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General Moto | Off-Topic Posts
Is Recession A Self-Fulfilling Prophecy?
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[QUOTE="Vic, post: 1320708, member: 18322"] Along those lines- [b] December 1, 2008 Congressional Effect Management Congressional Wealth Destruction Monitor: The Time Horizon of Pirates and Politicians Dear Congressional Wealth Destruction Followers, There was widespread rumor recently that Somali Pirates had agreed to takeover Citibank. The story is an important one, even though largely dispelled last weekend, because its widespread circulation shows how much the so-called civilized world has had its perceptions of time and viability distorted by the black hole of credit destruction. In this moment of crisis, it is worth examining the time horizons of the Somali Pirates and politicians to see if their approaches are internally consistent and good for society as a whole. The Somali Pirates have typically had a business cycle of several months from the first moment of raiding until the payoff of a ransom, as recently happened with the Ukrainian ship the Faina. First seized in September, with hostages and a cargo of Russian tanks, the Pirates made a preliminary ransom request of $25,000,000. However, the Pirates were willing to work with the insurance companies to arrange a work-out that would satisfy everybody’s needs. Over this past weekend came word that the Pirates had generously agreed to settle their claims for only $8,000,000, a mark down consistent with the sell-off in the emerging equity market price levels. Traditionally, the Somali Pirates have allocated the bulk of their booty to labor costs in percentages comparable to those of the former investment banks on Wall Street, while reinvesting a minor portion of their proceeds in new capital equipment (i.e., faster boats, bigger weapons). As a result of their continuous upgrading of their capability, the Somali Pirates are currently sitting on a Saudi oil tanker, and the expectation is that the release of the tanker will follow customary business practices. In a sign of their reasonableness, already the Pirates have dropped their ransom demand for the tanker from $25,000,000 to $15,000,000. Insurance rates are poised for unprecedented increases, which will show up in higher prices for all goods. The Saudis, who are currently contemplating withholding oil from the markets to drive the price back up, may appreciate all that the Pirates are doing on their behalf. Do the Somali Pirates care about the common good of lower prices for all, as Jeremy Bentham might have? Not at all. They care only for themselves. While private enterprise in the United States is usually planned on a multi-year cycle, the time horizon for congressional planning appears in actuality to be much closer to that of the Somali Pirates. Boeing takes five years to develop a new airplane, and new drug development takes ten to fifteen years. Somewhere in between the Pirates and Boeing, there is a political cycle, which has a major cycle every four years with the Presidential election, but in most important planning aspects, revolves around the two year cycle of federal Congressional elections. As a result, there is not much genuine political will to solve problems that are more than four years away. And not much more for problems that are two years away. And as for problems like the lack of solvency of the Social Security and Medicare systems, which are enormous, but over five to ten years away, these items might as well be on the other side of the moon. The ideal political cycle from a political fund raising viewpoint is a short term crisis, about which something MUST be done, immediately, or else we will all be blown to smithereens. It is in this kind of a crisis that Congress takes the most credit for acting swiftly to save us all from certain disaster. This is pretty much what happened with the various bailouts that have recently erupted, and which promise to keep on erupting. Indeed, one of the members of the new administration (and a former Congressman) has stated that as an organizing principle, it is important to “not let a good crisis go to waste.” So now we find ourselves with a Congress that pretty much has the same planning horizon as the Somali Pirates. They are returning to office in January, and want to have a giant stimulus plan on the new President’s desk on January 20, about 50 days away. The problem is that when the political cycle dominates the business cycle, the resulting market volatility robs businesses of the ability to raise capital and to plan in an orderly way. And businesses, panicked at the thought that competitors will get cheap government capital, line up looking for bailouts and handouts, whether or not it’s the right thing to do long term. Tempted by fresh capital, and threatened with more regulations and requirements, industries pre-emptively surrender bit by bit until one day they wake up to find they can no longer compete. The domestic auto industry, whipsawed by a Congress who allowed high tariffs on gas guzzling SUVs while simultaneously imposing higher CAFÉ demands, is now going under. It is waving at us, like Captain Ahab strapped to Moby Dick. The drug industry, no longer able to afford the FDA, seeks government funding for its research programs. The green industry, signaling a new dark age, has worked hard to suppress dissent of its dubious global warming science and now becomes the “hope” for the future, feasting on subsidies and new taxes that will become a giant replay of the collapse of ethanol company stock prices from 2005 until now. Exhibit A is the stock price of Pacific Ethanol, which peaked at $44.50 per share in 2005, only to plunge to $.52 per share as of December 1, 2008. (Just because a fuel is alternative, does not mean it is economically viable.) When you only have 50 days of planning visibility until inauguration day, collecting ransoms and playing industry favorites are the easiest solutions. Various industries have been routinely threatened by Congress, with the result that lobbyists have been hired to help save them. For example, Fannie Mae and Freddie Mac spent over $170,000,000 in lobbying to help defer and distract additional regulation while the mortgage crisis was brewing. In 2007, Exxon-Mobil alone paid $16,900,000 in lobbying expenses in addition to donations to its PAC. It is safe to assume that some portion of these lobbying expenses are then re-directed as campaign donations to the campaigns of the politicians. Sometimes, when the lobbying donations are large enough, legislation that was threatened for this year somehow becomes legislation that is only going to be on next year’s agenda. The Somali Pirates should be jealous: they actually have to capture a ship. Congressmen can be paid without actually passing new legislation. The epidemic of bailouts and stimuli has to be seen in this context. Most of the reasons we need bailouts in the first place is that Congress so distorted the credit markets to "help the needy" that we all went systemically overboard with too much credit. And now, to help us with our hangover, Washington wants to give us hundreds of billions more to jump start our consumption. Paying taxes to Washington, only to have them take a cut, borrow more money on our credit, and send it back to us with instructions to spend it quickly feels like the relationship the Saudis have with the Somali Pirates. The joke is on us after the political cycle is over, and the ill effects of government intrusion manifest themselves in programs that must be finally cut back because we can no longer pretend that government mandates really enhance our competitiveness. The symptoms will include much larger unemployment, much lower growth, much less confidence in the dollar and declining birthrates as people postpone or forgo children for economic reasons. And with declining birthrates comes nominally lower year over year comparisons. The bailouts of Citibank, Fannie Mae, Freddie Mac, and AIG have each been done in the name of “they are too big to fail.” But without failure, there is no rock bottom price, and there is no true fresh start. Just before Thanksgiving, as a pre-requisite to a Congressional bailout, GM, Ford and Chrysler were given a week by Congress to come up with a written plan that would allow them to build cars the public wants at a competitive prices while keeping the union and labor obligations substantially intact. The Speaker of the House assured us that a written plan would work. There is talk of a pre-packaged bankruptcy. The CEO of Ford is reportedly driving the 411 miles from Detroit to Washington D.C. (Do you think driving is a good use of his time?) But a government controlled slow motion bankruptcy will not force the real compromises required to make some portion of these companies viable. You can send stimulus payments to a frightened population to spur the economy, but they are still more likely to put it mostly under their mattresses to start to replenish their savings. The government finds itself still pushing on a string. What goes unsaid in all of this is the lengthy time horizon, substantial will, powerful intellectual capital, and reward required to build businesses that are truly competitive in a world the New York Times describes as flat. When government supplies the capital, it also claims the reward. But smart people may shy away from committing all, when government has a big claim on the upside. You can’t build competitive new national industries on a Pirates’ timetable or with Pirate partners. Sincerely, Eric T. Singer President Congressional Effect Management[/b] [/QUOTE]
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General Moto | Off-Topic Posts
Is Recession A Self-Fulfilling Prophecy?
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