Monday, June 01, 2009

Yugo, Guy

Ask the man who's owned one in the collective sense:
When the Romanian dictator Nicolae Ceausescu decided in the mid-1960s that he wanted to have a car industry, he chose me to start the project rolling. In the land of the blind, the one-eyed man is king. I knew nothing about manufacturing cars, but neither did anyone else among Ceausescu's top men. However, my father had spent most of his life running the service department of the General Motors affiliate in Bucharest.

My job at the time was as head of the Romanian industrial espionage program. Ceausescu tasked me to mediate the purchase of a minimum, basic license for a small car from a major Western manufacturer, and then to steal everything else needed to produce the car.

Three Western companies competed for the honor. Ceausescu decided on Renault, because it was owned by the French government (all Soviet bloc rulers distrusted private companies). We ended up with a license for an antiquated and about-to-be-discontinued Renault-12 car, because it was the cheapest. "Good enough for the idiots," Ceausescu decided....

"Too luxurious for the idiots," Ceausescu decreed when he saw the first Dacia car made in Romania. Immediately, the radio, right side mirror and backseat heating were dropped. Other "unnecessary luxuries" were soon eliminated by the bureaucrats and their workers' union that were running the factory. The car that finally hit the market was a stripped-down version of the old, stripped-down Renault 12. "Perfect for the idiots," Ceausescu approved. Indeed, the Romanian people, who had never before had any car, came to cherish the Dacia.

....Ceausescu was an extreme case, but automobile manufacturing and government were never a good mix in any socialist/communist country. In the late 1950s, when I headed Romania's foreign intelligence station in West Germany, I worked closely with the foreign branch of the East German Stasi. Its chief, Markus Wolf, rewarded me with a Trabant car -- the pride of East Germany -- when I left to return to Romania.

That ugly little car became famous in 1989 when thousands of East Germans used it to cross to the West. The Trabant originally derived from a well regarded West German car (the DKW) made by Audi, which today produces some of the most prestigious cars in the world. In the hands of the East German government, the unfortunate DKW became a farce of a car. The bureaucrats and the union that ran the Trabant factory made the car smaller and boxier, to give it a more proletarian look. To reduce production costs, they cut down on the size of the original, already small DKW engine, and they replaced the metal body with one made of plastic-covered cardboard. What rolled off the assembly line was a kind of horseless carriage that roared like a lawn mower and polluted the air worse than a whole city block full of big Western cars.

After German reunification, the plucky little "Trabi" that East Germans used to wait 10 years to buy became an embarrassment, and its production was stopped. Germany's junkyards are now piled high with Trabants, which cannot be recycled because burning their plastic-covered cardboard bodies would release poisonous dioxins. German scientists are now trying to develop a bacterium to devour the cardboard-and-plastic body.

The FLUBA awaits the Obami.

Never trust anyone over 30

Especially with the future of the auto industry:
It is not every 31-year-old who, in a first government job, finds himself dismantlingGeneral Motors and rewriting the rules of American capitalism.

But that, in short, is the job description for Brian Deese, a not-quite graduate of Yale Law School who had never set foot in an automotive assembly plant until he took on his nearly unseen role in remaking the American automotive industry.

....A month ago, when the administration was divided over whether to support Fiat’s bid to take over much of Chrysler, it was Mr. Deese who spoke out strongly against simply letting the company go into liquidation, according to several people who were present for the debate.

“Brian grasps both the economics and the politics about as quickly as I’ve seen anyone do this,” said Lawrence H. Summers, the head of the National Economic Council who is not known for being patient whenever he believes an analysis is sub-par — or disagrees with his own. “And there he was in the Roosevelt Room, speaking up vigorously to make the point that the costs we were going to incur giving Fiat a chance were no greater than some of the hidden costs of liquidation.”

Mr. Deese was not the only one favoring the Fiat deal, but his lengthy memorandum on how liquidation would increase Medicaid costs, unemployment insurance and municipal bankruptcies ended the debate.

That last sentence would seem to have let the cat out of the bag. This policy isn't about saving GM as much as it is about continuing to hide the insolvency of the agencies that politicians have touted as the 'social safety net' lo these many decades.

The Trouble With Larry

Irwin Stelzer thinks none of this would be happening if Larry Summers was still alive:
The administration, led by GM and Chrysler CEO Barack Obama, also decided to lay hands on the auto industry. First it shortchanged the companies' creditors--pension funds and investors who had lent the -companies money on terms that gave them preferential access to the companies' assets should there be a bankruptcy. What matter contractual obligations when the United Auto Workers is awaiting payback for its support of Obama in the primary and general election campaigns? Surely Summers knows that such a move will make investors more reluctant to lend in the future and inclined to charge higher interest rates to any companies they do finance. Some say Summers sat in on these meetings and either lost the argument--implausible, in the view of those who have jousted with him in the past--or remained silent. Say it ain't so, Larry.

The administration has also promised to lower health care costs by introducing new IT systems and expanding insurance coverage. Virtually every expert says that information technology might be a nice thing--automated records, easily accessible--but at best will have only a trivial effect on costs. And just how expanding coverage can lower costs remains a mystery to most economists. Unless, of course, the administration is planning to ration health care, a nightmarish system that until recently led the National Health Service in Britain to deny treatment to patients suffering from macular degeneration until they were blind in one eye. Summers knows all about these cost figures and the inefficiencies of rationing. Did he decide to go along to get along? Say it ain't so, Larry.

Then there is energy policy. The president says he can make us independent of foreign oil. Summers knows he can't. He knows too that many economists contend fuel efficiency standards are more likely to deny consumers the cars they want than to have any effect on global climate, given the developing countries' plans to build thousands of new coal-fired generating stations. .... Say it ain't so, Larry.

....There's more, but you get the idea. When Barack Obama won the election and began to staff up, those of us who worried that the administration's policies would lean so far in the direction of political pandering as to create serious economic problems took heart when we learned that Larry Summers was to be at the center of policy-making. His fearless intelligence and debating skills would certainly prevent the administration from making terrible, irrevocable policy errors. Christina Romer, chosen by Obama to chair his Council of Economic Advisers, might prefer that appointment to fidelity to her academic research findings--tax cuts are more effective in stimulating an economy than is spending--but surely Larry Summers would not. So great is his reputation that Obama's chief political adviser, David Axelrod, told the press, "I'm not sure we would have gotten him but for the fact that we have a crisis that is equal to his talents."

Many of us joined Axelrod in praising Obama for landing Summers. And those who know him even slightly had no doubt that he has the good sense to treat fools slightly more kindly than his reputation would lead one to expect. So he could be heard. But we wonder if his voice of sanity has gone the way of Paul Volcker's, stifled and ignored. Say it ain't so, Larry.

Sunday, May 10, 2009

Home on the Deranged

Steven Malanga details the decades long obsession American politicians have had with home ownership, and its unintended consequences. Predictably, no one seems to have learned:
...before we’ve even worked our way through this crisis, elected officials and policymakers are busy readying the next. Barney Frank, the Massachusetts congressman who serves as chair of the House Financial Services Committee, has balked at proposals to privatize Fannie Mae and Freddie Mac, which would eliminate their risk to taxpayers and their susceptibility to political machinations.

Why? Simple: the government uses them to subsidize the affordable-housing programs that Frank supports. California congressman Joe Baca, head of the Congressional Hispanic Caucus, also opposes reining in affordable housing lending. “We need to keep credit easily accessible to our minority communities,” he asserts.

Republicans and Democrats, meanwhile, have scrambled to reignite the housing market through ill-conceived tax credits and renewed federal subsidies for mortgages, including the Obama administration’s mortgage bailout plan, which recalls the New Deal’s H[ome]O[wner's]L[oan]C[orp].

As Harvard economist and City Journal contributing editor Edward Glaeser has observed, mortgage lenders have finally “recovered their sanity”—only to have government dangling subsidized low interest rates and tax credits in front of them and their potential customers all over again. Behind these efforts is a fundamental misconception among politicians that housing drives the American economy and therefore demands subsidy at virtually any cost.

Wednesday, May 06, 2009

Emperor...No Clothes

We think Joe the Plumber and Cliff Asness would get along just fine:
Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process.

Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing.

Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.

....Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.

Careful what you wish for, UAW

NYU's Thomas Cooley says, you'll be sorry:
Government interference in the normal conduct of business has had a chilling effect on financial markets and threatens the progress of the recovery.

....Investors, other than the banks who desperately needed TARP funds for survival, are leery of any program that uses them. Anyone who took TARP funds has been subject to government interference in managerial decisions. The restrictions on bonuses and executive pay have been widely discussed in the media. Less well known are restrictions on the banks' ability to hire foreigners, and the constant harassment by Congress over internal management decisions on everything from the use of private aircraft to the locations of conferences. Some of these concerns are well justified, of course, but it wasn't clear ex-ante what all of the rules were and it isn't clear ex-post either.

....The Obama administration has shown repeatedly that it is willing to change the rules and even challenge the sanctity of contracts in the interests of its political agenda. The best, most recent example is the Chrysler restructuring.

The administration decided to tilt the restructuring in favor of the unions. The government proposed giving the United Auto Workers' retiree health fund a 55% equity stake in Chrysler--more than the combined stakes of Chrysler's merger partner, Fiat, or the other secured creditors that are owed roughly $7 billion. When some of the secured creditors, who were offered 30 cents on the dollar, balked, they were attacked by Obama as speculators.

....Citi, JP Morgan Chase, Goldman Sachs and Morgan Stanley, all major recipients of TARP Funds, all deep in the pocket of the Treasury, agreed to the administration's plan. So it looks like bankruptcy law will take a back seat to social policy.

There is at least some poetic justice in this outcome. The unions, whose years of work rules, and pension and health care deals helped sink the company, will have to eat their own cooking from now on. But their future success needs not only labor but capital.

Why would private capital get involved when the rules of the game are so capricious? No one would take that gamble when it is clear that, in dealing with the government, private capital will always take a back seat to politically powerful entities.

Sunday, May 03, 2009

Cheaters Never Prosper?

It seems their enablers do:
At the Ashley Madison agency, which revels in the motto, "Life is short. Have an affair," the global economic downturn is proving a boon for business.

....the message is hitting home as the economy reels, according to Noel Biderman, the company's founder and chief executive.

Membership has soared from one million to 3.6 million in just 12 months, and he expects another surge after the company launched a service allowing members to access the site from their mobile phones. The innovation is aimed at would-be cheaters who are nervous about leaving evidence of their infidelity on their computer at home or work.

Mr Biderman said that many couples who would otherwise have divorced were seeking affairs at the moment because of the cost of hiring lawyers and the difficulty of selling the marital home.

....It is free to register with Ashley Madison, but members pay with purchased credits to send messages to other users. The agency charges $49 (£33) for 100 credits or $249 for 1,000 credits and 50 credits buys 60 minutes of instant messaging time or 10 emails to different users.

They shoot horses, don't they?

If, they don't, they might start, in Indian country:
WARM SPRINGS INDIAN RESERVATION —
Here on this reservation in north-central Oregon, horses are woven deeply into daily life. They are traditionally used by tribal members in their work and their culture, whether it be for rodeos or horse parades.

Gathering, breaking and selling wild horses has long been part of the tribe's economy. Horses that don't make the grade are sold for slaughter.

But the nation's final three slaughterhouses were shuttered two years ago, and a perfect storm has formed with a glut of horses, lack of a market and economic recession.

Tribal rangeland managers now estimate 20,000 wild horses are overrunning Indian Country in Washington, Idaho and Oregon, with an annual foal crop raising the population by some 20 percent a year.

....Agricultural and rangeland experts from five tribes have been meeting quietly since last winter to explore options to manage horse populations on reservation lands. Their ideas, still in discussion, run the gamut.

The most controversial: opening a slaughter plant at the Warm Springs reservation, and maybe someday packing the meat for human consumption overseas, if the regulatory hurdles can be cleared and economics pencil out.

....There used to be a thriving horse market in this country, with buyers bidding on horses for processing plants in Stanwood; Maytown, Thurston County; and more than 20 other plants across the country, supplying an eager trade, particularly in Europe.

But the country's remaining three horse slaughterhouses, in Illinois and Texas, closed in 2007 after a sustained campaign by animal-rights activists that resulted in Congress forbidding USDA inspection of horse meat for human consumption. That ended any legal commercial packing industry for horse meat in this country.

Still, there is a demand for horse meat, particularly in Europe. But with no packer competition in the U.S. to supply it, and a glut of horses, foreign packers can set their price.

Trucking the animals long distances to slaughterhouses in Canada and Mexico also means buyers will take only the fattest, biggest animals.

For the sick, the old, and the skinny, today there is often no market at any price. Buyers who remember paying 70 cents a pound at auction are today paying as little as 6 cents a pound — if the packers will even take the animal.

....The bottom has fallen out of the horse market just as the recession is driving even owners of pedigreed, suburban stock to unload animals they can't afford to care for, overwhelming rescue and shelter operators.

It's the same story for the U.S. Bureau of Land Management, which is struggling to feed and care for some 30,000 wild mustangs gathered from public rangelands and put out to pasture in the Midwest in deference to opponents of slaughter.

The BLM is paying $27 million this year alone to feed and care for wild horses living out their days at taxpayer expense. With another 30,000 or so more wild mustangs still roaming the range, multiplying every year, the costs are growing. So far, the BLM has no solution to the problem.

Hold the Phone!

At the University of Washington, the PhDs are in...but their telephones are out:
"I think we're all aware that we're living through events that in 10 or 20 years we'll be talking about in our classes," he said.

He's referring to the day they took his telephone away.

[Richard] Kielbowicz, whom I had to reach by e-mail, is a professor at the University of Washington's Department of Communication. These are lean times at the UW, so to save money this department that specializes in how society exchanges information has gotten rid of its landline phones.

....Most professors have personal cellphones, so they're hardly shut off from the world. Still there are some who feel the demise of the landline phone is sad.

....On the other hand, the relics never rang anymore.

Kielbowicz, who teaches a course in the history of communication technology from the Gutenberg press to the World Wide Web, says his office phone would ring maybe once every two weeks. Calls became so rare that he began to view any that did come in with trepidation.

"Students no longer call on the phone, ever," he said.

Friday, May 01, 2009

Republican Optimist, Thy Name Is...

Mitch Daniels, governor of Indiana:
In Indiana, Republicans are the party of change and reform; ask anybody -- our opponents, the press, everybody. In the rhythm of life here, four years ago we replaced a 16-year regime that had gone stale.

And so we are the party that restored fiscal integrity. We are the party that addressed health care for the uninsured. We are the party that rebuilt an attractive business environment. We are the party that cleaned up the ethics issues in government -- that and much more. We attacked our infrastructure problem in a novel and taxpayer-friendly way.

....you know, the results are in -- and incidentally, we just won with the largest vote total in the history of elections in our state for any office any year.

....I guess what I'm saying is that when Indiana Republicans meet, I always tell them we cannot control what the party looks like in other places or nationally, but here in Indiana if we don't remain the party always defining the agenda, bringing the new ideas and standing for constructive change, then people will excuse us from duty. And they should. ...

People want to know first of all that you hear them and understand what's going on in their lives. I work at this incessantly -- I was riding all over Salden, Indiana, on my motorcycle Saturday -- and that you have some thoughts about how you make life better, more secure for them. Now, those thoughts can be animated by what we consider Republican principles, and that's fine. In other words, I don't think fiscal prudence went out of style; in fact, people are rediscovering it themselves, right? Save more, spend less -- and I think they expect government to emulate that.

When we addressed health care for the uninsured, or insurance for those without, it's a very free-market solution -- it's basically HSA's for poor people -- and it's extraordinarily popular. I had a lady hugging me and crying down in a coffee shop in Connorsville Saturday morning because she got coverage -- I've had this experience a thousand times -- she got coverage and she couldn't possibly have had it any other way. I just think that the image problems we have are very real, but also addressable, by a Republican Party that goes out of its way to show that it cares about average people and the least advantaged.

Let me just go off on another one my little sermons I always give. Here's a political fact of life: You can be a blue-blood, silver spoon, coastal elitist, and if you have the Democratic label, you start with the presumption that you are connected to average folks. And the Republicans start with the negative presumption. So don't whine about it being unfair, just recognize it and go work on it.

Thursday, April 23, 2009

Fat So?

Life is like a box of chocolates, except you do know what you're getting in this case:
Consumers appear to be comfort eating their way through the recession if the surge in profits of U.S. chocolate giant Hershey is anything to go by.

The firm, which makes Hershey's Kisses and Kit Kat, today posted results for the first quarter of the year, revealing profits had jumped 20per cent annually.

Consumer psychologists are suggesting people could be using chocolate bars as a relatively cheap pick-me-up during the economic downturn.

Tuesday, April 21, 2009

No Mas

Britain expects every gardener to do her duty:
Householder Sandra Smith has been ordered to cover up her garden gnomes after complaints that the naked ornaments were upsetting local children.

The gnomes, one male and two female, have stood in Mrs Smith's front garden for around 15 years in Hunnington in the West Midlands.

The grandmother has been forced to put clothes on the ornaments after a neighbour complained to Bromsgrove District Council and an officer phoned her.