Post No. 44a: An Argument for Further Deliberation about Our Financial Situation

Copyright 2008 The New York Times Company

September 22, 2008

Op-Ed Columnist

Cash for Trash

By PAUL KRUGMAN
Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

Copyright 2008 The New York Times Company

Post No. 44: At What Price Dumbing Down?

© The Institute for Applied Common Sense

One of the somewhat overlooked ironies of this campaign year is that a black man, who was born outside of this country and the product of a broken home, and who managed to beat the odds and become a reasonably well educated public servant after attending two Ivy League institutions, is currently being framed as an “elitist” in our society.

That this should occur should cause us all to pause.

Last spring I managed to get myself involved is scoring reading and writing competencies for some of the prospective graduates of one of our state institutions.

The state wide results just came in reflecting an, on average, 2% decrease in reading comprehension, and a 17% increase in writing communication.

Not surprisingly, the schools that scored worst are challenging the test.

Even less surprisingly, I will be spending the last half of October explaining my scoring.

My guess is that this anomaly can be explained by the Internet.

Computers have got kids writing, seriously, earlier than ever before in history... but to paraphrase Mr. Gossage (http://adage.com/century/people023.html), they write about what interests them.

If we continue to dumb down and politically correct our text books, year after year, to revise the content to match whatever we consider to be the prevailing political winds... we shouldn't be surprised if our children choose to read that which seems to be of more immediate, personal, value.

And the more we chose to force our teachers to keep to the politically correct curriculum of the day, the less opportunity these mostly right headed people will have to inspire and challenge their students...absent which we are well and truly screwed.

Advertising is not a bad example of what has gone wrong with our culture.

There is nothing more expensive in the marketing business than a failed campaign. But agency holding companies have gotten into bed with client purchasing departments, often offering to provide their services for free, and earned back their 20 - 30% margins by eliminating the people who actually do the work... not to mention any semblance of a training program

The result is often a single ad that offends nobody world wide... mostly because it is so innocuous nobody world wide notices it...supported by intergalactic media buys.... The Olympics come to mind...that cost nothing to negotiate... can be promoted as being available at some fictional discount only because of the agency's "massive media clout," and get bought on the discount rather than their effectiveness.

All of which we do under the umbrella of branding...and we ought to be ashamed of ourselves.

This is not the way people buy stuff.

Jim Jordan [http://en.wikipedia.org/wiki/James_Jordan_(publicist)], a giant in the marketing field, once said. "It's not creative unless it sells."

Bill Bernbach (http://en.wikipedia.org/wiki/William_Bernbach), also a giant, said, "It won't sell unless it's creative."

They were both right.

The problem is the people who now run their agencies got their jobs by buying things cheap... and that's what they talk to the client about when they sit down for their quarterly "state of the account dinners."

Unfortunately, expressing any of the above in front of current agency and client management can produce chronic underemployment.

More unfortunately, if somebody doesn't stand up pretty quick, we are on our way to becoming a supplier of natural resources to countries that have mastered the art of adding value.

In the immortal words of Jimmy Williams, "When you stop taking pride in what you make, you have hitched your star to a wagon."

Which I believe is Mr. Friedman's (http://en.wikipedia.org/wiki/Thomas_Friedman) point as well, in his discussion of innovation, global competition, and the future position of the United States. (http://theviewfromoutsidemytinywindow.blogspot.com/2008/09/post-no-41b-television-worth-viewing.html.)

At the end of the day, it really is all about creativity and innovation…. It’s what ultimately sells.

Always has, always will.

© The Institute for Applied Common Sense

Post No. 41b: Television Worth Viewing

Charlie Rose on PBS: A conversation with Thomas Friedman

http://www.charlierose.com/shows/2008/09/09/1/a-conversation-with-thomas-l-friedman

No matter what you may think of Thomas Friedman’s politics or positions, he raises some very significant points about innovation, global competition, and the future position of the United States, about which we should all be thinking. Friedman discusses his new book, Hot, Flat, and Crowded: Why We Need a Green Revolution - and How It Can Renew America )http://books.google.com/books?id=FMCxKQAACAAJ&dq=%22hot,+flat+and+crowded%22&ei=0VDHSOm9JpLkywS_q9DkAw.)

We can not simply continue to sit around, argue amongst ourselves, and think that terrorists are around every corner, while the world passes us by. This is a big picture discussion. We need to come up with solutions, and Friedman at least suggests some for our consideration.

Check your local listings. On the East Coast, it aired at 11:30 am on Tuesday, September 9, 2008.

Post No. 39b: And So You Thought That America Only Had to Worry About China's Ability to Make Things

Article of Interest from the New York Times:

August 31, 2008

Op-Ed Columnist

Postcard From South China

By THOMAS L. FRIEDMAN
Guangzhou, China

I had the pleasure the other day of visiting the delightfully named Zhuhai Guohua Wonderful Wind Power Exploitation Co. in Zhuhai, on the southern coast of China. It’s a good news/bad news story.

The good news was that the Chinese engineers showed me their control room, which has a giant glass window that looks out onto their 21 wind turbines that crown the peaks of a nearby mountain. “How nice,” I thought. “China’s really starting to go green.”

But as my eye drifted just to the left of that mountain, I saw Macau, with its rising skyline of casino skyscrapers. The Venetian Hotel in Macau alone has some 870 gaming tables and 3,400 slot machines. So, I did a quick calculation and figured that those 21 wind turbines together might power the Venetian’s army of one-armed bandits for a few hours of green gambling.

That dichotomy runs through a lot of what is going on here in Guangdong Province, where 30 years ago China began its economic opening. You’re starting to see the emergence of Chinese clean-tech companies — I also visited a solar panel start-up — and real environmental awareness among officials and students. But the momentum of this region’s growth, the sheer land-of-the-giants scale of the buildings, makes the renewable energy here literally a drop in the bucket.

As a result, there is a dawning awareness that if China is to break its own addiction to oil, it will take a much more fundamental shift from the growth model that powered its first 30 years.

That model was based on two linked ideas: 1) energy was inexhaustible, inexpensive and benign; and 2) China could count on raising its living standards by forever being the world’s low-cost manufacturing workshop, based on cheap energy.

In recent years, though, fossil-fuel energy has become expensive, exhaustible and toxic, and rising wages — to some extent because of rising environmental considerations and social security requirements — have meant that the workshops of southern China are no longer the low-cost producers in Asia. Vietnam and Western China now beckon.

The only way forward, say officials, is for China to gradually develop a cleaner, knowledge-based, service/finance economy. It has to move from “made in China” to “designed in China” to “imagined in China.”

In short, the economy here has to become greener and smarter. (Sound familiar?)

In 1992, China’s coastal economic powerhouses hit a similar wall when they found they could not grow further without the government loosening travel restrictions to attract workers from all over China. So, more personal freedom to move around China was unleashed then. Now, these same provinces need to allow more “mind movement” to get to the next level.

The problem for the ruling Communist Party is this: China can’t have a greener society without empowering citizens to become watchdogs and allowing them to sue local businesses and governments that pollute, and it can’t have a more knowledge-intensive innovation society without a freer flow of information and experimentation.

What surprised me is how much the party is thinking about all this. I actually came here at the invitation of Wang Yang, the Communist Party secretary, i.e. the boss of Guangdong Province. He had read one of my books on globalization in Chinese.

Wang is also a member of the Politburo in Beijing and is considered one of the most innovative thinkers in China’s leadership today. He has been given room to experiment and has begun advocating something he calls “mind liberation” — primarily an effort to change the culture of his bureaucracy and open it up to new ways of thinking. Right now he is focused on trying to shift dirty, low-wage manufacturing out of Guangzhou to the countryside, where jobs are still scarce.

And he is trying to attract clean industries and services to the city. His goal, he said, was a more “low-carbon economy.”

“Please put it in your column that Party Secretary Wang Yang welcomes [Western] clean energy technology companies to come to Guangdong Province and use it as a laboratory to develop their products,” he told me. “We will be most willing to participate in the innovation and provide the services they need.”

So my postcard from Guangzhou would read like this: “Dear Mom and Dad, this place is so much more interesting than it looks from abroad. I met wind and solar companies eager for Western investment and Chinese college students who were organizing a boycott of an Indonesian paper company for despoiling their forest. An ‘Institute of Civil Society’ has quietly opened at the local Sun Yat-sen University. The Communist Party is trying to break the old mold without breaking its hold. It’s quite a drama. Can’t wait to come back next summer and see how they’re doing ...”