1 Child Policy Folly Down the Drain, Not a day too soon

It has been an article of faith of the Chinese Communist Party since 1949 that Chinese families should not have more than 1 child. The folly was based on the ignorant quasi-Malthusian theory that unchecked population growth would hamper growth.

I used to argue with my "handler" back in those days when foreigners needed to be chaperoned.

I said: "Hey, imagine every Chinese on the mainland was as productive as, say, a Chinese in Hong Kong or Taiwan [whose respective per capital was then and still is now multiples of China's], wouldn't you agree that you wanted MORE Chinese not less? And the way to up there was not to limit the size of the population but to increase its productivity by a) investing massively in education; and b) not suffocating China's talented citizens with mindless political mantras and thought control?"

I was, for sure, marked down as another ignorant "overseas" Chinese or, worse, a foreign agent attempting to spiritually pollute the minds of right thinking Chinese communists.

Well, guess what. The powers-that-be are realizing two things: quantity plus quality translates into 1 + 1 = 3; and second, the growing imbalance between young and old means that the aging population is putting on an increasing economic burden on the young to support it. China needs more young people. They have to be made not in a factory but by husbands and wives in families.

Hence, the following development. Read here.

Better late than never. Oh, a small footnote. The Communist royalty was never bound by the 1 child policy.

Robert McNamara - My last word

He died almost 2 weeks ago. Reams of obits have been published and now forgotten. A few bullet points stood out:

- A brilliant man. A "whiz" kid.
- Youngest Ford Motor Company President ever. Gave up $$ for public service summoned by JFK, head of the Camelot roundtable.
- Total confidence in quantitative method.
- Wanted to win in Vietnam.
- Lost faith in that policy but kept quiet and then years and years later said "I was wrong" and then tried to redeem himself at World Bank "fighting" world poverty.

Nearly all commentators left it at that personal level, implicitly giving him an absolution without exploring further the moral implications of what he had done. Afterall, he did say "sorry", didn't he, at least kind of? He actually never did say that.

Bob Herbert of the New York Times was closest to opening the pandora box in his sobering column. It should be read in full.

Here is one priceless excerpt:

"McNamara, it turns out, had realized early on that Vietnam was a lost cause, but he kept that crucial information close to his chest, like a gambler trying to bluff his way through a bad hand, as America continued to send tens of thousands to their doom. How in God’s name did he ever look at himself in a mirror"?

The word "God" was invoked.

The unexplored questions that jumped out of this paragraph are intuitively obvious: Was that war "just" in the eyes of God explored by Aristotle all the way down to St. Augustine and St. Thomas Aquinas?

If it was not a just war, as nearly everyone now believes it was not -- the war was based on the groundless thesis that if "We don't fight the war in Vietnam we will one day fight a billion Red Chinese in Los Angeles armed with nuclear weapons" in the immortal words of the then Secretary of State Dean Rusk -- then was it only McNamara who may not have been able to look at himself in a mirror?

If it was not a just war, would the precedent set by the US government in hanging WWII Japanese general Tomoyuki Yamashita for crimes committed by his troops in the Philippines apply to US leaders who prosecuted the war from JFK all the way to Richard Nixon?

Robert McNamara may have found peace with his God though many do not believe he ever did for reasons still unclear, how does one look in the eyes of those surviving family members who who lost over 4 million of their sons and daughters (adding up American and Vietnamese military and civilian lives) for mistakes made by a handful of American leaders? I am leaving out the "collateral" damage in Cambodia and Laos.

That's the question obit writers have missed or dismissed by design.

But that's really the only important relevant issue of moral responsibility. Do we need to wait for more years, decades, centuries for the future Aristotle's and Thomas Aquinas's to give it a proper airing before we can close the chapter on that war?

Oh, please don't even get me started on the Iraq war which, too, was based on premises that the war makers knew early on were untrue. Ah, yes, I can hear the same refrain: "If we don't fight them in Iraq, we will have to fight them in New York armed with nuclear weapons".

By the way, I absolutely love the folksy but crystal clear language Dean Rusk used to explain what the Domino Theory was. It put to shame those think tank types who wrote erudite books and learned articles justifying that Theory in obscure jargons.

Dollar Dominance & RMB

Any cursory reading of the news these days indicate that the Chinese authorities are not letting up on their to-your-face attacks of the dominance of the US$ as the global reserve currency.

The unspoken subtext is the time has come for China's own currency, RMB, to assume a role of a global reserve currency.

All professionals understand that it is premature for the RMB to take on such a role. Several well-known pre-conditions need to be met before the RMB could become a serious contender as a reserve currency.

They include high quality of governance of the banking system, transparency of monetary and economic policy making, rule of law not -- only in commercial but also in just about all other areas including criminal laws. The recent sudden arrests of 4 top Rio Tinto executives is one example of how commercial disputes could quickly morphed overnight into a state-to-state crisis. This is more the stuff of George Orwell than that of globalization.

And then the currency must be a totally convertible one before it can go global.

There is little doubt sometime in the future China would be able to meet those requirements.

The issue is not whether, but when. It is also clear "when" is not quite here yet. Not even close.

Yet there is another level on which the Chinese attack is entirely apropos.

The ability of the US to print any amount of money it wants -- as it has been doing since Vietnam where both guns and butter were considered ok -- without creating a classical "third world" currency crisis is because the US$ is the only reserve currency every country uses it as the basic unit of accounting and exchange.

If the US had had to watch out for current account deficits, like any "normal" country, it would not have been able to borrow its way out of financing unbounded consumer appetite for goods and for its leaders to finance overseas ventures mindlessly. The flooding of the US$ in the world economy has been the major source of financial instability the latest of which is still being played out.

China's attack on the US$ has a geopolitical dimension that has not been sufficiently aired in the public domain.

Goldman Sachs - 2

Paul Krugman's latest column is devastating. Read here. However, Washington DC is not listening. Or if it was, the message is predictably falling on deaf ears for reasons by now well argued publicly by a large number of commentators from MIT's Simon Johnson to Columbia's Joseph Stiglitz.

Goldman Sachs (GS) has become a 2 letter word

GS maybe the most powerful financial institution on Wall Street, or what's left of it, but its leaders cannot be very comfortable in their privileged position. Even the Wall Street Journal, the symbol of capitalism, and a very unlikely protagonist, is pissing on them.

Read its July 16 editorial below.

Clearly the editors of the Journal wanted to be sure the world did not miss the message. Alongside its editorial, it printed a scathing and sarcastic op ed by a veteren Wall Street denizen, a former fedge fund manager, Andy Kessler.

Kessler piece is reprinted here following the WSJ editorial.

You may not agree with all the points in them but to see the "Goldman's" of the world criticized by the Journal is worth the time you spend reading. Enjoy




A Tale of Two Bailouts
Goldman's profits, CIT's trouble, and 'too big to fail.'

Yesterday saw one TARP recipient, Goldman Sachs, report $3.44 billion in profits even as another, CIT, teeters on the edge of either bankruptcy or another taxpayer bailout. Which way CIT will tip remained unclear as we went to press, but its very plight shows how the government's approach to systemic risk has created groups of financial "haves" and "have nots."

What the Goldmans of the world have in addition to profits is the widespread belief that they are too big to fail. Both Goldman and CIT converted into bank holding companies at the height of the financial panic last fall, which made them eligible for TARP injections. Goldman also benefited at a crucial moment from the Federal Reserve takeover of AIG, and it received the additional filip of FDIC-guaranteed debt issuance through the Temporary Liquidity Guarantee Program. CIT was excluded from the latter program on grounds that it didn't pose a systemic risk, even as larger competitors like General Electric were allowed in.

CIT's asset quality has since fallen further, and it now faces $2.7 billion in maturing debt this year that investors fear it will not be able to roll over. So it is seeking another taxpayer rescue, and officials at Treasury and Fed are sympathetic.

But if CIT -- a company one-tenth the size of Lehman Brothers -- can be bailed out long after the panic has passed, the word "systemic" has lost all meaning. CIT has long been a lender to subprime corporate borrowers, and this decade it took on even greater risks at precisely the wrong time. It has lost money for eight straight quarters. Its lending supports less than 1% of the total U.S. retail and manufacturing, and plenty of competitors could pick up its market share.

There's also a question of why the FDIC -- which is supposed to protect bank depositors -- should be the rescue agent. CIT's bank is only a small part of the company and is so far walled off from trouble. CIT executives want permission to stuff some of the company's assets into the bank so they can finance them with brokered deposits. But that would put the FDIC's deposit fund at greater risk just when it is stretched from other bank failures. The FDIC should also be winding down its debt guarantee program, not extending it to new and riskier companies. Taxpayers shouldn't be put at risk for further losses via the FDIC merely because Treasury and the Fed don't want to admit losses on their TARP investment.

Of course, if the feds do let CIT fail, this will only confirm that the only certain survivors in the current market are banks big enough that the government figures it must bail them out. Just ask the many small banks that have been rolled up by the FDIC at a rate of two a week since the beginning of the year, with eight so far in July alone. That can only strengthen the likes of Goldman, which apparently needs no help printing money anyway.

Goldman's traders profited in the second quarter from taking advantage of spreads left wide by the disappearance of some competitors (Lehman, Bear Stearns) and the risk aversion of others (Morgan Stanley). Meantime, Goldman's own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books.

Goldman will surely deny that its risk-taking is subsidized by the taxpayer -- but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it's not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs -- or should we say Goldie Mac? -- enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.

We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business. Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail. But that is all but impossible now and for the foreseeable future. Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it.

If there is a lesson in this week's tale of two banks, it's that it won't be enough to give the Federal Reserve a mandate to "monitor" systemic risk. Last fall's bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share. Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer's dime.

One policy response to the incentives created by last fall's bailout is simply to restrict the proprietary trading done by the subsidiaries of bank holding companies that enjoy both FDIC deposit insurance and an implicit government subsidy on their cost of capital. This is what Paul Volcker proposed, only to be overruled by Tim Geithner and Larry Summers. Another answer would be an FDIC-style bailout tax, perhaps tied to leverage ratios, for those in the too-big-to-fail camp. Developing a template to facilitate the seizure and orderly winding down of failing financial giants is also an essential element of whatever reform Congress cooks up.
* * *

No one welcomes the pain and dislocation if CIT files for bankruptcy. But U.S. policy toward financial companies cannot avoid all hardship, or the result will be a de facto cartelization of finance, with a resulting loss of competition and dynamism that have long been an American strength. The divergent fortunes of CIT and Goldman Sachs show how much we changed when we stepped in to save certain banks in the name of saving the system.

Andy Kessler

* OPINION
* JULY 16, 2009

The Bernanke Market
We won't get real growth until Congress and Treasury get policy right.



By ANDY KESSLER

I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.
[Commentary]

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.

Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.

Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).

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California's IOU - 2

Well, guess what. No one it seems wants to accept Terminator's IOU's!

The Wall Street Journal reported in yesterday's edition that a group of large banks had announced it would not accept IOUs issued by the state of California. The group includes the four horsemen of the financial crisis: Citigroup, Bank of America/Merrill/Countrywide, JPMorgan Chase/Bear Stearns/WaMu, and Wells Fargo/Wachovia.

California, were it a country, would be the 6th largest. Sad. But what happens now not only in California but in other deficit ridden states?

Stay tuned.

McNamara is Dead. Really?

"Every generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it", wrote George Orwell, the noted author of 1984.

Robert Strange McNamara, the most controversial Secretary of Defense of USA before Donald Rumsfeld bungled his way into Baghdad died two days ago.

His arrogance in dismissing critics of the Vietnam War summed up the hubris of a nation so sure of its military, moral and geopolitical footings that it went to kill needlessly tens of thousands of people in countries it hardly knew.

Robert McNamara admitted so in his own writing in his 1995 memoire (“the war was wrong, terribly wrong.”) and in his celebrated interview in the must see 2003 documentary: The Fog of War produced by Errol Morgan.

One time he went to Harvard to give a speech. Students protesting against the Vietnam War surrounded his motorcade. He got on to the top of his limo and shouted at the students: “I am smarter and tougher than you.”

He later greatly regretted. At his farewell lunch at the Pentagon he wept to the horror of those present. He wept not over his leaving but over his mistakes in believing the war was just.

The lessons of McNamara’s over confidence in using “scientific”, quantitative methods in running wars and formulating foreign polices are well-documented.

Yet, events subsequent to the Vietnam war, now again in full display in Iraq and Afghanistan show each generation makes similar mistakes all the time thinking it is smarter than the one before.

Hubris is not an American monopoly. Every major power in history at one time or another acquired it.

Winning the hearts and minds of those one wish to “conquer” remains just a slogan. Each power thinks firepower alone can do it. Yes, perhaps for a while. But as Vietnam, Cuba, Afghanistan invaded by Russia, Eastern Europe under Soviet Union and many in earlier centuries show clearly, power comes from the barrel of the gun, as Mao so cleverly put it, is an illusion in the long run. Just ask the Chinese leaders who are having to deal with unhappiness in Xinjiang and in Tibet. How long can you keep an unhappy people down with guns?

McNamara in many of his post War writings and interviews kept saying: “We must see the world from the eyes of the other side.”

And of course each generation ignores the lessons of history.

California's IOU and Money Supply

I promised to write if something important happens while I am still on vacation. Something has.

California, deep in a fiscal hole, unable to get its State legislature to pass a budget, is issuing IOU's as a money substitute. Go to this link: http://www.nytimes.com/2009/07/03/us/03calif.html?_r=1&hp.

Why is this important?

Remember only the Fed can print money. If all the states in United States of America begin to print IOU's to finance their debt, then there is not just one printing press. There will be 50 of them.

Amigos, that's how Argentina got its world class financial crisis 7 years ago because the provinces began to do exactly what California is doing. The country lost its control of quantity of money issued.

Argentina's much ballyhooed 1 to 1 fixed peso to dollar link cracked under massive inflation and the debasement of its currency.

Paul Krugman, the noted Nobel laureate economist, tirelessly reminds readers in his NY Times columns that higher savings rate in the US would mean a firmer US dollar. That maybe so in normal times. Indeed, current higher savings rate is probably sustaining a dollar that should have been a lot lower given the massive amount of credit and money printed or committed by the Fed to pop up a variety of institutions.

However, the precedent set by California could be a game changer if the size of IOU's gets bigger and if other states follow the same practice.

Get ready to take your $ to the nearest bank and buy Euro or Australian dollar. So watch how thie IOU"s business evolves in the weeks and months ahead.

Still On Vacation

I am still on vacation. Unless something dramatic has happened, I will only write occasionally. I apologize to you who follow this blog. I should be back in full swing in 3 weeks. Thank you for your patience and understanding.

Obama's 100 days+

Obama has done one thing that will go down in history as "game changing". I don't just mean getting himself elected. That certainly was a game changer. How quickly has the country (apart from a small minority of racist largely Republican) accepted a black president as "normal".

The really significant thing in my view is the number of "people of color" he has brought into his cabinet whose credentials are awesome. Steve Chu is a Nobel physicist. His new Supreme Court nominee is a Hispanic who graduated Summa from Princeton and onto Yale Law Review. And so on. Never again one should hear the argument that there are no qualified "minority" citizens. There are plenty and Obama has once put away that not so subtle racist argument.

However, as long time supporter of Obama, Frank Rich of the NY Times wrote in today's Sunday paper that some serious stuff is going down badly. The full column is here. It shoudl be read in full.

Here are a few excerpts:

...The administration’s two financial gurus, Lawrence Summers and Timothy Geithner, wrote to preview their plan [in the Washington Post]: “Some people will say that this is not the time to debate the future of financial regulation, that this debate should wait until the crisis is fully behind us,” they wrote by way of congratulating themselves on taking charge.

Who exactly are these “some people” who want to delay debate on the future of regulation? Not anyone you or I know. Most Americans were desperate for action and wondered why it was taking so long. The only people who Summers and Geithner could possibly be talking about are the bankers in their cohort who helped usher us into this disaster in the first place. Both men are protégés of one of them, Robert Rubin, the former wise man of Citigroup.

There are some worthwhile protections in the Summers-Geithner legislation, especially for consumers, but there’s little that will disturb these unnamed “people” too much.

Remember I raged over the lose-lose proposition of Geithner's Public/Private Investment Plan? To see how the issue of "conflict of interest" has been set aside for Obama's economic team working with some of the powerful people in the financial sector, just read in the same issue of NY Times a long article on Bill Gross's role in shaping government policy. I don't know to laugh or to cry. Read the full article as well here.

NY Times has been a huge supporter of Obama's Campaign for President.

Another longstanding "liberal" magazine close to the Center is also unhappy about Obama's increasingly "traditional" politics as usual presidency. The whole article by Kevin Baker needs subscription at Harper's Magazine, July Issue. But here is one excerpt.

Wall Street Won - 2

I am still on the road in the United States living off a suitcase with just time and energy to do emails. I try to keep up with the news but cannot blog as often as I would like. Very sorry.

However, one thing caught my eyes. Michael Lewis, one of best writers about Wall Street, is angry at the same thing I was sometime ago regarding how Obama, as advised by his two chief economic lieutenants, had cratered to Wall Street tycoons. The biggest of them all on Wall Street are those who run Goldman Sachs. Read here.

There are two fundamental issues in the financial rescue operation: systemic stability and economic justice. They are not mutually exclusive especially in this particular financial meltdown when the victims, the majority of taxpayers, are also footing the bill to rescue Wall Street.

It is simply wrong to save Wall Street in the name of restoring systemic stability at further disadvantage against the working stiffs who in California are experiecing a growing unemployment rate now at over 12% and rising.

Paul Krugman just came out with a short but punchy analysis of what was so lacking in Obama's new policy on regulating Wall Street.

The package is yet again an example of saving the backsides of the tycoons while plugging some holes related to systemic risks. Read here.

A Decaying Empire

It gives me no pleasure to lament over the sad state of many aspects of the United States who has given so many shelter, protection and a second chance in life from their unhappy past. Me included. My parents were refugees from China before 1949.

Yet, as the American Society of Civil Engineers, (ASCE) the nation's largest such association, has been warning over the past many years, the conditions of the American infrastructure, once the world's Gold Standard, are in dire conditions. Anyone who has visited mainland China (even!), or Korea which US once saved from the North or Taiwan, can spot the lamentable state of much of American roads, telecomunication, bridges. Internet speed is mostly slow even in the high income neighborhood. I compare it to what I have in Thailand. Read the latest from ASCE here.

It isn't just "hardware" that's a big issue in this country where I have been traveling the past weeks.

American airline companies these days, like Detroit automakers, must be prime materials in management courses as to how not to run any organizations.

Not only flight delays are routine, not only service is uncaring, even baggage handling is laughably "Third World". My short flight from San Francisco to Los Angeles was delayed for 3 hours. I checked in 2 hours before scheduled departure. Yet, the carrier managed to have left behind my luggage. If only my random experience were exceptional. But my story met with a knowing shrug among all my friends for it was apparently a common phenomenon. Sad

An Apology

I have been traveling constantly last 2 weeks in California on personal business living off a suitcase.  Two more weeks to go before I could sit down and do some serious writing.  Please accept my apologies.

Nothing fundamentally has changed.  Wall Street is still practically dictating what the economic team of the Obama Administration should or should not do.  

Financial markets like what they see, for now.  Despite reassurances from Washington that its policies are only anti-deflationary, inflation fears are increasingly affecting the bond market as the long end moves up.  Gold, Oil, other commodities have stayed very strong.  

Dr Doom, Marc Faber, an old friend, is going around the world saying US is going the way of Zimbabwe because the Feds have been printing and committing trillions to avoid Great Depression 2.  So inflation was to become hyperinflation.

Marc as usually overstates his case, but his directional prediction is not to be dismissed so quickly.  

For the time being, I can only contribute occasionally to my blog.  July should be when I get back to the swing of things.  

General Motors and Team Obama

GM is dead. Long Live GM. Uncle Sam is there to give you back life. Will the new GM work? Can a broken vase be put back together?

No one provides a better answer to the GM question by the normally conservative NY Times columnist David Brooks. His analysis is here.

The following rejoinder by a reader makes a good companion piece to Brooks' analysis:

David, your thinking is sound, but missing an historical context that would actually reinforce it.

There are two books that completely explain what GM was, is, and will become:

1. "My Years With General Motors" by Alfred Sloan

2. "Concept of the Corporation" by Peter Drucker

The first is by the quintessential GM insider. Sloan was chairman of GM during its formative years - and pioneered the ostensible virtue that proved to be GM (and other American) companies' demise. That is, of course, centralized finance and decentralized operations.

GM has always been run by its finance people. Recently, run into the ground. This is perhaps why Barack's team is so deceptively comfortable at its helm.

Everything by the numbers. The Corvair. The Vega. The Aztek. More harmfully, a succession of mediocre models.

The second is by the quintessential GM outsider - and about GM from an outsider's perspective. The poignancy here goes to the other fatal aspect of GM's culture - its insularity.

As Drucker wrote his book, GM's senior executive management grew so comfortable with him, they wanted to offer him a senior executive job. Upon reading the book, however, that thought dissipated. They had grown to see Peter as an insider - and so his outsider's view was seen as disloyal and even seditious. So Drucker brought his lessens elsewhere. To Japan.

Santayana's comment (incidentally, Barack, a Harvard man through and through) about those not remembering the past being doomed to repeat is eerily poignant here.

Lutz, from Chrysler - the engineering-oriented company of the big three - couldn't make a significant dent (pun intended) in GM's culture.

But our new young president might just get it right - and I certainly wish him and his team well to that end - and learn a valuable lesson in wealth creation.

GM's challenge is not creating a supply of cars. It is about creating demand.

For that - he needs to turn to the marketing-oriented company of the big three.

I see a Ford in GM's future. You heard it here first.

— W in the Middle, New York State

Beijing Ridiculed Tim Geithner

US Treasury Secretary, Tim Geithner, is in Beijing to reassure America's single largest creditor that it's bonds are "safe". Chinese Prime Minister, Wen Jia Bao, recently asked for reassurance as China is saddled with US government papers.

The Peking University audience to which Geithner addressed humiliated Geithner by laughing out loud when he said "Your assets are safe".

A former Central Bank governor of China told the press Geithner's math was dubious when Geithner claimed US could reduce its fiscal deficits substantially in the foreseeable future. It is rare that Chinese hosts so openly disparage a guest.

The coup de grace came when the ex Chinese central banker said "The Federal Reserve Bank is the world's largest investor in junk assets."

Three signs of any empire falling: a decaying economy, declining morality and a world losing respect of the emperor seen to be increasingly naked. The US unfortunately is well on its way to meeting those three pre-conditions. The Bloomberg report on Geithner's visit in Beijing is here.

Crony Capitalism V2

Wall Street has been shaping Geithner/Summers's financial rescue policies. This much is well-known. But the brazenness with which they do so and the docileness with which Geithner et al allow the Wall Street chieftains to walk all over Washington is getting a little obscene.

Here is the latest chapter on how Wall Street is effectively playing with public money in full view, buying up each other's toxic assets after getting bailout $$ to bid up prices of such assets which they couldn't sell to unconnected parties at unrigged market prices. Read this from NYU Professor Nouriel Roubini's famous website:

"In order to persuade the private sector to participate in the PPIP, the government is engineering solutions that sidestep the strings attached to direct government aid, in particular executive pay restrictions. Moreover, reports show that banks are planning to bid on each other's assets to drive up the price and take advantage of the subsidies, while the FDIC is mulling to let banks share in any upside if they participate in the program as Treasury wants to keep participation voluntary. Increasingly, questions arise about the legality of this approach starting with AIG's full bailout of counterparties with taxpayer money. Given the limited TARP buffer left ($150 billion after PPIP) and likely Congressional opposition to new TARP money, the administration is under pressure to restore the banking system with the help of private capital if it wants to avoid anything resembling nationalization. This puts Wall Street in a position to dictate the terms..."

Racial barriers in USA

President Obama is doing one thing really well. He is systematically tearing down the barriers in USA against "people of color". What an euphemism.

Obama has nominated Sonia Sotomayor to be a Supreme Court Judge who calls herself a NewYorkrican.

The cognoscenti will recognize that word to mean a New Yorker whose origin was Puerto Rico, a Spanish speaking Latin society and an almost US state.

Ms Sotomayor, a graduate of Princeton and Yale Law School, will be the first American of Hispanic heritage to sit on the Court if confirmed by the Senate.

One by one, Obama is showing his country "color" is no longer a relevant issue in USA. Well done.

Now, could you please fire Geithner and Summers for having taking too good a care of their buddies on Wall Street in their rescue package you have approved?

That's Crony Capitalism, don't you know?

Whither the Republican Party in USA?

Every thriving democracy needs at least one strong, intelligent opposition party.

USA, though a young country, has the longest democracy in history. The 2 party model (Democrat and Republican) in the US, Conservative and Labor in the UK, has been a shining example of how a democracy can work without splintered by multi-party chaos. Witness Italy.

That's why the decline of the Republican Party into becoming a fringe group representing a narrow electorate consisting mainly of white, Christian and ultra-nationalists, and often racist, is an alarming development.

The following two articles are worthy of your time. Paul Krugman in the NY Times is here and the Bloomberg article on former Secretary of State and retired General Colin General Powell is here.

It is sad to see the Party of Lincoln, Eisenhower and the Rockefellers, symbols of fiscal conservatism, cultural tolerance, political moderation abroad has descended into a totally unrecognizable party of intolerance.

Many traced that change to Richard Nixon. While a brilliant international tactician, he brought a dark side to US politics with his many brooding Freudian insecurities and "hatred" against his domestic "enemies".

Ronald Reagon was not a "hater" the way Nixon was. But he too had a black and white view of Democrats and Republicans; the tax cutters (GOP) vs the tax and spenders (the Democrats).

In fact under Nixon and Reagon, US began its march towards becoming a larger and larger debtor country.

Fiscal conservatism, long associated with Republican principles, was replaced by reckless tax cutting and spending at the same time. The worst is George W Bush, the last president, in economic policies and in his reliance on fundamentalists in USA to assume a key role in domestic politics.

US becoming a Third World Country?

I have been arguing that "crony capitalism" USA is damaging the country in public/private sector governance and credibility around the world.

Now, the other shoe is about to drop. USA is poised to lose its AAA bond rating as its national debt shoots up from a small single digit as a percentage of its GDP to a double digit in 2009-2011.

The Obama Administration is saying budget deficit will soon come down a couple of years out. No economists outside of the Administration buy that scenario. A very sad situation for US debt for as long as one can remember is the Platinum Standard for sovereign debt. Read the latest from Bloomberg News here.

Crony Capitalism USA

My view on "Stress Tests" distributed by Project Syndicate and published in the Japan Times, May 19, 2009 is Here.