Perhaps you've heard of this video by now. It appeared on YouTube on November 10th. As of the morning of November 18th, as I'm writing this post, it has had just over 1.5MM views.
The creator of the video appeared on CNBC's early afternoon program yesterday. He is a former commodities trader who produced the clip to explain QE & QE2 to his economically-challenged friends. On air, he deferred his specific thoughts about QE2 to the video, but, later, agreed that, in a word, he does not agree with the Fed's policy.
For some clarification before you watch the clip, I noted a few factual errors. Ben Bernanke has prior monetary policy experience. He is generally regarded as a leading expert on the economic history of the Great Depression, and served on the Fed prior to his being named as Chairman.
I also think that the video is a bit unfair in characterizing Goldman Sach's mission as 'ripping off the American people.' Prior posts under that label will reveal that I feel the firm is rapacious and dangerous with which to do business. If you interact with Goldman on a professional basis, even as a so-called client, prepare to be dealt with sharply and without undue concern for your welfare. You are well-advised to look after your own interests, because the firm will certainly look after its own equally with, if not before yours, even if you are their client.
But, that said, it has certain expertise which may be used on its clients' behalf's. And you can, if you wish, always share in their alleged ill-gotten gains through purchase of their publicly-traded stock.
In case the embedded video doesn't play, you can go to the clip here.
Friday, November 19, 2010
More Confusion On Inflation
Kelly Evans writes a typically-interesting daily column, Ahead of the Tape, in the Wall Street Journal's Money & Investing section.
Wednesday's piece focused on inflation, with the declarative title Why an Inflationary Outbreak Isn't Likely.
Arguing from Keynesian demand-based, capacity-oriented bases, Evans wrote,
"U.S. consumers, in other words, are hardly better-equipped today to handle higher prices. That is no small matter. It limits the risk of an inflationary outbreak. If consumers don't have rising incomes or savings to pay for higher food and energy costs, for example, they will have to adjust by pulling back on spending elsewhere. That is a deflationary, not an inflationary, outcome."
That's true, from a purely Keynesian perspective. Evans went on to cite comparisons to the 1970s and quote an economist for further proof of slack labor demand.
The problem is, this approach ignores the Austrian school's definition and conception of inflation as a monetary phenomenon. Milton Friedman, of course, agreed, with his now famous quote,
"Inflation is always and everywhere a monetary phenomenon."
Isn't that why we had stagflation in the 1970s, and may be creating it again now, as I argued in this recent post? Back then, one commodity, oil, drove the US inflation rate up into the teens. Arthur Okun's misery index skyrocketed, as interest rates soared to cover inflation expectations. Yet, curiously, Evan's doesn't touch on those aspects of the late 1970s US stagflation experience.
The reason stagflation can occur is because slow economic growth can be divorced from inflation caused by commodity prices and foreign trade flows which can depreciate the dollar.
Only by focusing on Keynesian production-factor supply and demand as the source of inflation can you ignore the monetary sources of the phenomenon.
I'm frankly a bit surprised that the Journal is printing this sort of nonsense.
Wednesday's piece focused on inflation, with the declarative title Why an Inflationary Outbreak Isn't Likely.
Arguing from Keynesian demand-based, capacity-oriented bases, Evans wrote,
"U.S. consumers, in other words, are hardly better-equipped today to handle higher prices. That is no small matter. It limits the risk of an inflationary outbreak. If consumers don't have rising incomes or savings to pay for higher food and energy costs, for example, they will have to adjust by pulling back on spending elsewhere. That is a deflationary, not an inflationary, outcome."
That's true, from a purely Keynesian perspective. Evans went on to cite comparisons to the 1970s and quote an economist for further proof of slack labor demand.
The problem is, this approach ignores the Austrian school's definition and conception of inflation as a monetary phenomenon. Milton Friedman, of course, agreed, with his now famous quote,
"Inflation is always and everywhere a monetary phenomenon."
Isn't that why we had stagflation in the 1970s, and may be creating it again now, as I argued in this recent post? Back then, one commodity, oil, drove the US inflation rate up into the teens. Arthur Okun's misery index skyrocketed, as interest rates soared to cover inflation expectations. Yet, curiously, Evan's doesn't touch on those aspects of the late 1970s US stagflation experience.
The reason stagflation can occur is because slow economic growth can be divorced from inflation caused by commodity prices and foreign trade flows which can depreciate the dollar.
Only by focusing on Keynesian production-factor supply and demand as the source of inflation can you ignore the monetary sources of the phenomenon.
I'm frankly a bit surprised that the Journal is printing this sort of nonsense.
Thursday, November 18, 2010
GM & It's IPO
We've been bombarded with GM IPOmania this week. Today is the big show.
Predictably, CNBC has been hauling anyone with a word to say about this onto their network to comment. A favorite has been one-time GM, Ford and Chrysler senior executive Bob Lutz. He was recently paired with Paul Ingrassia to debate various aspects of the IPO.
Lutz, of course, is a big cheerleader for the re-emergence of GM as a publicly-held entity, playing down the remaining 25% government stake in the firm. Ingrassia was more balanced.
Whereas Lutz crowed about the great Rattner-led government reorganization of the firm under Chapter 11, Ingrassia noted that it was GM's management that refused to do so when it would still have saved the firm from its ultimate failure.
Elsewhere, on yesterday's noontime program, former hedge fund manager Michael Steinhardt replied with an immediate, unequivocal "no" when asked if he would buy/hold the GM IPO. Steinhardt cited industry and competitive factors which offered more downside than upside potential in the years ahead.
CNBC's resident auto sector reporter, Phil LeBeau, was popping up distressingly frequently, backed by big electronic displays of data and analytics to stump for the GM deal. He ranted incessantly about how all GM needed was for the industry to return to some higher annual vehicle sales rates, and GM was just sure to coin money. In a November 3rd Wall Street Journal article entitled GM Could Be Free of Taxes for Years, the paper reported,
"General Motors Co. will drive away from its U.S.-government-financed restructuring with a final gift in its trunk: a tax break that could be worth as much as $45 billion.
Now it turns out, according to documents filed with federal regulators, the revamping left the car maker with another boost as it prepares to return to the stock market. It won't have to pay $45.4 billion in taxes on future profits.
The tax benefit stems from so-called tax-loss carry-forwards and other provisions, which allow companies to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In GM's case, the losses stem from years prior to when GM entered bankruptcy.
Usually, companies that undergo a significant change in ownership risk having major restrictions put on their tax benefits. The U.S. bailout of GM, in which the Treasury took a 61% stake in the company, ordinarily would have resulted in GM having such limits put on its tax benefits, according to tax experts.
But the federal government, in a little-noticed ruling last year, decided that companies that received U.S. bailout money under the Troubled Asset Relief Program won't fall under that rule.
The government's rationale, said people familiar with the situation, is that the profit-shielding tax credit makes the bailed-out companies more attractive to investors, and that the value of the benefit is greater than the lost tax payments, especially since the tax payments would not exist if the companies fail."
This extra sweetheart deal for the firm is yet another reason it should have gone through conventional bankruptcy. Then some other firm, seeing this special TARP-related benefit, might have paid up handsomely to acquire GM assets and the special tax treatment. As it is, the crony capitalism under which GM was "rescued" insulated the firm from outside pressures, other than the government, and unfairly penalized Ford by essentially rewriting the tax code for a newly-public GM.
Still, just because I don't like that treatment doesn't mean it doesn't have economic value. It does. The question is, how much of GM's attraction rests on special, one-time tricks and deals? Like the five-year union no-strike deal? Or the tax-loss carry-forwards? It's one thing to spin GM out with all these special deals, but it's another for the firm to make consistent progress on cost controls, revenue growth and total returns for shareholders.
The sector in which GM operates is still highly competitive. Many of its more effective competitors produce their US vehicles in Southern right to work states without unions. Any rise in annual US vehicle sales will result in GM's competitors fighting for the added share. It's not like AutoNation's Mike Jackson and CNBC's Lebeau suggest, which is that GM will somehow be assured of a healthy share of US sales growth. We still don't know that the firm can produce a full line of saleable, profitable vehicles for several consecutive years.
Does anyone really think GM's competitors will be standing still, so that the newly-public firm can just walk in and take new share?
Like Lucent when it was spun off from ATT, I prefer to wait a few years for the new firm to demonstrate its ability to perform in a consistently superior manner. And to do so in a sector that offers sustainable strength, thus making the firm attractive among a wide range of other equities one might buy.
Predictably, CNBC has been hauling anyone with a word to say about this onto their network to comment. A favorite has been one-time GM, Ford and Chrysler senior executive Bob Lutz. He was recently paired with Paul Ingrassia to debate various aspects of the IPO.
Lutz, of course, is a big cheerleader for the re-emergence of GM as a publicly-held entity, playing down the remaining 25% government stake in the firm. Ingrassia was more balanced.
Whereas Lutz crowed about the great Rattner-led government reorganization of the firm under Chapter 11, Ingrassia noted that it was GM's management that refused to do so when it would still have saved the firm from its ultimate failure.
Elsewhere, on yesterday's noontime program, former hedge fund manager Michael Steinhardt replied with an immediate, unequivocal "no" when asked if he would buy/hold the GM IPO. Steinhardt cited industry and competitive factors which offered more downside than upside potential in the years ahead.
CNBC's resident auto sector reporter, Phil LeBeau, was popping up distressingly frequently, backed by big electronic displays of data and analytics to stump for the GM deal. He ranted incessantly about how all GM needed was for the industry to return to some higher annual vehicle sales rates, and GM was just sure to coin money. In a November 3rd Wall Street Journal article entitled GM Could Be Free of Taxes for Years, the paper reported,
"General Motors Co. will drive away from its U.S.-government-financed restructuring with a final gift in its trunk: a tax break that could be worth as much as $45 billion.
Now it turns out, according to documents filed with federal regulators, the revamping left the car maker with another boost as it prepares to return to the stock market. It won't have to pay $45.4 billion in taxes on future profits.
The tax benefit stems from so-called tax-loss carry-forwards and other provisions, which allow companies to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In GM's case, the losses stem from years prior to when GM entered bankruptcy.
Usually, companies that undergo a significant change in ownership risk having major restrictions put on their tax benefits. The U.S. bailout of GM, in which the Treasury took a 61% stake in the company, ordinarily would have resulted in GM having such limits put on its tax benefits, according to tax experts.
But the federal government, in a little-noticed ruling last year, decided that companies that received U.S. bailout money under the Troubled Asset Relief Program won't fall under that rule.
The government's rationale, said people familiar with the situation, is that the profit-shielding tax credit makes the bailed-out companies more attractive to investors, and that the value of the benefit is greater than the lost tax payments, especially since the tax payments would not exist if the companies fail."
This extra sweetheart deal for the firm is yet another reason it should have gone through conventional bankruptcy. Then some other firm, seeing this special TARP-related benefit, might have paid up handsomely to acquire GM assets and the special tax treatment. As it is, the crony capitalism under which GM was "rescued" insulated the firm from outside pressures, other than the government, and unfairly penalized Ford by essentially rewriting the tax code for a newly-public GM.
Still, just because I don't like that treatment doesn't mean it doesn't have economic value. It does. The question is, how much of GM's attraction rests on special, one-time tricks and deals? Like the five-year union no-strike deal? Or the tax-loss carry-forwards? It's one thing to spin GM out with all these special deals, but it's another for the firm to make consistent progress on cost controls, revenue growth and total returns for shareholders.
The sector in which GM operates is still highly competitive. Many of its more effective competitors produce their US vehicles in Southern right to work states without unions. Any rise in annual US vehicle sales will result in GM's competitors fighting for the added share. It's not like AutoNation's Mike Jackson and CNBC's Lebeau suggest, which is that GM will somehow be assured of a healthy share of US sales growth. We still don't know that the firm can produce a full line of saleable, profitable vehicles for several consecutive years.
Does anyone really think GM's competitors will be standing still, so that the newly-public firm can just walk in and take new share?
Like Lucent when it was spun off from ATT, I prefer to wait a few years for the new firm to demonstrate its ability to perform in a consistently superior manner. And to do so in a sector that offers sustainable strength, thus making the firm attractive among a wide range of other equities one might buy.
Wednesday, November 17, 2010
Microsoft's Refusal To Consider Splitting Itself Into Separate Units
Imagine my surprise in finding yesterday's Wall Street Journal's Marketplace section's lead headline to be Microsoft Breakup Not in Cards.
Back in August of 2007, I wrote this post, in which I explicitly suggested,
"As I wrote nearly two years ago, what Microsoft needs to do is think and behave like a venture capitalist, and spin out various smaller entities to work on the areas in which it wishes to lead. By retaining a stake in the firms, seats on their boards, Microsoft, the parent, will share in the innovation-based value that these startups will create. In time, these startups could become the next Googles, etc.
But so long as senior Microsoft executives respond to Mundie's efforts with comments like Tom Gibbons, VP for various non-computer software efforts,
"I need to think of this as a completely new effort,"
in response to Mundie's stimuli involving mulicore processors, I think Microsoft is doomed to remain a large, hulking, mediocre giant whose best days of consistently superior total return performance are way, way behind it."
Another posts discussing this may be found here. Suffice to say, others have publicly echoed my thoughts in the last few years.
For Ballmer and Gates to audaciously dismiss shareholder questions about this is really over the top, isn't it?
Last time I looked, neither of those two Microsoft board members and billionaires are valuation experts. Gates didn't even finish college.
That's not to take anything away from how Gates originally built Microsoft. I wouldn't go so far as Julian Robertson did, calling Gates the most important innovator or inventor, or whatever he called him, of last or this century. But I do acknowledge his early success in providing consumers with powerful, inexpensive, fairly useful, if not elegant and bulletproof applications and operating system software.
Ballmer's only stock in trade, of which I am aware, was bullying customers like Dell and HP to pre-load Windows and, at one point, Explorer, on PCs, or else.
Neither earned his spurs as either an investment banker or valuation consultant. So wouldn't it have been a reasonable, even defensible response to the investor's question for Ballmer to agree to have the board consider retaining one or two outside, objective experts to opine on the answer to his question? The Journal article even references a Goldman analyst's public suggestion that spinning off the businesses "could potentially unlock hidden value."
Sure it would. But the wrong way to answer was what Ballmer and Gates did, which was to simply dismiss the question out of hand, citing their own personal beliefs in a preference for a monolithic Microsoft.
I don't care what Gates or Ballmer babble about imagined "synergies." Ballmer's public acknowledgement of the company's dismal share price performance over the past decade, combined with a refusal to think broadly about how to remedy that failing, tells you all you need to know about the firm's closed-minded management.
A few weeks ago, I heard one of those inane pro-con CNBC debates on the occasion of Gates' birthday. In that post, I wrote,
"In the CNBC discussion, two fund managers with opposing views were pitted against one another on the occasion of Bill Gates' birthday.
What amazed me is that, despite the admission of a decade of non-performance, the CNBC anchors refrained from criticism of the company. Instead, they seemed to want to favor the opinions of a fund manager who claims that the firm's cashflow will now rise, and the XBox proves the company is still innovative.
I can't think of many companies with a flat ten-year equity price performance that roughly apes the S&P which would enjoy this sort of media treatment."
For some reason, Microsoft, and Gates, seem to provoke irrational responses by analysts, fund managers and the media. They get a pass for poor performance, where other firms would be flayed for the same failures.
It's probably another example of a corporate failure having too much influence and spending power to warrant being treated honestly in the media, fund management and brokerage communities. Heaven forbid one of them should lose their place at Microsoft's spending or information trough for being candid about the firm's lackluster performance and mistreatment of its non-billionaire or -millionaire outside shareholders.
Back in August of 2007, I wrote this post, in which I explicitly suggested,
"As I wrote nearly two years ago, what Microsoft needs to do is think and behave like a venture capitalist, and spin out various smaller entities to work on the areas in which it wishes to lead. By retaining a stake in the firms, seats on their boards, Microsoft, the parent, will share in the innovation-based value that these startups will create. In time, these startups could become the next Googles, etc.
But so long as senior Microsoft executives respond to Mundie's efforts with comments like Tom Gibbons, VP for various non-computer software efforts,
"I need to think of this as a completely new effort,"
in response to Mundie's stimuli involving mulicore processors, I think Microsoft is doomed to remain a large, hulking, mediocre giant whose best days of consistently superior total return performance are way, way behind it."
Another posts discussing this may be found here. Suffice to say, others have publicly echoed my thoughts in the last few years.
For Ballmer and Gates to audaciously dismiss shareholder questions about this is really over the top, isn't it?
Last time I looked, neither of those two Microsoft board members and billionaires are valuation experts. Gates didn't even finish college.
That's not to take anything away from how Gates originally built Microsoft. I wouldn't go so far as Julian Robertson did, calling Gates the most important innovator or inventor, or whatever he called him, of last or this century. But I do acknowledge his early success in providing consumers with powerful, inexpensive, fairly useful, if not elegant and bulletproof applications and operating system software.
Ballmer's only stock in trade, of which I am aware, was bullying customers like Dell and HP to pre-load Windows and, at one point, Explorer, on PCs, or else.
Neither earned his spurs as either an investment banker or valuation consultant. So wouldn't it have been a reasonable, even defensible response to the investor's question for Ballmer to agree to have the board consider retaining one or two outside, objective experts to opine on the answer to his question? The Journal article even references a Goldman analyst's public suggestion that spinning off the businesses "could potentially unlock hidden value."
Sure it would. But the wrong way to answer was what Ballmer and Gates did, which was to simply dismiss the question out of hand, citing their own personal beliefs in a preference for a monolithic Microsoft.
I don't care what Gates or Ballmer babble about imagined "synergies." Ballmer's public acknowledgement of the company's dismal share price performance over the past decade, combined with a refusal to think broadly about how to remedy that failing, tells you all you need to know about the firm's closed-minded management.
A few weeks ago, I heard one of those inane pro-con CNBC debates on the occasion of Gates' birthday. In that post, I wrote,
"In the CNBC discussion, two fund managers with opposing views were pitted against one another on the occasion of Bill Gates' birthday.
What amazed me is that, despite the admission of a decade of non-performance, the CNBC anchors refrained from criticism of the company. Instead, they seemed to want to favor the opinions of a fund manager who claims that the firm's cashflow will now rise, and the XBox proves the company is still innovative.
I can't think of many companies with a flat ten-year equity price performance that roughly apes the S&P which would enjoy this sort of media treatment."
For some reason, Microsoft, and Gates, seem to provoke irrational responses by analysts, fund managers and the media. They get a pass for poor performance, where other firms would be flayed for the same failures.
It's probably another example of a corporate failure having too much influence and spending power to warrant being treated honestly in the media, fund management and brokerage communities. Heaven forbid one of them should lose their place at Microsoft's spending or information trough for being candid about the firm's lackluster performance and mistreatment of its non-billionaire or -millionaire outside shareholders.
CNBC Showcases Senator Debbie Stabenow's Misleading Untruths Re: GM
On the eve of tomorrow's much-ballyhooed GM IPO, CNBC is trotting out all manner of political and business people who want to bask in the limelight of the topic.
This morning, Michigan Senator Debbie Stabenow got her turn. Trouble is, the bulk of Stabenow's statements were either grossly misinformed, or lies.
This sort of segment is the reason I only watch/listen to CNBC for actual market news and the occasional bona fide pundit. For the most part, the network's morning programming has managed to sink to the level of Pravda before perestroika.
Before I discuss Stabenow's comments, let me quote the relevant lines from her own biography concerning her credibility and aptitude on matters concerning GM, macroeconomics and energy. If you scroll down to the very end of Stabenow's bio page, you will find this extensive description of her pre-government experience,
"She attended Michigan State University, where she received her Bachelor's (1972) and Masters (1975) degrees. She worked with youth in the public schools before running for public office."
That's it. She was either a teacher or counselor in the Michigan public school system. She won her first elected post in 1974, which suggests she did a part-time MSU masters while commencing her real career- politics. Wikipedia lists her graduate degree as an MSW. I don't typically rely on that source, but in this case, it's ostensibly more detailed than the Senator's own bio page.
My point is, Stabenow doesn't appear to have any economics or business background. Like so many in Congress, of either party, she had a brief, post-college career in public education, followed by a quick exit into a 30+ year career in politics. So I think it's safe to say that the bulk of what Stabenow voiced this morning was probably collected and prepared by her staff. She is, in effect, a mouthpiece.
For contrast, recall that Phill Gramm and Dick Armey were PhDs and professors of economics. Newt Gingrich was a history professor and PhD. Even New Jersey's geriatric Democratic Senator, Frank Lautenberg, once, long ago founded and successfully built payroll processing giant ADP.
Stabenow isn't close to being in a league with any of those other past or present Congressional members.
Never the less, Stabenow assured one and all that a failure of the government to bail out GM two years ago would have brought down the economy, wrecked all its suppliers and, with them, our defense sector. Additionally, she contended that the only way we can have a viable American middle class is to preserve GM-like 'manufacturing' jobs.
Stabenow next assured viewers that GM's workers sacrificed so much to keep the failed auto maker alive. Yes, the UAW was a force for good, and never was a factor in the firm's demise.
Then the Senator swung to the 'green jobs' front, alleging that the US must lead the world in this job-creating sector. And, of course, Michigan is going to lead in that. With, did she mention- no- overly-generous helpings of federal subsidies. And state investments. No, the way in which Stabenow couched these subsidies was government-private sector 'partnerships.'
There may have been more whoppers, but I don't recall them. I'm sure you could see them for yourself over on CNBC's website this morning, before the video disappears behind a paid subscription wall.
So much for Stabenow's tall tales. Here are more truthful versions of her contentions.
The alternative to the manner in which the federal government, under both presidents Bush and Obama, assisted GM, was not to do nothing. Thus, the alternative outcome for the economy, GM's UAW members, vendors, and auto- and defense-related competitors was not bankruptcy, dissolution and widespread economic ruin.
As I have written in many posts, found under the labels 'GM,' and 'Government Intervention,' a well-managed, conventional, Constitutionally-provided Chapter 11 filing by GM, without government ownership or coercion of the firm's legitimate bondholders, could have easily avoided all of the catastrophic consequences mentioned by Stabenow and others. I won't go into the same detail here as in prior posts, but merely sketch the alternative scenario.
Rather than pump tens of billions into a failed management structure, the federal government could have, for much less money, sent direct payments to idled workers. A conventional bankruptcy would have allowed GM's operations to continue under court protection, while they were reorganized. Some operations would have been closed, and some may have been sold or spun back out separately. If private sector banks declined to fund the interim operations, the federal government could have provided loan guarantees, rather than direct aid, in order to facilitate those private loans.
Further, by not strong-arming bondholders to rescind their rightful status, in favor of the politically-connected UAW, needless uncertainty for future fixed income investors regarding bankruptcy actions would have been avoided.
By maintaining some operations under bankruptcy, the process would have kept the various suppliers and the competitors which also relied on those suppliers in business.
The US economy need not have collapsed simply because the federal government declined to pump upwards of $50B into a failed GM.
The UAW, far from making noble sacrifices, was bailed out by a Democratic administration, to the detriment of legal bondholders. Stabenow is not telling the truth when she paints the union's GM workers as saints who gave unstintingly in a worthy cause. In fact, they came away far better thanks to the federal bailout of GM than they would have in a conventional bankruptcy, under which their labor agreements could have been suspended and forcibly renegotiated.
On the subject of electric cars and other 'green' business initiatives, one only has to read this week's excellent Wall Street Journal editorial by George Gilder to understand how wrong-headed and false Stabenow's contentions on this topic are. By deliberately reducing energy efficiency and requiring cumbersome new energy networks to move from gasoline to electric vehicular propulsion, we will be lowering US living standards. Even Boone Pickens' vehicular natural gas plans make better economic sense than Stabenow's simple-minded regurgitation of false, ill-conceived and misleading left-wing green energy platitudes.
Further, Stabenow blithely blesses the unholy strategy of extreme reliance on subsidies by the green energy sector. Gilder skewered Silicon Valley venture funds for turning from private sector-financed computer- and information-technology businesses, to favor investments in green energy startups whose major revenue sources are government loans, grants and subsidies. You cannot hide the fact that the green energy push is not market economics at work, but merely old-fashioned government-directed and funded economics using taxpayer money to subsidize politically-popular technologies and pet projects.
Almost nothing Stabenow said this morning was true on its face.
Shame on CNBC for allowing such political grandstanding without serious challenges to any or all of her contentions.
This morning, Michigan Senator Debbie Stabenow got her turn. Trouble is, the bulk of Stabenow's statements were either grossly misinformed, or lies.
This sort of segment is the reason I only watch/listen to CNBC for actual market news and the occasional bona fide pundit. For the most part, the network's morning programming has managed to sink to the level of Pravda before perestroika.
Before I discuss Stabenow's comments, let me quote the relevant lines from her own biography concerning her credibility and aptitude on matters concerning GM, macroeconomics and energy. If you scroll down to the very end of Stabenow's bio page, you will find this extensive description of her pre-government experience,
"She attended Michigan State University, where she received her Bachelor's (1972) and Masters (1975) degrees. She worked with youth in the public schools before running for public office."
That's it. She was either a teacher or counselor in the Michigan public school system. She won her first elected post in 1974, which suggests she did a part-time MSU masters while commencing her real career- politics. Wikipedia lists her graduate degree as an MSW. I don't typically rely on that source, but in this case, it's ostensibly more detailed than the Senator's own bio page.
My point is, Stabenow doesn't appear to have any economics or business background. Like so many in Congress, of either party, she had a brief, post-college career in public education, followed by a quick exit into a 30+ year career in politics. So I think it's safe to say that the bulk of what Stabenow voiced this morning was probably collected and prepared by her staff. She is, in effect, a mouthpiece.
For contrast, recall that Phill Gramm and Dick Armey were PhDs and professors of economics. Newt Gingrich was a history professor and PhD. Even New Jersey's geriatric Democratic Senator, Frank Lautenberg, once, long ago founded and successfully built payroll processing giant ADP.
Stabenow isn't close to being in a league with any of those other past or present Congressional members.
Never the less, Stabenow assured one and all that a failure of the government to bail out GM two years ago would have brought down the economy, wrecked all its suppliers and, with them, our defense sector. Additionally, she contended that the only way we can have a viable American middle class is to preserve GM-like 'manufacturing' jobs.
Stabenow next assured viewers that GM's workers sacrificed so much to keep the failed auto maker alive. Yes, the UAW was a force for good, and never was a factor in the firm's demise.
Then the Senator swung to the 'green jobs' front, alleging that the US must lead the world in this job-creating sector. And, of course, Michigan is going to lead in that. With, did she mention- no- overly-generous helpings of federal subsidies. And state investments. No, the way in which Stabenow couched these subsidies was government-private sector 'partnerships.'
There may have been more whoppers, but I don't recall them. I'm sure you could see them for yourself over on CNBC's website this morning, before the video disappears behind a paid subscription wall.
So much for Stabenow's tall tales. Here are more truthful versions of her contentions.
The alternative to the manner in which the federal government, under both presidents Bush and Obama, assisted GM, was not to do nothing. Thus, the alternative outcome for the economy, GM's UAW members, vendors, and auto- and defense-related competitors was not bankruptcy, dissolution and widespread economic ruin.
As I have written in many posts, found under the labels 'GM,' and 'Government Intervention,' a well-managed, conventional, Constitutionally-provided Chapter 11 filing by GM, without government ownership or coercion of the firm's legitimate bondholders, could have easily avoided all of the catastrophic consequences mentioned by Stabenow and others. I won't go into the same detail here as in prior posts, but merely sketch the alternative scenario.
Rather than pump tens of billions into a failed management structure, the federal government could have, for much less money, sent direct payments to idled workers. A conventional bankruptcy would have allowed GM's operations to continue under court protection, while they were reorganized. Some operations would have been closed, and some may have been sold or spun back out separately. If private sector banks declined to fund the interim operations, the federal government could have provided loan guarantees, rather than direct aid, in order to facilitate those private loans.
Further, by not strong-arming bondholders to rescind their rightful status, in favor of the politically-connected UAW, needless uncertainty for future fixed income investors regarding bankruptcy actions would have been avoided.
By maintaining some operations under bankruptcy, the process would have kept the various suppliers and the competitors which also relied on those suppliers in business.
The US economy need not have collapsed simply because the federal government declined to pump upwards of $50B into a failed GM.
The UAW, far from making noble sacrifices, was bailed out by a Democratic administration, to the detriment of legal bondholders. Stabenow is not telling the truth when she paints the union's GM workers as saints who gave unstintingly in a worthy cause. In fact, they came away far better thanks to the federal bailout of GM than they would have in a conventional bankruptcy, under which their labor agreements could have been suspended and forcibly renegotiated.
On the subject of electric cars and other 'green' business initiatives, one only has to read this week's excellent Wall Street Journal editorial by George Gilder to understand how wrong-headed and false Stabenow's contentions on this topic are. By deliberately reducing energy efficiency and requiring cumbersome new energy networks to move from gasoline to electric vehicular propulsion, we will be lowering US living standards. Even Boone Pickens' vehicular natural gas plans make better economic sense than Stabenow's simple-minded regurgitation of false, ill-conceived and misleading left-wing green energy platitudes.
Further, Stabenow blithely blesses the unholy strategy of extreme reliance on subsidies by the green energy sector. Gilder skewered Silicon Valley venture funds for turning from private sector-financed computer- and information-technology businesses, to favor investments in green energy startups whose major revenue sources are government loans, grants and subsidies. You cannot hide the fact that the green energy push is not market economics at work, but merely old-fashioned government-directed and funded economics using taxpayer money to subsidize politically-popular technologies and pet projects.
Almost nothing Stabenow said this morning was true on its face.
Shame on CNBC for allowing such political grandstanding without serious challenges to any or all of her contentions.
Regarding Alan Blinder's Defense of Bernanke
I do not possess a PhD in economics. Not even a BA in the subject. However, I do hold two business degrees, the completion of which provided me with a substantial amount of both micro and macro economic education, plus a healthy dose of anti-trust law and economics.
Thus, when I read Alan Blinder's In Defense of Ben Bernanke in Monday's Wall Street Journal, my initial reaction was one of potential academic inadequacy to question or critique Blinder's contentions. But, upon rereading his editorial, I realized that many of what I see as his errors are not those of abstruse higher-level economics, so much as those of reasoning and logic. On those bases, I feel quite comfortable discussing his piece.
Blinder begins by claiming "one current catchphrase is "job-killing spending.""
Really? Alan gives no cite on this. So much for PhD-level work, eh? His opening salvo is an unsourced complaint. Even so, it's not government spending that is killing jobs. It's over-regulation, erratic government takeovers of portions of the economy, and vague taxation policies. The spending, by the way, didn't go for infrastructure, as promised, but mostly for transfer payments. Which didn't create jobs, but allegedly saved some. Hardly the same thing.
He then uses an ad hominum argument by calling his friend's detractors "the economic equivalent of the Flat Earth Society." Again, hardly academic-quality reasoning. Or, maybe it is.
Only at the end, by the way, does Blinder tell you what his current position already should. As a Princeton economics professor, he would be well-acquainted with Bernanke. This isn't an objective defense of the Fed chairman. It's somehow personal.
But, back to Blinder's editorial.
Blinder then writes,
"Yet critics are branding QE2 a radical departure from past practices and a dangerous experiment."
He counters that QE2 is really just a big ol' open market operation like the Fed constantly performs. Nothing to be scared of.
But in this recent post, I discussed the Wall Street Journal's lead staff editorial which expressed concerned for QE2's heretofore unheard of effects on the Fed's balance sheet. It is, actually, a dangerous experiment. Blinder's attempt to gloss over type and maturity of assets is misleading.
He continues in his editorial,
"The next charge is that QE2 will be inflationary. Partly true. The Fed actually wants a bit more inflation because, now and for the foreseeable future, inflation is running below its informal 1.5% to 2% target. In fact, there's some concern that inflation will dip below zero—into deflation. The Fed, thank goodness, is determined to stop that. We don't want to be the next Japan now, do we?"
For a counter argument to this, read posts here, here, here and here regarding recent, true inflation rates among commodities and other economic inputs. Virtually every knowledgeable observer realizes that the Fed has switched inflationary measures in order to avoid admitting how commodities in everyday use, e.g., food, energy, metals, are skyrocketing thanks to two phenomena. One is dollar weakness, the other is increased demand by newly-enriched nations. Blinder is just wrong on this argument, following the Fed's lead and choosing convenient measures of inflation which aren't practical, but allow him to claim we're closer to deflation than inflation.
Blinder finishes his item-by-item defense with this passage,
"The final major charge, levied especially by a number of foreign officials, is that the Fed's new policy amounts to currency manipulation: deliberately lowering the international value of the dollar to gain competitive advantage for U.S. exporters. Is there any truth to this? Not if words have any meaning."
Blinder follows with a conventional description of interest-rate effects on capital inflows versus trade-related inflows thanks to a cheaper dollar, claiming nobody knows which will dominate, so Ben is innocent. I don't think that's an adequate or even relevant defense. Just because Ben isn't sure if the trade flows will win out doesn't mean he's not hoping they will.
Then there was Blinder's attempt to clean up various other troubling comments about QE2,
"More important, the U.S. is a sovereign nation with a right to its own monetary policy. So I was stunned when a top aide to the Russian president suggested that the Fed should consult with other countries before making major policy decisions. Come again? An independent central bank doesn't even consult with its own government.
Finally, there's that old hobgoblin: consistency. Critics tell us that QE2 won't give the U.S. economy much of a boost but will lead to rampant inflation. Both? How does that work?
If buying Treasurys is a weak policy tool, a view with which I have some sympathy, then it shouldn't be very inflationary. There is no magic link between growth of the central bank's balance sheet and inflation. People, businesses and banks have to take actions—like spending more, investing more, and lending more—to connect the two. If they don't, we will get neither faster growth nor higher inflation, just more idle bank reserves.
But I don't run the Fed. Maybe Chairman Bernanke's ideas are better than mine and, in any case, the planned QE2 is far better than doing nothing. It is not a shot in the dark, not a radical departure from conventional monetary policy, and certainly not a form of currency manipulation."
Blinder contends QE2 is weak medicine, so, no problem. He then lambastes those who believe that QE2's effectiveness and damage must be proportional. But that's not at all true. QE2 can easily trigger inflation without doing much in the way of boosting US economic activity. I think the more relevant approach is to ask Blinder to explain why the effects should be equal?
Then Blinder switches gears, and claims that if QE2 doesn't work, all we'll have is idle bank reserves. Here, he ignores the effects of all that money creation on the perceptions of the world's investors on dollar valuation.
Finally, is QE2 really "far better than doing nothing?" This is a peculiarly Keynesian view with which Austrian school economists, including Milton Friedman, would never agree. And it is certainly not the first two of Blinder's last three descriptors. And if it's not the third, it's a pretty good facsimile of it.
Thus, when I read Alan Blinder's In Defense of Ben Bernanke in Monday's Wall Street Journal, my initial reaction was one of potential academic inadequacy to question or critique Blinder's contentions. But, upon rereading his editorial, I realized that many of what I see as his errors are not those of abstruse higher-level economics, so much as those of reasoning and logic. On those bases, I feel quite comfortable discussing his piece.
Blinder begins by claiming "one current catchphrase is "job-killing spending.""
Really? Alan gives no cite on this. So much for PhD-level work, eh? His opening salvo is an unsourced complaint. Even so, it's not government spending that is killing jobs. It's over-regulation, erratic government takeovers of portions of the economy, and vague taxation policies. The spending, by the way, didn't go for infrastructure, as promised, but mostly for transfer payments. Which didn't create jobs, but allegedly saved some. Hardly the same thing.
He then uses an ad hominum argument by calling his friend's detractors "the economic equivalent of the Flat Earth Society." Again, hardly academic-quality reasoning. Or, maybe it is.
Only at the end, by the way, does Blinder tell you what his current position already should. As a Princeton economics professor, he would be well-acquainted with Bernanke. This isn't an objective defense of the Fed chairman. It's somehow personal.
But, back to Blinder's editorial.
Blinder then writes,
"Yet critics are branding QE2 a radical departure from past practices and a dangerous experiment."
He counters that QE2 is really just a big ol' open market operation like the Fed constantly performs. Nothing to be scared of.
But in this recent post, I discussed the Wall Street Journal's lead staff editorial which expressed concerned for QE2's heretofore unheard of effects on the Fed's balance sheet. It is, actually, a dangerous experiment. Blinder's attempt to gloss over type and maturity of assets is misleading.
He continues in his editorial,
"The next charge is that QE2 will be inflationary. Partly true. The Fed actually wants a bit more inflation because, now and for the foreseeable future, inflation is running below its informal 1.5% to 2% target. In fact, there's some concern that inflation will dip below zero—into deflation. The Fed, thank goodness, is determined to stop that. We don't want to be the next Japan now, do we?"
For a counter argument to this, read posts here, here, here and here regarding recent, true inflation rates among commodities and other economic inputs. Virtually every knowledgeable observer realizes that the Fed has switched inflationary measures in order to avoid admitting how commodities in everyday use, e.g., food, energy, metals, are skyrocketing thanks to two phenomena. One is dollar weakness, the other is increased demand by newly-enriched nations. Blinder is just wrong on this argument, following the Fed's lead and choosing convenient measures of inflation which aren't practical, but allow him to claim we're closer to deflation than inflation.
Blinder finishes his item-by-item defense with this passage,
"The final major charge, levied especially by a number of foreign officials, is that the Fed's new policy amounts to currency manipulation: deliberately lowering the international value of the dollar to gain competitive advantage for U.S. exporters. Is there any truth to this? Not if words have any meaning."
Blinder follows with a conventional description of interest-rate effects on capital inflows versus trade-related inflows thanks to a cheaper dollar, claiming nobody knows which will dominate, so Ben is innocent. I don't think that's an adequate or even relevant defense. Just because Ben isn't sure if the trade flows will win out doesn't mean he's not hoping they will.
Then there was Blinder's attempt to clean up various other troubling comments about QE2,
"More important, the U.S. is a sovereign nation with a right to its own monetary policy. So I was stunned when a top aide to the Russian president suggested that the Fed should consult with other countries before making major policy decisions. Come again? An independent central bank doesn't even consult with its own government.
Finally, there's that old hobgoblin: consistency. Critics tell us that QE2 won't give the U.S. economy much of a boost but will lead to rampant inflation. Both? How does that work?
If buying Treasurys is a weak policy tool, a view with which I have some sympathy, then it shouldn't be very inflationary. There is no magic link between growth of the central bank's balance sheet and inflation. People, businesses and banks have to take actions—like spending more, investing more, and lending more—to connect the two. If they don't, we will get neither faster growth nor higher inflation, just more idle bank reserves.
But I don't run the Fed. Maybe Chairman Bernanke's ideas are better than mine and, in any case, the planned QE2 is far better than doing nothing. It is not a shot in the dark, not a radical departure from conventional monetary policy, and certainly not a form of currency manipulation."
Blinder contends QE2 is weak medicine, so, no problem. He then lambastes those who believe that QE2's effectiveness and damage must be proportional. But that's not at all true. QE2 can easily trigger inflation without doing much in the way of boosting US economic activity. I think the more relevant approach is to ask Blinder to explain why the effects should be equal?
Then Blinder switches gears, and claims that if QE2 doesn't work, all we'll have is idle bank reserves. Here, he ignores the effects of all that money creation on the perceptions of the world's investors on dollar valuation.
Finally, is QE2 really "far better than doing nothing?" This is a peculiarly Keynesian view with which Austrian school economists, including Milton Friedman, would never agree. And it is certainly not the first two of Blinder's last three descriptors. And if it's not the third, it's a pretty good facsimile of it.
Tuesday, November 16, 2010
A Financial Plumber Speaks In Favor of Managed Trade
At the end of last month, John Cochrane wrote a great editorial in the Wall Street Journal entitled Geithner's Global Central Planning. I wrote about it here. So Geithner & Co.'s nonsensical ideas about global trade central planning, in concert with exchange rate management, is not news.
Never the less, Geithner recently wrote another defense of these bad ideas in the Journal. It was the same basic set of themes, i.e., set balance of trade flow targets, get other countries to appreciate their currencies so the US can depreciate its dollar.
Cochrane exposed them as stupid and unfounded theories then, and nothing has changed about his critique in the past three weeks.
However, there's a deeper issue here, as well. That is the question of Geithner's credibility. As I have written in prior posts, there's nothing in Geithner's background to suggest that he is anything but a financial systems plumber. When he's had a significant policy-level position, such as running the New York Fed, he botched the job. Remember, in that capacity, he let himself be out-maneuvered by Goldman Sachs and a couple of French banks, resulting in his using taxpayer dollars to fully repay those parties for their AIG exposure.
I don't recall Geithner authoring oft-cited, learned papers concerning international trade theory. Or theories of currency policy and management.
In fact, everything about his recent articles attempting to defend his wacky notions of international trade and currency valuations smacks of expediency and, as Cochrane notes, unfounded, un-normed concepts prone to political manipulation.
Frankly, I just don't think Geithner, a guy who couldn't even do his taxes correctly, or manage to hire a competent accountant, has the mental horsepower to comprehend the current dilemma of US monetary and economic officials.
Back some years ago, I believe in the late 1980s, in a Wall Street Journal editorial, a respected economist made the insightful observation that nations had only two policy levers- monetary and fiscal- with which to attempt to affect three phenomena- domestic economic growth, domestic inflation, and international trade balances. The latter former lever, monetary policy, is typically given the double duty of governing inflation and international trade and currency policies.
Stronger currencies, following from low monetary base growth and/or higher interest rates, tend to hurt economic exports and often bring in foreign investment flows. Pro-growth monetary policies, such as our current weakening dollar and zero interest rates, aid exports but cause global investors to seek other instruments. As a reserve currency, these policies do even more damage by causing global holders of dollars, as a store of value and commonly-accepted medium of exchange, to seek more stable exchange media.
This is where, in past times, gold was used as the third lever to automatically affect international trade flows and valuation. Not coincidentally, monetary base growth, being backed by gold, was restricted from over-expansion by the knowledge that a cheaper currency would only hurt a nation when foreign holders of that currency redeemed it for now-cheaper gold.
Geithner's transparent attempts to force global investors and other countries to overlook US devaluation of the dollar and management of trade flows to our benefit haven't fooled anyone. But, then, what do you expect from a guy who, as a financial plumber, is trying to work beyond his capabilities?
Never the less, Geithner recently wrote another defense of these bad ideas in the Journal. It was the same basic set of themes, i.e., set balance of trade flow targets, get other countries to appreciate their currencies so the US can depreciate its dollar.
Cochrane exposed them as stupid and unfounded theories then, and nothing has changed about his critique in the past three weeks.
However, there's a deeper issue here, as well. That is the question of Geithner's credibility. As I have written in prior posts, there's nothing in Geithner's background to suggest that he is anything but a financial systems plumber. When he's had a significant policy-level position, such as running the New York Fed, he botched the job. Remember, in that capacity, he let himself be out-maneuvered by Goldman Sachs and a couple of French banks, resulting in his using taxpayer dollars to fully repay those parties for their AIG exposure.
I don't recall Geithner authoring oft-cited, learned papers concerning international trade theory. Or theories of currency policy and management.
In fact, everything about his recent articles attempting to defend his wacky notions of international trade and currency valuations smacks of expediency and, as Cochrane notes, unfounded, un-normed concepts prone to political manipulation.
Frankly, I just don't think Geithner, a guy who couldn't even do his taxes correctly, or manage to hire a competent accountant, has the mental horsepower to comprehend the current dilemma of US monetary and economic officials.
Back some years ago, I believe in the late 1980s, in a Wall Street Journal editorial, a respected economist made the insightful observation that nations had only two policy levers- monetary and fiscal- with which to attempt to affect three phenomena- domestic economic growth, domestic inflation, and international trade balances. The latter former lever, monetary policy, is typically given the double duty of governing inflation and international trade and currency policies.
Stronger currencies, following from low monetary base growth and/or higher interest rates, tend to hurt economic exports and often bring in foreign investment flows. Pro-growth monetary policies, such as our current weakening dollar and zero interest rates, aid exports but cause global investors to seek other instruments. As a reserve currency, these policies do even more damage by causing global holders of dollars, as a store of value and commonly-accepted medium of exchange, to seek more stable exchange media.
This is where, in past times, gold was used as the third lever to automatically affect international trade flows and valuation. Not coincidentally, monetary base growth, being backed by gold, was restricted from over-expansion by the knowledge that a cheaper currency would only hurt a nation when foreign holders of that currency redeemed it for now-cheaper gold.
Geithner's transparent attempts to force global investors and other countries to overlook US devaluation of the dollar and management of trade flows to our benefit haven't fooled anyone. But, then, what do you expect from a guy who, as a financial plumber, is trying to work beyond his capabilities?
Monday, November 15, 2010
The Easy Way To Defund GSEs
Emil Henry, Jr., a former assistant secretary of the Treasury in the Bush administration, wrote an insightful editorial in last Thursday's Wall Street Journal regarding Fannie and Freddie.
According to Henry, Treasury has always had the power to rein in the GSEs. Here's what he wrote,
"But the Treasury doesn't need Congress or an academic assessment in order to tackle the most important reform goal: eliminating the GSEs and moving their activities to the private sector. Mr. Geithner himself can immediately reshape the mortgage markets—by withholding his approval of new debt issuances by the GSEs. That's the best way to begin curtailing the GSEs, and it can be done unilaterally.
Congress chartered the GSEs and in their charters required that the Treasury secretary approve all of their new debt. For decades, the Treasury exercised this duty, and the GSEs submitted each new debt issuance to the department for prior approval.
But the Clinton administration found this process cumbersome and a strain on Treasury staff. It established a new process that weakened the administrative approval process for GSE securities offerings. This hands-off approach represented an abdication of Treasury's essential oversight powers.
By the mid-2000s, the GSEs' process of debt approval had devolved to a simple notification of the Treasury, without any formal process of approval. The pace of debt issuance was so rapid that such notifications came to the Treasury weekly, typically on one piece of paper that simply listed proposed issuances without supporting data (such as income statements or balance sheets) upon which to make informed judgments.
I found these to be fairly stunning revelations. First, that Treasury has a legal ability to approve GSE debt issues- or not. Second, that this power had been abdicated to the point of the GSEs simply sending non-descriptive advisories of debt issuances.
Henry thus reasons,
If the Obama administration is serious about addressing the GSEs, it should re-establish a rigorous process to review all GSE debt issuance. That process should require the GSEs to provide Treasury with full financial data and justification for issuances, including statistics that show the creditworthiness of the agencies after each offering. In addition, the Treasury secretary should have to approve all new debt issuances personally.
The administration should also announce that in 2012 the Treasury will begin to deny a portion of GSE debt issuances with the goal of reducing their debt 50% by 2015 and 100% by 2018. This eight-year period of adjustment would allow the private markets ample time to provide secondary market liquidity.
There will be a private market ready to absorb the securities currently held by the GSEs. Private companies won't be able to borrow as cheaply as the GSEs could (thanks to their implicit government guarantee), but there will still be plenty of profit left to capture in the market for mortgage securities."
This might not be expected action for the next two years. But a change in administration could bring this about, regardless of who controls Congress from 2012 onward. I think Henry is correct to believe that private conduits would re-emerge if Fannie and Freddie were limited by debt ceilings. And there certainly would be sufficient profit in private label securitization, once the GSEs are hobbled and have begun to shrink.
According to Henry, Treasury has always had the power to rein in the GSEs. Here's what he wrote,
"But the Treasury doesn't need Congress or an academic assessment in order to tackle the most important reform goal: eliminating the GSEs and moving their activities to the private sector. Mr. Geithner himself can immediately reshape the mortgage markets—by withholding his approval of new debt issuances by the GSEs. That's the best way to begin curtailing the GSEs, and it can be done unilaterally.
Congress chartered the GSEs and in their charters required that the Treasury secretary approve all of their new debt. For decades, the Treasury exercised this duty, and the GSEs submitted each new debt issuance to the department for prior approval.
But the Clinton administration found this process cumbersome and a strain on Treasury staff. It established a new process that weakened the administrative approval process for GSE securities offerings. This hands-off approach represented an abdication of Treasury's essential oversight powers.
By the mid-2000s, the GSEs' process of debt approval had devolved to a simple notification of the Treasury, without any formal process of approval. The pace of debt issuance was so rapid that such notifications came to the Treasury weekly, typically on one piece of paper that simply listed proposed issuances without supporting data (such as income statements or balance sheets) upon which to make informed judgments.
I found these to be fairly stunning revelations. First, that Treasury has a legal ability to approve GSE debt issues- or not. Second, that this power had been abdicated to the point of the GSEs simply sending non-descriptive advisories of debt issuances.
Henry thus reasons,
If the Obama administration is serious about addressing the GSEs, it should re-establish a rigorous process to review all GSE debt issuance. That process should require the GSEs to provide Treasury with full financial data and justification for issuances, including statistics that show the creditworthiness of the agencies after each offering. In addition, the Treasury secretary should have to approve all new debt issuances personally.
The administration should also announce that in 2012 the Treasury will begin to deny a portion of GSE debt issuances with the goal of reducing their debt 50% by 2015 and 100% by 2018. This eight-year period of adjustment would allow the private markets ample time to provide secondary market liquidity.
There will be a private market ready to absorb the securities currently held by the GSEs. Private companies won't be able to borrow as cheaply as the GSEs could (thanks to their implicit government guarantee), but there will still be plenty of profit left to capture in the market for mortgage securities."
This might not be expected action for the next two years. But a change in administration could bring this about, regardless of who controls Congress from 2012 onward. I think Henry is correct to believe that private conduits would re-emerge if Fannie and Freddie were limited by debt ceilings. And there certainly would be sufficient profit in private label securitization, once the GSEs are hobbled and have begun to shrink.
Friday, November 12, 2010
Cisco's Troubles- Are They Really Surprising?
Today's Wall Street Journal has a piece calling attention- apparently in surprise- to Cisco's latest earnings disappointment. The article cites slowing revenue growth at the networking gear giant.
Frankly, like a procession of formerly-consistently superior performing technology icons before it, including JDS Uniphase, Cognizant Technologies, Dell, Microsoft, and Intel, Cisco has been a total return has-been for quite some time.
The nearby five-year price chart for Cisco and the S&P500 Index show the firm has outperformed the latter over the period. But, upon close inspection, it's evident that the outperformance has really been in the brief period of the equity market crash between late 2008 and early 2009. Before and after, the performance patterns were similar, with Cisco declining to nearly the index's level by fall of 2009.
However, a much more revealing chart is the next one, spanning the public life of the firm. It produced shareholder value so fast in its early years that comparisons with the index are really pointless. But it's easy to see that, like Microsoft, Cisco has really 'enjoyed,' or, more pointedly, its shareholders have not, a lost decade. From its peak at the peak of the technology bubble in 2000, Cisco slid dramatically and really never substantially recovered.
I have checked my own records, and do not find evidence of the firm in any of my portfolios after early 2000. Between its dismal total return performance, relative to better-performing firms, and, I expect, slowed revenue growth, the firm joined the list I mentioned earlier in the post. Those technology firms whose charmed life of meteoric total return and revenue growth has slipped into history, almost certainly never to return.
Thus my amazement that pundits still put so much emphasis on the firm's every move. The information is clearly available for all to see- Cisco hasn't been a consistently superior performer worthy of long term holding for a decade. You'd have to be a market timer to have earned significant gains by owning the firm during that period. And if you simply bought and held, you'd be a big loser.
But, I guess analysts have to create interest and drama in order to be noticed and, well, get paid. As for me, I won't be expecting Cisco to be returning to its former, attractive performance profile of the 1990s, when it hasn't managed to do so in the intervening decade.
Thursday, November 11, 2010
How Did We Return To The Brink of 1970s Stagflation?
You sit up and take notice when people as diverse as economist Alan Reynolds, former Reagan Treasury official Bob Zoellick, and former Alaskan Governor Sarah Palin decry, the latter two in the same edition of the Wall Street Journal, the Fed's QE2 policies for stoking inflation.
Palin's remarks demonstrated a surprisingly firm and clear understanding that Helicopter Ben's recent QE2 monetization of Treasury debt is weakening the dollar, thus driving dollar-denominated prices of commodities skyward.
Add to this Alan Meltzer's Journal editorial a week ago, entitled Milton Friedman vs. the Fed, and you should really be worried. Meltzer began his piece,
"Some people, including this newspaper's David Wessel in a column last week, believe the great Nobel laureate would favor this inflationary program. I am certain he would not.
Friedman's main message for central banks was to maintain a monetary rule that kept the growth of the money supply constant. In his Newsweek column, "Inflation and Jobs" (Nov. 12, 1979), for example, Friedman emphasized that "unemployment is . . . a side effect of the cure for inflation," so that if a central bank "cured" unemployment by inflating, it "will have unemployment later." In other words, don't try it."
That's what I recall from my undergraduate economics courses, as well. Friedman was famous for eschewing any active currency creation, instead, legislating some constant rate of growth of the currency, perhaps related to population or GDP growth rates.
On the subject of inflation measurement and expectations, Meltzer helpfully wrote,
"In the late 1980s, former Fed Chairman Alan Greenspan encouraged everyone to watch the core deflator for personal consumption expenditure—the PCE deflator. Since then, the Fed has used that measure as its inflation target. Recently, without much publicity, the Fed switched to the consumer price index (CPI). The reason? From 2003 to 2009, the two measures moved together. In 2010, they diverged—and the CPI shows substantially less inflation than the PCE.
Even so, the most recent PCE deflator shows inflation running at around 1.2% annually, about where the Fed says it wants to hold the inflation rate. And it has been between 1.5% and 1.8% for a year. There is no sign of deflation.
The two measures diverged because they give different weights to their components, especially housing prices. The CPI gives almost double the weight to housing prices, especially the rental value of owner-occupied houses. This is not a number that government statisticians sample in the market. They make an estimate. The new long-term bond purchase program puts a lot of weight on a weak foundation.
Paul Volcker and Alan Greenspan restored much of the credibility that the Fed lost in the great inflation of the 1970s. The Fed's plan to increase inflation puts this credibility at risk and is a large step away from the policy that Milton Friedman favored."
So we see that the Fed has been playing fast and loose with measured inflation, while somewhat unbelievably declaring that the current risk to the economy is deflation. I distinctly read of Bernanke's recent comments about how slack labor markets virtually guarantee no imminent inflation. This while commodity prices such as copper, corn and oil spike to new highs, thanks to global perceptions of the administration's and Fed's weak dollar policy.
Can anybody say "stagflation?" Art Laffer wrote a Journal editorial just over a year ago, on which I wrote this post. He rather eerily foresaw what is now occurring. A few years ago, I dismissed some pundits' fears of stagflation, because, then, monetary policy-induced inflation wasn't yet evident. It is now.
I well recall, though young at the time, the decade of monetary policy incompetence delivered by Fed Chairmen Arthur Burns and G. William Miller. They presided over the monetary half of US stagflation, while LBJ's Great Society spending, combined with the Vietnam war, provided the fiscal half.
Is it really that possible that we've learned nothing from that era, as well as, per Laffer's editorial, the 1930s? What more evidence is needed for the Fed and Congress to understand where their joint policies are headed?
Only, this time, global interests and ubiquitous information make reactions near-immediate and much more damaging. As significant as our deficits and foreign-held debt were in the 1970s, they are far larger now. And today's global economy is much more multi-lateral than it was forty years ago.
Reynolds notes this in his recent Journal editorial, Ben Bernanke's Impossible Dream, in which he uses an EFT which ultra-shorts Treasuries, TBT, as a barometer of market reaction to Fed moves,
"Producer prices rose at an annual rate of 5.5% in September and 4.8% in August. The broad price index for GDP rose at an annual rate of 2.3% in the third quarter, up from 1.9% in the second quarter and 1% in the first.
Mr. Bernanke is unconcerned, however, because he believes (contrary to our past experience with stagflation) that inflation is no danger thanks to economic slack (high unemployment). He reasons that if people can nonetheless be persuaded to expect higher inflation, regardless of the slack, that means interest rates will appear even lower in real terms. If that worked as planned, lower real interest rates would supposedly fix our hangover from the last Fed-financed borrowing binge by encouraging more borrowing.
This whole scheme raises nagging questions. Why would domestic investors accept a lower yield on bonds if they expect higher inflation? And why would foreign investors accept a lower yield on U.S. bonds if they expect exchange rate losses on dollar-denominated securities? Why wouldn't intelligent people shift their investments toward commodities or related stocks (such as mining and related machinery) and either shun, or sell short, long-term Treasurys? And if they did that, how could it possibly help the economy?
On Oct. 15, Mr. Bernanke gave another speech, at the Boston Fed, saying, "Inflation is running at rates that are too low . . . and the risk of deflation is higher than desirable." TBT rose again to 34.17, up from 33.34. On Nov. 3, when the scope of the Fed's long-term Treasury purchase plan was revealed, TBT jumped from 32.69 at 2:12 p.m. (EST), just before the news was released, to 34.99 by 3:34 p.m. (TBT closed Monday at 34.99.) If the Fed's plan really portends a sustainable reduction in long-term rates ahead, TBT should have moved in the opposite direction. When technocrats and markets disagree, it is rarely wise to bet against the markets.
There is ample evidence from commodity and foreign-exchange markets that world investors are indeed confident the Fed will raise inflation. However, the growing interest in shorting long-term Treasury bonds shows that the market does not believe higher inflation is consistent with lower long-term interest rates.
In other words, Mr. Bernanke and his FOMC allies are risking higher interest rates and inflated commodity costs in the pursuit of the contradictory objectives of higher inflation and lower bond yields, seemingly oblivious to all the evidence that they are pursuing an impossible dream."
Why is it a collection of notable economists are observing, across a variety of media, that the Fed is pursuing a foolish goal which will lead to sharply increased inflation, and, yet, the Fed and Bernanke seem largely unmoved?
Now, more than any other time in history, large numbers of investors, economists and various pundits have access to historical evidence and current data to make the case that US policy makers, both monetary and fiscal, are retracing steps down a painfully familiar road to stagflation.
Yet the Fed continues on this dangerous and foolish path.
Palin's remarks demonstrated a surprisingly firm and clear understanding that Helicopter Ben's recent QE2 monetization of Treasury debt is weakening the dollar, thus driving dollar-denominated prices of commodities skyward.
Add to this Alan Meltzer's Journal editorial a week ago, entitled Milton Friedman vs. the Fed, and you should really be worried. Meltzer began his piece,
"Some people, including this newspaper's David Wessel in a column last week, believe the great Nobel laureate would favor this inflationary program. I am certain he would not.
Friedman's main message for central banks was to maintain a monetary rule that kept the growth of the money supply constant. In his Newsweek column, "Inflation and Jobs" (Nov. 12, 1979), for example, Friedman emphasized that "unemployment is . . . a side effect of the cure for inflation," so that if a central bank "cured" unemployment by inflating, it "will have unemployment later." In other words, don't try it."
That's what I recall from my undergraduate economics courses, as well. Friedman was famous for eschewing any active currency creation, instead, legislating some constant rate of growth of the currency, perhaps related to population or GDP growth rates.
On the subject of inflation measurement and expectations, Meltzer helpfully wrote,
"In the late 1980s, former Fed Chairman Alan Greenspan encouraged everyone to watch the core deflator for personal consumption expenditure—the PCE deflator. Since then, the Fed has used that measure as its inflation target. Recently, without much publicity, the Fed switched to the consumer price index (CPI). The reason? From 2003 to 2009, the two measures moved together. In 2010, they diverged—and the CPI shows substantially less inflation than the PCE.
Even so, the most recent PCE deflator shows inflation running at around 1.2% annually, about where the Fed says it wants to hold the inflation rate. And it has been between 1.5% and 1.8% for a year. There is no sign of deflation.
The two measures diverged because they give different weights to their components, especially housing prices. The CPI gives almost double the weight to housing prices, especially the rental value of owner-occupied houses. This is not a number that government statisticians sample in the market. They make an estimate. The new long-term bond purchase program puts a lot of weight on a weak foundation.
Paul Volcker and Alan Greenspan restored much of the credibility that the Fed lost in the great inflation of the 1970s. The Fed's plan to increase inflation puts this credibility at risk and is a large step away from the policy that Milton Friedman favored."
So we see that the Fed has been playing fast and loose with measured inflation, while somewhat unbelievably declaring that the current risk to the economy is deflation. I distinctly read of Bernanke's recent comments about how slack labor markets virtually guarantee no imminent inflation. This while commodity prices such as copper, corn and oil spike to new highs, thanks to global perceptions of the administration's and Fed's weak dollar policy.
Can anybody say "stagflation?" Art Laffer wrote a Journal editorial just over a year ago, on which I wrote this post. He rather eerily foresaw what is now occurring. A few years ago, I dismissed some pundits' fears of stagflation, because, then, monetary policy-induced inflation wasn't yet evident. It is now.
I well recall, though young at the time, the decade of monetary policy incompetence delivered by Fed Chairmen Arthur Burns and G. William Miller. They presided over the monetary half of US stagflation, while LBJ's Great Society spending, combined with the Vietnam war, provided the fiscal half.
Is it really that possible that we've learned nothing from that era, as well as, per Laffer's editorial, the 1930s? What more evidence is needed for the Fed and Congress to understand where their joint policies are headed?
Only, this time, global interests and ubiquitous information make reactions near-immediate and much more damaging. As significant as our deficits and foreign-held debt were in the 1970s, they are far larger now. And today's global economy is much more multi-lateral than it was forty years ago.
Reynolds notes this in his recent Journal editorial, Ben Bernanke's Impossible Dream, in which he uses an EFT which ultra-shorts Treasuries, TBT, as a barometer of market reaction to Fed moves,
"Producer prices rose at an annual rate of 5.5% in September and 4.8% in August. The broad price index for GDP rose at an annual rate of 2.3% in the third quarter, up from 1.9% in the second quarter and 1% in the first.
Mr. Bernanke is unconcerned, however, because he believes (contrary to our past experience with stagflation) that inflation is no danger thanks to economic slack (high unemployment). He reasons that if people can nonetheless be persuaded to expect higher inflation, regardless of the slack, that means interest rates will appear even lower in real terms. If that worked as planned, lower real interest rates would supposedly fix our hangover from the last Fed-financed borrowing binge by encouraging more borrowing.
This whole scheme raises nagging questions. Why would domestic investors accept a lower yield on bonds if they expect higher inflation? And why would foreign investors accept a lower yield on U.S. bonds if they expect exchange rate losses on dollar-denominated securities? Why wouldn't intelligent people shift their investments toward commodities or related stocks (such as mining and related machinery) and either shun, or sell short, long-term Treasurys? And if they did that, how could it possibly help the economy?
On Oct. 15, Mr. Bernanke gave another speech, at the Boston Fed, saying, "Inflation is running at rates that are too low . . . and the risk of deflation is higher than desirable." TBT rose again to 34.17, up from 33.34. On Nov. 3, when the scope of the Fed's long-term Treasury purchase plan was revealed, TBT jumped from 32.69 at 2:12 p.m. (EST), just before the news was released, to 34.99 by 3:34 p.m. (TBT closed Monday at 34.99.) If the Fed's plan really portends a sustainable reduction in long-term rates ahead, TBT should have moved in the opposite direction. When technocrats and markets disagree, it is rarely wise to bet against the markets.
There is ample evidence from commodity and foreign-exchange markets that world investors are indeed confident the Fed will raise inflation. However, the growing interest in shorting long-term Treasury bonds shows that the market does not believe higher inflation is consistent with lower long-term interest rates.
In other words, Mr. Bernanke and his FOMC allies are risking higher interest rates and inflated commodity costs in the pursuit of the contradictory objectives of higher inflation and lower bond yields, seemingly oblivious to all the evidence that they are pursuing an impossible dream."
Why is it a collection of notable economists are observing, across a variety of media, that the Fed is pursuing a foolish goal which will lead to sharply increased inflation, and, yet, the Fed and Bernanke seem largely unmoved?
Now, more than any other time in history, large numbers of investors, economists and various pundits have access to historical evidence and current data to make the case that US policy makers, both monetary and fiscal, are retracing steps down a painfully familiar road to stagflation.
Yet the Fed continues on this dangerous and foolish path.
Elizabeth Warren's Suspect Research On Personal Bankruptcies
Back at the end of September, Todd Zywicki wrote a lengthy article concerning Consumer Financial Protection Bureau head Elizabeth Warren. He focused on her rather checkered history researching alleged consumer financial bankruptcies. Zywicki teaches contract and bankruptcy law, as well as editing the University of Chicago's Supreme Court Economic Review, so he would seem to be familiar with some of the data Warren used in her studies.
Here are some of the passages from Zywicki's editorial,
"By appointing another White House czar to avoid Senate confirmation, the administration politicized the powerful new bureaucracy from its birth. And by appointing an individual with a track record of using questionable research to advance policy ends, it has jeopardized the second goal as well.
Consider Ms. Warren's much-ballyhooed study on the alleged link among health problems, medical expenses and personal bankruptcy filings. Published in the February 2005 issue of Health Affairs, the report was timed to head off bipartisan bankruptcy legislation that was enacted later that year. Ms. Warren and her co-authors claimed that "at least" 46% of personal bankruptcy filings in 2001 (the year from they collected the data) were the result of "medical causes," and that this represented a 23-fold increase over 20 years.
Both conclusions are extremely suspect. First, the study provided an implausibly broad definition of "medical bankruptcy"—including any filer who reported uncontrolled gambling, drug or alcohol addiction, or the birth or adoption of a child.
Equally dubious, the authors classified a bankruptcy as having a "major medical cause" if the individual had accumulated more than $1,000 in out-of-pocket medical expenses (uncovered by insurance) over the course of two years prior to filing—regardless of income, and even if the debtor did not cite illness or injury among the reasons for bankruptcy.
In 2001, average per capita out-of-pocket medical expenses were $683. During the two-year period Ms. Warren and her co-authors studied, in other words, Americans spent an average of $1,366 on uninsured medical expenses, or 30% more than their threshold definition of a "major medical cause." There was no larger context for their threshold figure: A debtor with $1,001 in uncovered medical expenses and $50,000 on a Saks card would constitute a "medical bankruptcy" in their study.
The claim of a 23-fold increase in medical bankruptcies was based on a comparison of their 2001 data with Ms. Warren's research in a 1981 study—which appears to count only those who self-reported as having filed bankruptcy for medical reasons. This is a completely different and much narrower definition of "medical bankruptcy" than the one she used 20 years later, and obviously inflates the increase.
In contrast to Ms. Warren's studies, a battery of analysis, including research done by the Department of Justice's Executive Office of the United States Trustee (which oversees the administration of bankruptcy cases), and by David Dranove and Michael Millenson of Northwestern University, concluded that fewer than 20% of bankruptcies are caused by health problems or medical expenses."
This is pretty troubling, isn't it? Just what is Warren's claim to expertise in this area, if her research is demonstrably flawed, poorly designed, and seemingly deliberately misleading. Warren comes across as having her conclusion in mind, and jamming the data into whatever classifications were required to support those a priori conclusions.
Zywicki further wrote,
"Last year Ms. Warren and her co-authors were back with an even more dramatic study, in the American Journal of Medicine, timed to promote President Obama's health-care reform law. Drawing on 2007 filings, the authors concluded that 62% of bankruptcy filings were the result of medical issues and that the odds that a bankruptcy had a medical cause had doubled between just 2001 and 2007. This study was also flawed.
After Congress made it harder for people to skip out on their debts in 2005, the number of bankruptcy filings plummeted. In 2001, the year Ms. Warren used for the first study, there were 1,452,030 personal bankruptcy filings; in 2007 there were 822,590. Even if we are to accept the methodologies of the two studies for the sake of argument, there were 670,838 "medical bankruptcies" in 2001 and 510,828 medical bankruptcies in 2007—a drop of 160,000 per year. Yet Ms. Warren's article nowhere acknowledges that the absolute number of bankruptcies and purported medical bankruptcies declined.
Concerns about Ms. Warren's presentation and interpretation of data have been longstanding. As I wrote in these pages in August 2007, her book "The Two-Income Trap" willfully ignores the obvious in her own data: that spiraling taxes—and not living expenses—were a major cause of middle class financial woes.
Similarly, reports of the Congressional Oversight Panel of the Troubled Asset Relief Program (TARP)—a panel of which she was chair—uniformly treated home foreclosures as the result of bank fraud and the bullying of helpless homeowners. Fraud and bullying there was, but her panel consistently ignored the many foreclosures that have resulted from a homeowner's strategic decision to walk away from a house whose value has fallen below the amount still owed on the mortgage. Economists and housing analysts widely agree that a substantial number of defaults occur for this reason. That reality is largely absent from the TARP panel's reports."
It's quite distressing to learn that Warren, a darling of Washington's liberals, has basically twisted facts and done shoddy research, published just in time to affect some key legislation which will continue to cause unintended consequences for years to come.
Here are some of the passages from Zywicki's editorial,
"By appointing another White House czar to avoid Senate confirmation, the administration politicized the powerful new bureaucracy from its birth. And by appointing an individual with a track record of using questionable research to advance policy ends, it has jeopardized the second goal as well.
Consider Ms. Warren's much-ballyhooed study on the alleged link among health problems, medical expenses and personal bankruptcy filings. Published in the February 2005 issue of Health Affairs, the report was timed to head off bipartisan bankruptcy legislation that was enacted later that year. Ms. Warren and her co-authors claimed that "at least" 46% of personal bankruptcy filings in 2001 (the year from they collected the data) were the result of "medical causes," and that this represented a 23-fold increase over 20 years.
Both conclusions are extremely suspect. First, the study provided an implausibly broad definition of "medical bankruptcy"—including any filer who reported uncontrolled gambling, drug or alcohol addiction, or the birth or adoption of a child.
Equally dubious, the authors classified a bankruptcy as having a "major medical cause" if the individual had accumulated more than $1,000 in out-of-pocket medical expenses (uncovered by insurance) over the course of two years prior to filing—regardless of income, and even if the debtor did not cite illness or injury among the reasons for bankruptcy.
In 2001, average per capita out-of-pocket medical expenses were $683. During the two-year period Ms. Warren and her co-authors studied, in other words, Americans spent an average of $1,366 on uninsured medical expenses, or 30% more than their threshold definition of a "major medical cause." There was no larger context for their threshold figure: A debtor with $1,001 in uncovered medical expenses and $50,000 on a Saks card would constitute a "medical bankruptcy" in their study.
The claim of a 23-fold increase in medical bankruptcies was based on a comparison of their 2001 data with Ms. Warren's research in a 1981 study—which appears to count only those who self-reported as having filed bankruptcy for medical reasons. This is a completely different and much narrower definition of "medical bankruptcy" than the one she used 20 years later, and obviously inflates the increase.
In contrast to Ms. Warren's studies, a battery of analysis, including research done by the Department of Justice's Executive Office of the United States Trustee (which oversees the administration of bankruptcy cases), and by David Dranove and Michael Millenson of Northwestern University, concluded that fewer than 20% of bankruptcies are caused by health problems or medical expenses."
This is pretty troubling, isn't it? Just what is Warren's claim to expertise in this area, if her research is demonstrably flawed, poorly designed, and seemingly deliberately misleading. Warren comes across as having her conclusion in mind, and jamming the data into whatever classifications were required to support those a priori conclusions.
Zywicki further wrote,
"Last year Ms. Warren and her co-authors were back with an even more dramatic study, in the American Journal of Medicine, timed to promote President Obama's health-care reform law. Drawing on 2007 filings, the authors concluded that 62% of bankruptcy filings were the result of medical issues and that the odds that a bankruptcy had a medical cause had doubled between just 2001 and 2007. This study was also flawed.
After Congress made it harder for people to skip out on their debts in 2005, the number of bankruptcy filings plummeted. In 2001, the year Ms. Warren used for the first study, there were 1,452,030 personal bankruptcy filings; in 2007 there were 822,590. Even if we are to accept the methodologies of the two studies for the sake of argument, there were 670,838 "medical bankruptcies" in 2001 and 510,828 medical bankruptcies in 2007—a drop of 160,000 per year. Yet Ms. Warren's article nowhere acknowledges that the absolute number of bankruptcies and purported medical bankruptcies declined.
Concerns about Ms. Warren's presentation and interpretation of data have been longstanding. As I wrote in these pages in August 2007, her book "The Two-Income Trap" willfully ignores the obvious in her own data: that spiraling taxes—and not living expenses—were a major cause of middle class financial woes.
Similarly, reports of the Congressional Oversight Panel of the Troubled Asset Relief Program (TARP)—a panel of which she was chair—uniformly treated home foreclosures as the result of bank fraud and the bullying of helpless homeowners. Fraud and bullying there was, but her panel consistently ignored the many foreclosures that have resulted from a homeowner's strategic decision to walk away from a house whose value has fallen below the amount still owed on the mortgage. Economists and housing analysts widely agree that a substantial number of defaults occur for this reason. That reality is largely absent from the TARP panel's reports."
It's quite distressing to learn that Warren, a darling of Washington's liberals, has basically twisted facts and done shoddy research, published just in time to affect some key legislation which will continue to cause unintended consequences for years to come.
Wednesday, November 10, 2010
CNBC Stumps For Ford
CNBC is pushing its special program on what it calls Ford's "turnaround," which apparently airs on the network this evening. In support of the documentary, the morning program orchestrated an on-air debate/discussion involving the network's auto reporter, Phil LeBeau, ex-every US auto company senior exec, Bob Lutz, former Wall Street Journal senior exec and Pulitzer Prize winning author Paul Ingrassia, and one or two other pundits.
As I've contended in many prior posts, as well as Alan Mulally has run Ford since his arrival, it hardly constitutes an enduring turnaround.
Bob Lutz, amidst his usual gushing, pointed out that GM, Chrysler and Ford all nose-dived, in terms of share price, during the financial crisis of two years ago. Echoing Holman Jenkins' recent WSJ editorials, on which I wrote here and here, Lutz contended that Ford's survival and subsequent greater prosperity was a matter of luck.
As he said this, Paul Ingrassia grew increasingly agitated, shaking his head. Given the "last word" in the debate, Paul quickly cited some capital management facts regarding GMAC and Ford's borrowing pre-crash that he felt demonstrated Ford to be the better-managed of the two companies.
I would have loved to have seen an on-air debate between just Ingrassia and Jenkins on the subject of GM vs. Ford for the past five years.
My last Ford-centric post was in March of this year, on the occasion of Mulally's interview in the Journal. I won't quote extensively from it, but merely observe that Ford has, for decades, experienced a sort of boom-and-bust pattern.
It's not hard to see why CNBC wants to do a big Ford special, is it? They showcase an advertiser, ensure continuing, and better access to Mulally and various Ford debuts, and, in my opinion, prematurely anoint the company as a turnaround wonder.
The problem is, as I've written before, one of timeframes and measurements. Holman Jenkins, in his second editorial defending Rick Wagoner, lamented the focus of so many observers, and probably investors, too, on share price performance. However, like it or not, that's what investors get. Whether a company is hiring more people, doing good works, etc., is, to public shareholders, really beside the point, unless those activities result in better-than-average total returns over time.
In that regard, I hardly think Ford's post-crisis share price snap-back constitutes a long term return to solid, consistently superior total return performance. What I wrote in that March post I believe still holds true,
"Thanks to global government support of various auto producers, industry over-capacity remains. Ford has to grapple with a government-owned and -subsidized competitor, GM, and a Congress and administration willing to and capable of attacking that failing auto maker's competitors, e.g., Toyota
Political expediency drives Ford to hybrids and alternative fuel sources for its cars, while end-user demand isn't necessarily there for the longer term. Nor is the economy healed, portending a potential slump in demand in the next few years.
Unless Mulally continues to pull more very sizable rabbits out of his hat at Ford, the pace of revenue growth, cost reductions, and, thus, total return performance, is likely to slow. Ford still competes in a business with too much capacity, a government-owned competitor, capital intensity and fairly volatile demand over time.
For all of the adulation given to someone like Warren Buffett
Perhaps demand for cars and trucks won't soften in the year ahead. But this sector is still one in which pricing power is very hard to achieve. Regardless of Mulally's great job in preparing Ford for the 2008 crisis, and managing to bring it out of that crisis in good shape, it's far from home free. It remains a firm with many competitors, a challenge to differentiate its products when much of the value-added of cars comes from vendor subsystems, and a unionized workforce.
I'd hardly say Ford's recent survival without resorting to Chapter 11 equates with it having turned around for good. Right now, it appears to be simply another upward move in a cycle the company has repeated for decades.
As I've contended in many prior posts, as well as Alan Mulally has run Ford since his arrival, it hardly constitutes an enduring turnaround.
Bob Lutz, amidst his usual gushing, pointed out that GM, Chrysler and Ford all nose-dived, in terms of share price, during the financial crisis of two years ago. Echoing Holman Jenkins' recent WSJ editorials, on which I wrote here and here, Lutz contended that Ford's survival and subsequent greater prosperity was a matter of luck.
As he said this, Paul Ingrassia grew increasingly agitated, shaking his head. Given the "last word" in the debate, Paul quickly cited some capital management facts regarding GMAC and Ford's borrowing pre-crash that he felt demonstrated Ford to be the better-managed of the two companies.
I would have loved to have seen an on-air debate between just Ingrassia and Jenkins on the subject of GM vs. Ford for the past five years.
My last Ford-centric post was in March of this year, on the occasion of Mulally's interview in the Journal. I won't quote extensively from it, but merely observe that Ford has, for decades, experienced a sort of boom-and-bust pattern.
It's not hard to see why CNBC wants to do a big Ford special, is it? They showcase an advertiser, ensure continuing, and better access to Mulally and various Ford debuts, and, in my opinion, prematurely anoint the company as a turnaround wonder.
The problem is, as I've written before, one of timeframes and measurements. Holman Jenkins, in his second editorial defending Rick Wagoner, lamented the focus of so many observers, and probably investors, too, on share price performance. However, like it or not, that's what investors get. Whether a company is hiring more people, doing good works, etc., is, to public shareholders, really beside the point, unless those activities result in better-than-average total returns over time.
In that regard, I hardly think Ford's post-crisis share price snap-back constitutes a long term return to solid, consistently superior total return performance. What I wrote in that March post I believe still holds true,
"Thanks to global government support of various auto producers, industry over-capacity remains. Ford has to grapple with a government-owned and -subsidized competitor, GM, and a Congress and administration willing to and capable of attacking that failing auto maker's competitors, e.g., Toyota
Political expediency drives Ford to hybrids and alternative fuel sources for its cars, while end-user demand isn't necessarily there for the longer term. Nor is the economy healed, portending a potential slump in demand in the next few years.
Unless Mulally continues to pull more very sizable rabbits out of his hat at Ford, the pace of revenue growth, cost reductions, and, thus, total return performance, is likely to slow. Ford still competes in a business with too much capacity, a government-owned competitor, capital intensity and fairly volatile demand over time.
For all of the adulation given to someone like Warren Buffett
Perhaps demand for cars and trucks won't soften in the year ahead. But this sector is still one in which pricing power is very hard to achieve. Regardless of Mulally's great job in preparing Ford for the 2008 crisis, and managing to bring it out of that crisis in good shape, it's far from home free. It remains a firm with many competitors, a challenge to differentiate its products when much of the value-added of cars comes from vendor subsystems, and a unionized workforce.
I'd hardly say Ford's recent survival without resorting to Chapter 11 equates with it having turned around for good. Right now, it appears to be simply another upward move in a cycle the company has repeated for decades.
Tuesday, November 09, 2010
Fed Governor Kevin Warsh's Straight Talk In The WSJ
Yesterday's Wall Street Journal editorial by Fed Governor Kevin Warsh seemed, at least to me, to be an unusual one for a sitting Fed Board member.
Unlike the double-speak and evasions we've grown used to in testimony on Capitol Hill by Greenspan and Bernanke when asked about fiscal policy, Warsh clearly states,
"Given what ails the economy, additional monetary policy measures are poor substitutes for more powerful pro-growth policies."
Warsh goes further, criticizing the last few years of temporary stimulus measures, culminating with this passage,
"Fiscal authorities should resist the temptation to increase government expenditures continually in order to compensate for shortfalls of private consumption and investment. A strict economic diet of fiscal austerity has greater appeal, a kind of penance owed for the excesses of the past. But root-canal economics also does not constitute optimal economic policy.
The U.S. would be better off with a third way: pro-growth economic policy. The U.S. and world economies urgently need stronger growth, and the adoption of pro-growth economic policies would strengthen incentives to invest in capital and labor over the horizon, paving the way for robust job-creation and higher living standards."
This is, to my knowledge, fairly unprecedented talk by a Fed Governor. In today's environment, it borders on political speech, given the very wide distance between Democrats and Republicans on so many fiscal policies. Warsh clearly sides with the latter.
Toward the end of his piece, he cautiously acknowledges that QE2 is making the Fed a Treasuries price setter, not taker. Something CNBC's Rick Santelli bemoaned on air late last week. Warsh rather carefully shares that concern with these words,
"As the Fed's balance sheet expands, it becomes more of a price maker than a price taker in the Treasury market. If market participants come to doubt these prices- or their reliance on these prices proves fleeting- risk premiums across asset classes and geographies could move unexpectedly."
Volumes are implied in those last two words.
Warsh ends his editorial with a nod to the growing currency wars, triggered by the Fed's own depreciation policy. But he doesn't suggest any solution. Instead, he refers vaguely to FOMC "tools and conviction to adjust policies appropriately."
Trouble is, he began his piece by pointing out that monetary policy can't substitute for good fiscal policies. And can't overcome bad fiscal policies.
So, except for the last line of Fed-style happy talk, Warsh seems to depart from the usual institutional silence or vagueness on macroeconomic fiscal policies.
If you connect the dots in his editorial with rising anger by other central banks and conservative American politicians over US monetary policy, it should cause significant concern. Because what Warsh is really saying is that the Fed is going to be unable to fix the problems caused by reckless US fiscal policies, new, exorbitant debt levels, and rising international anger at both US fiscal and monetary policies.
Unlike the double-speak and evasions we've grown used to in testimony on Capitol Hill by Greenspan and Bernanke when asked about fiscal policy, Warsh clearly states,
"Given what ails the economy, additional monetary policy measures are poor substitutes for more powerful pro-growth policies."
Warsh goes further, criticizing the last few years of temporary stimulus measures, culminating with this passage,
"Fiscal authorities should resist the temptation to increase government expenditures continually in order to compensate for shortfalls of private consumption and investment. A strict economic diet of fiscal austerity has greater appeal, a kind of penance owed for the excesses of the past. But root-canal economics also does not constitute optimal economic policy.
The U.S. would be better off with a third way: pro-growth economic policy. The U.S. and world economies urgently need stronger growth, and the adoption of pro-growth economic policies would strengthen incentives to invest in capital and labor over the horizon, paving the way for robust job-creation and higher living standards."
This is, to my knowledge, fairly unprecedented talk by a Fed Governor. In today's environment, it borders on political speech, given the very wide distance between Democrats and Republicans on so many fiscal policies. Warsh clearly sides with the latter.
Toward the end of his piece, he cautiously acknowledges that QE2 is making the Fed a Treasuries price setter, not taker. Something CNBC's Rick Santelli bemoaned on air late last week. Warsh rather carefully shares that concern with these words,
"As the Fed's balance sheet expands, it becomes more of a price maker than a price taker in the Treasury market. If market participants come to doubt these prices- or their reliance on these prices proves fleeting- risk premiums across asset classes and geographies could move unexpectedly."
Volumes are implied in those last two words.
Warsh ends his editorial with a nod to the growing currency wars, triggered by the Fed's own depreciation policy. But he doesn't suggest any solution. Instead, he refers vaguely to FOMC "tools and conviction to adjust policies appropriately."
Trouble is, he began his piece by pointing out that monetary policy can't substitute for good fiscal policies. And can't overcome bad fiscal policies.
So, except for the last line of Fed-style happy talk, Warsh seems to depart from the usual institutional silence or vagueness on macroeconomic fiscal policies.
If you connect the dots in his editorial with rising anger by other central banks and conservative American politicians over US monetary policy, it should cause significant concern. Because what Warsh is really saying is that the Fed is going to be unable to fix the problems caused by reckless US fiscal policies, new, exorbitant debt levels, and rising international anger at both US fiscal and monetary policies.
Monday, November 08, 2010
Scott Adams On Bad Management
Scott Adams, the creator of the comic strip Dilbert, wrote a hilarious piece in this past weekend's Wall Street Journal. He traced his own career from first part-time jobs to the one he held at Pacific Telephone, before finally relying on his published comics for financial independence.
What really struck me about his story was that, twice, he was told he could not be promoted because he was a white male, and his company's management(s) could not afford the risk of media criticism for more such promotions.
One of those companies was Pac Tel. I, too, was victimized in that fashion early in my career. At AT&T, of which Pac Tel was a subsidiary.
Adams writes that when informed of his second non-promotion, for reasons of race and gender,
"that was the day the "Dilbert" comic strip was born, although I had not yet drawn one. Let's call it a tipping point."
He then spends the rest of the piece discussing how those sorts of experiences create entrepreneurial motivations in otherwise-ordinary employees.
I'm just surprised that firms in back in that era couldn't comprehend the effects on morale, motivations and loyalty by simply notifying middle-management white males that they could forget being promoted.
There may not be as many EEOC lawsuits and as much interference in the promotion policies of corporate America, but I think management is, on balance, as deaf and blind as ever to what motivates their employees.
What really struck me about his story was that, twice, he was told he could not be promoted because he was a white male, and his company's management(s) could not afford the risk of media criticism for more such promotions.
One of those companies was Pac Tel. I, too, was victimized in that fashion early in my career. At AT&T, of which Pac Tel was a subsidiary.
Adams writes that when informed of his second non-promotion, for reasons of race and gender,
"that was the day the "Dilbert" comic strip was born, although I had not yet drawn one. Let's call it a tipping point."
He then spends the rest of the piece discussing how those sorts of experiences create entrepreneurial motivations in otherwise-ordinary employees.
I'm just surprised that firms in back in that era couldn't comprehend the effects on morale, motivations and loyalty by simply notifying middle-management white males that they could forget being promoted.
There may not be as many EEOC lawsuits and as much interference in the promotion policies of corporate America, but I think management is, on balance, as deaf and blind as ever to what motivates their employees.
Holman Jenkins' Defends Rick Wagoner As GM's True Savior- Part Two
Last Friday, I wrote about Holman Jenkin's piece in the weekend Wall Street Journal of the end of October defending Rick Wagoner's CEO tenure at GM. Inexplicably, at least to me, Jenkins wrote another defense of Wagoner in this past weekend's edition of the Journal.
He began the column,
"Of all the responses to a piece defending GM's Rick Wagoner, most irritating were those folding their arms, pointing to GM's stock price and harrumphing, "Case closed."
A stock price may be all a stockholder cares about, just as a movie studio may only care if a movie is profitable. But there are other things to be said about a CEO, who is dealt a certain hand."
I must say I'm shocked to see Jenkins using this language and perspective, even in GM's case. Using Cisco's wild valuation ride under John Chambers since 1999 doesn't, in my view, excuse what Wagoner did, and did not do, at GM. Mind you, I'm not agreeing with Steve Rattner that GM's 'rescue' is to be credited to the current administration. In my prior post, I clearly stated that I think it's premature to declare GM to be fixed at all at this point in time.
But back to Jenkins' second piece defending Wagoner. Jenkins pounds away on his most prominent theme in the latter's defense- negotiating with the UAW to remove certain benefit costs from GM, via a one-time payment, and getting various concessions to reduce costs and improve productivity.
According to Holman,
"The only difference between the companies (GM and Ford- my note) by then was a quirk of history- the kind that makes history interesting and CEO tenure worth examining through more lenses than one."
To make his point more forcefully, Jenkins describes Ford as having,
"mortgaged everything in sight, giving it a $23 billion safety net just in time to ride out the subprime disaster. This was not management genius or clairvoyance, and it was not shareholder-optimal at the time. It was a decision by the Ford family (owner of just 2% of the shares) that the company would survive or fail with the Fords in charge rather than accept a dominant foreign partner that way Chrysler, Nissan and others had."
Jenkins essentially attempts to build a case for Wagoner having done all the right things, then getting blindsided by the 2007-2008 financial crisis, which seized up the economy, choked car-buying credit, and led to GM's bankruptcy just as it was turning around. While Ford benefited from luck and GM's government bailout, which preserved the very same vendors on which Ford, too, depended, at not cost and with no public shame to Ford from taking a government handout.
Jenkins combines so many complicating themes and events that it becomes next to impossible to untangle the mess so that one can anoint Wagoner as GM's true savior, Ford's Alan Mulally as a lucky bum, and totally remove the financial meltdown as having any bearing on either CEO's performance.
My prior posts explains some of my reasoning for believing that Wagoner had continued to lead GM toward bankruptcy. I just don't think that GM was headed for any sort of consistently superior total return performances in the years ahead. I don't think Ford is, either, by the way.
Further, I continue to believe that, had GM and Chrysler been processed through conventional bankrupty processes, the vendors supplying them, and Ford, would have remained intact, as neither firm would have been shut down, but, rather, allowed to operate under temporary court supervision. If necessary, government money could have provided some short-term financing while viable divisions and operations were either sold or spun-off. The units destined for closure would have eventually been eliminated, or should have been. Any resulting share loss would have been made up by other brands, thus providing demand for the vendors so many pundits, including Jenkins, continues to believe would have failed.
It seems to me to be a very tall order to try, in two brief editorials, to rehabilitate the image of Wagoner as CEO of GM. Wagoner was named GM CEO in 2000, while Alan Mulally took over at Ford in late 2006. How is it that Mulally's quick actions which ultimately resulted in Ford's independent survival pale next to Wagoner's comparative inaction for most of his decade-long tenure at the helm of GM?
How is it that one excuses Wagoner for so many years of inaction, then, as Jenkins does, gives him superlative reviews for the last few years, excusing the ultimate outcome due to uncontrollable economic factors? Didn't Wagoner's GM continue to own and expand GMAC, which plunged deeply into housing finance, thus worsening GM's problems?
There are simply too many confounding factors, too much time in which Wagoner was responsible for GM's fortunes, and too little hard analysis in Jenkins' editorials for me to be convinced of any of his salient points. And certainly not convinced of his conclusion that Wagoner not only performed well, but should be seen as a viable future government resource.
He began the column,
"Of all the responses to a piece defending GM's Rick Wagoner, most irritating were those folding their arms, pointing to GM's stock price and harrumphing, "Case closed."
A stock price may be all a stockholder cares about, just as a movie studio may only care if a movie is profitable. But there are other things to be said about a CEO, who is dealt a certain hand."
I must say I'm shocked to see Jenkins using this language and perspective, even in GM's case. Using Cisco's wild valuation ride under John Chambers since 1999 doesn't, in my view, excuse what Wagoner did, and did not do, at GM. Mind you, I'm not agreeing with Steve Rattner that GM's 'rescue' is to be credited to the current administration. In my prior post, I clearly stated that I think it's premature to declare GM to be fixed at all at this point in time.
But back to Jenkins' second piece defending Wagoner. Jenkins pounds away on his most prominent theme in the latter's defense- negotiating with the UAW to remove certain benefit costs from GM, via a one-time payment, and getting various concessions to reduce costs and improve productivity.
According to Holman,
"The only difference between the companies (GM and Ford- my note) by then was a quirk of history- the kind that makes history interesting and CEO tenure worth examining through more lenses than one."
To make his point more forcefully, Jenkins describes Ford as having,
"mortgaged everything in sight, giving it a $23 billion safety net just in time to ride out the subprime disaster. This was not management genius or clairvoyance, and it was not shareholder-optimal at the time. It was a decision by the Ford family (owner of just 2% of the shares) that the company would survive or fail with the Fords in charge rather than accept a dominant foreign partner that way Chrysler, Nissan and others had."
Jenkins essentially attempts to build a case for Wagoner having done all the right things, then getting blindsided by the 2007-2008 financial crisis, which seized up the economy, choked car-buying credit, and led to GM's bankruptcy just as it was turning around. While Ford benefited from luck and GM's government bailout, which preserved the very same vendors on which Ford, too, depended, at not cost and with no public shame to Ford from taking a government handout.
Jenkins combines so many complicating themes and events that it becomes next to impossible to untangle the mess so that one can anoint Wagoner as GM's true savior, Ford's Alan Mulally as a lucky bum, and totally remove the financial meltdown as having any bearing on either CEO's performance.
My prior posts explains some of my reasoning for believing that Wagoner had continued to lead GM toward bankruptcy. I just don't think that GM was headed for any sort of consistently superior total return performances in the years ahead. I don't think Ford is, either, by the way.
Further, I continue to believe that, had GM and Chrysler been processed through conventional bankrupty processes, the vendors supplying them, and Ford, would have remained intact, as neither firm would have been shut down, but, rather, allowed to operate under temporary court supervision. If necessary, government money could have provided some short-term financing while viable divisions and operations were either sold or spun-off. The units destined for closure would have eventually been eliminated, or should have been. Any resulting share loss would have been made up by other brands, thus providing demand for the vendors so many pundits, including Jenkins, continues to believe would have failed.
It seems to me to be a very tall order to try, in two brief editorials, to rehabilitate the image of Wagoner as CEO of GM. Wagoner was named GM CEO in 2000, while Alan Mulally took over at Ford in late 2006. How is it that Mulally's quick actions which ultimately resulted in Ford's independent survival pale next to Wagoner's comparative inaction for most of his decade-long tenure at the helm of GM?
How is it that one excuses Wagoner for so many years of inaction, then, as Jenkins does, gives him superlative reviews for the last few years, excusing the ultimate outcome due to uncontrollable economic factors? Didn't Wagoner's GM continue to own and expand GMAC, which plunged deeply into housing finance, thus worsening GM's problems?
There are simply too many confounding factors, too much time in which Wagoner was responsible for GM's fortunes, and too little hard analysis in Jenkins' editorials for me to be convinced of any of his salient points. And certainly not convinced of his conclusion that Wagoner not only performed well, but should be seen as a viable future government resource.
Friday, November 05, 2010
Holman Jenkins' Gets It Wrong Regarding Rick Wagoner As GM's True Savior
Holman Jenkins wrote a curious piece in last weekend's Wall Street journal insisting that Rick Wagoner has now been vindicated for his management of GM.
Contrary to the editorial's title, GM's Wagoner Gets His Due, I don't believe that's the case.
His column begins by referencing a New Yorker article in which Malcolm Gladwell evidently defended Wagoner as having saved GM. Jenkins wrote,
"Everything else you imagine constituting the GM turnaround was accomplished by Mr. Wagoner.
As Mr. Gladwell points out, he cut hourly labor costs and improved productivity until they were in line with Toyota's U. S. plants. He capped GM's health-care obligations by turning them over to the United Auto Workers (UAW) union along with a promised one-time payment.
He delivered GM to the point where its product quality and features were competitive with those of the best auto makers in the world, well before American buyers began figuring this out last year."
But he also wrote, just before that passage,
"What saved GM was the government's willingness to spend money saving the company that it would likely never get back, while allowing itself the privilege of using a bankruptcy court to ram through a restructuring that short-shrifted due process for GM's other claimants. Give anybody that kind of deal and they will appear (to themselves at least) a financial genius."
The last sentences is directed at Steve "Overhaul" Rattner, the car czar who took credit for what Jenkins and Gladwell believe was really Wagoner's rescue of GM.
With a GM IPO road show beginning imminently, I'm going to argue they are all wrong. GM isn't "fixed" yet. It's simply a partially-revived zombie on account of what Jenkins observed in that passage. Give any company tens of billions of free capital, stiff legitimate creditors in a kangaroo bankruptcy process, and it'll look better. It may even manage to creatively produce a book value per share that induces some people to consider buying the refloated equity.
But don't think for a moment that GM is "fixed," anymore than Chrysler was after Iaccoca's reign. Recall, if you will, that not so long after its 'rescue,' Chrysler fell into the lap of Daimler-Benz, only to be coughed back up as too problematic to retain. The rest is sadly recent history.
Why should GM be any different?
I maintain that Wagoner's efforts were slightly more useful than rearranging deck chairs on the Titanic. Jenkins is very kind in believing that Wagoner had righted GM, but that's simply not true, as his prior statement demonstrates. Further, both Jenkins and Gladwell evidently have conveniently forgotten Wagoner's many prior mistakes, including the Jerry York board mess and stiff-arming ideas of collaborating with Carlos Ghosn and Nissan. At the time, Wagoner was roundly, and rightly criticized for being so insular.
It took egregiously generous government aid, along with a bankruptcy, to 'rescue,' GM. Only after did it appear that Wagoner's prior moves would allow some modestly-profitable operation.
Let me put it another way. I contended, in prior posts, that bankruptcy would have cleansed GM of its financial baggage, allowing other companies to buy the good parts, or spin them back out on their own. Wagoner's successes, such as they were, only mattered to a post-bankruptcy GM. They were never sufficient, on their own, to save the firm.
As to Wagoner being the future 'go to' guy for a hypothetical President Paul Ryan? I don't think so. If Wagoner had any applicable skills to begin with, as Jenkins contends, they were largely a function of his being an accountant at GM for so many years. Government accounting makes GAAP look like a walk in the park, by comparison.
I seriously doubt Rick Wagoner's going to be of that much use to a future president. It's still not clear to me that he really accomplished all that much at GM as CEO, and he certainly didn't save it.
Contrary to the editorial's title, GM's Wagoner Gets His Due, I don't believe that's the case.
His column begins by referencing a New Yorker article in which Malcolm Gladwell evidently defended Wagoner as having saved GM. Jenkins wrote,
"Everything else you imagine constituting the GM turnaround was accomplished by Mr. Wagoner.
As Mr. Gladwell points out, he cut hourly labor costs and improved productivity until they were in line with Toyota's U. S. plants. He capped GM's health-care obligations by turning them over to the United Auto Workers (UAW) union along with a promised one-time payment.
He delivered GM to the point where its product quality and features were competitive with those of the best auto makers in the world, well before American buyers began figuring this out last year."
But he also wrote, just before that passage,
"What saved GM was the government's willingness to spend money saving the company that it would likely never get back, while allowing itself the privilege of using a bankruptcy court to ram through a restructuring that short-shrifted due process for GM's other claimants. Give anybody that kind of deal and they will appear (to themselves at least) a financial genius."
The last sentences is directed at Steve "Overhaul" Rattner, the car czar who took credit for what Jenkins and Gladwell believe was really Wagoner's rescue of GM.
With a GM IPO road show beginning imminently, I'm going to argue they are all wrong. GM isn't "fixed" yet. It's simply a partially-revived zombie on account of what Jenkins observed in that passage. Give any company tens of billions of free capital, stiff legitimate creditors in a kangaroo bankruptcy process, and it'll look better. It may even manage to creatively produce a book value per share that induces some people to consider buying the refloated equity.
But don't think for a moment that GM is "fixed," anymore than Chrysler was after Iaccoca's reign. Recall, if you will, that not so long after its 'rescue,' Chrysler fell into the lap of Daimler-Benz, only to be coughed back up as too problematic to retain. The rest is sadly recent history.
Why should GM be any different?
I maintain that Wagoner's efforts were slightly more useful than rearranging deck chairs on the Titanic. Jenkins is very kind in believing that Wagoner had righted GM, but that's simply not true, as his prior statement demonstrates. Further, both Jenkins and Gladwell evidently have conveniently forgotten Wagoner's many prior mistakes, including the Jerry York board mess and stiff-arming ideas of collaborating with Carlos Ghosn and Nissan. At the time, Wagoner was roundly, and rightly criticized for being so insular.
It took egregiously generous government aid, along with a bankruptcy, to 'rescue,' GM. Only after did it appear that Wagoner's prior moves would allow some modestly-profitable operation.
Let me put it another way. I contended, in prior posts, that bankruptcy would have cleansed GM of its financial baggage, allowing other companies to buy the good parts, or spin them back out on their own. Wagoner's successes, such as they were, only mattered to a post-bankruptcy GM. They were never sufficient, on their own, to save the firm.
As to Wagoner being the future 'go to' guy for a hypothetical President Paul Ryan? I don't think so. If Wagoner had any applicable skills to begin with, as Jenkins contends, they were largely a function of his being an accountant at GM for so many years. Government accounting makes GAAP look like a walk in the park, by comparison.
I seriously doubt Rick Wagoner's going to be of that much use to a future president. It's still not clear to me that he really accomplished all that much at GM as CEO, and he certainly didn't save it.
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