Saving the Environment – We All Need to Give

Posted on January 25, 2009 | 4 comments

President Obama’s inaugural address has gotten me thinking about responsibility and sacrifice. The President said what we have all known for a long time: that Americans are too profligate – spending money we don’t have, burning energy we can’t afford – and that a day of reckoning would come. In fact, the President made clear that the day of reckoning is here: “our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed.” As a result, I am planning a series of entries on this topic, on the theme of sacrifice. Today’s item: the environment.

A recent article in the Wall Street Journal (regular readers know I love my WSJ) discussed Cape Wind, which aims to put 130 windmills off the coast of Cape Cod, reducing greenhouse gas emissions an amount equivalent to taking 175,000 cars off the road. A no brainer project, right? Wrong, because the wealthy folks who have their weekend houses on that part of the Cape don’t want their views marred by windmills out on the horizon. They have been protesting the project and putting up legal barriers, enlisting the help of their most powerful neighbor, Teddy Kennedy, whose family has a fabled compound in Hyannisport.

Massachusetts is famously liberal, and based on my two years in Boston, the people who weekend on the Cape would consider themselves environmentalists. They recycle, they install solar power, they drive their Prius to Whole Foods to buy local produce. But when it comes to windmills in their expensive view, suddenly they aren’t so green. This is where they need to listen to our new president and stop protecting their narrow interests. They need to sacrifice a little for the good of the environment.

Broadening the scope of this discussion, if we are going to defeat global warming, everyone is going to have to chip in. The NIMBY (not in my back yard) protests that stall projects like new power lines, or wind farms, are going to have to stop. Of course, nobody wants a giant tower in their back yard, or a windmill right off their front porch. But nobody wants temperatures to go up several degrees either, or ocean levels to rise to a point where Cape Cod weekend houses are under water. Global warming is a major problem that affects everybody, and we are all going to have to sacrifice a little – give up our SUV, or allow windmills near our weekend house – if we are going to solve it. As theologian Sallie McFague put in her new book regarding climate change, “either we will all make it together or none of us will.”

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J.S. Mill and Financial Regulation

Posted on January 15, 2009 | 1 comment

I was recently on vacation, which gave me a chance to reread John Stuart Mill’s On Liberty. This is a classic of the individual liberty movement, and I thought this might be an apt time to revisit it, what with the government nationalizing some financial institutions and making major investments in others, and almost certainly about to heavily reregulate the financial markets.

My expectation was that Mill would provide ammunition for those arguing against government involvement, but I was wrong. In fact, Mill clearly supports a government that is active in many affairs of its citizens, as long as there are definite and specific limits to that activity. As Mill says, “the fact of living in society renders it indispensable that each should be bound to observe a certain line of conduct toward the rest.” (p 70, all quotes from the Norton edition)

But let me take a step back. The money quote that summarizes all of On Liberty is this: “the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.” (p. 10) Mill’s basic position is that people should be allowed to do and say as they please, as long as they don’t harm anybody else. If left at this, Mill could easily be read to support a fully Libertarian position.

But Mill doesn’t leave it at that. Instead, he teases out a pretty broad definition of “harm,” and thereby a broad set of circumstances under which government can interfere in individual affairs. Continuing the quote from above, Mill notes “this conduct consists, first, in not injuring the interests of one another.” (p. 70) This sentence alone seems to support regulation of Wall Street, since virtually every trade has a counterparty whose interests are affected. Mill goes even further, claiming that the state can compel certain behavior from individuals: “to bear his fair share in the common defence, or in any other joint work necessary to the interest of the society of which he enjoys the protection.” (p. 12)

For Mill, the default position is to give people freedom, but he recognizes that a civil society involves so many interactions that the default may be infrequent, and thus there is significant warrant for government action. So while there are plenty of reasons to disagree with government policy on the financial bailout, John Stuart Mill is not one of them.

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Stop the Bailout Madness

Posted on December 22, 2008 | 1 comment

Today’s Wall Street Journal reported that commercial real estate developers are aggressively lobbying for a government bailout, trying to get into a $200 billion program designed to “salvage the market for car loans, student loans and credit-card debt.” Because the developers have a ton of debt coming due next year, and the frozen credit markets will prevent them from refinancing that debt, they want the government to step in. If they cannot refinance the debt, then their lenders will take over the high-rises and malls and hotels that the developers currently own.

This is where the bailout madness must end. Real estate developers are in a completely different league than banks or car companies or consumer debt. The bailouts for those industries could at least be defended, since credit and employment and consumers are essential for the economy to work. But allowing developers to keep the speculative properties they built does nothing for the economy. It doesn’t prop up employment or consumer spending. All it does is shift dollars from taxpayers to a few very wealthy and connected developers. If developers were erecting new buildings, at least they could claim to support construction jobs, but in this economy, not a lot of new buildings are being built.

Here are several of the problems I have with a bailout of developers:

  • As noted above, there is no economic benefit
  • Developers usually finance each project separately, so even if they lose one to the banks, it won’t bring down their whole firm
  • Developers push strongly against government regulation (zoning, height limits, etc.) when they are building, standing on the spurious rubric of “property rights.” So why don’t they rely on their precious freedom now instead of turning to the government?
  • The same issue of the WSJ also had a piece on how some real estate developers saw the crash coming and conservatively boosted their cash reserves, and are now sitting pretty. So why should we bailout the developers who were not so prescient?

Finally, I should note that generally speaking, developers are wealthy and sophisticated individuals or families. They weren’t talked into these investments by shady mortgage brokers, and they already have plenty of resources to deal with their problems. In fact, let’s look at the three named developers in the article. There is William Rudin, whose family “is a large Manhattan office building owner.” If you are a large owner of Manhattan high rises, then you are very very rich. The Related Cos, a major developer has, according to its web site, a $10 billion real estate portfolio, and this privately held company remains under the control of rounder and CEO Stephen Ross. Vornado Realty Trust is a huge landlord, publicly traded, with a market cap of $9 billion. Vornado CEO Steven Roth was paid $1 million last year and exercised options worth $68 million. On December 8 of this year, he exercised more options, with a net gain of $13 million. Do these guys need a bailout?

The government can’t keep giving money to every industry that asks for it. Let’s draw a line, and let’s draw it at the hugely wealthy individuals who don’t need and who won’t help the economy.

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Attack on Wall Street Follow Up

Posted on December 12, 2008 | Leave a comment

And I thought I was was harsh in saying that we should tax Wall Street folks on their bonuses from the last few years. The NY Times is reporting that if anger against big banks continues to grow, the next step will be criminal indictments. Which, by the way, I would support.

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Auto Industry Bailout Follow Up

Posted on December 12, 2008 | 1 comment

The NY Times is reporting that one of the things that kept the Republicans in the Senate from supporting the bailout was the UAW’s refusal to take any pay cuts until 2011. From the article, it sounds like Senator Bob Corker (R-TN) and UAW President Ron Gettelfinger are both lying, but regardless, if the UAW isn’t willing to make concessions right now, whether pay cuts or benefit cuts or work rule changes, then let the car companies go under and the UAW members find other jobs.

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Attack on Wall Street

Posted on December 11, 2008 | Leave a comment

As the financial crisis continues, seemingly with no end in sight, I’ve noticed an ever increasing willingness to attack Wall Street, and to blame the big investment banks for the difficult times many parties are finding themselves in.

For example, check out this Wall Street Journal article, in which consumers say that Wall Street failed them. The gist: investment firms developed more and more complicated products that pushed onto consumers the responsibility for their investments (eg. IRAs vs. pensions) and now those products are exploding. Or this one, describing how the Pennsylvania state pension fund may have to pay Wall Street firms more than $2.5 billion because of exotic investments that have gone bad.

This anger isn’t exactly surprising, nor is it necessarily misplaced – Wall Street firms seeking short term profits pushed dicey products – but what surprises me is how widespread it is. In those two articles alone, everyone from IT workers to professional investors are blaming Wall Street. And the Wall Street Journal itself is eagerly reporting on these complaints.

I wonder if this anger will spread to pushing for some sort of action. Certainly the Merrill Lynch board heard this anger when they rejected CEO John Thain’s request for a $10 million bonus this year, giving him zero instead. But maybe the anger will drive politicians to dig deeper. As I’ve noted before, the players in the financial house of cards have already taken tons of money off the table. We know all about CEOs and hedge fund titans making obscene amounts of money, but don’t forget that your average fixed income trader or salesman was probably bringing home over $1 million per year during the boom times. Will policy makers go after that money?

A retroactive tax on boom time earnings would feel like justice. It’s difficult to see the fairness of taxing the whole country while bankers keep their Hamptons houses. On the other hand, the precedent of invoking a punitive and backward looking tax seems dicey from a policy perspective. Would we reach back and punish people other times that their decisions turned out to be wrong? Would we separate those who know their bonds were crap from those who were just doing what their boss told them? Again, it’s questionable policy. But it would feel so good.

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Auto Company Bailout: Make it Hurt

Posted on November 18, 2008 | 9 comments

Politicians in Washington are debating whether the government should bail out the Big 3 American automakers: Chrysler, Ford and GM. In addition to the $25 billion in low cost loans the government has already committed to Detroit, the Democrats, including President-elect Obama, are pushing for more aid. I have long been fascinated by the utter incompetence of American car companies, and came out against the $25 billion in loans, so of course I have some thoughts on this push for additional help.

I’m going to ignore ideology (eg. in a free market we should let companies fail) and focus on practical issues. But practically speaking, giving money to the car companies would be rewarding failure. For 30 years the Big 3 have been getting spanked by Japanese, German and now Korean car companies. They have relied on trucks and SUVs to generate profit and have proven themselves completely unable to produce an appealing small car. They have also demonstrated a fantastic inability to retool their processes to compete with the imports.

NYU business professor David Yermack calculates that GM and Ford alone have invested $465 billion in capital since 1998 and have seen their combined market capitalizations drop from $117 billion to $6 billion today. These are not companies that spend money well, so why should the taxpayers give them any more? And let’s not forget that GM CEO Rick Wagoner made $3.3 million last year while Ford CFO Lewis Boothe made $3.1 million (I’m letting Ford’s CEO off the hook for his $9 million because he’s new and they had to pay up to recruit him from Boeing). Why should our money go to support multi-million dollar salaries for guys who are screwing up?

Conservative commentators (hello Wall Street Journal) blame much of Detroit’s problems on expensive union contracts and hefty benefits paid to retirees. The usual estimate is that retiree legacy payments add $1,500 to the cost of each vehicle. But even if you could take $1,500 off the price of American cars, they would still lose market share because the cars suck. A comparable Toyota is worth $1,500 more because it is better made and will last forever. Also, I should note that it was the executives of the car companies who signed those rich union contracts. That being said, the UAW is way out of line with the overall labor market. Gold-plated health benefits, ridiculous work rules and no-layoff clauses are no way to help your company beat the competition.

So the main argument against bailing out the Big 3 is that it would be throwing good money (OUR money) after bad. What are the reasons to support a bailout? It turns out that there are 3 million of them; that’s the number of jobs that analysts have tied to the auto industry. And the theory is that if we let the Big 3 fail, all those jobs will go away. The car companies are saying that nobody will buy cars from a bankrupt company. I don’t totally believe that – I think that Americans have flown enough airlines that were in bankruptcy to understand that a bankrupt GM doesn’t really go away – but nor do I agree with Yermack that Toyota and Honda can just take up the slack. Realistically, it will take years for the foreign car companies to ramp up production to take over for a failed Detroit company. There is also the argument that the auto industry drives America’s sophisticated manufacturing industry, which is essential for both national security and future economic growth. I don’t know enough about that to comment intelligently, but it makes some sense on its face. Finally, there are all those retirees with health insurance and pensions. If the Big 3 fail, the obligations to support all those people will fall on taxpayers anyway.

So maybe, on balance, some sort of bailout is a good idea. If even 500,000 jobs were lost and the Big 3 pensions put onto the taxpayers, that would not be good for the economy. But good idea or bad idea, the bailout is still going to happen; the Democratic leaders (Nancy Pelosi and Harry Reid) are pushing for it, and Barack Obama owes the unions big time for getting out the vote. And if it’s going to happen anyway, let’s at least push for it to be done the right way.

Any federal bailout of the Detroit automakers needs to A) be onerous to shareholders and executives, and B) force restructuring on the industry to make it competitive. Paul Ingrassia, who won a Pulitzer Prize for his Wall Street Journal coverage of the auto industry, argued for removing current management, wiping out shareholders and restructuring contracts. He is absolutely right. And wiping out shareholders has to include the Ford family, who continue to dominate Ford Motor Company. Michael Levine, a lecturer at NYU School of Law, adds that the dealer networks have to be restructured. It has long been known that the Big 3 have far too many brands and dealers relative to the cars they sell (GM has 7,000 dealers while Toyota has 1,500) but state laws protect dealers from being closed. These state laws exist because dealers are big players in local economies; unfortunately, they are not big players at the national scale, and these state laws need to be trumped by national concerns.

All of these objectives can be realized through a packaged bankruptcy, which was suggested by Edward Altman, a business professor at NYU (lots of NYU references in this post). Packaged Chapter 11 bankruptcies, in which the financing that takes you out of bankruptcy is pre-negotiated, are pretty common. The government would provide the financing, and that would address the concern that consumers won’t buy cars from a bankrupt manufacturer. In fact, a packaged bankruptcy is the only route I can see that achieves all important goals:

  • Management removed and compensation limits implemented
  • Current shareholders wiped out
  • Union contracts renegotiated
  • Dealer contracts renegotiated and state laws changed.

So please, politicians, I implore you: don’t give in to corporate and union lobbying and just hand the car companies money. Use this opportunity to force on the car companies the changes that they need.

An interesting side note is that this is another case of the metaphysical phenomenon of current actions sowing the seeds of one’s eventual destruction. For decades the Big 3 have fought against fuel efficiency, spending gajillions of dollars lobbying against the CAFE fuel economy standards instead of just building better cars. And now, because they can’t build a good small car, the Big 3 are begging for help. In the same way, Republicans have for years been resisting any legislative efforts to push fuel economy, and look what just happened to them. Congressman John Dingell of Detroit, although a Democrat, has been the Big 3’s biggest supporter in DC (his wife is an executive at GM), and now Henry Waxman is trying to take away Dingell’s precious chairmanship of the Energy and Commerce Committee. In all these cases, we are seeing people and groups being beaten by that against which they fought the hardest. Very Jungian, don’t you think?

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The GOP is Splitting in Two

Posted on November 7, 2008 | 3 comments

In the wake of sweeping Republican losses on November 4, we are seeing the GOP fracture into two wings. The first wing is the traditional, intellectual wing, as personified by George Will. This is the low taxes, small government, muscular foreign policy wing. The second wing is the Main Street, rail against the elites wing, as personified by Sarah Palin. This is the social conservative, religious right, law and order wing. These two wings always had a tenuous coexistence in the party, with the intellectual wing using wedge social issues to get the Main Street wing riled up, and then screwing them economically. The intellectuals provided the money and ideas while Main Street provided the votes.

This tenuous coexistence, however, has now turned into open hostility, with each side blaming the other for McCain’s loss. And as the GOP tries to figure out what it really is, and how to avoid a third consecutive stomping in 2010, these two wings are fighting for dominance. Unfortunately for the future of the Republican Party, the two wings can’t reconcile, and neither wing can win an election on its own. After all, even with the wings combined, they just got smoked by Barack Obama’s politics of hope. On their own, they are doomed.

The intellectual wing itself has two components – the rabid neocons and tax cutters versus the more moderate Rockefeller Republicans – but they both share a commitment to lowering taxes and shrinking government. They also share a slavish devotion to President Reagan. McCain, despite his campaign rhetoric in 2008, is part of this wing. As Joe Klein from Time described him:

He believed in the unilateral exercise of American power overseas, with an emphasis on military might rather than diplomacy. He believed in trickle-down, supply-side, deregulatory economics: his tax plan benefited corporations and the wealthy, in the hopes that with fewer shackles, they would create more jobs.

But widening income disparity and the financial crisis of 2008 have fundamentally discredited that economic approach. Reaganism failed. And while the Rockefeller Republicans might be able to craft a workable economic theory, they are so marginalized in the party that they can’t ever win. Moreover, there simply aren’t enough Americans driven by desire for lower taxes to support this wing of the party. There are too many citizens who actually want their government to provide something.

The Main Street wing of the GOP is the part that believes there is a “real America,” as opposed to the liberal “fake America.” It’s anti-elite, anti-intellectual and anti-media. Which is its main problem: it’s against everything and for nothing. It is fueled purely by anger and self-pity. This is unsustainable; without new ideas, this wing will wither and die. It will be consumed by a black tumor of hate, like Lee Atwater‘s brain.

Also, much like the intellectual wing, the Main Street wing isn’t large enough to win on its own. There aren’t enough voters who buy into its false dichotomy. This wing, however, has a chance. If it were to embrace a truly populist economic strategy, it might be able to peel off enough blue collar Democrats to build a winning coalition. Even the Wall Street Journal notes that “new Republican voices are popping up to argue that the importance of working-class voters means the party needs to develop economic policies more obviously directed toward the working class than the capitalist class.” But that would require a complete reworking of Republican economics: supporting unions and trade protection at the expense of corporate interests and wealthy individuals. It would require an approach that sounds strikingly similar to….the Democrats.

This is the problem facing GOP strategists as they figure out what to do. They want to chase the voters, but that will require moving away from their core philosophy, because that’s what the voters are doing. As Politico put it, the GOP is “a party that is overwhelmingly white, rural and aged in a country that is rapidly becoming racially mixed, suburban and dominated by a post-Baby Boomer generation.” Some strategists want to pursue growing demographics, namely black and Hispanic voters. But how do you do that when your two wings cater to wealthy WASPS and white rednecks, respectively? Both wings of the GOP have painted themselves into electoral corners, and there is no obvious way out.

Perhaps the recent election marked the generational shift that we all knew was coming. For the past 20 years government has catered to, and been run by, people of our parents’ generation – those who grew up in the 1940’s and 1950’s – often leaving those of us from later decades mystified at the decisions being made. And we kept wondering, as old fogeys (Ted Stevens!) retired or died, and young folk grew old enough to vote, when our generation would start making decisions. Nobody WE knew hated blacks, or thought that poor people should be abandoned, so why was government pursuing such crappy policies? Why was the GOP so out of touch with our generation? After all, when you belong to a generation where a third of you have tattoos, it’s hard to see how branding a black candidate as “Muslim” is going to work. And it didn’t: Obama won, while conservative congressional candidates lost.

The GOP isn’t dead; its basic message of small government and individual liberty will always resonate. But it needs to do a lot of work to retool that message into a governing philosophy that will appeal to the new generation.

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Shock & Awe – The Good Kind

Posted on November 5, 2008 | 1 comment

Last night’s results created the type of shock and awe that we can all use. Not so much shock for me, since I’ve been confident of an Obama win for about a week, but definitely awe.

I was watching the results last night with about 20 friends, and we are generally a boisterous crowd. But when Obama gave his acceptance speech, we were utterly silent. That silence was not because we wanted to hear Obama’s dulcet tones; it was because we were struck speechless by the import of the moment.

America’s first black president. Think about it. We did; in mute awe my friends and I contemplated the greatness of that achievement. None of us are black, but we all recognized how important this was. Obama’s election probably won’t solve all the country’s race problems, but it sure feels like a big step. How can you not love a country where a black man named Barack Hussein Obama can rise from modest means to become president?

Yet our awed silence transcended Obama’s race, for there was a sense that his election represented a transformation of American politics. Votes for Obama were votes against divisiveness and for unity. They were votes against dishonesty and for solutions, against paralysis and for progress. They were votes that swept aside the past eight years, years of Bush and DeLay, of crony capitalism and Terri Schiavo. We were silent because Obama’s victory justified – wait for it – the audacity of our hope, our hope for change.

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Treasury Plan Turns Taxpayers into Dumb Money

Posted on November 4, 2008 | Leave a comment

Yesterday’s Wall Street Journal ran an article about how the Treasury’s bank buyout fund is luring “thousands of banks.” When the program was first announced, banks were afraid to apply, thinking it would make them look weak, but now they are afraid not to apply, since not having government money could make banks look like they were too weak to qualify.

But the article also noted that banks are thronging the Treasury because the Treasury capital – taxpayer capital – is so cheap. Here is the money quote:

Now institutions across the U.S. worry that if they don’t try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments.

Many years ago I worked for a venture fund that was captive to a small investment bank. All the other VCs looked at us as dumb money. “Nobody else will invest in it, call those guys…they’ll do anything to get a banking fee.” Dumb money is who you call to bail out your losers. Dumb money accepts whatever price you offer, and doesn’t ask for better terms.

The Treasury department, acting on behalf of the taxpayers, is dumb money. WE’RE dumb money. That sucks.

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