

"Paul Krugman of the New York Times has been on the attack lately in regard to the New Deal. His new book "The Return of Depression Economics," emphasizes the importance of New Deal-style spending. He has said the trouble with the New Deal was that it didn't spend enough.

He's also arguing that some writers and economists have been misrepresenting the 1930s to make the effect of FDR's overall policy look worse than it was. I'm interested in part because Mr. Krugman has mentioned me by name. He recently said that I am the one "whose misleading statistics have been widely disseminated on the right." "

The argument between the two highlights the two opposing views of what should be done, or not done, by Congress in the current economic situation. The two camps each base their current recommendations upon their reading of the results of FDR's massive, never-before-or-since equalled, society-changing spending programs of the 1930s.

Krugman, a newly-anointed Nobel Laureate in Economics, has used this position to launch intensely nasty attacks upon the current administration's approach to economics. With his gleaming, newly-minted medal, Krugman is sure to be an oft-quoted and -cited 'expert' for those wishing to pass legislation to spend hundreds of billions of taxpayer dollars in the months ahead.

As Ms. Schlaes puts it,

"Mr. Krugman is a new Nobel Laureate, teaches at Princeton University and writes a column for a nationally prominent newspaper. So what he says is believed to be objective by many people, even when it isn't. But the larger reason we should care about the 1930s employment record is that the cure Roosevelt offered, the New Deal, is on everyone else's mind as well. In a recent "60 Minutes" interview, President-elect Barack Obama said, "keep in mind that 1932, 1933, the unemployment rate was 25%, inching up to 30%." "

Will any of it work?

Schlaes continues in her piece,

"The New Deal is Mr. Obama's context for the giant infrastructure plan his new team is developing. If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery. The answer is, they didn't. New Deal spending provided jobs but did not get the country back to where it was before.

This reality shows most clearly in the data -- everyone's data. During the Depression the federal government did not survey unemployment routinely as it does today. But a young economist named Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data for that key period. He counted up what he called "regular work" such as a job as a school teacher or a job in the private sector. He intentionally did not include temporary jobs in emergency programs -- because to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects.

The result is what we today call the Lebergott/Bureau of Labor Statistics series. They show one man in four was unemployed when Roosevelt took office. They show joblessness overall always above the 14% line from 1931 to 1940. Six years into the New Deal and its programs to create jobs or help organized labor, two in 10 men were unemployed. Mr. Lebergott went on to become one of America's premier economic historians at Wesleyan University. His data are what I cite. So do others, including our president-elect in the "60 Minutes" interview.

Later, Lee Ohanian of UCLA studied New Deal unemployment by the number of hours worked. His picture was similar to Mr. Lebergott's. Even late in 1939, total hours worked by the adult population was down by a fifth from the 1929 level. To be sure, Michael Darby of UCLA has argued that make-work jobs should be counted. Even so, his chart shows that from 1931 to 1940, New Deal joblessness ranges as high as 16% (1934) but never gets below 9%. Nine percent or above is hardly a jobless target to which the Obama administration would aspire."

The evidence Ms. Schlaes cites is pretty unequivocal. One wonders on what Krugman bases his objections. But, there's more.

Schlaes asks why so much Federal 'stimulus' and intervention, for nearly a decade, accomplished so little in terms of employment. Her response,

"What kept the picture so dark so long? Deflation for one, but also the notion that government could engineer economic recovery by favoring the public sector at the expense of the private sector. New Dealers raised taxes again and again to fund spending. The New Dealers also insisted on higher wages when businesses could ill afford them. Roosevelt, for example, signed into law first his National Recovery Administration, whose codes forced businesses to pay an above-market minimum wage, and then the Wagner Act, which gave union workers more power.

As a result of such policy, pay for workers in the later 1930s was well above trend. Mr. Ohanian's research documents this. High wages hurt corporate profits and therefore hiring. The unemployed stayed unemployed. "If you had a job you were all right" -- the phrase we all heard as children about the Depression -- really does capture the period.

Why does all this matter today? Because lawmakers are considering new labor legislation containing "card check," which would strengthen organized labor and so its wage demands. Because employees continue to pressure firms to spend on health care, without considering they may be making the company unable to hire an unemployed friend. Piling on public-sector jobs or raising wages may take away jobs in the private sector, directly or indirectly."

Ms. Schlaes hits the nail on the head. In order to avoid a rerun of the failed economic (and social) policy mistakes of the 1930s, we have to acknowledge what worked, and what did not.

Perhaps, before we get to that stage, we should heed Fed Chairman Ben Bernanke's response to a question after his prepared address in Texas this afternoon. When asked how the current economic situation compares with the Great Depression, Bernanke said they are not even close, and not at all comparable at this time. He then continued by reminding us that, prior to and in the Depression:

-unemployment rose to 25%
-money supply fell by 10% per year for several consecutive years
-GNP fell by roughly a quarter
-about 1/3 of the nation's banks failed

We are nowhere near any of those benchmarks. Thus, Ms. Schlaes' important closing paragraph,

"We know that the new administration is going to spend. But how? It can try to figure out a way to do that without hurting the private sector. Or it can just spend, Krugman-wise, and risk repeating the very depression we seek to avoid."

Volatility Measures In Agreement

Today's Wall Street Journal contained an article discussing the VIX's recent and longer-term performance.

Per the article,

"The most popular proxy for market fear is the Chicago Board Options Exchange's Volatility Index, or VIX. It peaked at nearly 81 about two weeks ago, roughly four times its historical average of about 20. Crescendos of fear sometimes mark stock-market bottoms, and on cue, the VIX has fallen sharply since then, and stocks have rallied."

The piece goes on to discuss longer term performance of the series,

"Still, the VIX's closing price Friday of 55.84 was unprecedented before October. Its 50-day moving average, which indicates the trend, is still moving higher; values for days now falling out of the sample were in the 30s. The VIX has exceeded 30, an unusually high level, for the past 54 trading days.

To find volatility so high for so long, one has to look long before the VIX's invention in 1993 by Robert Whaley, now a finance professor at Vanderbilt University.

Christopher Finger, European head of research at RiskMetrics Group, has a model that crunches returns on the Dow Jones Industrial Average into something approaching a VIX going back to 1900. According to his estimates, volatility has hit higher peaks twice since 1900, at the crashes of 1987 and 1929. But in terms of persistently high volatility, only the 1930s were worse than today. Other analysts' models back him up or suggest the current sustained volatility is actually the worst in history."

It's quite comforting to know that our own proprietary volatility measure has displayed the same characteristics. I wrote about the behavior of our own volatility measure in this post in October. As I noted in this passage,

"Seeking historical context, I applied our measure to the S&P500 from 1950 to the present in additional research conducted just last month. That nearby chart shows that the crash of 1987 was even more volatile than our current market situation- so far.

Extending the analysis back to 1928, via the Dow Jones Industrial Average, I found that the market volatility for that crash exceeded even that of 1987.

All of which is to state that the current equity market volatility is the third-highest in 80 years,"

we, too, found what Mr. Finger discovered.
Reviewing the charts I published in the prior, linked post, and the one nearby, I would conclude the same, again, as Mr. Finger, regarding volatility persistence.
While the 1987 crash required several months for volatility to fall to a long-term, healthy value, it fell fairly significantly quite soon after the October crash.
Not so in 1929. In that case, as the chart shows, the decline in volatility was much more gradual.
That's what we are seeing this time, too. In fact, rather than a normal-curve like decline, the current equity market volatility has built a 'shoulder' of fairly constant, high volatility since the second week of last month.
Thus, as I noted to my partner recently, no two market crises are exactly alike.
Despite the rather somber conclusions shared by our volatility measure and the VIX, and another party's extension of a VIX-like volatility measure further back in time, it is, never the less, pleasing for us to see our own findings confirmed by other volatility measures.