naked capitalism

Yves here. Mark Ames’ post discusses the institutionalization of a regressive policy, that of trying to eke more corporate growth out of extracting more and more out of workers rather than sharing the benefits of productivity gains with them. As we’ve discussed, Henry Ford, who was hardly a chartable sort, voluntarily doubled the wages of his workers, both to improve retention but also to enable them to be able to afford to buy his products.

As Thomas Palley has discussed, and the chart below underscores, the US changed in the early 1980s from a model where rising worker wages were seen as the driver to growth and hence a focus of policy, to one where rising consumer debt levels and asset appreciation were used to substitute for stagnant incomes.

The problem, as we discovered in the crisis, is that that paradigm is self limiting. Yet as Ames reveals, McKinsey and presumably other fonts of orthodox thinking are pushing for an even more aggressive version of that failed model.

By Mark Ames, the author of Going Postal: Rage, Murder and Rebellion from Reagan’s Workplaces to Clinton’s Columbine. Cross posted from The eXiled

This article was first published in ConsortiumNews.com

A little over a year ago, while researching the Confederacy’s economy, I stumbled across this unnerving graph charting the value of America’s “stock of slaves” in the last decades before the Civil War.

This graph tells the real story behind the South’s secession: the value of the South’s “slave stock”—the property of the ruling class — soared as secession approached, reaching an almost 90-degree angle in those final years before Harper’s Ferry. The South’s ruling class seceded to protect their riches, period: Read the rest of this entry »

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from http://www.testosteronepit.com/home/2012/2/25/greece-the-bottomless-barrel-as-germans-say.html“>Testosterone Pit.

The latest success—I suppose you could call it that, at least for those involved on the financial end—was the acquisition of Kiekert AG last week. The company was founded in 1857 in Heiligenhaus, near Düsseldorf, Germany, and over time became the largest manufacturer of automotive door-lock systems, with customers like GM, Ford, VW, BMW, and other automakers around the world. It has facilities in Germany, the Czech Republic, Great Britain, the US, Mexico, and, since 2008, China.

In 2000, it was taken over by Permira, a European PE firm that loaded up the company with debt. By 2006, the game was over. Kiekert was turned over to its creditors, Bluebay Asset Management, Silver Point Capital, and Morgan Stanley, in a debt-to-equity swap. And last week, the consortium was able to exit by selling Kiekert to Hebei Lingyun Industrial Group Corporation (Lingyun Group), a subsidiary of China North Industries Corporation. Norinco, as it’s called, is a government-owned conglomerate that manufactures motorcycles, cars, trucks, machinery, and so on, plus weaponry, missiles, and ammo—with a troubled history in the US. Among other issues, the Bush administration slapped it with sanctions in 2003 for selling missile-related products to Iran.

Norinco, through its subsidiaries, is on a shopping spree. Kiekert, the leader in the niche of door lock systems, was an obvious target. With 4,000 employees, it sold over 41 million systems worldwide in 2011. Lingyun Group, which makes automotive door components for the Chinese market, is hoping to use the acquisition to get its foot in the door with Kiekert’s customers in the US and Europe. Perhaps to allay certain anxieties, Kiekert’s press release states that Lingyun Group is a “publically traded” company—though Lingyun’s own website states that it is a subsidiary of Norinco and that one of the ten joint ventures and limited companies in the group is publically traded.

Chinese companies have been on buying spree. In 2011, Chinese companies invested in 158 projects in Germany, according to Germany Trade & Invest (GTAI). It made China “by far the most important investor in Germany,” said GTAI CEO Michael Pfeiffer. The US has dropped to second place with 110 projects in Germany (based on number of deals, not size).

“Europe is a gigantic market, and investors are looking for the safest and largest location, and that is Germany,” Pfeiffer said to explain the phenomenon. On the other hand, the amount that German companies want to invest overseas dropped sharply from €100 billion in 2011 to €70 billion in 2012, according to a survey by the Association of German Chambers of Industry and Commerce (DIHK). They’re reacting apparently “to the slower pace of the world economy, the debt crisis, and the risk-averse banks.”

Chinese companies are following the government’s five-year plan to buy into strategic areas, such as IT, finance, and the auto industry. They’re buying turnaround situations, like bankrupt automotive component supplier Saargummi, or healthy companies such as concrete-pump maker Putzmeister whose pumps made history in Chernobyl where they were used to dump concrete on the reactor, and in Fukushima where they were used to douse the reactors with water. And perhaps this fame induced Sany Group, a Chinese construction-equipment maker, to acquire Putzmeister in January 2012. And in a different kind of deal, the State Administration of Foreign Exchange (SAFE), which manages China’s foreign reserves, quietly accumulated stock in Munch Re Group, whose largest single shareholder, with 10.2%, is Warren Buffet’s insurance empire. By August 2011, SAFE’s stake exceeded the 3% limit that triggered disclosure.

The question is still open if Chinese executives can adjust their management methods to German business culture—though this is probably no more difficult than what German managers have to do in their ventures in China. And the fear persists that Chinese investors only seek intellectual property and technologies, and once they have acquired and repatriated them, that they will close German production locations. But Chinese companies also invest in Germany in order to gain access to the European market, which would indicate a desire for a permanent presence.

And there has been a sea change in the auto industry. Not long ago, if a Chinese investor wanted to buy a German component maker, its customers—VW, BMW, or Daimler—would veto the deal and it would go nowhere. But now German automakers are investing hand-over-fist in China where they expect to make the majority of their worldwide profits in a few years. In return for this access, the Chinese government sees to it that Chinese companies can go shopping for component suppliers in Germany. And the Kiekert deal, unthinkable a few years ago, is the latest incarnation of that quid pro quo.

The Chinese, however, appear to have little appetite for the French auto industry, which is reeling from sagging sales as consumers are getting hammered by fuel prices that have been hitting one record after another. Read…. The $10-Per-Gallon Gas Has Arrived, In Paris.

By Richard Smith, spelunker of the Web.

We started Robert Cowley’s web bio here and this is the second installment. We will be in Mayfair, London, or on the Gold Coast of Australia, and the story involves a dead Daily Mail journalist, a great racing driver, and a bad racing driver: a very bad one, in fact positively wicked. We introduce Cowley’s two pseudobanks, Eaglebanque and Investment Suisse, and trace what we can of two of his scams.

The dead journalist is Nigel Dempster. Here is his obituary and a sample of the man:

Nigel Dempster, who died yesterday aged 65, was the hot-breathed newspaper gossip ace of his day, a punctilious, and latterly careworn, chronicler of marital discord in the moneyed set.

The doyen of his metier for some quarter of a century, Dempster was cocky and plausible, to the extent that Princess Margaret became an acquaintance and informant. Straying peers and medallioned playboys came to fear a call from the dauntless, dapper Dempster.

In county drawing rooms up and down the land his column was indignantly excoriated – yet discreetly devoured. Secretaries and suburban housewives were equally addicted to his daily dispatch from the world of “luxury” yachts, “penthouse” flats and six-figure divorce settlements.
…
At his peak in the 1970s and early 1980s Dempster commanded the largest salary on Fleet Street. His subjects, drawn chiefly from the ritzier enclosures at Ascot and Cowes, were often men and women of the slimmest achievement but Dempster made them stars of faux scandal.

Such was his success that he earned more than some of the plutocrats and noblemen whose love lives he monitored. Yet proximity to the great gamblers and bed-hoppers of the age eventually corroded his spirit, if not his liver. He lost much of his money to bookmakers and by the end of his days his capacity for enjoyment was sadly diminished.
…
His English education gave him enough self-confidence to call strangers “old boy” and to keep (and wear) a large selection of public school ties. If his shoes, like his anecdotes, sometimes seemed too polished, it was because he remained deep-down an Aussie outsider.
…
Dempster contributed for several years to Private Eye, helping to write the venomous Grovel column. Here he gave vent to a far more critical appraisal of the social elite.

For a sample of his work in his declining years, we travel back to the very dawn of time, which, as far as the modern Internet is concerned, is about 2000 A.D.

Sadly, Dempster’s journalism doesn’t appear to form part of the Daily Mail online archive, but, courtesy of a couple of flukes, we can get some idea of a piece or pieces that Dempster wrote for the Mail around the 15th August 2000. The first fluke is another, unfortunately uncommunicative, blogger  who, like me, seems to have a bit of a thing going for Robert Cowley. I can patch up one of his slightly corrupted posts on Cowley’s past to restore something close to Dempster’s original text, which I don’t have:

This morning Annie Hill and her crooner husband Vince, attended by a Bailiff of the High Court, will regain possession of their Mayfair flat on which rent of £56,000 is outstanding.

Annie let the property three years ago to Eaglebanque, which paid her with a series of dud cheques on their branch in Baton Rouge, Louisiana.

‘I don’t expect to find anyone there. The telephone was cut off last week and Eaglebanque allowed a charity called the Foundation for the Arts, Sciences and Humanities to move in. I have been corresponding with a Mr George Russell of FASH but he has moved to Glasgow. Annie says she originally dealt with an Australian calling himself Sir Robert A. Cowley of Eaglebanque Securities Limited and has been to court ‘many times’ to get an eviction order.

When I get an order I negotiate with them and that means I can’t prosecute the order. But tomorrow is the day. I hope I don’t find too much of a mess.’

Via the Sydney Morning Herald’s interest in Australians overseas, and then via the Australian “Insolvency Lawyer” web site‘s interest in dodgy dealings, a closely-related piece of Dempster’s reporting turns up, rewritten:

Making a bad name for the rest of us are the Australian pair in London from the Zurich-based Eaglebanque who have moved into the Mayfair mews residence of the late superagent Dennis Selinger the bloke who handled Peter Sellers, David Niven and Michael Caine.

Selinger’s wife Debra had been having some problems getting access to the £20,000 deposit Sir Andrew Haverford and Sir Robert Cowley were said to have put down on the residence, The Daily Mail’s columnist Nigel Dempster reports.

Sir Robert, whose card also claims he is Robert, Baron Ardwallen and a Knight of the Sovereign Order of Malta, may drive a Rolls Royce, but all efforts by Dempster to verify the knighthood have drawn blanks.

Perhaps he should ask gold bug and futures spruiker, Harry S Schultz, who had a Maltese knighthood. You don’t win them for valour.

The 50-something-year-old pair also, apparently, spend some time doing whatever it is they do in Hong Kong, while Eaglebanque has offices in the USA’s deep south Baton Rouge, Louisiana and Fort Lauderdale, Florida.

Evidently it takes one Aussie outsider (Dempster) to spot the dubiousness of two more Aussie outsiders, Robert Cowley and “Sir Andrew Haverford”. So we’re off to Queensland next, where we find out exactly why these two are hanging out in Mayfair, and why they really should have been good for all that rent money, and the deposit too. From the Queensland State Parliament’s official record of proceedings (Hansard) for 11th December 2001, page 101 in the PDF:

Mr LAWLOR (Southport—ALP) (9.42 p.m.): The matters of which I am about to speak are the result of a two-year investigation by Gold Coast journalist Murray Hubbard and will be printed in detail in tomorrow’s edition of the Gold Coast Sun newspaper. Andrew John Haberfield, who lives in a palatial waterfront mansion at Benowa on the Gold Coast, is behind a major international scam masquerading as a charity called the Hope Foundation.

The Hope Foundation was started on the promise of providing humanitarian aid to poor countries, particularly after a disaster. The foundation intended buying a Boeing 747 and having it fitted out with an on-board hospital to fly into trouble spots as a first-response unit. Although a commendable idea, the reality was quite different.

The foundation acquired a Lockheed Jetstar—a smaller jet similar to a Lear jet—which was fitted out with luxury leather seats and used to take foundation executives on trips and to impress potential victims. Investing on the basis of earning a dividend while practising philanthropy of sorts, some 30 Australian and New Zealand victims lost $6.3 million by investing in the Hope Foundation. That money has disappeared from accounts held in Switzerland and Liechtenstein.

Agents for the foundation promote returns of 10 per cent and 40 per cent per month through their scheme. They unfortunately do not show how, with whom and in what country contributors’ money will be applied. There are no financial statements, no prospectus, no investment statement and, in a short time, no money. Haberfield is said to have personally gained more than $1 million from the scheme. Documents in my possession show authorisations from his business associate Robert A. Cowley, chairman of the board of the Hope Foundation, for money transfers made to Haberfield totalling more than $800,000.

The Hope Foundation has left a trail of debts in the United States, Australia, New Zealand and the United Kingdom. On foundation letterhead he has identified himself as Dr Andrew J. Haberfield and currently purports to be Sir Andrew Haberfield, a Knight of Malta’s Sovereign Teutonic Order. Robert Cowley also represents himself as ‘Sir Robert’.

Another scam is the Millionaires of the World Club, an offshoot of the Hope Foundation. For $20,000, or $15,000 cash, investors are offered a lifetime membership of the club and a promised annual rate of return of 240 per cent. Again, no-one ever sees his or her original investment again, let alone a return.

I am aware of two previous scams by Haberfield, including one in February 1999 when he attempted to set up a V8 racing team with driver Alan Jones and aspiring young driver Darren Pate. The team and racing cars never materialised and a number of suppliers and investors lost money, including Pate, who to this day is still owed $50,000.

In late 1999, Haberfield left Australia with his family for the United Kingdom with the trip paid for by the Hope Foundation. He lived the high life, drove a Rolls Royce and lived in Mayfair. I believe the Major Fraud Squad in London is very keen to speak with both Sir Andrew and Sir Robert.

Today Andrew Haberfield is back on the Gold Coast seeking sponsors and investors for a V8 supercar racing team for the 2002 season. He is working out of premises at the rear of 6 Supply Court, Arundel, and I have it on very good authority that he is failing to pay award wages, superannuation or other entitlements to those working for him.

So we have a little copy edit for the dead Dempster, ten years too late: the name is Haberfield, not Haverford. But there are our two racing drivers: the great Alan Jones, 1980 Formula One World Champion, whose due diligence is not so great, and the crappy fraudster Andrew John Haberfield, who, unperturbed by the Parliamentary allegations, did indeed end up competing in the 2002 Super Touring Cars season, in the Alan Jones team, for that season only, and won no races at all.

If only someone had pointed Jones to the report in the Gold Coast Sun before he ever got involved with Haberfield. If only he had terminated his association with Haberfield at the end of the 2002 season.

By August 2003 at the latest, as we see from the Wayback Machine, Jones has some sort of deal going with Robert Cowley too, via Cowley’s scam vehicle Investment Suisse. The Wayback Machine is slow, but if you give it time, it will retrieve the Investment Suisse page snipped here:

and the Alan Jones Consortium page snipped here (click on it to make it bigger)

Yup: as if Haberfield is not enough, Jones has a connection with Robert Cowley too. This does not bode well for Alan Jones’s finances, at all.

In fact, it looks as if Haberfield worked very quickly: he seems to have cleaned Jones out via AJR Wheels (mentioned above in the Queensland Hansard report) before Cowley followed through on his scam, a variant of the Lockheed Jetstar wheeze also mentioned in the Queensland Hansard. Perhaps Jones was in a very tight spot even before he hooked up with Cowley, because in The Sunday Telegraph (of Australia) text archive, dated June 22, 2003 we find this:

FORMER world champion race driver Alan Jones is fighting off bankruptcy after facing debts of more than $4 million.

The 56-year-old motor sports commentator, who retired from Formula One grand prix racing in 1987, has lived in luxury on the Gold Coast, owning a waterfront home, several luxury cars and four boats, including a $3 million yacht.

It is understood Jones — who won the F1 drivers’ championship in 1980 and is rated as one of the 10 best drivers of all time — sought a Part 10 Deed of Arrangement under the Bankruptcy Act late last year.

Under the agreement, which prevents him from being declared bankrupt, Jones is paying instalments totalling $20,000 a month.

…

Jones had incurred $4.1 million in liabilities, according to a report prepared by Controlling Trustee Jeffrey Crowther, from McCowans Solicitors.

The report shows Jones had assets valued at $2.2 million…

…

In his report, Mr Crowther said: “Mr Jones attributes his present insolvency to some bad business advice and the failure of a business known as AJR Wheels, which he established with a partner.

“The nature of the business was to export aluminium to the Philippines, where it would be turned into wheels and sent back to Australia for sale. He alleges his partner did not uphold his financial responsibility and Mr Jones ended up being responsible for the debts incurred.”

The report said Jones was contracted to a car manufacturer and television network, but with Channel 9 losing the grand prix television rights, his personal income would be about $50,000 for the next 12 months.

“Based on Mr Jones’s personal income, he would not be able to make compulsory contributions, should he become bankrupt”, said Mr Crowther, who recommended creditors accept the deed of arrangement.

Jones declined to comment.

Obviously one doesn’t know, from this account, how much of the AUD4million stuck to Haberfield or Cowley. Some of it, no doubt, and enough to finally cripple Jones financially, evidently. To me “his partner did not uphold his financial responsibility” does sound like an advance payment scam of some kind.

At AUD20,000 per month, the unfortunate Mr Jones might have made some sort of a dent in the ~AUD2Million net debt ten years later, and perhaps there’s been some genius lawyering, or a big upturn in his income. But I suppose he is still out there, slogging away. It is another very sad story, I’m afraid.

Andrew Haberfield, who drops off my radar completely, must still be out there as well. Did he get prosecuted for the Hope Foundation scam? Is he the same guy as the CEO of Super Series Rodeo, a Gold Coast company incorporated only last year? I don’t know. Perhaps some locals are knowledgeable enough, or curious enough, to dig down and enlighten us all.

Robert Cowley is still out there, too. More on him in our next.

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience, who writes at Testosterone Pit.

As some readers have pointed out, there was a major problem in my last post, Deep Trouble at the Core of the Eurozone. I thank all commenters who criticized or defended my post, and I apologize for the errors it contained.

On March 1, I was working on a post on the hard-hit French auto industry and the deal between GM and PSA Peugeot Citroën when I came across an article in a German paper about a 30% drop in registrations in February in Germany. Surprised and shocked that sales would fall off a cliff like that, I checked www.KBA.de, the German federal office for motor vehicles, which publishes the vehicle registration numbers every month. But it didn’t have the February numbers yet.

That should have been a warning. Why would a newspaper reporter get the numbers before the government publishes them? But the decline was so sudden that I threw caution into the wind and changed the focus of my story. I was overly eager to be out in front of what seemed to be a significant development—without getting confirmation. A big and stupid mistake. I posted it on my blog on March 1.

The actual figures (PDF), when they were released on March 2, were flat for February year over year, and showed a 0.2% decline year to date. These numbers match the mildly mixed German economic data that has emerged recently. Overall, given the registrations so far this year, I don’t envision a major up or down move in Germany in the near term. In other EU countries, the recent and sometimes steep declines may continue for a while. Industry sales for the EU are expected to decline this year.

German automakers may be able to overcome any weakness in the EU with strong sales in the US and Asia (but sales in China, after years of phenomenal growth, are at risk of a setback).

A corollary to Upton Sinclair’s famous saying, “It is difficult to get a man to understand something if his salary depends on his not understanding it” is “People promote ideas that help them secure or preserve a privileged position on the totem pole.”

A glaring example of these observations came in an op ed in the Sunday New York Times by Steve Rattner, former Lazard mergers & acquisition partner, later head of the private equity firm, Quadrangle Partners. He is best known as the chief negotiator in the auto bailouts (and he was criticized for not involving any auto industry experts). He paid $10 million to settle a kickbacks investigation and agreed not to work for a public pension fund in any role for five years. I happened to see Rattner on a panel at a Financial Times conference earlier this week and he elaborated on some of the themes in this piece, “Let’s Admit It: Globalization Has Losers,” which reader Brett asked me to debunk line by line. I’ll spare you and focus just on the most critical and bald-facedly dishonest bits.

Let’s start at the top:

For the typical American, the past decade has been economically brutal: the first time since the 1930s, according to some calculations, that inflation-adjusted incomes declined. By 2010, real median household income had fallen to $49,445, compared with $53,164 in 2000. While there are many culprits, from declining unionization to the changing mix of needed skills, globalization has had the greatest impact.

Apparently the NYT fact checkers give guys at Rattner’s level a free pass. This is false. Where was Rattner in 2007 and 2008? Real median income peaked in 2007, and that was modestly higher than in the last cyclical peak, in 1999. The decline in income (nominal, not just inflation adjusted) is the direct result of the global financial crisis, not inflation. So his entire piece is based on an inaccurate claim which has the effect of diverting blame from bankers like him.

This next bit is sneaky but worth pointing out:

The phenomenon that free traders like me adore has created a nation of winners (think of those low-priced imported goods) but also many losers.

We don’t have a system of free trade. It’s managed trade. As William Greider has pointed out, most other countries play the game in a way to produce better national outcomes (fewer lost jobs and trade surpluses). We seem to be running our trade policy not to optimize our national interest, but that of large international corporations, which is far from the same thing.

The next bit is pure reductivism:

A typical General Motors worker costs the company about $56 per hour, which includes benefits. In Mexico, a worker costs the company $7 per hour; in China, $4.50 an hour, and in India, $1 per hour. While G.M. doesn’t (yet) achieve United States-level productivity in China and India, its Mexican plants are today at least as efficient as those in the United States.

American management is also more expensive than management in Mexico or China or India. And I think you’d be hard pressed to say American management is better than management, say, from Sweden or Australia, where CEOs are vastly less well paid than here. So shouldn’t we expect CEO and upper management wages also to fall?

And remember, as we have said in other posts, the evidence is overwhelming that not only is CEO pay in the US not correlated with performance, it is negatively correlated with performance. The best paid CEOs deliver the worst results, and the leaders of Jim Collin’s stellar performers in Good to Great all paid themselves modestly.

We need to peel back several layers to debunk this notion that labor costs trump everything. First is that Rattner is implicitly arguing that the world is frictionless. But that is misleading. The US is a big market, and there are advantages in being close to the customer, in terms of rapid response, carrying smaller inventories (and thus having smaller losses when you get it wrong), lower shipping and financing costs. IKEA, which is in a low end manufacturing business, has its manufacturing for the US located in the US.

Second, he is also assuming that all products are more or less commodities. But the job of management is to find a way to gain competitive advantage, and being a low cost competitor is one of many options. I’m sure you’ve paid a big premium to buy food or a drink at a convenience store now and again. They are competing on location, not cost. Similarly, I’m always amused at techies who hector Apple product users in comments. They seem angry that consumers will pay a big premium for ease of use or maybe just sheer coolness (and I have to say, as a Manhattan person, being able to see a live person at 3 AM and get something diagnosed and fixed is worth a lot to me). So a fixation on costs too often reveals a management lacking in imagination and gumption facing increasingly competitive and mature markets.

Third, his focus on direct factory labor is disingenuous. Direct factory labor is typically just north of 10% of the cost of most manufactured goods; for cars, we are told it’s 13%. Even if you can extract meaningful savings there, you have significant offsets: the upfront cost of re-orgainzing production (which in the outsourcing scenario include hiring costly outsourcing “consultants” and paying attorneys to paper up the deals), higher ongoing managerial costs, higher shipping and related inventory financing expenses. Yes, there are cases where outsourcing and offshoring have been a big success, but there are also others where the benefits have been underwhelming and have come at considerable costs to US workers, communities, and the economy (see a very good long form discussion by Leo Hindery).

And in many cases where big multinationals come out ahead, it isn’t due solely to labor cost savings. As Greider pointed out:

At IBM back in the 1980s, [Ralph] Gomory watched in awe as Japan and other Asian nations captured high-tech industrial sectors in which US companies held commanding advantage. IBM invented the disk drive, then dropped out of the disk-drive business, unable to compete profitably. Gomory marveled at Singapore, a tiny city-state, as it lured American manufacturers with low-wage labor, capital subsidies and tax breaks. The US companies turned Singapore into a global center for semiconductor production.

And this sort of thing continues. I discussed long form the fate of a world class coated paper mill in Escanaba, Michigan. The main culprit in its demise was overleveraging and excessive compensation to executives who knew bupkis about the paper industry. But another factor I did not include in my getting-to-be-too-long post and was pointed out by readers in comments were the considerable subsidies given by the Chinese and Indonesian governments to their papermakers.

Consider the implications: if the only factor at work were factory labor, as Rattner implies, you’d see far fewer jobs ceded to foreign markets (put it another way: if the labor cost differential were a sufficient inducement, foreign governments wouldn’t need to offer such generous subsidies).

To put it another way, the argument that Rattner is making is basically that of the Stopler-Samuelson theorem. Let’s turn the mike over to development economist Dani Rodrik:

The Stolper-Samuelson theorem is a remarkable theorem: it says that in a world with two goods and two factors of production, where specialization remains incomplete (plus a few more technical assumptions), one of the two factors–the one that is “scarce”–must end up worse off as a result of opening up to international trade. Not in relative terms, but in absolute terms. But the theorem is also quite limited in its applicability. It applies only to a case with two goods and two factors, and so its real world relevance is always in question.

But there is a version of the theorem that is remarkably general and powerful. It says that regardless of the number of goods and factors, at least one factor of production must experience a decline in real income from trade as long as trade induces the relative price of some domestically produced good(s) to fall (and as long as the productivity benefits from trade are restricted to the traditional, inter-sectoral allocative efficiency improvements, about which more later). All that this result requires is a very mild assumption, namely that goods be produced with varying factor intensities (i.e., use different combination of factors). The stark implication is that someone will lose, even if the nation as a whole becomes richer.

So to give an example: Let’s say that as a result of globalization, the wholesale price of a car falls from $20,000 to $15,000. Let’s further assume that materials costs were $6000, direct factory labor was $3000, factory overheads were $2000, shipping is $1000, marketing is $2500, other management costs (top brass, IT, legal, accounting) were $2000, interest cost are $1000, and $1500 is for capital investment (as in repairs and replacements), with a target profit of $1000. Per Stopler-Samuelson, something has gotta give to get the manufacturing price down to $15,000.

But it does not have to be worker wages. For instance, over the years, we’ve seen manufacturers of all sorts get smarter (and in some cases, just stingier) in their use of raw materials. And all bets are off if you increase productivity. That means you can use fewer workers, but maintain their pay levels. As Rodrik continues by discussing a paper by Broda and Romalis that found that trade with China reduced income inequality in the US. Huh? Per Rodrik:

The puzzle here, at least on the face of it, is that one would expect China’s trade to have had the largest price impact on labor-intensive goods. And if so, wages of unskilled workers must have fallen even more, along the lines of the Stolper-Samuelson logic sketched out above. Can we still say that trade with China has helped reduce U.S. inequality?

The first thought that comes to mind is that Broda and Romalis are talking about consumer prices, and Stolper-Samuelson effects depend on changes in producer prices–i.e., prices of goods that are actually produced in the U.S. If nobody in the U.S. produces the garments and toys that China exports to the U.S., then it is conceivable that the relative price of labor-intensive goods will fall without hurting real wages.

But then this is unlikely, given substitutability between Chinese- and U.S.-made goods. And indeed another paper, by Raphael Auer and Andreas Fischer, employs a clever technique to document a sizable negative impact on U.S. producer prices from trade with China and other labor-abundant countries. So the benign effect of Chinese exports, if any, is not due to the fact that the U.S. no longer competes head-to-head with that country in similar products.

What gives? The Auer and Fischer paper underlines another important result. What lies behind the decline in U.S. producer prices in trade-affected sectors is not wage or other input price reductions but mostly increases in total factor productivity. So perhaps what is going is that the Stolper-Samuelson logic is defeated by increases in sectoral productivity induced by import competition. The mechanical link between prices and factor costs–which I appealed to above in the proof of the generalized S-S theorem–breaks down whenever there is productivity change. After all, if TFP increases, employers can afford to pay unchanged wages even if the prices they face decline.

So this is where the misdirection by Rattner is crucial. Until the 2000s, in every economic expansion, labor got the bulk of the increase in GDP, typically over 60%, via more jobs and increased pay. Post 2000, there was an astonishing change, a shift from labor share, which fell to below 30%, and a massive increase in corporate profits. In other words, there was huge shift away from labor to capital. This has little to do with globalization and much to do with the weakened bargaining power of US workers. As much as it has become fashionable to look down on unions (and their corruption and short-sightedness hasn’t helped), having well paid blue collar workers helped the negotiating position of non-unionized white collar employees.

Rattner also conveniently fails to discuss how the rapacious tendencies of private equity firms made matters worse. An unduly candid investor described the business model in Confidence Men: pile debt on the acquisitions, and if only one of ten made it (meaning survived!) you still made a good return for investors. So many companies in Europe have gone bankrupt thanks to the tender ministrations of PE pirates that the officialdom has read them the riot act. PE firms have to register, and they cannot either buy companies or raise money in the Eurozone unless the conform to regulations, which include strict limits on leverage.

Rattner argues in his piece that we should imitate Germany and focus on high skill manufacturing. But Germany’s population is roughly 1/4 ours and they already dominate certain niches. Rattner at the FT conference called for the US to start producing more engineers, which readers will laugh out of the room. Engineers don’t get paid enough for more people to want to seek out that career path; many of you have told me the only way to make a good living was to get another degree, like law, and go into another line of work.

And even if copying Germany might be a viable approach, it would take something like industrial policy to get there. Note the US already has industrial policy by default, with banks, the mortgage-industrial complex, military contractors, agriculture, and Big Pharma among the favored groups. But no, Rattner pooh-poohs the whole idea. Better to have industrial policy determined by lobbying effectiveness than a more thoughtful process:

The prospect of Washington lurching into the private sector is terrifying, as illustrated by the debacle of Solyndra, the solar energy company that failed with $535 million of taxpayer loans. While countries like China have put large resources behind industries they want to nurture, we should resist the temptation to plunge deeply into industrial policy.

I wish I had the space to discuss Solyndra in depth, but the sort form is that the failure of that deal is not an indictment of the overall program. If you are a VC investor, you expect a certain percentage (actually a pretty high percentage) to come a cropper. Solyndra was only a bit over 1% of the portfolio, and it appears to be the only loss. This looks like a classic “shit happens” deal failure: the investment looked sensible at the time, silicon prices collapsed, which had a direct, negative impact on competitiveness. Even so, a later-stage independent investor provided funding, which further confirms the original investment was not misguided (you’d get no rescue investors coming in if it looked like a hopeless turkey).

Rattner apparently missed a different Rodrik article, a Financial Times op ed, in which he warned:

If there is one lesson from the collapse of the 19th century version of globalisation, it is that we cannot leave national governments powerless to respond to their citizens.

Yet an unfettered system is precisely what Rattner is promoting, no doubt because it works to his and his fellow rentiers’s advantage.

By Matt Stoller, a fellow at the Roosevelt Institute. His Twitter feed is http://www.twitter.com/matthewstoller.

Today, the city of Providence, Rhode Island sent out layoff notices to every single teacher in the city. Every single one of them. If you want to understand why this is happening, why wages in the US keep getting cut, this chart from Doug Henwood tells the story.

That’s the number of strikes since 1947. What you’ll notice is that people in America just don’t strike anymore. Why? Well, their jobs have been shipped off to factory countries, their unions have been broken, and their salaries until recently have been supplemented by credit. It’s part of a giant labor arbitrage game, that the Federal Reserve and elites in both parties are happy to play. Strike, and you’re fired. Don’t strike, and your pay is probably going to be cut. Don’t like it? Sorry, we can open a plant abroad. And we have institutions, like the IMF, to make sure that we get goods from those factory-countries, and get them cheap.

But it’s not cheaper, or better, or more efficient. Firing your teachers isn’t exactly “winning the future”. And outsourcing manufacturing, as Boeing found out, is often a good way to increase coordination costs, create more operational risk, and destroy value. However, the system is good at maintaining the power of oligarch-style control of cultural institutions. If no one but the kids of rich people can read, only the kids of rich people will be able to organize society’s resources. Outsourcing work to China means that workers are scared and have no leverage, so they do what management wants. Again, this isn’t efficient; the UAW sought to make small cars in the 1940s, but was rebuffed by management. Workers are closest to production; treating them terribly is a good way to degrade product quality. Silicon Valley companies give their engineers free snacks and frisbees because happy employees that take ownership over their work create good quality products. Treating people terribly scares them, and makes them more pliable. Again, it’s about control.

The problem for the elites is that the system of control is breaking down. I noted a week and a half ago that the Egyptian revolution was a labor uprising against Rubinites. So to the extent that global labor arbitrage relies on sweatshops and environmental degradation in poor countries for cheap goods, successful strikes in poor countries undercuts the whole system. The reason to outsource work in the first place is to prevent workers in rich countries from gaining pricing and political power. Now workers in poor countries are getting pricing and political power? It’s actually a fragile system of control, and can be broken through either crackdowns on tax havens and oligarchs in wealthy countries or protests/strikes where the goods are made.

The Egyptian revolution was really a series of protests and highly politicized strikes, which is why people in Madison are taking inspiration from Cairo. In fact, the actions in Egypt may be creating a wave of labor actions worldwide, rippling to Wisconsin, Indiana, and Ohio. All of these strikes are aimed at a collusive set of tight relationships. Here’s new Republican Florida Governor Rick Scott in a back and forth with public employees explaining how this system works. One worker asked him about proposed benefit cuts in the face of a multi-year freeze in salaries and layoffs.

“Do you fully realize the gross unfairness of that proposal?” one worker asked Scott.

Scott said a change was needed and that, “You never know exactly what’s fair.”

“Right now your plan in underfunded, whether anyone wants to acknowledge it or not,” Scott said. “So whoever the youngest is, everyone else should thank them because there might not be a pension plan, just like we’re worried about Social Security.”

Scott didn’t mention the pension fund is about 88 percent funded – among the best in the country – while Social Security is scheduled to start paying out more than it takes in as soon as 2014.

Instead, Scott said both government and the private sector have less money to spend “and you guys all cause it.”

“As an example, you all shop at WalMart, right?” Scott said. “You don’t say, ‘Golly, I’m going to buy the product because they have a better pension plan or better health care plan or pay more taxes. You say, ‘I’m going to buy based on price.’

“That’s what taxpayers are doing now,” he said. “They’re moving around the country to pick states where they can keep more and more of their dollars. So what we’ve got to do … we’ve got to figure out how to get more efficient every day.”

A female worker was cheered when she asked this follow-up: “How do you expect employees to pay for these increases when we ourselves have not had an increase?”

“I would never defend that any compensation is ever fair for anybody, especially the hardest working people,” Scott said. “It’s never fair and it never will be fair.”

There’s a reason Scott is incoherent. Florida’s pension fund has lots of money in it, and Scott wants to make sure that workers don’t get very much of it. “You never know exactly what’s fair” and “It’s never fair and never will be fair” are cynical Rumsfeld-ian post-modern excuses for wealth transfers upward.

In this 5 minute long answer to another question of why workers are taking cuts while the wealthy do not have to share in the sacrifice, Scott spends time talking about luring companies to Florida, to compete with countries like China.

“There’s a reason [the jobs are overseas]. The labor’s less expensive, the regulation’s less expensive. Everything we do to make it harder on businesspeople means fewer jobs in Florida and less money to do the things we want to do.

This is absurd in one sense, because Florida’s problems have nothing to do with regulation. The whole state is underwater from a housing crash, and there’s just not enough aggregate demand to bring down unemployment. But these economic theories aren’t about efficiency, they are about a value system. Scott is arguing for a low trust low cost world, with no education, no regulatory standards, and low quality output. This is the dominant strain of thinking among American elites. It’s not just Rhode Island, where the teachers are literally all under threat of being fired (and where in 2010 Obama apparently sought to win the future by applauding this firing of teachers). In New York, Democratic Governor and prospective 2016 Presidential candidate Andrew Cuomo is gleefully slashing huge chunks of education and health care rather than retain a mild tax on the wealthy. This is a great way to increase crime, disease rates, and social disorder resulting from inequality.

Cuomo is just acting like a standard neoliberal Democrat. Obama has put forward a proposed pay freeze on non-security state Federal government workers, and Senate Democrats want to extent that for at least five years. That’s their starting position negotiating against the GOP. You can’t have a good regulatory state when you don’t pay regulators good wages. Instead, what you have when government is expansive and poorly run is big government corruption.

The GOP likes to foster corruption through privatization of public services, a shadow large government in the form of security contractors, corporations, and banks that are supported with taxpayer money but consider themselves part of the “private sector”. The elite Democratic model of governance is more subtle; it is embodied in high expertise-driven regulatory programs like the health care bill, cap and trade, GSE reform and Dodd-Frank. Low pay for regulators means corruption in the form of the revolving door. Whether it’s Scott Walker demanding the right to give state power plants and Medicaid money to oligarchs, or revolving door corruption through low pay to regulators, the real agenda of the elites seems to be: cuts for you, corruption for me. Whether the state Senate Democrats in Wisconsin represent an anomaly, or a trend, is an open question. Efficient this is not, but again, it’s not about efficiency, it’s about control.

Egyptians are trying to throw off the IMF-imposed austerity measures that created such a system for their country. The new government there is proposing raising taxes on oligarchs, increasing food subsidies, and reducing inequality. Their new cabinet is letting more people apply for “monthly portions of sugar, cooking oil, and rice.” The previous cabinet, “which was comprised of businessmen and former corporate executives”, had refused this.

And look at how Egypt is treating public employees: “Temporary workers who have spent at least three years working for the government will now be given permanent contracts that carry higher salaries, and benefits such as pension plans, and health and social insurance.”

Pension plans, health, and social insurance, oh my! How are they planning to pay for this? One member of a left-of-center party made it quite clear:

Confiscating wealth looted by cronies of the former regime, more egalitarian distribution of wealth, gradual taxation, better government oversight, and placing “a reasonable ceiling” on profitability of goods and services sold to the public are among the measures that should restore an economic balance to society, he said.

It is too early to pretend like this is a done deal, but it is certainly the case that the mass exercise of people-power in Egypt made this far more possible than it had been before. Even after Mubarak resigned, and even when the army tried to ban labor gatherings, the Egyptian labor movement continued to strike, gather, and make demands.

As Daniel Ellsberg once said, “Courage is contagious.” And what happened in Wisconsin came from the inspiration of see millions of powerless people join together and overthrow a regime in Egypt. It didn’t come from union leaders, who have been perpetually unprepared for the onslaught against them. Just look at the webpage of the AFL-CIO of Wisconsin. It looks like it was designed by Geocities in 1997. Yet, #wiunion has been trending on and off for a week on Twitter, and has inspired actions all over the country (check out the Cheesehead protest in NYC).

This upsurge certainly didn’t come from the Democratic Party leadership. I mean, Rhode Island is a pretty reliable blue state and the last Mayor of Providence was just elected to Congress as a Democrat. Meanwhile, Former Democratic Michigan Governor Jennifer Granholm is saying the Wisconsin state Senators need to get back to work. And what is striking about Obama’s posture on the greatest uprising in American labor history of this century, is how he is really nowhere, meekly tut-tutting about union busting while gravely acknowledging fiscal realities and tough choices. But the Wisconsin protests happen every day, without formal authority structures. This quote from the Huffington Post Hill newsletter shows that there is something new going on.

Tom O’Grady, a union sheet metal worker from Sun Prairie, Wis., said the sight of youngsters protesting against Gov. Scott Walker’s efforts to gut collective bargaining rights is bittersweet. “It’s humbling,” said O’Grady, 60. “We see all these kids, they may never have a union job, and they’re here every night for us? It’s very humbling.”

Striking just isn’t in the collective memory of the American public anymore. This kind of highly politicized hybrid political protest/strike walks like an Egyptian these days, which is why Egyptians were sending Wisconsinites pizza and Madison protesters were holding signs lauding teachers, workers, and the new Egyptian flag. In fact, Madison may represent a new kind of American labor model, the melding of old school unions, Howard Dean-style internet-based organizing, Anonymous-style serious pranking, and social media reporting on protests and policy. There’s an anti-bailout class-based fervor here as well, with a simmering anger at Wall Street as subtext. It’s headless and global, though there is leadership. The most powerful moment so far in the Wisconsin conflict didn’t come from the actions of a labor leader, but from a prank call by alt-weekly “Buffalo Beast” editor Ian Murphy, who pretended to be billionaire American oligarch David Koch and had a frank 20 minute conversation with Governor Scott Walker. Murphy originally wanted to pose as Hosni Mubarak, but couldn’t pull off the accent.

Perversely, people may be so beaten down that they only want to side with institutions that are visibly and aggressively advocating for them. This might lead them to recognize that middle class interests are aligned with those of labor, which was the widespread view in the first generation after World War II. However, that also means that the de facto business unionism of the 1970s onward isn’t appealing. People might only like unions when they see strikes, otherwise all they hear about is backroom negotiations. Perhaps effectively striking is actually the way to force people to ask questions about what kind of country they want to live in. I haven’t seen this much labor coverage since, well, ever in my lifetime. There seems to be multiple feedback loops at work: political, global, and economic.

As commodity prices shoot up, and become more volatile, the pressure to liquidate America will only increase. These increases take the form of gifting public assets to oligarchs, taxing the middle class and poor, slashing social service budgets, and cutting wages through inflation and outright demotions (like the NYC sanitation workers that were demoted right before a giant blizzard). But civil unrest is intensifying it its most basic forms: protests and strikes, and in advanced forms, like the blowback at the national security state embodied in the HB Gary and WIkileaks fiasco.

What we are seeing is two political and economic systems, increasingly at odds – high trust and cooperative, or dominance-based and lowest common denominator. This is not, fundamentally, a debate about economics. It is true that neoclassical economics doesn’t work, leads to corruption, and is intellectually dishonest. But that’s why this isn’t a question of economics, because the dishonesty is part of a system of corrupted values.

It is Andrew Mellon morality, the kind that led to the Great Depression (and will lead again to catastrophe):

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

Or it is the morality of Martin Luther King:

“True compassion is more than flinging a coin to a beggar. It comes to see that an edifice which produces beggars needs restructuring.”

Sometimes it really is that simple.

Yves here. While Quinn has a deliberately (some might say overly) provocative style and I quibble with some of his supporting arguments, his overarching observation, that America is wedded to an economic model past its sell by date, and that model has damaging social
and political consequences, is one I believe will resonate with many readers.

From Jim Quinn, who writes at The Burning Platform

Every single empire, in its official discourse, has said that it is not like all the others, that its circumstances are special, that it has a mission to enlighten, civilize, bring order and democracy, and that it has a mission to enlighten, civilize, bring order and democracy, and that it uses force only as a last resort. – Edward Said

The increasingly fragile American Empire has been built on a foundation of lies. Lies we tell ourselves and Big lies spread by our government. The shit is so deep you can stir it with a stick. As we enter another holiday season the mainstream corporate mass media will relegate you to the status of consumer. This is a disgusting term that dehumanizes all Americans. You are nothing but a blot to corporations and advertisers selling you electronic doohickeys that they convince you that you must have. Propaganda about consumer spending being essential to an economic recovery is spewed from 52 inch HDTVs across the land, 24 hours per day, by CNBC, Fox, CBS and the other corporate owned media that generate billions in profits from selling advertising to corporations schilling material goods to thoughtless American consumers. Aldous Huxley had it figured out decades ago:

Thanks to compulsory education and the rotary press, the propagandist has been able, for many years past, to convey his messages to virtually every adult in every civilized country.

Americans were given the mental capacity to critically think. Sadly, a vast swath of Americans has chosen ignorance over knowledge. Make no mistake about it, ignorance is a choice. It doesn’t matter whether you are poor or rich. Books are available to everyone in this country. Sob stories about the disadvantaged poor having no access to education are nothing but liberal spin to keep the masses controlled. There are 122,500 libraries in this country. If you want to read a book, you can read a book. The internet puts knowledge at the fingertips of every citizen. Becoming educated requires hard work, sacrifice, curiosity, and a desire to learn. Aldous Huxley describes the American choice to be ignorant:

Most ignorance is vincible ignorance. We don’t know because we don’t want to know.

It is a choice to play Call of Duty on your PS3 rather than reading Shakespeare. It is a choice to stand on a street corner looking for trouble rather than reading Hemingway. It is a choice to spend Black Friday in malls fighting other robotic consumers for iSomethings, the latest innovative, advanced TVs, flashy Rolexes, and ostentatious Coach bags rather than spending the day reading Guns of August by Barbara Tuchman, a brilliant Pulitzer Prize winning history of the outset of World War I, which would provide insight into what could happen on the Korean Peninsula. It is a choice to watch 6 hours per day of Dancing With the Stars, American Idol, Brainless Housewives of Everywhere, or CSI of Anywhere rather than reading Orwell or Huxley and discovering that their dystopian warnings have come true.

Conspicuous Consumption Conquistadors

Americans have chosen to lie to themselves. They have persuaded themselves that buying stuff with plastic cards while paying 19% interest for eternity, driving BMWs while locked into never ending indecipherable lease schemes, and living in permanently underwater McMansions bought with 0% down on an interest only liar loan, is the new American Dream. They think watching the boob tube will make them smart. They soak in the mass media hype, misinformation and lies like lemmings walking off a cliff. Depending on their political predisposition, they watch Fox or MSNBC and unthinkingly believe the propaganda that pours from the mouths of the multi-millionaire talking heads who read Teleprompters with words written by corporate media hacks. They tell themselves that buying stuff on credit, giving them the appearance of success as measured by the media elite, is actually success. This is a bastardized, manipulated, delusional version of accomplishment. Americans have chosen to believe the lies because the truth is too hard to accept.

Becoming educated, thinking critically, working hard, saving money to buy what you need (as opposed to what you want), developing human relationships, and questioning the motivations of government, corporate and religious leaders is hard. It is easy to coast through school and never read a book for the rest of your life. It is easy to not think about the future, your retirement, or the future of unborn generations. It is easy to coast through life at a job (until you lose it) that is unchallenging, with no desire or motivation for advancement. It is easy to make your everyday troubles disappear by whipping out your piece of plastic and acquiring everything you desire today. If your brother-in-law buys a 7,000 sq ft, 7 bedroom, 4 bath, 3 car garage, monolith to decadence for his family of 3, thirty miles from civilization, with no money down and a no doc Option ARM providing the funds, why shouldn’t you get in on the fun. It’s easy. Why sit around the kitchen table and talk with your kids, when you can easily cruise the internet downloading free porn or recording every trivial detail of your shallow life on Facebook so others can waste their time reading about your life. It is easiest to believe your elected leaders, glorified mega-corporation CEOs, and millionaire pastors preaching the word of God for a “small” contribution to their mega-churches.

Americans love authority figures who act as if they have all the answers. It matters not that these egotistical monuments to folly and hubris (Bush, Obama, Paulson, Geithner, Greenspan, Bernanke) have committed the worst atrocities in the history of our Republic, leaving economic carnage and the slaughter of thousands in their wake. The most dangerous man on this earth is an Ivy League educated, arrogant ideologue who believes they are smarter than everyone else. When these men achieve power, they are capable of producing catastrophic consequences. Once they seize the reigns of authority these amoral psychopaths have no problem lying to the American public in order to achieve their objectives. They know that Americans love to be lied to, so the bigger the lie, the more likely it is to be believed.

The current lie proliferating across the land of the free financing and home of the debtor is that austerity has broken out across the land. The mainstream media and the government, aided by various “think tanks” and Federal Reserve propagandists insist that Americans have buckled down, reduced spending, increased savings, and have embraced austerity.

They now proclaim that it is time to spend again. It is the patriotic thing to do, just like defeating terrorists by buying an SUV with 0% down from GM was the patriotic thing to do after 9/11. Defeating terrorists by going further into debt was the brilliant idea of those Ivy League geniuses Bush & Greenspan. Let’s critically examine the facts to determine how austere Americans have become:

* Consumer credit outstanding is $2.41 trillion, the same level reached in early 2007, and up from $1.5 trillion in 2000. This is a 60% increase in ten years. Personal income has risen from $8.4 trillion to $12.6 trillion over this same time frame, a 50% increase. Americans have substituted debt for income in order to keep up with the Joneses. The mass delusion lives.
* The MSM declares that the reduction in overall consumer debt from its peak of $2.56 trillion in 2008 to $2.41 trillion today proves that consumers have been cutting back and paying off debt. This is another media lie. Non-revolving debt, which includes car loans, education loans, mobile home loans and boat loans sits at $1.6 trillion, an all-time high matched in 2008. Credit card debt has “plunged” from $957 billion to $814 billion, not because consumers paid down their balances. The mega Wall Street banks have written off $20 billion per quarter since early 2009, accounting for ALL of the reduction in credit card debt. Clueless consumers continue to charge at the same rate as the peak in 2008.

* Average credit card debt per household with credit card debt: $15,788
* There are 609.8 million bank credit cards held by U.S. consumers.
* The U.S. credit card default rate is 13.01%
* In 2006, the United States Census Bureau determined that there were nearly 1.5 billion credit cards in use in the U.S. A stack of all those credit cards would reach more than 70 miles into space – and be almost as tall as 13 Mount Everests.
* Penalty fees from credit cards added up to about $20.5 billion in 2009.
* The national average default rate as January 2010 stood at 27.88% and the mean default rate is 28.99%.
* Total bankruptcy filings in 2009 reached 1.4 million, up from 1.09 million in 2008. Bankruptcies in 2010 are on pace to exceed 1.6 million.
* 26% of Americans, or more than 58 million adults, admit to not paying all of their bills on time. Among African-Americans, this number is at 51%.

Does This Look Like Austerity? Really?

This data clearly proves that austerity has not broken out across the land of delusion. The billions in consumer loan write-offs by the Wall Street banks that run this country have masked the fact that Americans have not cut back on their spending habits at all. GMAC (taxpayer owned) and Ford Credit continue to dish out car loans to anyone with a pulse and a 600 credit score. The Federal Reserve and the FASB have encouraged, if not insisted, that banks fraudulently value the commercial real estate loans on their books. The Federal Reserve has bought $1.5 trillion of toxic mortgage loans from the criminal Wall Street banks at 100 cents on the dollar. The government’s corporate fascist public relations firms then spread the big lie that the economy is recovering and consumers should join the party and spend, spend, spend.

If Americans were capable or willing to do some critical thinking, they would realize that those in power have created the illusion of a recovery by handing $700 billion of your money to the banks that created the financial meltdown, spending $800 billion on worthless pork barrel projects borrowed from future generations, dropping interest rates to 0% so that the mega-Wall Street banks can earn billions risk free while your grandmother who depended on interest income from her CDs edges closer to eating cat food to get by, and lastly Ben Bernanke’s blatant attempt to enrich Wall Street by buying US Treasury bonds in an effort to make the stock market go up, while the middle and lower classes are crushed under the weight of soaring fuel and food price increases that exceed 30% on an annual basis. The illusion of recovery is not a recovery. With a true unemployment rate of 22%, a true inflation rate of 8% and a real GDP of -1.5% (Shadowstats), we are in the midst of the Greater Depression. You are being lied to, but most of you prefer it.

The Little Lies We Tell Ourselves

Our ignorance is not so vast as our failure to use what we know. – M King Hubbert

When Jimmy Carter gave his malaise speech in 1979, Americans were in no mood to listen. Carter’s solutions were too painful, required sacrifice, and sought to benefit future generations. The leading edge of the Baby Boom generation had reached their 30s by 1979, and the most spoiled, pampered, egocentric generation in history could care less about future generations, long term thinking, or sacrifice for the greater good. They were the ME GENERATION. The 1970s had proven to be tumultuous episode in US history. M King Hubbert’s calculation in 1956 that U.S. oil production would peak in the early 1970s proved to be 100% correct.

The Arab oil embargo resulted in gas shortages and economic chaos in the U.S. Hubbert used the same method to determine that worldwide oil production would peak in the early 2000s. If long term planning had been initiated in the early 1980s, combining exploration of untapped reserves, greater utilization of natural gas, development of nuclear plants, more stringent fuel efficiency standards, increased taxes on gasoline, and more thoughtful development of housing communities, we would not now face a looming oil crisis within the next few years. Instead of dealing with reality, adapting our behavior and preparing for a more localized society, we put our blinders on, chose ignorance over reason and pushed the pedal to the medal by moving farther away from our jobs, building bigger energy intensive mansions, and insisting on driving tank-like SUVs, Hummers, and good ole boy pickups. Kevin Phillips in American Theocracy explained that hyper-consumerism, fear, and inability to use logic have left our suburban oasis lives in danger of implosion when the reality of peak cheap oil strikes:

Besides the innate thirst of SUVs, some of the last quarter century’s surge in U.S. oil consumption has come from Americans driving more – some twelve thousand miles per motorist per year, up almost one – third from 1980 – because they as a whole live farther from work. In consumption terms, exurbia is the physical result of the latest population redistribution enabled by car culture and the electorate that upholds it.

Family values are central – if by this we mean having families and accepting lengthy commutes to install them in reasonably safe and well churched places. In the 1970’s such households might have been fleeing school busing or central city crime; in the post – September 11 era, many sought distance from “godless” school systems or the random violence and terrorist attacks expected to occur in metropolitan areas.

We willingly believe the lies espoused by the badly informed pundits on CNBC and Fox that if we just drill in Alaska and off our coasts, we’ll be fine. The ignorant peak cheap oil deniers insist there are billions of barrels of oil to be harvested from the Bakken Shale, even though there is absolutely no method of accessing this supply without expending more energy than we can access. Environmentalists lie about the dangers of nuclear power, while shamelessly promoting the ridiculous notion that solar, wind and ethanol can make a visible impact on our future energy needs. Ideologues on the right and left conveniently ignore the facts and the truth is lost in a blizzard of their lies. Here is an explanation so clear, even a CNBC “drill baby drill” dimwit could understand:

When oil production first began in the mid-nineteenth century, the largest oil fields recovered fifty barrels of oil for every barrel used in the extraction, transportation and refining. This ratio is often referred to as the Energy Return on Energy Investment (EROEI). Currently, between one and five barrels of oil are recovered for each barrel-equivalent of energy used in the recovery process. As the EROEI drops to one, or equivalently the Net Energy Gain falls to zero, the oil production is no longer a net energy source. This happens long before the resource is physically exhausted.

After the briefest of lulls when oil reached $145 per barrel, Americans have resumed buying SUVs, pickup trucks, and gas guzzling muscle cars. They have chosen to ignore the imminence of peak cheap oil because driving a leased BMW makes your neighbors think you are a success, while driving a hybrid would make your neighbors think you are a liberal tree hugger. It boggles my mind that so many Americans are so shallow and shortsighted. According to Automotive News, at the start of 2008 leasing comprised 31.2% of luxury vehicle sales and 18.7% of non-luxury sales. This proves that hundreds of thousands of wannabes are driving leased BMWs and Mercedes to fill some void in their superficial lives.

I bought a Honda Insight Hybrid six months ago. It gets 44 mpg and will save me $1,500 per year in gasoline costs. I put 20% down and financed the remainder at 0.9% for three years. My payment is $450 per month. I will own it outright in 2 ½ years. I could have leased a 2010 BMW 328i with moonroof, bluetooth, power seats with driver seat memory, lumbar support, leather interior, iPod adapter, 17″ alloy wheels, heated seats, wood trim, 3.0 Liter 6 Cylinder engine with 230 horsepower for 3 years at $389 per month. At the end of 3 years I’d own nothing. In 2 ½ years I’ll be able to put $450 per month away for my kids’ college education and I’ll be saving more on fuel as gasoline approaches $5 per gallon. The self important egotistical BMW leaser pretending to be successful will need to hand over their sweet ride and move on to the next lease, never saving a dime for the future. I’m sure they’ll make a killing in the market or their McMansion will surely double in price, providing a fantastic retirement.

After the briefest of lulls when oil reached $145 per barrel, Americans have resumed buying SUVs, pickup trucks, and gas guzzling muscle cars. They have chosen to ignore the imminence of peak cheap oil because driving a leased BMW makes your neighbors think you are a success, while driving a hybrid would make your neighbors think you are a liberal tree hugger. It boggles my mind that so many Americans are so shallow and shortsighted. According to Automotive News, at the start of 2008 leasing comprised 31.2% of luxury vehicle sales and 18.7% of non-luxury sales. This proves that hundreds of thousands of wannabes are driving leased BMWs and Mercedes to fill some void in their superficial lives.

The delusion that cheap oil is a God given right of all Americans can be seen in the YTD data on vehicle sales. Pickups and SUVs account for 48.5% of all sales, while small fuel efficient cars account for only 16.5% of all sales. Americans will continue to lie to themselves until it is too late, again.

Americans are so committed to their automobiles, hyper-consumerism, oversized McMansions, and suburban sprawl existence that they will never willingly prepare in advance for a future by scaling back, downsizing, or thinking. Our culture is built upon consumption, debt, cheap oil and illusion. Kevin Phillips in American Theocracy concludes that there are so many Americans tied to our unsustainable economic model that they will choose to lie to themselves and be lied to by their leaders rather than think and adapt:

A large number of voters work in or depend on the energy and automobile industries, and still more are invested in them, not just financially but emotionally and culturally. These secondary cadres included racing fans, hobbyists, collectors, and dedicated readers of automotive magazines, as well as the tens of millions of automobile commuters from suburbs and distant exurbs, plus the high number of drivers whose strong self-identification with vehicle types and models serve as thinly disguised political statements. In the United States more than elsewhere, a preference for conspicuous consumption over energy efficiency and conservation is a signal of a much deeper, central divide.

M King Hubbert was a geophysicist and a practical man. He observed data, made realistic assumptions, and came to logical conclusions. He didn’t deal in unrealistic hope and unwarranted optimism. He knew that our culture had become so dependent upon lies and an unsustainable growth model based on depleting oil and debt based “prosperity”. He knew decades ago that we were incapable of dealing with the truth:

Our principal constraints are cultural. During the last two centuries we have known nothing but exponential growth and in parallel we have evolved what amounts to an exponential-growth culture, a culture so heavily dependent upon the continuance of exponential growth for its stability that it is incapable of reckoning with problems of non-growth.

Our country is at a crucial juncture. It is time for thinkers. It is time for realists. It is time to deal with facts. It is time to drive the ideologues off the stage. Are you tired of lying to yourselves? Are you tired of being lied to by the corporate fascists that run this country? It is time to wake up. Right wing and left wing ideologues will continue to spew lies and misinformation as they are power hungry and care not for the long-term survival of our nation or the unborn generations that depend upon the decisions we make today. It is time to see how we really are.

Most of one’s life is one prolonged effort to prevent oneself from thinking. People intoxicate themselves with work so they won’t see how they really are. – Aldous Huxley

By Marshall Auerback, a portfolio strategist .hedge fund manager, and Roosevelt Institute Senior Fellow

My friend, Yves Smith, has posed the question as to why there is no political outlet for the anger on the left. In other words, where are today’s Huey Longs when you need them? It’s become patently obvious to anybody with half a brain and a pulse that President Obama’s “progressivism” has more in common with Mussolini’s corporatism than anything remotely connected to a genuinely progressive agenda.

If you think I’m exaggerating, I suggest you read Denis Mack Smith’s excellent accounts of Il Duce’s tenure in Smith’s “Modern Italy: A Political History”,
or his biography, “Mussolini”. Both works describe a country which, while claiming to reduce an inflated bureaucracy, needed to do precisely the opposite in order to reward personal “clients” and followers. Both books also recount that in spite of the efforts of Mussolini’s first Fascist Finance Minister De’Stefani’s efforts to curb tax evasion and limit stock exchange speculation, his efforts were constantly thwarted by other political cronies of Il Duce, as well as Mussolini himself, who soon allowed the majority of his Cabinet to discredit one of the few competent ministers, who was of above average intelligence and competence (Elizabeth Warren, watch out).

Yet today we are being confronted by the sight of a desperate President, hoping to re-engage with a thoroughly dispirited base. President Obama recently told black leaders that he wanted their support to “guard the change” he was allegedly delivering. That would be the “change” which essentially perpetuated the TARP bailouts initiated by former President Bush and former Treasury Secretary Hank Paulson? Or the health care “reform” bill which will shovel billions of dollars into the private insurance industry with little in the way of a quid pro quo for improved HEALTH CARE? Or the “change” which brought us the supposed withdrawal from Iraq even as the Pentagon conceded that “nothing will change” – a direct quote from the Army’s chief spokesman in Iraq (although cited in a Colorado Springs Gazette dispatch which probably explains the lack of national commentary). What about the “change” in a corrupt narco-state like Afghanistan, where, the Obama Administration has concluded that its war strategy is fundamentally sound and that a December review, once seen as a pivotal moment, is now unlikely to yield any major alteration in policy?

And the President wonders why there is an enthusiasm gap amongst his base? Or why there is a smoldering anger which continues to manifest itself through the rise of the Tea Party movement? At a townhall meeting last week, Obama told the audience he relishes the opportunity to get out of Washington and talk with regular people. Hmm…one wonders. As Bloomberg’s Margaret Carlson recently pointed out, Velma Hart told the President that she’s “exhausted of defending you,” “deeply disappointed with where we are right now,” and waiting for him finally “to change things in a meaningful way for the middle class.”

The President’s response, noted Carlson, was petulant in the extreme: “Now, as I said before, times are tough for everybody right now, so I understand your frustration,” he told Hart, after rather clumsily praising her as part of “the bedrock of America” and before citing new credit-card rules and student- loan procedures as evidence of progress.

“As I said” always carries with it the implied question, Weren’t you paying attention? “For everybody” telegraphs you’re one out of millions, nothing special. And “everybody” isn’t suffering, which is the truth that gets to the heart of Obama’s problem and makes his brushing off Hart as much substance as theater.

And then there was this message last week from the President at a $30,000-a-plate fundraiser at Greenwich, Connecticut home of the appropriately named fundraiser, Rich Richman, where Obama was doing his best to reinforce the “professional left” caricature initiated by his Press Secretary Robert Gibbs. Democrats, just congenitally, tend to get – to see the glass as half empty. If we get an historic health care bill passed – oh, well, the public option wasn’t there. If you get the financial reform bill passed – then, well, I don’t know about this particularly derivatives rule, I’m not sure that I’m satisfied with that. And gosh, we haven’t yet brought about world peace and -) I thought that was going to happen quicker. (Laughter.) You know who you are. (Laughter.)

At times like this, the President sounds like someone who works in a slaughterhouse, whilst seeking to preach the virtues of vegetarianism. It’s hard not to have a Howard Beale moment.

The corporate elites in this country saw Bush driving the country off a cliff, so they concocted an allegedly “post-racial” moderate Democrat to stabilize the system and obtain Democratic buy-in on issues like perpetual war, and a government as feeding trough, which has facilitated ongoing corporate predation. The same elites began to use the media to focus on distracting non-issues like Obama’s birth certificate, Muslim mosques, and the like to divert attention away from the only real issue: the political economy of the garrison/predator state, ignoring the manner in which Obama has consolidated it with bipartisan buy-in.

Likewise on domestic policy, we spent months focusing on death panels in health care, ignoring the more salient fact that the White House never wanted a public option in the health care bill, which explains why Rahm said so early last summer. Why? Because the big insurance companies did not want it, so Rahm did not want it. End of issue.

Financial reform has been similarly disappointing. Any private investor who had put as much as the government has put into faltering banks would have far more supervision (board seats, probably regular operational reports) and would also have replaced the CEO, with an understanding that he could clean house if he saw fit. Getting a new CEO in is usually standard operating procedure with distressed organizations, but the Treasury and Fed have continued to write checks and frustrated any serious attempt to make inquiries. Cover-up has been the hallmark. Why else implement a financial reform bill without at least exploring the cause of the crisis in the first place? Look at the contrast with the treatment of GM and Chrysler, which were asked plenty of tough questions and required to submit turnaround plans that could be rejected or be revised under duress.

Leaving aside the economic and political costs of the policies undertaken by President Obama, there is a much more profoundly corrosive social effect at work here. There is a pervasive sense that people who have played according to the rules are being persistently jobbed by this Administration – this has begun to perpetuate a feeling of “they’ve got theirs and now I want mine.” It’s hard to quantify the impact of this growing mentality, but it is the kind of phenomenon often manifests itself via widespread tax evasion and a corresponding loss of political legitimacy on the part of a government in other countries.

The primary reason the public accepts what we call “fiat money” is because it has tax liabilities to the government. If the tax system were removed, the government would eventually find that its fiat money would lose its ability to purchase goods and services on the market. In the words of the economist Abba Lerner:

The modern state can make anything it chooses generally acceptable as money…It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.

If that trend persists, then we do end up being like Greece. Not because of growing national insolvency, but more because our citizenry begins to view the government as a piggy bank to be exploited, rather than an instrument which mobilizes national resources for broader public purpose. Absent this political authority, everything begins to break down.

For all of his renewed vigor on the campaign trail, Mr. Obama fundamentally fails to understand this phenomenon, which is why his exhortations of the kind that he uttered last weekend to the Congressional Black Caucus no longer resonate with the broader public. His “change” message is no longer a symbol of hope, but has become a source of bitter irony and cynicism. As a result, this President risks turning off an entire generation of new voters who were once genuinely excited by the man’s promise.

Frank Rich recently suggested that “it’s time for this big dog to bite back” and urged Obama to “call out the powerful interests…whether on Wall Street or in Big Oil or any other sector where special interests are aligned against reform in the public interest.” All well and good. But consider the fact that these “powerful interests” were some of the President’s biggest campaign donors. Which leaves a more troubling question: what if this particular “Big Dog” is actually nothing more than a lap dog – guarding the very special interests that he purports to oppose?

When you start advocating Federally backed “moon shots” as a way to compensate for the shortcomings of American management, you know you are in deep doo doo.

Tom Friedman has a characteristically breathless article at at the New York Times arguing America better get off its duff because China is very serious about electric cars:

China is doing moon shots. Yes, that’s plural. When I say “moon shots” I mean big, multibillion-dollar, 25-year-horizon, game-changing investments. China has at least four going now: one is building a network of ultramodern airports; another is building a web of high-speed trains connecting major cities; a third is in bioscience, where the Beijing Genomics Institute this year ordered 128 DNA sequencers — from America — giving China the largest number in the world in one institute to launch its own stem cell/genetic engineering industry; and, finally, Beijing just announced that it was providing $15 billion in seed money for the country’s leading auto and battery companies to create an electric car industry, starting in 20 pilot cities. In essence, China Inc. just named its dream team of 16-state-owned enterprises to move China off oil and into the next industrial growth engine: electric cars.

Not to worry. America today also has its own multibillion-dollar, 25-year-horizon, game-changing moon shot: fixing Afghanistan.

OK, so far, not unreasonable. But Friedman later argues the US needs to chase China in the electronic car biz:

The electric car industry is pivotal for three reasons, argues Shai Agassi, the C.E.O. of Better Place, a global electric car company that next year will begin operating national electric car networks in Israel and Denmark. First, the auto industry was the foundation for America’s manufacturing middle class. Second, the country that replaces gasoline-powered vehicles with electric-powered vehicles — in an age of steadily rising oil prices and steadily falling battery prices — will have a huge cost advantage and independence from imported oil. Third, electric cars are full of power electronics and software. “Think of the applications industry that will be spun out from electric cars,” says Agassi. It will be the iPhone on steroids.

Europe is using $7-a-gallon gasoline to stimulate the market for electric cars; China is using $5-a-gallon and naming electric cars as one of the industrial pillars for its five-year growth plan. And America? President Obama has directed stimulus money at electric cars, but he is unwilling to do the one thing that would create the sustained consumer pull required to grow an electric car industry here: raise taxes on gasoline. Price matters. Sure, the Moore’s Law of electric cars — “the cost per mile of the electric car battery will be cut in half every 18 months” — will steadily drive the cost down, says Agassi, but only once we get scale production going. U.S. companies can do that on their own or in collaboration with Chinese ones. But God save us if we don’t do it at all.

Um, let’s consider a little backstory Friedman omits. His own paper, the New York Times, reported in April 2009 that China was out to become the the leader in electric and hybrid cars:

Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.

The goal, which radiates from the very top of the Chinese government, suggests that Detroit’s Big Three, already struggling to stay alive, will face even stiffer foreign competition on the next field of automotive technology than they do today.

The big reason the US is behind in the electric car game is Detroit, and the battle was lost some time ago. (Separately, the time for higher gas prices was also some time ago, but the then Big Three and a host of others would have fought it tooth and nail. And think we’re gonna impose gas taxes now in the middle of a deep downturn and worry about adequate demand? Sure, there’s a way to have compensation elsewhere, mainly offsets to other taxes middle and lower income people face, but that’s too many moving parts to be realistic unless you had a well disciplined party with a decent majority in Congress behind that agenda, conditions notably absent right now).

In 1993, I did due diligence on an advanced battery venture on behalf of a major hedge fund, visited Detroit, and drove an electric car made by a GM consortium. At the time, there was a mandate in California as well as the Northeast scheduled to come into effect in a few years to have 2% of cars sold be electric. Now the idea of forcing a sales goal seems silly, unless you had some obvious targets. The early vehicles were best suited for city use (no worry about your car running out of juice on the interestate). Public transport, delivery services (think the Post Office, UPS, Fedex) and government fleets were logical buyers, particularly since they also solved the chicken and egg problem of charging station infrastructure (fleets go home at night and can be recharged in relatively few locations). But the states did nothing to help create a market.

GM spent over $1.5 billion manufacturing and marketing the EV1, its electric car, despite its ambivalence (at least when I was investigating, which prior to the 1996-2000 opportunity to lease the car in Arizona and California). GM did costly consumer marketing in those states, despite being able to manufacture only 600 cars a year. California also welched on its promise to lease electric cars and trucks in meaningful numbers and wouldn’t install public chargers.

Another issue was the batteries were not ready for prime time (I had looked at all the competing technologies adn recommended against investment for that reason and the lack of enthusiasm for the iniative). Batteries don’t do well in the cold. And electric engines don’t throw off heat the way an internal combustion one does, so the early EVs had small gas fired heaters to warm the passenger area.

However, success also depends on commitment to overcome obstacles, and GM had already divested key bits of relevant technology BEFORE the EV1 launch. Which begs the question, how hard were they really trying to make this work (for instance, did they press the California government when it started waffling?).

We have ceded leadership in battery technology to Asia, and reader Keenan pointed out, also the know-how for the related drive trains:

h torque DC servomotors are the sine qua non for electric vehicles.

High torque performance is achieved via magnets made of alloys of various so called “rare earth” elements. Prominent among the alloys are samarium-cobalt and neodymium-iron-boron. GM held a majority interest in Magnaquench, an Indiana company with expertise in such materials and magnet fabrication. GM however decided that electric motors did not fit into its “core competencies.”.

While the article highlights the aspects of defense technology, the commercial / industrial side of the business is every bit as important in today’s world of economic warfare.

GM sold Magnaquench in 1995:

Magnequench had a unique expertise in the manufacture of high-powered neodymium magnets, which it pioneered in the 1980s for its parent company, General Motors, to use in airbags and mechanical sensors. When GM restructured in the early 1990s, the company began to divest itself of subsidiaries that were not in its “core competence.” Magnequench, in spite of its high-tech pedigree—and the fact that it provided critical component parts to “precision guided munitions” that were then in great demand by the U.S. Department of Defense—was put up for sale.

Reportedly, Magnequench supplied 85 percent of the neodymium magnets used in servo motors for PGMs,[5] but neodymium magnets are far more important and ubiquitous than their use in advanced weaponry might suggest. They are the sole reason high-speed, high-capacity computer data storage devices can work. They are found in literally every computer in the world, and in 2004, Magnequench, together with its merger partner NEO Material Technologies (and its integrated Chinese joint-venture partners), supplied about 80 percent of the world market share of neodymium and rare-earth oxide powders used in those magnets.[6]

So when GM put Magnequench on the block in 1995, who should come up with the $70 million asking price?[7] An investment consortium headed by Archibald Cox Jr. (son of the illustrious Watergate prosecutor) acting in concert with two Chinese state-owned metals firms, San Huan New Material and China National Nonferrous Metals Import and Export Company (CNNMIEC), which had been pestering GM to sell Magnequench since 1993.[8]…

Magnequench’s Chinese owners cleverly reinterpreted the CFIUS conditions. One Magnequench employee reported that shortly after the Chinese took over, Magnequench’s neodymium-iron-boron magnet production line was “duplicated in China” and that, after the Chinese “made sure that it worked, they shut down” the U.S. production in Indiana. The employee added, “I believe the Chinese entity wanted to shut the plant down from the beginning. They are rapidly pursuing this technology.”[16]

So this vignette reveals the degree to which Detroit helped seal its own fate. It went along with the electric car mandate fully hoping its 2% goal would make it a non-starter (that was the line I heard, anyway, that the cars would be costly enough that the target was pretty certain to be unrealistic) and played the game out, rather than try to influence the legislation so as to get a program that might be viable for the states as well as the carmakers.

GM, with $75 bn in cash in reserves, bought AmeriCredit, a small subprime lender,  in an all cash deal for $3.5 bn. GM is also currently in bankruptcy.

AmeriCredit, which is rated BB by Fitch, was put on watch by Fitch, after the deal announcement.

Fitch is unsure whether the deal will help or hurt the debt rating of AmeriCredit.

A giant, though bankrupt, company, that is effectively a ward of the state, with an upcoming IPO being steered by US Treasury, is buying a tiny subprime lender for all cash – and Fitch says it can’t tell which is the good company and which is the bad.

That is the current state of finance, rating agencies and Treasury department machinations, in a nutshell.

The officers of AmeriCredit probably don’t care either way though, because they all just got cashed out.

h/t anonymous.

Felix guessed how this Structured Finance issue pipeline would get sorted out, for the moment.

Three not necessarily inconsistent takes on causes and effects:

A neat way to embarrass the government. The rating agency logjam and the GM deal announced yesterday are closely related: if there’s one thing GM will think it still needs for its IPO, now that it’s got a subprime lender, it’s a freely moving subprime auto loan pipeline. So I would guess that there might be a GM IPO sometime in the next six months, but possibly not right at the end of that time.

Or, this instant fracas just points to the likely result of the tortuous bill-drafting process – “unintended consequences”, a phrase we will see plenty more times in connection with regulatory change. Maybe that turns into organized push back by the business.

Or, perhaps it was an intended consequence, and the agencies’ letters to issuers, requesting that the rating not be registered, actually represent first drafts of  the ratings agencies’ suicide notes. If even they don’t trust their own ratings, why should anyone else? What is the formal point of the agencies now, apart from their niche in the regulations? Who is left to offer guarantees against rating agency risk, if not the agencies? Actually, one can see why they’re a bit windy. Pretty much everyone else who took that risk on has gone bust, or lost their job. But maybe it’s a business opportunity for someone if the price can be got right.

Oh, I see Disequilibria sort of agrees with me, plus a linked video.

Regulators Hired by Toyota Helped Halt Investigations Bloomberg and Bursting Pipes Lead to a Legal Battle New York Times. Faulty financial products, faulty cars, faulty pipes….what next?

IMF Tells Bankers to Rethink Inflation Wall Street Journal (hat tip reader Don B)

The Myth of Efficiency James Kwak

Welcome to boarded-up Britain: One in eight shops now stand empty as recession hits high streets Daily Mail (hat tip reader Steve L)

Is The FDIC Killing Short Sales? ActiveRain (hat tip reader Scott)

The danger of bearing gifts to the Greeks Ambrose Evans-Pritchard, Telegraph, Swedish Lex adds:

Ambrose’s assessment of the EU declaration of yesterday is pretty accurate although a couple of important pieces are missing in order to make the puzzle more complete. A lot is captured in the opening sentences of the column:

“The Greek rescue plan agreed by EU leaders after a week of leaks is strangely thin, raising suspicions that Germany, Holland and the creditor states of Northern Europe still cannot agree on the terms of any bail-out.

The euro tumbled 1pc to a nine-month low of $1.36 against the dollar and Club Med debt yields jumped as investors read the summit text, searching in vain for details of debt guarantees or bilateral loans, or guidance on an EU eurobond. All they found was an expression of “political will”.”

It is true that the EU and the Member States have not had time to agree on a master plan and that, for instance, Germany has quite a bit of internal cuisine to attend to before a more comprehensive program will begin to emerge. So in a way it is right to say that the EU is buying time, a commodity of which there is little in stock.

However, the message of the EU leaders of yesterday is clear in some regards. For instance, the euro states will do what it takes to avoid another George Soros/ERM moment, allowing a speculator or a wolf pack of speculators to steal the show. Whoever it is that is taking positions in order to achieve George Soros fortune and fame this time, by hitting the euro where it hurts most, will now face the full attention of the ECB, Germany and France. Their calculation is, it seems, that the euro can remain imbalanced and incomplete, with their ad hoc support, longer than the speculators can remain solvent.
The other factor that Ambrose did not mention is that Merkel and France yesterday again reiterated their commitment to developing and making proposals for global economic governance. The current euro crisis could be the perfect catalyst for speeding up that process.

It seems that Merkel is assuming the role or the bad cop, with her insistence yesterday that Greece will have to produce monthly reports as regards the austerity program imposed by the EU Commission. If there previously was any doubt in Greece that any future support from the other euro states, should it become necessary, will come with a lot of strings attached, that doubt should have vanished by now.

Steering Out of a Smash-Up No One Wants Andy Xie

Antidote du jour (hat tip reader Kevin):

By Edward Harrison of Credit Writedowns

Yves is going to be in a light posting mode, so I will be posting some links and a few posts for your reading pleasure. The first one is an update to some thoughts that Yves had on GMAC on the 27th.

By the way, where is Jesse? I want to see him posting here too. (hint, hint)

And you thought the bailouts were over and market discipline might be restored.  Not a chance – the bailouts will continue, come hell or high water. The latest demonstration of this is GMAC, where the government will now be majority owner. GMAC has officially been nationalized. Now the government is running auto financing in addition to running the companies making the cars.

Below is a quote from the Financial Times. Notice the parts I have bolded.

GMAC, the car financing company, is set to receive up to $5.6bn in a new capital injection from the Treasury, filling a hole identified in the “stress tests” earlier this year and paving the way for the government to become the majority shareholder.

The company, formerly the financing arm of General Motors, was one of 19 institutions to submit to a capital adequacy programme led by the Federal Reserve and completed in May. That determined that GMAC had a shortfall, which will now be provided by the government in the form of preferred equity, according to two people familiar with the situation.

As widely expected, GMAC has been unable to raise the necessary capital in the market and the company – which will take on fresh lending responsibilities when it merges with Chrysler Financial – was seen as vital to the government-led restructuring of the US automotive industry and deserving of more funds from the $700bn troubled asset relief programme.

“When we laid out the stress tests, we expressly said that some additional Tarp capital may be needed given the severity of the downturn – this capital need is not new information,” said an administration official.

“But the transparency brought about by the stress tests allowed all other institutions to raise the capital required by the stress tests to ensure these firms could withstand a more severe economic scenario than anticipated,” the official said.

What you should be reading from this statement is the following:

• All the firms identified as lacking capital under the stress tests were given time to raise funds in the capital market to meet the shortfall.
• Some firms did meet the shortfall and they are now free to do as they please.
• Others have not and we the government are now going to take a more muscular approach in dealing with them.
• GMAC is the first public example of our flexing our muscles.
• But there surely are/will be other examples; some may already be happening in secret.

If the US government is going to throw its weight around to deal with financial firms short of capital, I would personally prefer they try a process which allows these firms to fail whereby equity and debt holders suffer consequences that are consistent with taking market risk.  Bailing out GMAC is a moral hazard plain and simple.

But, what’s done is done. The GMAC case does, however, give a lot more credence to my view that Citigroup’s actions are being dictated by government. As I indicated when the stress tests were done in April, firms were going to get some time to raise capital and if they didn’t, the government was going to move on to Plan B (debt-for-equity swaps, nationalization, and FDIC seizure). Expect to see more indications that other financial companies with capital shortfalls are falling under the government umbrella.

The numbers aren’t as impressive as AIG’s but the general premise is the same. The automaker’s financial service arm it asking for a third taxpayer-provided cash transfusion. Might help if someone stanched the bleeding first.

But no, bleeding is part of the game plan. The reason for more dough to GMAC is so GM and Chrysler can continue to finance auto purchases, not as a result of greater than expected losses on its existing portfolio. So this is cash for clunkers under another brand name.

From the Wall Street Journal:

GMAC Financial Services Inc. and the Treasury Department are in advanced talks to prop up the lender with its third helping of taxpayer money…

The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government’s 34% stake in the company could increase if existing shares eventually are converted into common equity.

The willingness by Treasury officials to deepen taxpayer exposure to GMAC reflects the troubled company’s importance to the revival of the auto industry….

Federal officials also are moving to shore up GMAC’s ability to fund its daily operations, with the Federal Deposit Insurance Corp. telling the company Tuesday the agency will guarantee an additional $2.9 billion in debt, according to people familiar with the discussions. The FDIC guarantee will make it easier for the company to sell debt to investors. The FDIC backed $4.5 billion in GMAC-issued debt earlier this year.

The FDIC approval came just four days before the expiration of the regulator’s program that guarantees debt issued by certain banks. It ended months of tense negotiations between GMAC and regulators. Without a deal, the company would have been forced to further reduce its lending volume. New-car loans by the company tumbled 55% to $5.6 billion in the second quarter from a year earlier.

The US tonight imposed steep tariffs on tires, a move directed against Chinese imports. From the Wall Street Journal:

The Obama administration will put steep import duties on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs, U.S. Trade Representative Ron Kirk announced Friday night.

The announcement of 35% import tariffs, which would decline to 30% in the second year and 25% in the third, comes at a sensitive time. The heads of state of the 20 largest economies arrive in Pittsburgh in less than two weeks for a summit of the Group of 20, amid rising trade tensions and looming economic disputes. The United States needs China to help float a U.S. deficit expected to reach $1.56 trillion this year. President Barack Obama is also likely to seek new sanctions against Iran to combat its nuclear program, and China’s vote on the United Nations Security Council is pivotal….

Between 2004 and 2008, China’s tire production capacity surged by 152% and is projected to jump an additional 16% by 2010. At 235.2 million tires, China’s production capacity in 2008 was more than three times greater than its shipments to its home market. U.S. imports of tires from 2004 to 2008 jumped from 14.6 million to 46 million. China’s share of the U.S. tire market surged 255% in that time, to 16.7% from 4.7%.

Meanwhile, four U.S. tire plants closed in 2006 and 2007. Three more are planned for closure this year. There were 5,168 fewer workers in the U.S. tire industry in 2008 than there were in 2004.

The New York Times stresses that this is the first time the US has invoked a specific safeguard included as a condition of China’s entry to the WTO:

Under that safeguard provision, American companies or workers harmed by imports from China can ask the government for protection simply by demonstrating that American producers have suffered a “market disruption” or a “surge” in imports from China.

Readers are welcome to correct me, but it looks as if Team Obama has chosen to take a stand on a pretty narrow matter. Given this Administration’s history of brave talk combined with cautious to no real action, this is more likely to be meant to be a concession to labor than a shot across China’s bow.

But it is easy to see that the Chinese may view this differently, particularly since given the precedent set by relying on a heretofore unused mechanism.

And it is hard to know what the Chinese will do. On the one hand, China is clearly wedded to mercantilist trade policies and it is hard to see them making serious changes when their economy is flagging. So they could see this as a frontal challenge at a time not of their choosing. The rhetoric from the Chinese, at least as reported in China Daily, says the Chinese regard this move as an affront, but the Chinese so frequently go into high dudgeon mode, it is hard to tell when they are merely posturing and when they are quite serious:

Experts have called the proposal “unreasonable and unfair” and said that Chinese tire manufactures “largely do not compete against their American counterparts in the US.

Chinese tires have been “targeting the budget and no-brand replacement tire market for US consumers with severe budget constraints,” a sector that the US tire makers
gave up long ago and are unwilling to enter again, said China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters in a letter to President Obama….

But the Chinese government will not turn away from issues that will harm the interests of Chinese industries. Officials from the Bureau of Fair Trade for Imports & Exports with the Ministry of Commerce said China has prepared an assortment of plans for countering different possible results from the Obama administration.

“We will surely protect local tire manufacturers from being hurt when needed,” they said.

China will likely take retaliatory measures against the US industries. The Tire Industry Association has petitioned China to launch restrictive measures.

Moreover, experts suggested the Chinese government clamp down on US auto imports. During the first half, China imported more than $1 billion worth of automobiles from the US, up by 9.1 percent year-on-year.

“It’s unfair for Chinese laborers, after we made the American automakers happy, if the US launches sanctions against Chinese tire imports,” said He Weiwen, a council member of the China Society for American Economy Studies.

Stay tuned. This could get interesting in a bad way.