It's just after 8am and I'm listening to CNBC's morning program. The March employment numbers are due at 8:30, so a handful of talking heads are arguing about them, and the economy.
As usual, economic no-nothing Steve Liesman is involved, imagining himself to have a clue about economics.
Bob Barbera, ITG chief economist, the program's obligatory liberal economist, is a guest host. Mark Zandi, the perennial S&P economist and someone who actually focuses on this topic for a living, is on hand.
And, finally, the token supply-side economist, former Bear Stearns chief economist, now NY Senate candidate, David Malpass.
In the runup to the release of the numbers, there was a spirited argument between Malpass and Barbera. The former argued that employment, even if up, is essentially counting government hires as the private sector shrinks. Malpass lamented the huge government footprint in the private sector and its crowding out of both private investment and jobs.
One of the more laughable moments came when CNBC senior economic idiot Liesman tried to argue that near-zero rates are beneficial for funding the "marginal business."
Having just come through a long period of too-low rates which stoked marginal housing development and, consequentially, a serious recession, it's hard to believe anyone who even remotely follows economics would argue that ultra-low rates promote healthy economic growth.
That he does so is a measure of just how stupid Liesman actually is.
Malpass correctly argued that rates have to rise in order to clear out questionable business growth, and, that, ideally, government would get out of the way. He reminded everyone that all the federally-generated liquidity wasn't funding business loans but, in reality, cycling back into Treasuries.
Barbera then attacked Malpass for daring to question government intervention, citing "50 years of classical recovery pattern." According to Barbera, as day follows night, recessions must be ended by hefty doses of federal intervention.
Nevermind Alan Reynolds' piece last August in the Wall Street Journal which exposed this myth for what it is. Reynolds' research provided evidence that the greater the scale of government intervention, the longer and deeper the economic contraction. To repeat his conclusion,
"On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy. Foreign countries in which government spending accounts for about half of the economy have also suffered the deepest recessions lately, while economic recovery is well established in countries where government spending is a smaller share of GDP than in the U.S. In short, bigger government appears to produce only bigger and longer recessions."
Funny how so many economists, or those who pretend to be, choose to simply ignore evidence and continue to parrot how wonderful heavy-handed government intervention is for economic growth.
As I write this sentence, it's 8:26, and the CNBC panelists are giving their predictions just prior to the release of the numbers. Malpass forecasts a positive, six-figure number, 250,000, I think, but cautions that what is crucial is the private sector component, not the government.
And the number is.....
+162,000 total.
+110,000 private sector.
9.7% unemployment rate.
positive prior-month revisions.
6.5MM out of work six-months or longer, an all-time high (Santelli will not be surprised).
Overall, a mild expansion of jobs, but hardly a sign of robust recovery.
Friday, April 02, 2010
Thursday, April 01, 2010
Sandy Weill's Citigroup Officially Dismembered Today
It took years...many years.....but Sandy Weill's original, unwise and unwieldy merger of Travelers and Citibank was dissolved today with the IPO of Primerica.
After probably inducing then-Treasury Secretary Bob Rubin to look the other way while he smashed Glass-Steagal, Weill hired Rubin as the non-executive Chairman of the merged firm. It didn't take long for Weill to manage to toss former Citibank CEO, his alleged co-head of the merged firm, out a window, leaving Weill to play with his new, hydra-headed toy.
That was 1998-2000.
Ten years on, Weill's monstrosity has been significantly dismembered with the separation of its insurance and banking components.
After probably inducing then-Treasury Secretary Bob Rubin to look the other way while he smashed Glass-Steagal, Weill hired Rubin as the non-executive Chairman of the merged firm. It didn't take long for Weill to manage to toss former Citibank CEO, his alleged co-head of the merged firm, out a window, leaving Weill to play with his new, hydra-headed toy.
That was 1998-2000.
Ten years on, Weill's monstrosity has been significantly dismembered with the separation of its insurance and banking components.The nearby price chart for Citigroup and the S&P500 Index shows how badly the universal bank performed since Weill's grand mistake.
In the same timeframe, the index was down only slightly.
Too big to fail? How about just too big to be managed by anyone, and, instead, just limp along losing shareholders' wealth?
Am I the only person who doesn't completely understand why Sandy Weill wasn't sued by shareholders?
Polaroid: A Schumpeterian Tale
I noticed an unassuming little lifestyle story in Friday's Wall Street Journal. Eric Felten's tale of Polaroid's struggles in the age of digital photography was couched as a warm and fuzzy story, but it actually portrays the gritty operation of Joseph Schumpeter's theory of creative destruction.
It's worth reading the article, if you subscribe to the Journal. Basically, an Austrian, Florian Kaps, saw evidence of a continuing market for instant camera demand. He located, bought and then resold old Polaroid film stock. Kaps offered to buy what remained of Polaroid's equipment and rights from the current owners.
Instead of a reply, he was invited to the closure of Polaroid's last remaining facility, in Holland.
In a very 'It's A Wonderful Life' sort of twist, the machinery hadn't yet been destroyed, and the factory, due to the recession, wasn't going to be rehabbed right away. Kaps raised money from friends and family, got the facility and machinery, plus, with a team of fellow engineers, managed to develop (no pun intended) a reasonable facsimile of the chemical formulation to make new/old instant film.
He now markets Polaroid instant film from his website, TheImpossibleProject.com, and, according to the Felten, will add color film to his black and white stock this summer.
To me, the most interesting facet of this story is how perfectly Schumpeterian it is. Polaroid's entire business essentially went to zero value, based on older assumptions and processes. But there was some latent demand for the products and supplies.
It took literally near-total destruction of Polaroid's business assets before a new player could afford to buy the remaining assets and begin producing film for the existing base of cameras on an economic basis.
In a way, it's inspirational. So long as there is some demand left for products or services, it's possible for another investor to buy remaining assets at market-clearing prices, then, with that lower cost base, continue to meet demand economically.
Markets are wonderful mechanisms. They allow prices to rise, or fall, to levels which facilitate continued operation of businesses, where economically feasible. Or kill them, when it's not.
Sometimes, when you swear a business is or ought to be dead, market forces still allow them to continue, albeit at a tiny fraction of their prior size. But they still meet customer needs and earn revenue and, apparently, even a little profit.
It's worth reading the article, if you subscribe to the Journal. Basically, an Austrian, Florian Kaps, saw evidence of a continuing market for instant camera demand. He located, bought and then resold old Polaroid film stock. Kaps offered to buy what remained of Polaroid's equipment and rights from the current owners.
Instead of a reply, he was invited to the closure of Polaroid's last remaining facility, in Holland.
In a very 'It's A Wonderful Life' sort of twist, the machinery hadn't yet been destroyed, and the factory, due to the recession, wasn't going to be rehabbed right away. Kaps raised money from friends and family, got the facility and machinery, plus, with a team of fellow engineers, managed to develop (no pun intended) a reasonable facsimile of the chemical formulation to make new/old instant film.
He now markets Polaroid instant film from his website, TheImpossibleProject.com, and, according to the Felten, will add color film to his black and white stock this summer.
To me, the most interesting facet of this story is how perfectly Schumpeterian it is. Polaroid's entire business essentially went to zero value, based on older assumptions and processes. But there was some latent demand for the products and supplies.
It took literally near-total destruction of Polaroid's business assets before a new player could afford to buy the remaining assets and begin producing film for the existing base of cameras on an economic basis.
In a way, it's inspirational. So long as there is some demand left for products or services, it's possible for another investor to buy remaining assets at market-clearing prices, then, with that lower cost base, continue to meet demand economically.
Markets are wonderful mechanisms. They allow prices to rise, or fall, to levels which facilitate continued operation of businesses, where economically feasible. Or kill them, when it's not.
Sometimes, when you swear a business is or ought to be dead, market forces still allow them to continue, albeit at a tiny fraction of their prior size. But they still meet customer needs and earn revenue and, apparently, even a little profit.
Wednesday, March 31, 2010
Toyota, DOT, NASA & Ray LaHood
This week's engagement of NASA by Transportation Secretary Ray LaHood marks a new low in government harassment of companies in the private sector.
As I mentioned in passing in this post last month, Mr. LaHood was my 7th grade civics teacher. In writing that post, I checked his bio, and found that his brief teaching job at my Catholic primary school was essentially his only private sector employment. After that, he worked in a youth program elsewhere in Illinois, then became one of GOP House Minority Leader Bob Michel's staffers.
I point this out to provide an example of how professional, career politicians wreak havoc on companies attempting to operate in our mixed economy.
Mr. LaHood, having noted that his own DOT investigators found no smoking gun involving electronic controls in Toyota acceleration systems, is extending the witch hunt by calling in NASA engineers.
It's a travesty. How many investigations must Toyota endure? Where is the due process?
The way LaHood is operating, it's as if Toyota is presumed guilty, and the Transportation Department will continue to investigate for an unspecified length of time, until it finds 'something.'
Any findings of 'no cause' won't stop him. Or the witch hunt.
Granted, having been accused of attacking Toyota on behalf of government-owned GM, Mr. LaHood has provided a fig leaf by claiming to have NASA investigate acceleration systems on vehicles of many vendors. But one senses this is just a formality.
After all, Toyota is the company that was recently persecuted by a Congressional committee. Does anyone really believe LaHood expects NASA investigators to find problems where none have been alleged, outside of Toyota?
This farce is yet another example of what is continuing to go seriously wrong in our nation, as government interferes to ever greater degrees in the operation of businesses.
As I mentioned in passing in this post last month, Mr. LaHood was my 7th grade civics teacher. In writing that post, I checked his bio, and found that his brief teaching job at my Catholic primary school was essentially his only private sector employment. After that, he worked in a youth program elsewhere in Illinois, then became one of GOP House Minority Leader Bob Michel's staffers.
I point this out to provide an example of how professional, career politicians wreak havoc on companies attempting to operate in our mixed economy.
Mr. LaHood, having noted that his own DOT investigators found no smoking gun involving electronic controls in Toyota acceleration systems, is extending the witch hunt by calling in NASA engineers.
It's a travesty. How many investigations must Toyota endure? Where is the due process?
The way LaHood is operating, it's as if Toyota is presumed guilty, and the Transportation Department will continue to investigate for an unspecified length of time, until it finds 'something.'
Any findings of 'no cause' won't stop him. Or the witch hunt.
Granted, having been accused of attacking Toyota on behalf of government-owned GM, Mr. LaHood has provided a fig leaf by claiming to have NASA investigate acceleration systems on vehicles of many vendors. But one senses this is just a formality.
After all, Toyota is the company that was recently persecuted by a Congressional committee. Does anyone really believe LaHood expects NASA investigators to find problems where none have been alleged, outside of Toyota?
This farce is yet another example of what is continuing to go seriously wrong in our nation, as government interferes to ever greater degrees in the operation of businesses.
Tuesday, March 30, 2010
The Grand Inquisitors
I think we've finally reached the point of total hilarity and Kafkaesque intrusion of government into the private sector.
Democratic Representatives Henry Waxman and Bart Stupak are shocked....SHOCKED!!!!!....that some companies have publicized higher expense recognitions they are making in the wake of the recent passage of a universal health care law.
The Congressmen, angered at being embarrassed by the reaction of some in the business community to the new realities of health care insurance expenses, are demanding the appearance of the presumed-guilty executives before a Congressional Committee.
Of course, this is perhaps extra embarrassing for Stupak, because he pretended to agonize over the pro-life consequences of the bill, before caving in for a meaningless executive order. Now, his faux pro-life cover blown, he also looks stupid for having voted for a bill that will, contrary to his colleagues' and his own affirmations, raise the costs of doing business.
Caterpillar, John Deere, Verizon and a few other companies, in compliance with the Congressionally-mandated Sarbanes-Oxley law, adjusted their expenses for the effects of the new health care law only days after its passage.
Now, they are being called to task for obeying that law.
You see, many in the business community warned over the past year that passage of this ill-advised legislation would result in higher costs to businesses. But Democrats ignored this, as they ignored any suggestions for health care reform which would not result in a totally socialized health insurance and care system.
Now that the law has been passed, by the thinnest of party-line majorities, Democrats in the House are outraged that their claims are being disputed by some executives at large US companies.
It should be quite the show. After all, Sarbanes-Oxley makes it a crime for executives to sign off on corporate filings which they know to be false. So we know this week's disclosures of the higher expenses are real, and true. Otherwise, the affected executives could be charged and convicted of perjury and violations of Sarbanes-Oxley.
Of course, it's ironic that the CEOs being summoned to Washington would, if they used the same approach to accounting that Congress used in the bill, and which the CBO blessed, they'd be in jail. The assumptions and tax/benefit mismatches, intentionally gamed by Democrats and the president to force a misleading, nonexistent 'savings' in the federal budget, wouldn't pass GAAP muster.
The inconvenient truth, to use a popular leftist phrase, is that economic realities are hitting the idealistic, misleading Democratic claims for the health care sector reorganization within a week of the bill becoming law.
Think of how much more bad news will be coming from the private sector as a result of this bad law in the coming months, prior to the November mid-term elections.
Democratic Representatives Henry Waxman and Bart Stupak are shocked....SHOCKED!!!!!....that some companies have publicized higher expense recognitions they are making in the wake of the recent passage of a universal health care law.
The Congressmen, angered at being embarrassed by the reaction of some in the business community to the new realities of health care insurance expenses, are demanding the appearance of the presumed-guilty executives before a Congressional Committee.
Of course, this is perhaps extra embarrassing for Stupak, because he pretended to agonize over the pro-life consequences of the bill, before caving in for a meaningless executive order. Now, his faux pro-life cover blown, he also looks stupid for having voted for a bill that will, contrary to his colleagues' and his own affirmations, raise the costs of doing business.
Caterpillar, John Deere, Verizon and a few other companies, in compliance with the Congressionally-mandated Sarbanes-Oxley law, adjusted their expenses for the effects of the new health care law only days after its passage.
Now, they are being called to task for obeying that law.
You see, many in the business community warned over the past year that passage of this ill-advised legislation would result in higher costs to businesses. But Democrats ignored this, as they ignored any suggestions for health care reform which would not result in a totally socialized health insurance and care system.
Now that the law has been passed, by the thinnest of party-line majorities, Democrats in the House are outraged that their claims are being disputed by some executives at large US companies.
It should be quite the show. After all, Sarbanes-Oxley makes it a crime for executives to sign off on corporate filings which they know to be false. So we know this week's disclosures of the higher expenses are real, and true. Otherwise, the affected executives could be charged and convicted of perjury and violations of Sarbanes-Oxley.
Of course, it's ironic that the CEOs being summoned to Washington would, if they used the same approach to accounting that Congress used in the bill, and which the CBO blessed, they'd be in jail. The assumptions and tax/benefit mismatches, intentionally gamed by Democrats and the president to force a misleading, nonexistent 'savings' in the federal budget, wouldn't pass GAAP muster.
The inconvenient truth, to use a popular leftist phrase, is that economic realities are hitting the idealistic, misleading Democratic claims for the health care sector reorganization within a week of the bill becoming law.
Think of how much more bad news will be coming from the private sector as a result of this bad law in the coming months, prior to the November mid-term elections.
Monday, March 29, 2010
Chase's Private Equity Deals
This morning's Wall Street Journal contained a small piece highlighting Chase's private equity group bidding $6/share for the outfit that produces American Idol.
The article was attempting to be wry in its scepticism over the price and proposed deal. The quasi-analysis focused on the production company's contract with Fox to air a few more seasons of the program, and Simon Cowell's recent departure from the firm.
Bottom line, concluded the piece, is that Chase may be overpaying for the small firm's current assets and management.
That's not what struck me about the article, though.
No, what I saw was yet another case of a federally-, meaning taxpayer-insured financial institution playing roulette with our money.
First, why on earth should taxpayers even allow a federally-insured bank to have a private equity unit? Private equity is all about risk. About bidding on existing firms, typically with more debt than is in the current structure. That's the easiest way for a private equity firm to bid over current market valuations, i.e., put in less equity, borrow more money and toss it to current owners.
Fine if you're, say, TPG. Or Cerberus.
Ooops! Not Cerberus, actually, after the GMAC and Chrysler fiascoes.
And that's my point.
Dress it up any way you like, Chase's private equity group is essentially taking on obligations, by way of borrowed money, used to pay off the current owners of CKX. If the deal doesn't work as envisioned, shareholder equity is the first call for repayment of the debt.
But, ultimately, the last resort is you and me, via the FDIC and Treasury.
This is why the Volcker Rule makes so much sense. And causes such outraged opposition in the banking sector.
Jamie Dimon obviously would love to keep this sweet, one-way risk spreading deal.
You and I should not want that.
And don't be fooled by the implication that Chase is so large that it can absorb the risk. If their private equity group is too small for the risk to matter, it's too small to really affect earnings or valuations.
If it's not, it's too risky for a taxpayer-guaranteed bank.
Period.
At a minimum Chase should be forced to separately organize and incorporate the private equity group, with equity capital that is off-limits for use against the bank's other activities. Further, the private equity unit shouldn't be allowed any leverage whatsoever. Of course, in today's private equity world, that would make it extremely disadvantaged. It would, could be little more than an investor in the deals of others, because it would never be able to offer competitive bids for companies based on all-equity funding. But to allow such an entity to borrow is to basically recreate the flawed Citigroup SIVs of several years ago.
In effect, this little thought experiment demonstrates why allowing a federally insured bank to gamble with businesses like private equity or proprietary trading is nothing more than playing with taxpayer funds. Heads, Chase wins. Tails, taxpayers lose.
How is it, two years after Bear Stearns' collapse, we still allow taxpayer-backed financial institutions to take large leveraged investment bets?
Have we, and, most importantly, our pompous, pontificating Congressional members and federal regulators, learned nothing?
Evidently not.
The article was attempting to be wry in its scepticism over the price and proposed deal. The quasi-analysis focused on the production company's contract with Fox to air a few more seasons of the program, and Simon Cowell's recent departure from the firm.
Bottom line, concluded the piece, is that Chase may be overpaying for the small firm's current assets and management.
That's not what struck me about the article, though.
No, what I saw was yet another case of a federally-, meaning taxpayer-insured financial institution playing roulette with our money.
First, why on earth should taxpayers even allow a federally-insured bank to have a private equity unit? Private equity is all about risk. About bidding on existing firms, typically with more debt than is in the current structure. That's the easiest way for a private equity firm to bid over current market valuations, i.e., put in less equity, borrow more money and toss it to current owners.
Fine if you're, say, TPG. Or Cerberus.
Ooops! Not Cerberus, actually, after the GMAC and Chrysler fiascoes.
And that's my point.
Dress it up any way you like, Chase's private equity group is essentially taking on obligations, by way of borrowed money, used to pay off the current owners of CKX. If the deal doesn't work as envisioned, shareholder equity is the first call for repayment of the debt.
But, ultimately, the last resort is you and me, via the FDIC and Treasury.
This is why the Volcker Rule makes so much sense. And causes such outraged opposition in the banking sector.
Jamie Dimon obviously would love to keep this sweet, one-way risk spreading deal.
You and I should not want that.
And don't be fooled by the implication that Chase is so large that it can absorb the risk. If their private equity group is too small for the risk to matter, it's too small to really affect earnings or valuations.
If it's not, it's too risky for a taxpayer-guaranteed bank.
Period.
At a minimum Chase should be forced to separately organize and incorporate the private equity group, with equity capital that is off-limits for use against the bank's other activities. Further, the private equity unit shouldn't be allowed any leverage whatsoever. Of course, in today's private equity world, that would make it extremely disadvantaged. It would, could be little more than an investor in the deals of others, because it would never be able to offer competitive bids for companies based on all-equity funding. But to allow such an entity to borrow is to basically recreate the flawed Citigroup SIVs of several years ago.
In effect, this little thought experiment demonstrates why allowing a federally insured bank to gamble with businesses like private equity or proprietary trading is nothing more than playing with taxpayer funds. Heads, Chase wins. Tails, taxpayers lose.
How is it, two years after Bear Stearns' collapse, we still allow taxpayer-backed financial institutions to take large leveraged investment bets?
Have we, and, most importantly, our pompous, pontificating Congressional members and federal regulators, learned nothing?
Evidently not.
Friday, March 26, 2010
Vik Pandit's Tight Corner: Restructuring Citigroup
Yesterday's Wall Street Journal featured a front page article bemoaning ailing Citigroup's CEO's troubles in shedding problematic businesses.
Vik Pandit made the usual excuses, painted the usual rosy future picture, and tried to avoid facing the fundamental truth.
That truth is, precisely at the time businesses are in their worst shape is when you can't typically sell them. And, small world that it is, most of the buyers are least able to pay more than current, depressed values for them.
GE ran into this issue last year with some of its newly-unwanted businesses. Now, Citigroup can't find buyers, at prices it wants, for some credit card and private equity businesses.
Of course, being significantly government-owned, Pandit wants time to wait for prices to rise. In the meantime, he'd like to be allowed to simply ignore the consequences of having built badly-performing businesses.
What would normally happen in this situation is one of two things. Either one or more competitors would offer to take over and break up Citigroup, or creditors would force their way onto the board to get the restructuring moving, perhaps by simply shutting some businesses.
Time is the luxury weak, troubled businesses don't have, or get. If there were no time limits, every business would eventually wait out valuation issues. But, well, time is money.
Pandit wants a reprieve from either selling or closing businesses, because either of those would permanently bring the low valuations home to shareholders' equity for good, and permanently lock in the losses.
You have to wonder why Citigroup is even allowed to continue its existence in a sector with excess capacity.
Vik Pandit made the usual excuses, painted the usual rosy future picture, and tried to avoid facing the fundamental truth.
That truth is, precisely at the time businesses are in their worst shape is when you can't typically sell them. And, small world that it is, most of the buyers are least able to pay more than current, depressed values for them.
GE ran into this issue last year with some of its newly-unwanted businesses. Now, Citigroup can't find buyers, at prices it wants, for some credit card and private equity businesses.
Of course, being significantly government-owned, Pandit wants time to wait for prices to rise. In the meantime, he'd like to be allowed to simply ignore the consequences of having built badly-performing businesses.
What would normally happen in this situation is one of two things. Either one or more competitors would offer to take over and break up Citigroup, or creditors would force their way onto the board to get the restructuring moving, perhaps by simply shutting some businesses.
Time is the luxury weak, troubled businesses don't have, or get. If there were no time limits, every business would eventually wait out valuation issues. But, well, time is money.
Pandit wants a reprieve from either selling or closing businesses, because either of those would permanently bring the low valuations home to shareholders' equity for good, and permanently lock in the losses.
You have to wonder why Citigroup is even allowed to continue its existence in a sector with excess capacity.
Thursday, March 25, 2010
Ocado Ltd.'s Grocery Strategy
I've always had a special affection for the grocery business. Perhaps it's because my second job, as a teenager, was working for Matarelli's Grocery in Peoria Heights, Illinois.
Matarelli's was a literal corner grocer. Situated across from the Pabst Brewery, it received a steady stream of shift workers buying food for lunch, as well as many upscale housewives dropping off shopping lists or picking up orders.
The store was run by two elderly Italian spinsters, and their brother. It was a great job for many reasons. Their management style was decidedly "Theory Y," working us hard but fairly. If you knew to ask not, "may I go home now," but, "do you have more work for me to do," the sisters would send you home early, but pay you until closing.
They hired two delivery boys each year, with the job passing down to two new seniors at the Catholic high school I attended. If you happened to know the prior two guys, you had a decent shot at this dream job.
Working at Matarellis meant alternating weekends and working half the after-school afternoons during the school year. In summer, it was alternate weeks. We stocked shelves, carried orders to cars, stored the weekly distributor's massive deliveries, drove to pick up produce, and, best of all, drove the store's station wagon on deliveries.
This last part was, by far, the best aspect of the job. As a 16 year-old, we were being paid to drive someone else's car up to three times per day. The tips were fantastic, and I learned a lot about people's daily lives, as we were in so many kitchens on delivery runs.
Thus, I was fascinated by Tuesday's Wall Street Journal piece concerning UK grocer Ocado.
Though it initially looks similar to the failed San Francisco grocer, Webvan, founded and run so ineptly by some former Andersen Consulting execs years ago, Ocado seems to be better-grounded in customer needs.
The article notes that the firm does very well in Britain because of the country's bad weather, limited parking and ubiquity of high-speed internet access.
The company invested in proprietary warehouse picking systems, virtually automating the order-assembly process. This is very much more advanced, but along the lines of a concept a colleague and I had a few decades ago, when we worked together at Chase Manhattan Bank.
Now, however, online orders make the customer's side of the process easier and cheaper. Ocada has made great strides on its side, as well.
The Journal article concludes by comparing Ocada with its US counterpart, Freshdirect. When I noticed former Citigroup EVP, Lotus and Priceline CEO Rick Braddock is now the latter's CEO, it made me even more confident this business has finally arrived.
Both Braddock and the finance chief at Ocada stress sustainable profitability now, not merely logistical skills. It may take a little time, but one can't but help think this is a trend that we'll see more of in the future.
Matarelli's was a literal corner grocer. Situated across from the Pabst Brewery, it received a steady stream of shift workers buying food for lunch, as well as many upscale housewives dropping off shopping lists or picking up orders.
The store was run by two elderly Italian spinsters, and their brother. It was a great job for many reasons. Their management style was decidedly "Theory Y," working us hard but fairly. If you knew to ask not, "may I go home now," but, "do you have more work for me to do," the sisters would send you home early, but pay you until closing.
They hired two delivery boys each year, with the job passing down to two new seniors at the Catholic high school I attended. If you happened to know the prior two guys, you had a decent shot at this dream job.
Working at Matarellis meant alternating weekends and working half the after-school afternoons during the school year. In summer, it was alternate weeks. We stocked shelves, carried orders to cars, stored the weekly distributor's massive deliveries, drove to pick up produce, and, best of all, drove the store's station wagon on deliveries.
This last part was, by far, the best aspect of the job. As a 16 year-old, we were being paid to drive someone else's car up to three times per day. The tips were fantastic, and I learned a lot about people's daily lives, as we were in so many kitchens on delivery runs.
Thus, I was fascinated by Tuesday's Wall Street Journal piece concerning UK grocer Ocado.
Though it initially looks similar to the failed San Francisco grocer, Webvan, founded and run so ineptly by some former Andersen Consulting execs years ago, Ocado seems to be better-grounded in customer needs.
The article notes that the firm does very well in Britain because of the country's bad weather, limited parking and ubiquity of high-speed internet access.
The company invested in proprietary warehouse picking systems, virtually automating the order-assembly process. This is very much more advanced, but along the lines of a concept a colleague and I had a few decades ago, when we worked together at Chase Manhattan Bank.
Now, however, online orders make the customer's side of the process easier and cheaper. Ocada has made great strides on its side, as well.
The Journal article concludes by comparing Ocada with its US counterpart, Freshdirect. When I noticed former Citigroup EVP, Lotus and Priceline CEO Rick Braddock is now the latter's CEO, it made me even more confident this business has finally arrived.
Both Braddock and the finance chief at Ocada stress sustainable profitability now, not merely logistical skills. It may take a little time, but one can't but help think this is a trend that we'll see more of in the future.
Jack Welch On CNBC Tuesday Morning
Former GE CEO Jack Welch made an appearance on CNBC's Tuesday morning program.
Welch's comments on the economy are somewhat suspect now, since he's been gone from the daily grind of running a company or business for almost a decade. His insistence that there was a very sharp "V-shaped" recovery wasn't very convincing at all.
Instead, he sounded much more credible criticizing the recently-passed health care bill.
Calling the CBO's evaluation "a sham," he bluntly said that he, and everyone else, knows this bill's provisions will cost much, much more than promised, and in no way could ever actually save the nation any money at all.
Toward the end of his appearance, he then launched into an area in which I don't think he has any qualifications, and with which he is totally out of touch- politics.
Welch claimed that, with so much government money sloshing around, there would be a recovery by November, and Republicans would make only typical, average gains in the House and Senate mid-term elections. Further, Welch claimed people would simply forget the health care bill bribes and tawdry manner of passage, on such narrow margins in both chambers.
I don't believe Welch is aware of the incredible anger growing in the larger part of the voting citizenry.
However, true to its liberal slant, CNBC immediately prepared clips of Welch's political forecasts for use on subsequent programs that morning, and on other websites. Curiously absent were his criticisms of the bill's fiscal tricks and lies.
Well, some things never seem to change. CNBC thinks Welch is relevant anymore, and continues to stump for the liberal political class, rather than report the truth.
Welch's comments on the economy are somewhat suspect now, since he's been gone from the daily grind of running a company or business for almost a decade. His insistence that there was a very sharp "V-shaped" recovery wasn't very convincing at all.
Instead, he sounded much more credible criticizing the recently-passed health care bill.
Calling the CBO's evaluation "a sham," he bluntly said that he, and everyone else, knows this bill's provisions will cost much, much more than promised, and in no way could ever actually save the nation any money at all.
Toward the end of his appearance, he then launched into an area in which I don't think he has any qualifications, and with which he is totally out of touch- politics.
Welch claimed that, with so much government money sloshing around, there would be a recovery by November, and Republicans would make only typical, average gains in the House and Senate mid-term elections. Further, Welch claimed people would simply forget the health care bill bribes and tawdry manner of passage, on such narrow margins in both chambers.
I don't believe Welch is aware of the incredible anger growing in the larger part of the voting citizenry.
However, true to its liberal slant, CNBC immediately prepared clips of Welch's political forecasts for use on subsequent programs that morning, and on other websites. Curiously absent were his criticisms of the bill's fiscal tricks and lies.
Well, some things never seem to change. CNBC thinks Welch is relevant anymore, and continues to stump for the liberal political class, rather than report the truth.
Wednesday, March 24, 2010
A Local Retreat For Starbucks
Last fall, I wrote this post describing the woefully inept customer service ethic at my local Stop & Shop grocery store.
Earlier this week, while visiting the store for some minor items, which I continued to do in the wake of that post, I noticed the most significant change since the fall. Or, really since the store completed its upgrade to "Super" Stop&Shop.
The in-store Starbucks kiosk/cafe is closed.
Considerable money and effort were expended on this feature. The kiosk was a handsomely-paneled, freestanding wood structure which emulated the ambiance of a Starbucks retail location. Stop & Shop employees were painstakingly trained as Starbucks barristas. A broad selection of Starbucks items, paraphernalia and coffees were on display for sale outside the kiosk.
Earlier this week, as I briefly visited the store for a few produce items, I saw massive sheets of brown paper covering the kiosk. Strips of tape cordoned off the area. It looked like the entire structure was being packed up for return to the coffee roaster.
I can't help but think this is more evidence of the overall weakness of Starbuck's strategy and management. The extreme overreach, if you will, of the brand down market to average-income Americans.
Not being privy to the business arrangement between Starbucks and Stop&Shop, I can only surmise the terms. But, certainly, Starbucks paid some royalty to the grocer for the space and/or sales volumes. Or, perhaps Stop&Shop operated it as a licensed business, paying the employees and booking the profits, while paying a percentage of the gross or net to the coffee giant.
Either way, the two must have been splitting the too-meager profits.
As I recall, the hours of the kiosk weren't the same as the store, which remained open until 11PM. Even during the hours it was open, I seldom saw more than two people at the Starbucks kiosk.
Perhaps this was simply part of the large retrenchment of Starbucks locations in process during the past year. But, given the captive grocery customers, you have to wonder what this portends for Starbucks' future growth. Evidently it just isn't penetrating beyond the upper-income segments, especially in this recession.
Earlier this week, while visiting the store for some minor items, which I continued to do in the wake of that post, I noticed the most significant change since the fall. Or, really since the store completed its upgrade to "Super" Stop&Shop.
The in-store Starbucks kiosk/cafe is closed.
Considerable money and effort were expended on this feature. The kiosk was a handsomely-paneled, freestanding wood structure which emulated the ambiance of a Starbucks retail location. Stop & Shop employees were painstakingly trained as Starbucks barristas. A broad selection of Starbucks items, paraphernalia and coffees were on display for sale outside the kiosk.
Earlier this week, as I briefly visited the store for a few produce items, I saw massive sheets of brown paper covering the kiosk. Strips of tape cordoned off the area. It looked like the entire structure was being packed up for return to the coffee roaster.
I can't help but think this is more evidence of the overall weakness of Starbuck's strategy and management. The extreme overreach, if you will, of the brand down market to average-income Americans.
Not being privy to the business arrangement between Starbucks and Stop&Shop, I can only surmise the terms. But, certainly, Starbucks paid some royalty to the grocer for the space and/or sales volumes. Or, perhaps Stop&Shop operated it as a licensed business, paying the employees and booking the profits, while paying a percentage of the gross or net to the coffee giant.
Either way, the two must have been splitting the too-meager profits.
As I recall, the hours of the kiosk weren't the same as the store, which remained open until 11PM. Even during the hours it was open, I seldom saw more than two people at the Starbucks kiosk.
Perhaps this was simply part of the large retrenchment of Starbucks locations in process during the past year. But, given the captive grocery customers, you have to wonder what this portends for Starbucks' future growth. Evidently it just isn't penetrating beyond the upper-income segments, especially in this recession.
Continuing Avoidance of Responsibility For Fannie By Paul Kanjorski
Yesterday morning on CNBC, Pennsylvania Democratic Representative Paul Kanjorksi exhibited yet more avoidance of responsibility for the mess at Fannie Mae and Freddie Mac.
With a straight face, Kanjorski accused 'Wall Street firms' of being culpable for the last several years of the housing finance bubble, totally excusing Fannie's and Freddie's involvement. What's more, Kanjorski actually said that Barney Frank had 'admitted he was wrong' to push the GSEs to buy mortgages made to ever poorer borrowers.
So, Kanjorski implied, everything's okay with Barney and he's to be held in high esteem.
Unbelievably, Kanjorski then said he personally favors creating 'hundreds' of little GSEs, so that having only a few go bust through securitizing bad mortgages wouldn't be so systemically crippling.
Called on to defend having any governmental role in housing finance, Kanjorski excoriated private lenders and mortgage pipelines for 'only being interested in the most profitable' parts of the business.
Let's see.
Fannie and Freddie bankrupted themselves at Congressional direction by securitizing bad mortgages. The result was to have far too many homes built and money lent on such homes. Because GSE's didn't have a profit motive.
Now Kanjorski is saying things would be worse if we had a financial sector in which housing was built and financed only because it was profitable for various vendors to do so.
If you wonder why there is so little business news outside of Washington anymore, Kanjorski exemplifies the reason.
Private enterprise, profit-driven economic activity and the sane, restrained economic system that develops are not trusted, nor wanted, by Washington's power brokers.
Instead, though they won't say it to us clearly, the Washington powers that be believe in nationalizing as much of our economy as possible, as soon as possible, e.g., GM, GSEs, TARP banks, AIG, health insurance and care.
With a straight face, Kanjorski accused 'Wall Street firms' of being culpable for the last several years of the housing finance bubble, totally excusing Fannie's and Freddie's involvement. What's more, Kanjorski actually said that Barney Frank had 'admitted he was wrong' to push the GSEs to buy mortgages made to ever poorer borrowers.
So, Kanjorski implied, everything's okay with Barney and he's to be held in high esteem.
Unbelievably, Kanjorski then said he personally favors creating 'hundreds' of little GSEs, so that having only a few go bust through securitizing bad mortgages wouldn't be so systemically crippling.
Called on to defend having any governmental role in housing finance, Kanjorski excoriated private lenders and mortgage pipelines for 'only being interested in the most profitable' parts of the business.
Let's see.
Fannie and Freddie bankrupted themselves at Congressional direction by securitizing bad mortgages. The result was to have far too many homes built and money lent on such homes. Because GSE's didn't have a profit motive.
Now Kanjorski is saying things would be worse if we had a financial sector in which housing was built and financed only because it was profitable for various vendors to do so.
If you wonder why there is so little business news outside of Washington anymore, Kanjorski exemplifies the reason.
Private enterprise, profit-driven economic activity and the sane, restrained economic system that develops are not trusted, nor wanted, by Washington's power brokers.
Instead, though they won't say it to us clearly, the Washington powers that be believe in nationalizing as much of our economy as possible, as soon as possible, e.g., GM, GSEs, TARP banks, AIG, health insurance and care.
Tuesday, March 23, 2010
Collusion By Private Equity Customers
This morning's Wall Street Journal featured a rather surprising article in the Money & Investing section.
It seems that CALPERS and other large, pension-related, asset-rich entities, all members of the Institutional Limited Partners Association (ILPA), have explicitly met to formulate a set of 'principles' which they will demand private equity funds adopt.
In response, several private equity shops are exploring a lawsuit on anti-trust bases.
The Journal piece ends with what is probably the most sensible point, which is a quote from an attorney expressing the view that the federal bench isn't going to go to bat for the likes of Henry Kravis.
While almost certainly true, it is, also, beside the point. Justice is supposed to be blind, and if the private equity groups have a case, well, then, they have a case.
But they really don't.
The ILPA may meet to draft common principles. But who said that's the entire market for private equity funding? In fact, if anything, the ILPA is probably doing themselves a favor by potentially excluding themselves from private equity deals.
After all, look at Cerberus. Great job with GMAC and Chrysler, guys. Isn't that John Snow, former Treasury Secretary, overseeing those embarrassments?
The situation here is really quite simple.
Over the past few decades, private equity groups became overwhelmed with funding. Their activity levels, and the prices of their acquisitions, soared. In time, Blackstone even went partially-public, enriching its partners at previously unheard-of levels.
If that's not a sign of an overheated market, what is? And ILPA members were very likely in the vanguard of the rush to overfund private equity groups.
Now, having become disappointed with results, these institutions are crying foul and developing "principles."
By the way, last time I looked, CALPERS had done a very fine job of screwing up on its own with a reckless land investment scheme that's gone sour at a huge cost to the entity's assets.
Here's what will actually happen in years to come.
First, the ILPA will try to hold private equity groups to the newly-restrictive terms. The vaunted "principles" center around, as you'd expect, pricing. Terms such as fees, disclosure and investor oversight.
Second, a few ailing private equity groups will cave in, to preserve funding. But the better firms won't.
Third, the better-performing private equity groups will be pursued by ILPA members who will toss away their newly-created terms in order to get a piece of the best returns in the sector.
That's how these cycles always work. Hedge funds are the same way. Once burned, institutional investors declare that they won't stand for such restrictive terms. Then, when the hedge funds become the best-performing investment firms, such concerns are easily discarded in the pursuit of returns.
There won't be a lawsuit by private equity groups. The weak ones will want it, but the stronger ones realize it serves no purpose to air this dirty laundry. And they will naturally regain the institutional customers once market conditions turn to their favor once more.
Still, it's an interesting circus to watch. Institutional investors looking to blame the recipients of their investments, rather than admit to their own mistakes, while the weaker private equity groups run for legal cover.
It seems that CALPERS and other large, pension-related, asset-rich entities, all members of the Institutional Limited Partners Association (ILPA), have explicitly met to formulate a set of 'principles' which they will demand private equity funds adopt.
In response, several private equity shops are exploring a lawsuit on anti-trust bases.
The Journal piece ends with what is probably the most sensible point, which is a quote from an attorney expressing the view that the federal bench isn't going to go to bat for the likes of Henry Kravis.
While almost certainly true, it is, also, beside the point. Justice is supposed to be blind, and if the private equity groups have a case, well, then, they have a case.
But they really don't.
The ILPA may meet to draft common principles. But who said that's the entire market for private equity funding? In fact, if anything, the ILPA is probably doing themselves a favor by potentially excluding themselves from private equity deals.
After all, look at Cerberus. Great job with GMAC and Chrysler, guys. Isn't that John Snow, former Treasury Secretary, overseeing those embarrassments?
The situation here is really quite simple.
Over the past few decades, private equity groups became overwhelmed with funding. Their activity levels, and the prices of their acquisitions, soared. In time, Blackstone even went partially-public, enriching its partners at previously unheard-of levels.
If that's not a sign of an overheated market, what is? And ILPA members were very likely in the vanguard of the rush to overfund private equity groups.
Now, having become disappointed with results, these institutions are crying foul and developing "principles."
By the way, last time I looked, CALPERS had done a very fine job of screwing up on its own with a reckless land investment scheme that's gone sour at a huge cost to the entity's assets.
Here's what will actually happen in years to come.
First, the ILPA will try to hold private equity groups to the newly-restrictive terms. The vaunted "principles" center around, as you'd expect, pricing. Terms such as fees, disclosure and investor oversight.
Second, a few ailing private equity groups will cave in, to preserve funding. But the better firms won't.
Third, the better-performing private equity groups will be pursued by ILPA members who will toss away their newly-created terms in order to get a piece of the best returns in the sector.
That's how these cycles always work. Hedge funds are the same way. Once burned, institutional investors declare that they won't stand for such restrictive terms. Then, when the hedge funds become the best-performing investment firms, such concerns are easily discarded in the pursuit of returns.
There won't be a lawsuit by private equity groups. The weak ones will want it, but the stronger ones realize it serves no purpose to air this dirty laundry. And they will naturally regain the institutional customers once market conditions turn to their favor once more.
Still, it's an interesting circus to watch. Institutional investors looking to blame the recipients of their investments, rather than admit to their own mistakes, while the weaker private equity groups run for legal cover.
Monday, March 22, 2010
Leverage Doesn't Equal Risk, But It Seems To Account For Much Of It
I wrote this post a few weeks ago discussing the use of the Kelly Criterion for scaling allocations to uncertain investments.
By following links in that post, you can read my reviews and discussions of Scott Patterson's recent book, The Quants.
That book, and Poundstone's Fortune's Formula, were the subject of some discussions with a colleague on Saturday morning, as we drove to the Washington, D.C., "Kill the Bill!" rally on the Capitol lawn.
As my friend and I revisited the topic of risk, risk management, and the Volcker Rule, I realized that, despite there being many aspects of risk, Kelly's work demonstrates that, of all of them, leverage is by far the greatest source of risk.
First, our fractional banking system exposes us to constant leverage. The reason you have an FDIC is due to US experience during the Depression with failed banks which had lost their capital through leveraged mortgage lending, and no longer could pay depositors their money.
Fractional-reserve banking provides much of the multiplier effect in our economy.
But we have explicitly allowed leverage in other areas, as well. Margin lending for selling securities short, for example. And, in effect, credit derivatives.
By exchanging risk without the use of exchange-traded instruments, as in those swaps, we learned in recent years that there can be unknown leverage borne by a counterparty.
Many pundits immediately derided the Volcker Rule. It's also no surprise that any bank CEOs who commented on it did so negatively and dismissively.
That, I observed to my friend, ought to tell you how necessary and effective Volcker's recommendation actually is.
Of course, if you are Jamie Dimon, Vik Pandit or Lloyd Blankfein, you want people to believe that a US investment or commercial bank simply must be allowed to engaged in leveraged, proprietary trading. These CEOs easily confuse legislators and regulators by citing a need to provide complete client solutions.
But leveraged proprietary trading isn't customer service.
Like it or not, despite what Jamie & Co. assert, when a financial institutions is highly-levered, and federally insured, and it is allowed to engage in proprietary trading and/or investing, by definition, that proprietary trading or investment is levered.
Why?
Because any proprietary activities' losses hit the institution's equity. And since financial institution equity is often only 5-8% of total assets, it won't take much, as we saw in late 2008, to bring investment banks as large as Morgan Stanley and Goldman to the edge of solvency.
This is what Patterson exposed in his book. By failing to heed the Kelly Criterion, billionaire hedge fund owners levered up and sustained crippling losses.
Imagine if those had been part of insured banks.
Wait, they were! Morgan Stanley's PDT group.
That's why Volcker is right. So long as any institution is implicitly or explicitly federally insured, and operating with leverage, any proprietary losses are, in effect, guaranteed by taxpayers.
Heads, they win. Tails, the rest of us lose.
That is the most frequently observed risk in our financial system in the last 30 years.
But you must notice there are two characteristics which must be separated. And only two.
Leverage and federally-insured deposits or businesses.
For example, suppose Blackstone invests billions of borrowed money in various ventures, and loses it all?
As a private equity firm, its partners/owners lose a lot. Its lenders, presumed to have analyzed Blackstone's balance sheet and operations, will probably take painful writedowns.
Losses like these could come from bad private equity deals, or even bad startup venture funding.
Or, they could come from Blackstone's own proprietary trading operations.
So long as only private sector counterparties risked their capital, whether as a creditor via loans to fund the balance sheet, or a creditor via counterparty risk, the rest of us aren't directly hurt.
It's only when federally-insured entities lose in leveraged proprietary trading that we all suffer directly.
That's why the Volcker Rule is so simple and effective. He identified the only two practices which should never occur together, i.e., proprietary leveraged trading and government guarantees of deposit insurance.
We shouldn't care if an unlevered Chase lost on proprietary trading, because those loses are limited to its own capital. But as soon as the bank is allowed to lever, implicitly, its losses can outstrip its capital.
Risk management is challenging enough without adding leverage to increase it. All the squawking over Paul Volcker's recommendations indicate that they address a serious problem. One which should be solved along the lines of his Rule, while ignoring the bleating and complaints of those in the sector who know they will lose valuable access to federal bailouts if his idea is put into practice.
By following links in that post, you can read my reviews and discussions of Scott Patterson's recent book, The Quants.
That book, and Poundstone's Fortune's Formula, were the subject of some discussions with a colleague on Saturday morning, as we drove to the Washington, D.C., "Kill the Bill!" rally on the Capitol lawn.
As my friend and I revisited the topic of risk, risk management, and the Volcker Rule, I realized that, despite there being many aspects of risk, Kelly's work demonstrates that, of all of them, leverage is by far the greatest source of risk.
First, our fractional banking system exposes us to constant leverage. The reason you have an FDIC is due to US experience during the Depression with failed banks which had lost their capital through leveraged mortgage lending, and no longer could pay depositors their money.
Fractional-reserve banking provides much of the multiplier effect in our economy.
But we have explicitly allowed leverage in other areas, as well. Margin lending for selling securities short, for example. And, in effect, credit derivatives.
By exchanging risk without the use of exchange-traded instruments, as in those swaps, we learned in recent years that there can be unknown leverage borne by a counterparty.
Many pundits immediately derided the Volcker Rule. It's also no surprise that any bank CEOs who commented on it did so negatively and dismissively.
That, I observed to my friend, ought to tell you how necessary and effective Volcker's recommendation actually is.
Of course, if you are Jamie Dimon, Vik Pandit or Lloyd Blankfein, you want people to believe that a US investment or commercial bank simply must be allowed to engaged in leveraged, proprietary trading. These CEOs easily confuse legislators and regulators by citing a need to provide complete client solutions.
But leveraged proprietary trading isn't customer service.
Like it or not, despite what Jamie & Co. assert, when a financial institutions is highly-levered, and federally insured, and it is allowed to engage in proprietary trading and/or investing, by definition, that proprietary trading or investment is levered.
Why?
Because any proprietary activities' losses hit the institution's equity. And since financial institution equity is often only 5-8% of total assets, it won't take much, as we saw in late 2008, to bring investment banks as large as Morgan Stanley and Goldman to the edge of solvency.
This is what Patterson exposed in his book. By failing to heed the Kelly Criterion, billionaire hedge fund owners levered up and sustained crippling losses.
Imagine if those had been part of insured banks.
Wait, they were! Morgan Stanley's PDT group.
That's why Volcker is right. So long as any institution is implicitly or explicitly federally insured, and operating with leverage, any proprietary losses are, in effect, guaranteed by taxpayers.
Heads, they win. Tails, the rest of us lose.
That is the most frequently observed risk in our financial system in the last 30 years.
But you must notice there are two characteristics which must be separated. And only two.
Leverage and federally-insured deposits or businesses.
For example, suppose Blackstone invests billions of borrowed money in various ventures, and loses it all?
As a private equity firm, its partners/owners lose a lot. Its lenders, presumed to have analyzed Blackstone's balance sheet and operations, will probably take painful writedowns.
Losses like these could come from bad private equity deals, or even bad startup venture funding.
Or, they could come from Blackstone's own proprietary trading operations.
So long as only private sector counterparties risked their capital, whether as a creditor via loans to fund the balance sheet, or a creditor via counterparty risk, the rest of us aren't directly hurt.
It's only when federally-insured entities lose in leveraged proprietary trading that we all suffer directly.
That's why the Volcker Rule is so simple and effective. He identified the only two practices which should never occur together, i.e., proprietary leveraged trading and government guarantees of deposit insurance.
We shouldn't care if an unlevered Chase lost on proprietary trading, because those loses are limited to its own capital. But as soon as the bank is allowed to lever, implicitly, its losses can outstrip its capital.
Risk management is challenging enough without adding leverage to increase it. All the squawking over Paul Volcker's recommendations indicate that they address a serious problem. One which should be solved along the lines of his Rule, while ignoring the bleating and complaints of those in the sector who know they will lose valuable access to federal bailouts if his idea is put into practice.
Friday, March 19, 2010
Peter J. Wallison On Dodd's Financial Regulatory "Reform" BIll
I don't typically find Peter Wallison's Wall Street Journal editorials to be particularly sensible or well reasoned.
Yesterday's, however, critiquing Chris Dodd's financial regulatory "reform" bill, was an exception. Wallison correctly excoriates Dodd for creating unworkable new entities (FSOC), giving the failed Fed more control over the financial system, and providing alternatives to bankruptcy which will reward overly-large banks with lower-cost borrowed funds.
As Wallison points out, those institutions judged "too big to fail" will attract plenty of lower-cost funds from bond investors, because they will correctly expect to be repaid, in full, by the federal government, should the institution fail.
Finally, Wallison notes the idiocy of Congress rushing to write and pass a regulatory "reform" bill before receiving a report from its own Financial Crisis Inquiry Commission, due in mid-December of this year.
It's hard to believe our Congress, and, in particular, retiring Senator Dodd, could deliberately be this obtuse and stupid. But there's no denying the content of Dodd's bill, and the likelihood that it will, if passed, be the source and cause of even more large-scale financial sector disasters to come.
Only, this time, everyone will know in advance who will win- bondholders- and who will lose- taxpayers.
Yesterday's, however, critiquing Chris Dodd's financial regulatory "reform" bill, was an exception. Wallison correctly excoriates Dodd for creating unworkable new entities (FSOC), giving the failed Fed more control over the financial system, and providing alternatives to bankruptcy which will reward overly-large banks with lower-cost borrowed funds.
As Wallison points out, those institutions judged "too big to fail" will attract plenty of lower-cost funds from bond investors, because they will correctly expect to be repaid, in full, by the federal government, should the institution fail.
Finally, Wallison notes the idiocy of Congress rushing to write and pass a regulatory "reform" bill before receiving a report from its own Financial Crisis Inquiry Commission, due in mid-December of this year.
It's hard to believe our Congress, and, in particular, retiring Senator Dodd, could deliberately be this obtuse and stupid. But there's no denying the content of Dodd's bill, and the likelihood that it will, if passed, be the source and cause of even more large-scale financial sector disasters to come.
Only, this time, everyone will know in advance who will win- bondholders- and who will lose- taxpayers.
Thursday, March 18, 2010
Tyler Mathisen Must Go- Part 2
Only a month after I wrote this post, Ole' Ty, a/k/a Tyler Mathisen of CNBC, has provided still more evidence that somebody at CNBC needs to give the old campaigner the hook.
This afternoon, while discussing Aetna's decision to change its planned communications with investors, in light of the attacks from Washington Democrats, Ty managed to totally misunderstand the nature of the evolving risks in the health insurance sector.
While Michelle Caruso-Cabrera sensibly noted the assault on all health insurers, and their reasonable profits, by Congress and the administration, Ole' Ty weighed in with the hopeful thought that Aetna and its ilk will receive many more customers from ObamaCare.
Ty rambled on about how, whether those customers are subsidized, or not, they still represent new revenues.
If only Ty had a full brain, he'd remember that profits are revenues MINUS costs! And that the longer term aim of Washington's bureaucrats is to, first, direct subsidized new customers to insurers like Aetna. Then they will observe how much federal money Aetna receives, and squelch premium increases, while expanding mandated coverage.
It won't take very long for insurers like Aetna to begin losing money, as their premiums are capped and their payouts are increased.
Ole' Ty doesn't get this. So, in addition to being irascible, churlish, curmudgeonly and cranky, you may now add....stupid.
It's clear that CNBC's on-air cupboard has become barren, what with the loss over the past year of Bill Griffeth, Charlie Gasparino, Becky Jarvis, Dylan Ratigan (no great loss), and another female anchor whose name escapes me who left to join the Fox Business News startup at its inception.
But, surely, CNBC's management can do better than dragging Ole' Ty out of his dotage and propping him up in front of a camera each afternoon?
This afternoon, while discussing Aetna's decision to change its planned communications with investors, in light of the attacks from Washington Democrats, Ty managed to totally misunderstand the nature of the evolving risks in the health insurance sector.
While Michelle Caruso-Cabrera sensibly noted the assault on all health insurers, and their reasonable profits, by Congress and the administration, Ole' Ty weighed in with the hopeful thought that Aetna and its ilk will receive many more customers from ObamaCare.
Ty rambled on about how, whether those customers are subsidized, or not, they still represent new revenues.
If only Ty had a full brain, he'd remember that profits are revenues MINUS costs! And that the longer term aim of Washington's bureaucrats is to, first, direct subsidized new customers to insurers like Aetna. Then they will observe how much federal money Aetna receives, and squelch premium increases, while expanding mandated coverage.
It won't take very long for insurers like Aetna to begin losing money, as their premiums are capped and their payouts are increased.
Ole' Ty doesn't get this. So, in addition to being irascible, churlish, curmudgeonly and cranky, you may now add....stupid.
It's clear that CNBC's on-air cupboard has become barren, what with the loss over the past year of Bill Griffeth, Charlie Gasparino, Becky Jarvis, Dylan Ratigan (no great loss), and another female anchor whose name escapes me who left to join the Fox Business News startup at its inception.
But, surely, CNBC's management can do better than dragging Ole' Ty out of his dotage and propping him up in front of a camera each afternoon?
The CBO, Deficits & Transfer Payment Programs
"Social Security and Medicare were popular from the start and passed with bipartisan support."
That statement, buried in Fred Barnes' editorial in this morning's Wall Street Journal, jarred me.
Why, I mused, were these gargantuan transfer payment programs so popular at their inception, in contrast to the current abomination, Obama's health care proposal? Especially as crafted by the Senate, and filled with bribes to selected states whose Democratic Senators required those payoffs to vote for the bill?
A little research reminds us that Social Security became law in 1935, while Medicare was enacted in 1966. Both of those years were in eras distinctly different from our own.
Social Security was passed in the midst of the Great Depression. People were worried, extrapolating then-current experience, about providing for their aged years. The country had what is now viewed as essentially no external debt. Additionally, not a trivial point, the program was only meant as a safety net, not a universal entitlement. Ostensibly, FDR and his ilk foolishly believed that that average American would continue saving as if nothing had changed, with Social Security only intended to pay those who, through bad luck, ill health or stupidity, failed to save enough for their later years.
So much for good intentions. And a first taste of the sting of unanticipated consequences.
Medicare passed during what I view as the height of America's post-WWII salad days. I learned from people like my late father how unimpeded US business was abroad. With Germany and, for that matter, most of Europe still recovering from the war, and Japan exporting copycat transistor radios and silly little Toyota Corollas, American business reigned supreme, and American labor demanded and received extravagant promises of future pension and health care benefits.
So, ironically, our two largest social welfare transfer payment programs were passed with widespread support in two distinctly different, but each uniquely accommodating eras.
Thus, Fred Barnes' quote, so simple in its candor, expresses, really, the profound naivete of the American people and Congress in 1935 and 1966.
In the former, nobody thought it appropriate to be against such a simple, small old age pension scheme thought to only be needed for a few extreme cases. Nobody noticed that the very first Social Security check ever cut was for more than that first beneficiary had paid into the system in her lifetime. The pattern was set from the very start.
In the latter, a lucky nation mistook that luck for its lasting position as a supreme economic power spewing out uncountable wealth, and simply promised a sizable share of that presumed future wealth to oldsters for their medical care.
Everyone in business who is at all effective knows that implementation matters. It's not just superior concepts that profit, but well-implemented ones.
How often do we hear an aphorism such as, "better lucky than smart?"
Or, "Better to have a bad strategy implemented well, than a good strategy implemented badly?"
In the case of both Social Security and Medicare, stupid Congressmen designed and implemented a 'communal pot' scheme. That is, rather than providing individualized accounts for each program's transfer payments, so that individuals had a cap on benefits, and owned them, Congress just tossed all the payments into a pot, then dipped into the pot for payouts, too.
No caps nor any notion of limitations on individual claims were considered. Worse, because Social Security wasn't yet broke by the time the geniuses in Washington dreamt up Medicare, they did the same thing with that, as well.
Since then, both programs have vastly outrun their initial spending projections, and are deeply in deficit. Because they are not accounted on the federal government's balance sheet, their deeply-unfunded liabilities are not shoved in the faces of taxpayers and voters. But, like the unsightly children (Ignorance and Want) beneath the cloak of the Ghost of Christmas Passed in Dickens' A Christmas Carol,
"The live....oh they live."
And grow, as well. The deficits grow because, as Barnes noted, the programs are so popular. Yes, transfer payment programs sure do engender behavior that swells their usage far beyond the limited spending projections naive Congressmen used to pass them, don't they?
Now health care is becoming the third in a series of disastrous, ultimately economy-wrecking social transfer payment programs.
It's bad enough that Congress is still full of members who, in their majority, are too stupid to realize the necessity of individual, benefit-capped accounts.
But now they've added a new disastrous wrinkle. They lie about the program's structure, then rely on the Congressional Budget Office to certify the lies as fiscally responsible.
Yesterday morning, on CNBC, a former CBO official served as guest host. He confirmed that the CBO has two unyielding dicta: it can't question assumptions of Congressional schemes given to it to estimate costs, and; it can't make a 'good/bad' judgment.
Thus, the widespread knowledge that the current Senate health care bill is unsustainably expensive is not reflected in this morning's new CBO 'scoring' of the bill.
Rather than highlight the front-end loaded new taxes and Medicare cuts, combined with only 6 years of benefits, and explain that this results in a fraudulent 'savings' of $100B, the CBO can only state the alleged savings.
Further, the CBO is not allowed to inject the effects of realistic human behavior on the scheme. That is, seeing how Americans behaved with respect to other free-ride transfer payment schemes, i.e., Social Security and Medicare, it's reasonable to expect that Americans will overuse and overspend estimated usage of this new proposed program.
Which brings me, again, back to Fred Barnes' statement.
When government alleges it can give you something for apparently nothing, who doesn't like that? In the 1930s, nobody really grasped the long run costs of Social Security. The envisioned usage of the program just didn't seem to be very much to spend in order to keep a few oldsters off the streets in their waning years.
Instead, as long ago as 1975, when I was a freshman in college, I had a classmate who was paying for his tuition with Social Security benefits from his father's death.
Huh?
I seriously doubt that's what the Congress of 1935 ever envisioned for Social Security.
Of course there was widespread popular approval for Medicare. The US seemed economically invincible, so Congress enacted another 'bread and circuses' program to appease voters and promise to remove the burdens of health care costs in old age.
Once again, linkages between behavior and consequence, and the notion of individual responsibility affecting risky behavior, vanished.
And you wonder why we have an obesity crisis today?
Now we combine the elements of the perfect economic/transfer payment scheme storm. A misleading CBO report of alleged 'savings' for a new, vast health care and insurance transfer payment program which will destroy the private health insurance business, heap the resulting risks onto the taxpayers, promise open-ended benefits for all forever. And presume to borrow from investors in the rest of the world to fund it.
Barnes is right when he asserts that, unlike Social Security and Medicare, this new entitlement program will spark annual funding fights and crisis from the moment it passes, if it passes.
And its repeal will become the Republican party's major, focusing objective for the next three years.
As I said to my business partner at lunch yesterday, it's just possible that this bill must pass, in order for health care entitlement to finally be vanquished when it is repealed in three more years.
Otherwise, the dimwitted, gullible American public won't understand the horrifying loss of liberty and imposition of huge taxes to fund this mistake. Not to mention the fiscal emasculation of our country and downgrading of its debt, as the world wisely declines to fund our misguided entitlement programs.
That statement, buried in Fred Barnes' editorial in this morning's Wall Street Journal, jarred me.
Why, I mused, were these gargantuan transfer payment programs so popular at their inception, in contrast to the current abomination, Obama's health care proposal? Especially as crafted by the Senate, and filled with bribes to selected states whose Democratic Senators required those payoffs to vote for the bill?
A little research reminds us that Social Security became law in 1935, while Medicare was enacted in 1966. Both of those years were in eras distinctly different from our own.
Social Security was passed in the midst of the Great Depression. People were worried, extrapolating then-current experience, about providing for their aged years. The country had what is now viewed as essentially no external debt. Additionally, not a trivial point, the program was only meant as a safety net, not a universal entitlement. Ostensibly, FDR and his ilk foolishly believed that that average American would continue saving as if nothing had changed, with Social Security only intended to pay those who, through bad luck, ill health or stupidity, failed to save enough for their later years.
So much for good intentions. And a first taste of the sting of unanticipated consequences.
Medicare passed during what I view as the height of America's post-WWII salad days. I learned from people like my late father how unimpeded US business was abroad. With Germany and, for that matter, most of Europe still recovering from the war, and Japan exporting copycat transistor radios and silly little Toyota Corollas, American business reigned supreme, and American labor demanded and received extravagant promises of future pension and health care benefits.
So, ironically, our two largest social welfare transfer payment programs were passed with widespread support in two distinctly different, but each uniquely accommodating eras.
Thus, Fred Barnes' quote, so simple in its candor, expresses, really, the profound naivete of the American people and Congress in 1935 and 1966.
In the former, nobody thought it appropriate to be against such a simple, small old age pension scheme thought to only be needed for a few extreme cases. Nobody noticed that the very first Social Security check ever cut was for more than that first beneficiary had paid into the system in her lifetime. The pattern was set from the very start.
In the latter, a lucky nation mistook that luck for its lasting position as a supreme economic power spewing out uncountable wealth, and simply promised a sizable share of that presumed future wealth to oldsters for their medical care.
Everyone in business who is at all effective knows that implementation matters. It's not just superior concepts that profit, but well-implemented ones.
How often do we hear an aphorism such as, "better lucky than smart?"
Or, "Better to have a bad strategy implemented well, than a good strategy implemented badly?"
In the case of both Social Security and Medicare, stupid Congressmen designed and implemented a 'communal pot' scheme. That is, rather than providing individualized accounts for each program's transfer payments, so that individuals had a cap on benefits, and owned them, Congress just tossed all the payments into a pot, then dipped into the pot for payouts, too.
No caps nor any notion of limitations on individual claims were considered. Worse, because Social Security wasn't yet broke by the time the geniuses in Washington dreamt up Medicare, they did the same thing with that, as well.
Since then, both programs have vastly outrun their initial spending projections, and are deeply in deficit. Because they are not accounted on the federal government's balance sheet, their deeply-unfunded liabilities are not shoved in the faces of taxpayers and voters. But, like the unsightly children (Ignorance and Want) beneath the cloak of the Ghost of Christmas Passed in Dickens' A Christmas Carol,
"The live....oh they live."
And grow, as well. The deficits grow because, as Barnes noted, the programs are so popular. Yes, transfer payment programs sure do engender behavior that swells their usage far beyond the limited spending projections naive Congressmen used to pass them, don't they?
Now health care is becoming the third in a series of disastrous, ultimately economy-wrecking social transfer payment programs.
It's bad enough that Congress is still full of members who, in their majority, are too stupid to realize the necessity of individual, benefit-capped accounts.
But now they've added a new disastrous wrinkle. They lie about the program's structure, then rely on the Congressional Budget Office to certify the lies as fiscally responsible.
Yesterday morning, on CNBC, a former CBO official served as guest host. He confirmed that the CBO has two unyielding dicta: it can't question assumptions of Congressional schemes given to it to estimate costs, and; it can't make a 'good/bad' judgment.
Thus, the widespread knowledge that the current Senate health care bill is unsustainably expensive is not reflected in this morning's new CBO 'scoring' of the bill.
Rather than highlight the front-end loaded new taxes and Medicare cuts, combined with only 6 years of benefits, and explain that this results in a fraudulent 'savings' of $100B, the CBO can only state the alleged savings.
Further, the CBO is not allowed to inject the effects of realistic human behavior on the scheme. That is, seeing how Americans behaved with respect to other free-ride transfer payment schemes, i.e., Social Security and Medicare, it's reasonable to expect that Americans will overuse and overspend estimated usage of this new proposed program.
Which brings me, again, back to Fred Barnes' statement.
When government alleges it can give you something for apparently nothing, who doesn't like that? In the 1930s, nobody really grasped the long run costs of Social Security. The envisioned usage of the program just didn't seem to be very much to spend in order to keep a few oldsters off the streets in their waning years.
Instead, as long ago as 1975, when I was a freshman in college, I had a classmate who was paying for his tuition with Social Security benefits from his father's death.
Huh?
I seriously doubt that's what the Congress of 1935 ever envisioned for Social Security.
Of course there was widespread popular approval for Medicare. The US seemed economically invincible, so Congress enacted another 'bread and circuses' program to appease voters and promise to remove the burdens of health care costs in old age.
Once again, linkages between behavior and consequence, and the notion of individual responsibility affecting risky behavior, vanished.
And you wonder why we have an obesity crisis today?
Now we combine the elements of the perfect economic/transfer payment scheme storm. A misleading CBO report of alleged 'savings' for a new, vast health care and insurance transfer payment program which will destroy the private health insurance business, heap the resulting risks onto the taxpayers, promise open-ended benefits for all forever. And presume to borrow from investors in the rest of the world to fund it.
Barnes is right when he asserts that, unlike Social Security and Medicare, this new entitlement program will spark annual funding fights and crisis from the moment it passes, if it passes.
And its repeal will become the Republican party's major, focusing objective for the next three years.
As I said to my business partner at lunch yesterday, it's just possible that this bill must pass, in order for health care entitlement to finally be vanquished when it is repealed in three more years.
Otherwise, the dimwitted, gullible American public won't understand the horrifying loss of liberty and imposition of huge taxes to fund this mistake. Not to mention the fiscal emasculation of our country and downgrading of its debt, as the world wisely declines to fund our misguided entitlement programs.
Wednesday, March 17, 2010
Boeing's Vulnerability
Yesterday's Wall Street Journal carried an article discussing Boeing's newly-vulnerable single-aisle airplanes. If only because this type of piece has become a vanishing breed in the Journal, it was welcome.
The piece noted an unanticipated consequence of the expensive, overdue, over-budget Dreamliner project. That is, Boeing is being pressured by airlines to replace its 737 with a new airplane. But, according to the Journal piece, Boeing can't afford the cost of such a new development project at this time.
Meanwhile, Canada's Bombardier has developed an all-new plane, the CSeries, which can service the lower end of the 737's market.
Now, Boeing faces erosion of a very profitable, old cash cow when it still needs those profits to offset the Dreamliner woes.
The nearby price chart for Boeing and the S&P500 Index for the last five years shows that the company has squandered whatever outperformance it managed to effect by 2007. Now, Boeing is barely positive and outperforming the index over the period.This can't bode well for the firm, as one would expect Dreamliner sales to already be factored into its equity price.
Whether losses of volume on its 737 are also already "in" the equity price is unclear, but quite possibly not yet fully understood.
Who would have guessed that Jim McNerny's failure to get the Dreamliner on track and budget earlier would end up complicating the company's defense of a bread and butter segment, the short haul, single-aisle jet market?
The article contends that neither Boeing, nor Airbus can easily design a brand new plane just now. Allegedly, needed technological breakthroughs are a few years away. Thus, in what has been a duopoly since Boeing bought McDonnell-Douglas 13 years ago, the multi-line Canadian transportation manufacturer seems to be sneaking into the big leagues of jet airplane production.
Could it be that the scope of larger, longer-range jet design and manufacture is changing the nature of competition in the sector, leaving smaller, simpler jets to be profitably built by smaller, newer entrants? Is a full-scale Schumpeterian evolution afoot in airplane design and manufacture? Will we soon see Asian entrants, as well?The nearby chart, stretching back to the early 1960s, illustrates that Boeing's period of significant, consistent outperformance of the S&P500 primarily occurred between 1971 and 1980. After that decade, while Boeing has enjoyed a slightly steeper slope in its equity price curve, compared with that of the index, the observed volatility certainly has substantially offset that slight advantage.
Given Boeing's struggles to offer shareholders a reason to buy the company's equity over the past half decade, or even the past thirty years, one wonders if its seen its best days already.
Tuesday, March 16, 2010
Dennis Berman's Scary Visit to The Philly Fed
The Wall Street Journal's Dennis Berman wrote a rather disturbing story in today's edition concerning the actual work of bank oversight, as performed by the Philadelphia Fed's corps of bank examiners.
When an examiner describes himself not as an auditor, but as a "government-paid consultant," you should be worried. Very worried.
Berman really conveys a sort of quill and inkwell style of 'bank examination.' Instead of, say, resident software programs which flag questionable money flows or worrisome rates of loan delinquencies or defaults, you get the sense that these guys are literally poring over paper printouts generated by bank employees. That they can, and are, easily overwhelmed by data.
Then there is Berman's observation that the examiners are motivated by their senior managers. And since the Fed's main mission is monetary policy, examiners generally feel they are second-class citizens to begin with.
I must admit, if only for this reason, I would understand moving primary bank oversight and examination into another entity. Perhaps the FDIC, whose insurance role makes it a reasonable domicile for examining the risks of those institutions it is charged with ultimately underwriting.
Berman's very brief piece contains outsized weight by virtue of his writing. In a few paragraphs, he paints a picture of a few lone, under-armed road warriors trying to ferret out warning signs of bank health erosion.
As I wrote last week in this post, it supports and reinforces my own view that bank regulation requires far more a priori research in order to provide clearer, more objective knowledge about what signals predict bank failure or malfeasance.
It's not a pretty picture at all.
When an examiner describes himself not as an auditor, but as a "government-paid consultant," you should be worried. Very worried.
Berman really conveys a sort of quill and inkwell style of 'bank examination.' Instead of, say, resident software programs which flag questionable money flows or worrisome rates of loan delinquencies or defaults, you get the sense that these guys are literally poring over paper printouts generated by bank employees. That they can, and are, easily overwhelmed by data.
Then there is Berman's observation that the examiners are motivated by their senior managers. And since the Fed's main mission is monetary policy, examiners generally feel they are second-class citizens to begin with.
I must admit, if only for this reason, I would understand moving primary bank oversight and examination into another entity. Perhaps the FDIC, whose insurance role makes it a reasonable domicile for examining the risks of those institutions it is charged with ultimately underwriting.
Berman's very brief piece contains outsized weight by virtue of his writing. In a few paragraphs, he paints a picture of a few lone, under-armed road warriors trying to ferret out warning signs of bank health erosion.
As I wrote last week in this post, it supports and reinforces my own view that bank regulation requires far more a priori research in order to provide clearer, more objective knowledge about what signals predict bank failure or malfeasance.
It's not a pretty picture at all.
David Malpass For Senate!
I know this seems to be a political post, but there are business aspects to this headline.
This morning, on CNBC, it was announced that "a former chief economist for Bear Stearns has filed to run for a Senate seat."
Initially, I wondered if they were referring to their CNBC colleague, Larry Kudlow. But with his age and substance abuse/rehab background, I thought this was unlikely.
Turns out it's the well-respected economist David Malpass. He has filed to run for the New York Senate seat currently filled by a political appointee.
When asked why he'd be more effective as one Senator among 100, as opposed to continuing to freely express himself as an independent economist, Malpass earnestly stated that he felt it was important to make that Senate seat vote correctly. As an example, he criticized Hillenbrand's recent consent to raise the debt ceiling. A vote Malpass characterized as reaching into every American family's home and slapping a higher tax on its children and grandchildren, in order to eventually service and retire the extra trillions of debt recently enabled by Congress.
Further, Malpass alluded to being able to provide better economic knowledge in the Senate than currently exists.
It should be a very interesting race to follow. As a Republican, Malpass already has an uphill fight. Then, again, with the state's horrendous financial mess as a backdrop, it's just possible even New York Democrats will vote for national fiscal restraint, in the person of Mr. Malpass.
Put another way, if we have a second-rate standup comic in the Senate, albeit under a cloud of election-theft, why not a respected economist in a straight-up, legitimate victory?
This morning, on CNBC, it was announced that "a former chief economist for Bear Stearns has filed to run for a Senate seat."
Initially, I wondered if they were referring to their CNBC colleague, Larry Kudlow. But with his age and substance abuse/rehab background, I thought this was unlikely.
Turns out it's the well-respected economist David Malpass. He has filed to run for the New York Senate seat currently filled by a political appointee.
When asked why he'd be more effective as one Senator among 100, as opposed to continuing to freely express himself as an independent economist, Malpass earnestly stated that he felt it was important to make that Senate seat vote correctly. As an example, he criticized Hillenbrand's recent consent to raise the debt ceiling. A vote Malpass characterized as reaching into every American family's home and slapping a higher tax on its children and grandchildren, in order to eventually service and retire the extra trillions of debt recently enabled by Congress.
Further, Malpass alluded to being able to provide better economic knowledge in the Senate than currently exists.
It should be a very interesting race to follow. As a Republican, Malpass already has an uphill fight. Then, again, with the state's horrendous financial mess as a backdrop, it's just possible even New York Democrats will vote for national fiscal restraint, in the person of Mr. Malpass.
Put another way, if we have a second-rate standup comic in the Senate, albeit under a cloud of election-theft, why not a respected economist in a straight-up, legitimate victory?
Monday, March 15, 2010
The Long Road Ahead For Government Pension Obligations
The US fiscal dilemma involves, as several pundits have recently noted, municipal defaults. Obviously, US states, such as California, New York, Illinois, Michigan, New Jersey and Massachusetts are also on the list of governmental entities in deep fiscal trouble.
Thus, as an economic society, we not only have the US federal deficit and spending with which to contend, but our smaller governmental entities. Among the liabilities weighing heavily on municipalities and states are pensions promised to government-related workers, such as police, firemen, teachers, sanitation workers and administrators.
One of my close friends is a teacher in one of the nearby northern New Jersey school districts. She works in the public school system so, of course, she is a union member, although, personally, she is a pretty solid political conservative.
This makes for some truly shocking behaviors and attitudes within a single person. For example, my friend has remained in the same school, in the same district, for her entire career. Holding several masters degrees and being a very intelligent person, she quickly grasped the essence of succeeding in a union-controlled environment. In a single word- seniority.
Thus, she has never contemplated moving to a closer school system. She currently earns the maximum allowable compensation for her work, yet she is not even 50 years old. Her cash compensation puts her, on an annualized basis, well above the US average. She only has to work 9 months per year. On top of the cash compensation, she has enviable pension and medical benefits.
Recently, she began expressing concern over recently-elected Governor Chris Christie's sequestering of unspent education funds. My friend alleges that Christie lied, because he said no jobs or programs would be curtailed, but, now, programs are being cut back, and teachers laid off.
From what she explained, it appears that something like this has been going on for years. The state tops up local school district budgets. Those districts squirrel some of the money away to spend on discretionary programs and hiring of teachers. In effect, New Jersey residents are taxed, or pay interest on borrowed funds, which are shipped to school districts which don't actually use all the money as intended. Or at all.
Christie, being extremely budget-conscious, is apparently freezing and recovering every unspent state dollar in sight.
My friend moans that her district's children's test scores are among the best in the nation. We can't simply abandon their efforts or afford to lose that status.
I carefully replied that this may be laudatory and desirable, but, actually, unaffordable. I tried to explain to her that the overwhelming majority of New Jersey and, I dare say, US adult voters feel their education-directed taxes are largely wasted. If anything, education spending needs to be pared back.
Everyone is aware of the numbers showing massive spending/pupil in urban districts whose test scores are abysmal.
If I wrote what my friend's actual compensation is, most readers would make a note to consider becoming a primary school teacher in the next life. It's very cushy. But my friend feels she is underpaid, reasoning that she could have earned much more in the private sector.
This is the mindset with which Christie, and his ilk across the US, must contend. Well-meaning, unionized employees feeling that every dollar of state spending cut from their budgets is a mistake.
It shouldn't be a surprise that my friend's contribution to her pension has risen in the wake of her union's fund's value drop during the recent financial sector meltdown. She informed me over the weekend that the state had borrowed liberally from the fund for years, and, thus, it's not even well-funded.
Chalk up another one for deceitful governing by Corzine, McGreavy, Florio, Whitman and Kean.
Speaking gingerly, so as not to end a friendship, I tried to explain to my teacher/friend that every group from which Christie is taking funding must feel like her. They all want to keep their budgets and salaries. My friend is genuinely scared that she, or some of her friends, will lose their jobs. When I shared some data I recently read with her about New Jersey job creation over the past decade or so, it made little impression. That data showed how there has been no net private sector job creation over the past 7-10 years, but something on the order of 50,000 new public sector jobs.
This didn't make a significant impression on my friend. She asked the enduring, rhetorical question of why those who teach our children aren't worth more than they currently are paid?
When I carefully offered an alternative view of education, free of unions and mandated public school monopolies, I was greeted with incomprehension. When I suggested specialists like my friend, free of unions and monopolies, could organize into special schools priced to offer premium services, she simply said that the low-priced teachers would always be hired before the more expensive ones.
She simply had no grasp, I believe thanks to her union brainwashing, that quality commands a premium. When I noted that unions penalize the best teachers, like her, and protect the least competent, she was silent.
New Jersey has too much government. And it's not alone.
Too many fire and police departments, departments of public works and local government administrators for tiny municipalities. In the ten miles between my town and Basking Ridge, there are six other small towns, each possessing their own fire, police, sanitation and council infrastructures. Overlaid on this are townships and counties. More councils. More police. More pensions and budgets.
It's no wonder the US has looming debt and deficit problems. At local levels, we've allowed ourselves to make government a better paying career than the private sector. Now, your and my friends include people who live off of our taxes. So when we want to pay less for less government, we're forced to feel that's a bad thing, because it's a friend's rice bowl we're taking away.
How did we get to this sad and untenable state of affairs? How can we return from this situation, when so many intelligent and educated fellow citizens, colleagues, and friends, make their living from bloated and unaffordable levels of state and local government spending?
Forget about the faux-crisis of government health insurance or medical spending. Existing overspending on federal, state and local government is a far more urgent, observable and, dare I say, more easily corrected crisis.
One which, when turned back, will instantly release funds back to individuals to create jobs, spending, and, in time, personal wealth. Real economic activity.
But when we spend so much on government, under whatever name you wish to hide it, we simply have less for private economic activity that creates business, jobs and wealth.
Thus, as an economic society, we not only have the US federal deficit and spending with which to contend, but our smaller governmental entities. Among the liabilities weighing heavily on municipalities and states are pensions promised to government-related workers, such as police, firemen, teachers, sanitation workers and administrators.
One of my close friends is a teacher in one of the nearby northern New Jersey school districts. She works in the public school system so, of course, she is a union member, although, personally, she is a pretty solid political conservative.
This makes for some truly shocking behaviors and attitudes within a single person. For example, my friend has remained in the same school, in the same district, for her entire career. Holding several masters degrees and being a very intelligent person, she quickly grasped the essence of succeeding in a union-controlled environment. In a single word- seniority.
Thus, she has never contemplated moving to a closer school system. She currently earns the maximum allowable compensation for her work, yet she is not even 50 years old. Her cash compensation puts her, on an annualized basis, well above the US average. She only has to work 9 months per year. On top of the cash compensation, she has enviable pension and medical benefits.
Recently, she began expressing concern over recently-elected Governor Chris Christie's sequestering of unspent education funds. My friend alleges that Christie lied, because he said no jobs or programs would be curtailed, but, now, programs are being cut back, and teachers laid off.
From what she explained, it appears that something like this has been going on for years. The state tops up local school district budgets. Those districts squirrel some of the money away to spend on discretionary programs and hiring of teachers. In effect, New Jersey residents are taxed, or pay interest on borrowed funds, which are shipped to school districts which don't actually use all the money as intended. Or at all.
Christie, being extremely budget-conscious, is apparently freezing and recovering every unspent state dollar in sight.
My friend moans that her district's children's test scores are among the best in the nation. We can't simply abandon their efforts or afford to lose that status.
I carefully replied that this may be laudatory and desirable, but, actually, unaffordable. I tried to explain to her that the overwhelming majority of New Jersey and, I dare say, US adult voters feel their education-directed taxes are largely wasted. If anything, education spending needs to be pared back.
Everyone is aware of the numbers showing massive spending/pupil in urban districts whose test scores are abysmal.
If I wrote what my friend's actual compensation is, most readers would make a note to consider becoming a primary school teacher in the next life. It's very cushy. But my friend feels she is underpaid, reasoning that she could have earned much more in the private sector.
This is the mindset with which Christie, and his ilk across the US, must contend. Well-meaning, unionized employees feeling that every dollar of state spending cut from their budgets is a mistake.
It shouldn't be a surprise that my friend's contribution to her pension has risen in the wake of her union's fund's value drop during the recent financial sector meltdown. She informed me over the weekend that the state had borrowed liberally from the fund for years, and, thus, it's not even well-funded.
Chalk up another one for deceitful governing by Corzine, McGreavy, Florio, Whitman and Kean.
Speaking gingerly, so as not to end a friendship, I tried to explain to my teacher/friend that every group from which Christie is taking funding must feel like her. They all want to keep their budgets and salaries. My friend is genuinely scared that she, or some of her friends, will lose their jobs. When I shared some data I recently read with her about New Jersey job creation over the past decade or so, it made little impression. That data showed how there has been no net private sector job creation over the past 7-10 years, but something on the order of 50,000 new public sector jobs.
This didn't make a significant impression on my friend. She asked the enduring, rhetorical question of why those who teach our children aren't worth more than they currently are paid?
When I carefully offered an alternative view of education, free of unions and mandated public school monopolies, I was greeted with incomprehension. When I suggested specialists like my friend, free of unions and monopolies, could organize into special schools priced to offer premium services, she simply said that the low-priced teachers would always be hired before the more expensive ones.
She simply had no grasp, I believe thanks to her union brainwashing, that quality commands a premium. When I noted that unions penalize the best teachers, like her, and protect the least competent, she was silent.
New Jersey has too much government. And it's not alone.
Too many fire and police departments, departments of public works and local government administrators for tiny municipalities. In the ten miles between my town and Basking Ridge, there are six other small towns, each possessing their own fire, police, sanitation and council infrastructures. Overlaid on this are townships and counties. More councils. More police. More pensions and budgets.
It's no wonder the US has looming debt and deficit problems. At local levels, we've allowed ourselves to make government a better paying career than the private sector. Now, your and my friends include people who live off of our taxes. So when we want to pay less for less government, we're forced to feel that's a bad thing, because it's a friend's rice bowl we're taking away.
How did we get to this sad and untenable state of affairs? How can we return from this situation, when so many intelligent and educated fellow citizens, colleagues, and friends, make their living from bloated and unaffordable levels of state and local government spending?
Forget about the faux-crisis of government health insurance or medical spending. Existing overspending on federal, state and local government is a far more urgent, observable and, dare I say, more easily corrected crisis.
One which, when turned back, will instantly release funds back to individuals to create jobs, spending, and, in time, personal wealth. Real economic activity.
But when we spend so much on government, under whatever name you wish to hide it, we simply have less for private economic activity that creates business, jobs and wealth.
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