I’m a bit troubled that it seems we are, here on the left, pissed at financial institutions that took bailout money and pissed at those same financial institutions when they decide to pay it back. Can’t really have it both ways, you know? Sure, there is the potential for banks handing back the money when they need it and, as a result, not lending, etc. And there is the potential for troubled banks handing it back because they feel the need to keep up with healthier banks who don’t need it and, as a result, those troubled banks go under (which sucks in the short term but is probably better in the long term). But, either way, either we should pissed when the take the money and, therefore, pleased when they give it back OR we’re pleased when they take it but pissed when they pay it back but right now it appears we’re pissed when they take it AND pissed when they pay it back. Which is kinda fucked up.
Credit Crisis for Dummies
Prior to 2008, I didn’t know much about banking, finance and economics. For obvious reasons, I, and many others, have taken a bit of a remedial course in these subjects in attempt to wrap our heads around what’s happening in the world. Now that I done hours of reading on the subject, I’ve managed to find an easy, simple 10 minute primer.
Enjoy
The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.
Who could have seen this coming?
The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.
”I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. ”I wasn’t around during the 1930’s or the debate over Glass-Steagall. But I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”
Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ‘’seemed determined to unlearn the lessons from our past mistakes.”
”Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,” Mr. Wellstone said. ”Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.”
Source: NY Times, 11.5.1999
I beg your pardon?
Un-frickin’-believable. From the Financial Times, we get this gem:
Jack Welch, who is regarded as the father of the “shareholder value” movement that has dominated the corporate world for more than 20 years, has said it was “a dumb idea” for executives to focus so heavily on quarterly profits and share price gains.
and
Mr Welch last week said he never meant to suggest boosting a company’s share price should be the main goal of executives.
“It is a dumb idea,” he said. “The idea that shareholder value is a strategy is insane. It is the product of your combined efforts – from the management to the employees”.
Ooopsie Daisy, I guess.
In house pimping.
Matthew can’t pimp work he does elsewhere. That would be a smidge gauche.
But I can pimp it for him.
A great read. Doubly so because I found while browsing the job listings.
European Union inching closer?
Actually, this one is for Matthew:
The European commission is preparing itself for a membership bid, depending on the outcome of a snap general election expected in May. An application would be viewed very favourably in Brussels and the negotiations, which normally take many years, would be fast-forwarded to make Iceland the EU’s 29th member in record time, probably in 2011.
Olli Rehn, the European commissioner in charge of enlargement, said: “The EU prefers two countries joining at the same time rather than individually. If Iceland applies shortly and the negotiations are rapid, Croatia and Iceland could join the EU in parallel. On Iceland, I hope I will be busier. It is one of the oldest democracies in the world and its strategic and economic positions would be an asset to the EU.”
Its strategic and economic positions….interesting.
Idiot Journalism
I was gonna write a long screed about the state of the economy, but after a pass through the mainstream press today, particularly the New York Times, I was overwhelmed by the stupidity of the journalistic community.
Before getting to that, here’s the skinny on the economy…remember back in November when the National Bureau of Economic Research (NBER) told us we’d been in a recession since December of 2007 and all of us were, like, “no shit…it took you 11 months to piece that together?”
Okay…sometime in June the same rocket scientists are gonna tell us we entered a depression in November of 2008. Trust me. It’s coming. There are various mathematical indicators that lead me to this conclusion and I’ll go into them in a later post just for the geeks that care about such things…but the biggest leading indicator is that rich guys are throwing themselves in front of trains or off ledges or whatever. When rich guys (and by rich I mean worth 100’s of millions or billions) start killing themselves specifically because they are now poor, the economic shit has officially hit the fan…which is as good a description of a depression as any other I’ve come across.
On to journalistic idiocy…
Toxic Assets: Okay…can we kill this term? Please? No, really, I’m begging. It’s such a wonderfully misleading mix of drama (Toxic…poisonous…a cloud over a suburb that kills small children and the elderly) and sideways passive voice let ‘em all off the hook crap. It sounds like there’s something inherently wrong with the asset. “See that house over yonder, Clem? Fucker’s toxic.” Let’s call these things what they are: bad loans; bad investments; bad choices. Toxic assets makes it sounds like some unsuspecting friendly neighborhood banker gave someone a loan for a commercial building and it turned out to be riddled with asbestos. It wasn’t. Only thing wrong with the building is that there were too goddamn many buildings and not enough people to put in ‘em. Bad. Fucking. Loan. Which changes the image in one’s head to smugly arrogant 30 something Manhattan investment banker buying up a bunch of loan packages he didn’t really understand, making a few million a year, and then looking kinda confused and as dumb as he actually is when it all crashed down around his ears.
Nationalization: Oh, sweet Jesus. The Paper of Record ran an article today with the headline “Rescue of Banks Hints at Nationalization”. Fuck me. Just fuck me now. No. It does not hint at nationalization. The government taking a 6% ownership stake in Bank of America in exchange for somewhere in the neighborhood of $120 Billion is not nationalization. It’s a bailout of a bunch of fuckups. In exchange for bailing out a bunch of fuckups who put the entire national economy at risk through their poor choices, the government, like any owner, makes a few demands. That’s not nationalization. Nationalization would be the government taking over the bank, all of it, with little or no compensation to the shareholders, and running the damn thing. There is no “hint” of nationalization in this. But…they found some bonehead banking analyst who said…
“We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “We are going to go back to a time when the government controlled the banking system.”
Um…no. We’re going to nothing like that. We’re going to an era where the government is bailing out jackasses like Gerard (hey, Gerry…did you see this recession/depression coming? I just combed through some of your analyst reports and it appears you thought shit was doing just fine…so forgive me if I think I don’t need to pay attention to you ’cause you’re kinda dumb) and taking a radically undervalued ownership stake just so jackasses like Gerard can’t pull all of us down the tubes with them. Ain’t nothing being nationalized up in here. What’s happening is the government is taking on the risks that the financial institutions shouldn’t have taken on in the first place. The nationalization talk is a way of subtly applying political pressure in the form of “don’t start making demands in exchange for your ownership stake” that would result in a giveaway to these institutions with no limits on what they can do with it or how they can operate…no other major shareholder would accept those kind of limitations. The government shouldn’t.
Other Passive Voice Abominations: The one that’s up my ass today is referring to financial institutions that talk about large banks that cannot function as “the sinking economy erodes their capital”. Again…passive voice bullshit. It’s like the economy is sinking on its own…as if some weird form of gravity heretofore unknown to us has grabbed hold of the economy and is pulling down into quicksand. The sinking economy that is eroding their capital is entirely of their own making. Take away the housing and commercial property bubbles, the easy credit, the credit to people who shouldn’t have been given credit, the utter lack of fiscal responsibility, the buying and selling of debt instruments that the buyers and sellers didn’t understand, the huge upswing in risk profiles of these institutions and the greed of executives and shareholders that looked the other way, and you don’t have a fucking sinking economy.
Thank you for letting me vent.
Shut up, Russ
Just saw Feingold on CNN talking about backing the bailout of the automakers…”An America where we don’t make our own vehicles is unthinkable”. But it’s okay ’cause he’s gonna fight for more fuel efficient cars as part of the deal.
Shut the fuck up, Russ.
US automakers are in a mess because they made a series of bad management decisions. Period. We (in the form of the government) subsidized their bad decisions through absurd things like massive tax breaks for buying SUV’s. Really. And, of course, various other automaker assistance programs over the years. Despite what the executives of these companies are saying and despite the echoes of their horseshit being mouthed by union leaders, a bailout of domestic automakers does not have to be an all or nothing thing. Pick two. Bail their asses out and let one die off. Better yet, don’t bail any of the big three out. Use that $25BB to provide one hell of a soft landing for the adversely impacted non-management workers (fuck the executives) and see what shakes out. One of the reasons we don’t have viable alternative energy vehicles and auto companies in the US that actually make GOOD cars is that we prop up a bunch of crap companies who create extremely costly barriers to entry (see also: Airlines). So, knock some of those barriers down and use the money to give a cushion to the workers. It does not have to be an all or nothing gig where we save all three.
Of course, given bailout fever, we’ll be lucky if Congress doesn’t pass a bailout bill with more than they’re actually asking for.
This Is What A Smear Campaign Looks Like
I can’t even go into how mad this makes me. A friend of mine, who has never been a Republican in their lives, got this in the mail today. They were kind enough to let me share it with you.
I don’t have the time and don’t really think I need to go through point by point everything that is wrong with this.
This piece of mail is what the Republican Party of Minnesota is sending on behalf their members with the money their members gave them (Michele Bachmann’s, Norm Coleman’s Arne Carlson’s ALL of the MINNESOTA GOP).
Sorry you’ll have to click on the page numbers to see the actual hit piece. But it was the quickest way to do it.
If you felt like I did, you called the MNGOP at 651-222-0022 at told them what you thought of this.
What the Meltdown Reveals…
While on some level it’s amusing watching Paulson engage in ideological pretzeling as he now takes a strong position for the government taking equity stakes in troubled financial institutions, it is troubling on a number of fronts.
First, the proposal to do this was part of the House Dems original response to his 3 page bailout plan. It was the point most ferociously opposed by Paulson and, presumably, the Prezzz. Anything that sniffed of nationalization was anathema to them.
Second, we’ve spent nearly four weeks now fucking around with the original bailout proposal while the Administration fought off the position it is now adopting. This in the the midst of a panic. Panic’s are not thoughtful and reasonable things. They move very, very quickly. Panic’s show up because of widespread uncertainty and when you introduce additional uncertainty they get worse. You can still dial ‘em down but the price tag associated with doing so goes up the longer you take.
Third, and most important, it shows how perfectly incapable conservatism is (in its current incarnation) iof answering a crisis. We saw it first rear its head in the ridiculous House Republican proposal (a brief recap: take action that keeps the government out of the markets and does nothing to inject capital into the financial system…said injection being the only thing that has a prayer of knocking this crisis down…but is nonetheless aligned with “government bad” ideology). The fundamental belief that government is bad and should be kept out of any and all markets and choked down to the smallest possible size, works only if nothing ever goes wrong. And something always goes wrong. Katrina, anyone? The financial meltdown, anyone? Conservatism’s answer to those things, as we have seen all too clearly, is to do little or nothing. It has to do little or nothing or its core philosophical tenets are revealed as being as empty and unrealistic as they actually are. Nice work, guys.
Fourth, it reveals the limitations inherent in electing an ideologically pure but rather dimwitted figurehead as your chief executive. Where the hell has Bush been? It’s staggering that in the midst of a crisis this size the voice of the government has been an apointee and not the President. Anyone out there vote for Paulson? No…you couldn’t have. It’s what President’s are supposed to fucking do, you know? Pilot the ship through rough waters. Be the voice of reason and assurance and responsibility and leadership. Where is he? He has addressed the nation once and then, much like Katrina, after it became apparent that he absolutely had to do something. He didn’t lead. He followed.
There’s no doubt in my mind that if this happened under an Obama presidency that he would have been out in front in addressing the nation. There is also no doubt in my mind that McCain would be out in front when it comes to addressing the nation. There is no doubt in my mind that if something had happened to Obama and we had a Biden Administration that hip-shooter Joe would have been out in front. And what of Palin. I guess I’m in the camp that says we’ve seen enough of empty headed ideologically pure figureheads. My God, the woman managed to say, in the same debate, that government is the problem and needs to get out of the way and that government needs to be (in terms of the meltdown) more involved in oversight. And the staggering thing is I believe that she believes that. She has convinced me that she does not have the intellectual capacity to realize that those two positions are diametrically opposed and cannot be logically reconciled. She is the embodiment of slogan driven, liberals are bad, government is evil, brain-locked, 21st century conservatism.
What we are seeing in this meltdown is the logically absurd conclusion that today’s brand of conservatism leads to. It is mind-boggling that there are still significant numbers of people who either sell out sound decision making to the next guy who promises a tax cut, or who actually believe that it works.
Why The House Republican Bailout Counter-Proposal Is A Stinking Piece of Shit
I know my economic rantings are sometimes arcane and hard to follow. As a result I chose the above headline with great care to see if I could help make the point a little clearer.
House Republicans came forward with a bailout mini-proposal at the last minute on Thursday to change the nature of the bailout such that the government would create a huge mortgage insurance agency. McCain, because he’s stupid about all things economic enabled this particular piece of stupidity by posturing that the bailout can’t be left on the taxpayer’s front door and blahblahblahblahblah.
The House Republican proposal plays well on the surface. We, the people, don’t appear to be responsible, mortgages are insured, which sounds like people won’t get foreclosed.
The problems are legion:
- The problem in the economy right now is, first and foremost, that credit markets are frozen. No one is issuing credit either because they are unsure of the risk of the borrower or (more common right now) the financial institutions have no fucking clue how exposed they are to bad debt in their own portfolios (which tells you something about how smart the financial wizards of Wall Street actually are). The insurance plan does nothing to inject cash into the system. Without an injection of cash the credit markets remain frozen. That means that banks will continue not to lend. This has very little direct impact on consumers…you buy a house or a car or take out a college loan very infrequently. It crushes business, particularly labor and raw materials intensive industries (i.e. industries that supply blue collar jobs). They need to borrow to smooth out cash flows associated with the cycles of their industries. They need to borrow to invest in materials, plants, and technologies that make them competitive. Without an injection of cash you will see some relatively rare examples of companies going out of business but you will see, daily, massive layoffs and downsizings, plant closings, production line interruptions, etc. Our staggering 6.1% unemployment rate (to put that in historical context the last time the rate was that high was 1994), which McCain thinks is a sign of a fundamentally sound economy, is trending up at a frightful pace (a 30% increase since the beginning of the year from 4.7% to 6.1% with the majority of that in the last four months when you usually see a seasonal drop) and will continue to do so with a bailout. With this stupid ass House Republican proposal it will go through the roof as, again, companies lose access to capital in the form of credit.
- People will still get foreclosed. Mortgage insurance doesn’t insure the people in the homes. It insures the companies holding the mortgages so that when they kick you out of your house those entities still get the money they carry on their books. It would likely increase foreclosure rates. You boot someone out of their house right now and you, the noteholder, have an utterly worthless property. You have an incentive to work with the homeowner. In the case of the insurance scenario, you have an incentive to foreclose because the insurance on your book value (which will always be higher than the actual value in this economy) kicks in and you come out better off. Then you sit on the worthless property, wait for prices to rise, and sell it (essentially) again.
- For the notes in the worst shape right now (and this shit is liquid and ever-changing) the insurance program provides nothing to anyone. Those 10%-15% at the bottom of the mortgage system are already worthless…they have essentially no value. Meaning that “insuring” them insures a value of zero. This is kinda not so helpful to the noteholders. Like, at all. Even an ideologically vapor locked airhead like Representative Eric Cantor (R-VA), one of the most aggressively vociferous of the House Republican Rebels, had to cop to the fact that in dealing with the worst of the securities in question the House Republican plan would accomplish nothing so that in those cases “you have to go with Paulson’s”. Again, Grumpy Old Man McCain thinks that this House Republican plan (which I assure you he does not understand and which he didn’t actually come out in support of and didn’t actually come out in opposition to the negotiated plan ’cause he doesn’t fucking understand it either) thinks this is plan, put together by pinheads like Cantor, needs to be part of the negotiating process.
- As bad as Paulson’s bailout is, it at least has the opportunity for the taxpayers to recoup some or all of the expense a looooong way down the road. The insurance proposal does not do that. In fact, it makes the government the insurer of last resort meaning that it will be exposed to greater losses than the Paulson bailout proposal with no prayer of recoupment.
There’s more, but it gets even more arcane than those four points above.
Don’t get me wrong. I don’t like the Paulson bailout. I still can’t find specific reference to what regulatory changes will be made that will shore up the financial system so that this shit doesn’t happen, again. However, the House Republican version is utterly devoid of any regulatory requirements, where Paulson’s at least refers vaguely to an ability for the government to impose “regulations and controls as needed” (there ain’t alot of mystery here as to what they should be, starting with capital reserve requirements and oversight or elimination of the credit rating services). Regulations and controls as needed would, in fact, be imposed under a Democratic President. Under a McCain administration, not so much. Still, the Paulson plan injects caqital into the markets and the House Republican Dumbfuck plan does not. Which means it does nothing to prevent the collapse of the economy.
A friend indeed?
From The Wall Street Journal:
Mr. Paulson is resisting efforts to limit the pay of executives whose firms participate in the program and plans to fight it “hard,” according to a person familiar with the matter. He fears that provision would render the program moot, since many firms might choose not to participate
So the limit of executive pay is the one item Treasury Secretary Paulson is going to fight “hard”, because firms might “not participate” in the biggest free-for-all-after-a-massive-f***-up-of-cosmic-proportions ever? Riiiight.
Something isn’t sitting well. While the money for those vultures is certainly of enormous symbolic importance to all players, it is a “minor” issue - we are still talking BOATLOADS of money, I know - compared to the rest of what’s on the table, namely the more direct assistance to home owners and stricter oversight. Paulson knows that, too, and has already been signaling that he his ready to compromise on aid for homeowners, according to the WSJ article.
So, again, why is the executive pay so important to Paulson? Shouldn’t he be fighting the proposed oversight regulations and relief for Main Street much harder that the Democrats proposed over the weekend?
There are several possible answers to this:
a) Secretary Paulson is really trying to cover his friends in need and doesn’t care about the public reaction - after all, the man was previously the CEO of Goldman Sachs, or
b) Secretary Paulson needs to show his old buddies that he really, really tried, alas…, or
b) Secretary Paulson is trying to publicly blow a comparatively minor, but highly symbolic, matter out of proportion to retain bargaining power regarding the much more important items on the Democrats’ wish list, or
c) Secretary Paulson is playing a game of Chicken with the Congress of the United States of America and therefore the American people - and they should call his bluff
Neither explanation instills confidence in me that the man can be trusted with a $700 billion bucket of taxpayers money without any checks and balances in place.
Big Ass Bailout Part II
The Big Ass Bailout (BAB) is cruising down the highway. The Bush Administration is asking Congress for $700BB and enormous leeway for the Fed to be able to buy the bad debt of ailing financial institutions for the next two years. Not only will the US Government become the largest private equity firm in the world, it will do so buy buying assets that have little to no value. In the written version of the plan, acquired by the AP (but I’ve not yet seen a link to that version anywhere or I’d include it here) there is reportedly zero mention of what the government would get from financial institutions in return.
I am of the mind that a bailout is needed and needed immediately. AIG failing, Fannie or Freddie failing, any of the other hurting banks and investment funds (a line that is seriously blurred) failing would have a spectacular domino effect that would eventually bleed down to us guys…wiping out savings, 401k’s, insurance protections, the works. To provide a local example, if anyone of those players above went down I’d bet my car that you’d see TCF eat shit a couple of weeks later.
This crisis is the direct result of Republican policies first inflicted on the country as part of the Contract on America years in the mid-90’s…policies that were written by Phil Gramm, John McCain’s chief economic advisor and the guy who is writing McCain’s economic plan. If the AP report is correct (and it would certainly be par for the course that this Administration and the party it represents would ask for nothing in return from big financial institutions) and there are no requirements on banking behavior or regulations that would minimize the risk of such a crisis arising again due to the horrible management of risk by these same institutions, then this bailout boils down to two things:
- A massive transfer of debt from the exceedingly wealthy financial institutions to the exceedingly not wealthy tax base (particularly the middle class and the nearly poor). In other words a gift.
- A signal to Wall Street that it can outsource its risk to the taxpayer which would not only keep it from happening again but would guarantee that it happens again. Without a tradeoff that would diminish the upside reward while also minimizing the downside risk, any financial institution that didn’t behave going forward as if it didn’t need to sweat the risk of bad loans, fucked up financial instruments, and risky products would be officially stupid. Why would they ever sacrifice their upside for the sake of managing their downside risk? If you know the government is going to bail your ass out every time there is no downside risk (see also: the airline industry).
The Dems are making frightening noises. Much like the run-up to the Iraq war where they showed all the spine of an invertebrate, they are sounding like they are going to cave in to Republican scare tactics and not insist on a new regulatory scheme that would address the fundamental structural issues that caused this crisis. They are correct in assuming that action must be taken quickly. They would be foolish to assume that this means they cannot exercise their obligation for oversight. There must be concessions from the industry and the Administration that there ain’t no free lunches and that this bailout for them comes at a cost…that cost being no more Wild West risk management. That means not only a comprehensive regulatory approach but full funding of the monitoring and enforcement components. A very successful tactic for the Republicans has been to approve the regulation when they know they can’t win the fight but simply defund the monitoring and enforcement on the back end so that the regulation doesn’t work.
I know that Lehman and AIG and Bear and those names can seem very far away and as if they don’t have an impact on you. They do on a number of fronts (counterparty risk, access to capital, access to credit, etc). If nothing else, think of the price tag (and it’s important to note that the same Administration that is estimating $700BB are the folks that, $2 Trillion later brought you the $50BB Iraq war). Fix the levees in New Orleans? $30BB. Upgrade the energy infrastructure (electric grid) about the same. Provide health insurance to every citizen…’bout $100BB. Fix social security for another 100 years…’bout $200BB. Eliminate childhood malnourishment? $15BB. All of these things that we allegedly can’t afford to do, will be completely off the table for-fucking-ever as we pay off the bad debts of the private sector for generations to come…while the dudes that did it kick it in their summer beach homes and whine about how their golden parachutes were diminished all the way down to silver parachutes. The Dems must insist on a new regulatory scheme, a robust monitoring and enforcement capability and should, while they are at it, insist on a say in the executive compensation packages of any top executives of companies that need to be bailed out.
The Big Ass Bailout
The Administration is currently trying to shove down the collective throat of Congress a bailout of the financial system (meaning big ass wealthy financial services firms) with a price tag of somewhere north of $500BB (which would follow the $600BB already spent on prior bailouts this year). Following their typical scare tactics they are telling Senators and Representatives that they have to act now, can’t change a word of it, can’t add anything to it. Particularly they are threatening to pull the plan off the table (which would be hard since they haven’t published the fucking thing yet…no one…NO ONE…has actually seen it in writing) if Dems try to attach language tightening the deplorable lack of regulation on financial institutions that led to this crisis in the first place. And it’s looking like wimp ass Dems are falling for it.
Here’s hoping they don’t.
No He Didn’t!
I’m working in Manhattan for the next three months. Interesting place to be what with the meltdown of Lehman, the sorta meltdown of Merrill, AIG eating shit, etc. Wall Street types are bummed the fuck out.
To give you an idea of what voting Republican will mean for you, John McCain announced today that his answer to the hundreds of billions of dollars the financial markets meltdown (Highlights for new Taxpayer liabilities: $30BB for Bear-Stearns buyer MorganStanley; $200BBish for Fannie and Freddie; $85BB for AIG) is to form a “blue-ribbon commission to study the nation’s deepening crisis in the financial services industry”. That’s Washington code for “do fucking nothing”. This was fundamentally a failure of regulation…not a bad regulatory scheme but a legislative and administrative lack of will and/or inclination to regulate a huge sector of the financial services industry. There is no need for a “blue-ribbon commission”. There is a need only for the Democrats to find the spine to legislate and for the Democrats to take the executive branch with the will to have regulatory agencies enforce aforementioned legislation to regulate the totally lacking in oversight mortgage markets. Either McCain wants a commission so he can do to its findings what Bush regularly does with his blue ribbon commission’s findings (see also: 9/11 Commission) or he is proving what should have been apparent all along…he’s stupid about the economy. In either case the outcome is the same…more government welfare to irresponsible and poorly run massive corporations with no attempt to address the fundamental infrastructure problems that brought about the need for those welfare payments.
A vote for McCain is a vote for more corporate bailouts.
One More Time, Again
It’s looking like US Air is heading towards its 3rd bankruptcy in 7 years. You read that right. 3 in 7. One bankruptcy every 2 years and 4 months. Remember, the do-nothing Congress of 2004-6 did manage to pass a personal bankruptcy law that made it much, much harder for individuals to gain bankruptcy protection (a grossly under-reported factor in the current mortgage crisis). As a big ass company, it’s still so easy it’s as viable a strategy as issuing debt is. At some point, we have to seriously considering limiting the number of times a company can go to the bankruptcy well. At some point the advocates of the free market (as Republicans allegedly are despite overwhelming evidence to the contrary) have to let the market work…which in the case of US Air means let that piece of crap business die the ugly death fit for it.
The current problem for US Air, and for nearly every other airline, is the price of oil. A year ago many industry analysts, when the price of oil was $60/barrel, said they didn’t think the industry as a whole was viable if the price of oil doubled. Said price is now at $130/barrel. Doubling complete. Hmmm…
Consolidation (mergers between Northwest and Delta and the one being explored between United and US Air) ain’t gonna provide the answer in anything but a short term sense. The reason for this is that the price of oil (as mentioned ad nauseum by me it is a factor of production in everything) is skyrocketing. The only answers are going to be new business models, new technologies, and most of all, higher prices. Get good with that concept. The price of oil, the single biggest factor of production for an airline, is rising far faster than fares. We are just now starting to see higher fares but they do not reflect the full increase in oil. Airlines will continue to piss off their employees by hammering them on pay but you can only get so much blood from that corpse before it runs dry. Fares are going up and they’re gonna keep going up. They have to.
It doesn’t end with airlines. Prices are going to rise. China and India’s increasing demand for oil has radically changed the market for oil and it ain’t changing back any time soon. It may stabilize, the rate of increase may slow, but the price for crude will, for the forseeable future, keep going up.
As a result, stupid shit like the gas-tax holiday, opening up ANWR, opening up the coasts to drilling, are ineffective. The gas tax thing is, as Obama says, electioneering. It gets you in office. What are you going to do…suspend it as long as the price of oil is above some trigger level? It’s a bullshit policy. Opening up ANWR and the coasts to more drilling will do nothing meaningful to lower the price of oil. In a best case scenario it’d drop from $130 to $125 or so. It would, however, make the very wealthy oil companies very wealthier.
There is not going to be a single solution to this. We are entering the age of expensive oil and the age of increasing global oil demand. This is a considerable threat to us as a nation, given our oil dependence. Not foreign oil dependence…any oil dependence. The next President is going to have to lead this country kicking and screaming (and I mean all of us who love our cars and our gadgets and our lights and our heat and all the things we do and rely on that lead to the endless burning of fossil fuels) into a new future that is not powered by oil.
One important note (and this from a knee-jerk environmentalist): environmental organizations want to have you believe that switching from fossil fuels to low carbon energy will be painless economically. Don’t believe it. It will be expensive and it will be painful. Industries will die out. Jobs will be lost. The whole shooting match. However…the sooner we start through things like widespread publicly supported research of alternative fuels, new engine designs, etc., the less expensive and less painful it will be.
Huh.
Here’s an interesting li’l tidbit from the Pittsburgh Post-Gazette (for reasons I don’t understand when I tried to put the link in I kept blowing up this post).
H.J. Heinz Co. plans to close a plant in Dallas next month, affecting nearly 200 employees. The Pittsburgh-based food company says work now done at the plant will be transferred to Heinz facilities in Mason, Ohio, Jacksonville, Fla., and Chatsworth, Calif.
The reason I bring this up is that here in Minnesota (and happening in states all over this great land) the righties in the state legislature have an annual drama-fest over “lower the corporate tax rate! lower the corporate tax rate! Businesses leaving! Can’t compete! blahblahblah”. In the case of Heinz, I don’t know why they decided to consolidate operations and shut down one of their four plants. I do know that corporate tax rates weren’t the reason. In fact, if you read about consolidations taking place and the reasons for choosing one state over another, etc…the one thing that rarely comes up, and when it does it’s way down the list, is the corporate tax rate. In this instance I know, unequivocally, that it wasn’t the corporate tax rate. How, you ask? ‘Cause California is a high tax state, Ohio is medium-high, and Florida is generally low. And Texas? The state they left? The “we’re a damn tax-haven state so come bring your biness (Texan for business) here” state. It hasn’t got a fucking corporate tax rate (okay, okay…it has a thing that’s called a Franchise tax but it’s full of loopholes and even when applied it’s roughly 3x lower than Florida’s low ass rate).
So, righties in the legislature, shut the hell up. Stop selling the theory that the corporate tax rate leads to decreased business investment. Bring me data…not anecdotal examples…but solid data.
I issue this challenge with great confidence. ‘Cause their ain’t no data to support it. Sure, you could set the rate so high that businesses would bail. Absolutely. But the tax rates that currently exist in this state, high as they are, show zero…ZERO…correlation to corporations exiting the state or cutting back on operations within it.