Econowatch

By Steve Maich - Thursday, March 5, 2009 at 8:00 AM - 1 Comment

The pessimists will focus on the fact that U.S. gross domestic product tumbled at a rate of 6.2 per cent in the final months of last year. They will gravely point out that this dismal reading was the worst since early 1982. Domestic naysayers will chime in that Canada’s 3.4 per cent decline was also ugly, and would’ve been worse if not for the fact that Canadian businesses kept churning out goods faster than they were being bought, driving up inventories and certainly worsening this year’s economic pain.

The pessimists will, of course, dwell on the continued declines in U.S. durable goods orders (down another 5.2 per cent in January—a record sixth consecutive down month) and warn that the world’s biggest economy is still getting worse, not better. Naturally, they’ll lament the still-plunging real estate markets on both sides of the border. And, of course, they’ll point with horror at the U.S. Treasury Department’s injection of another US$30 billion in capital into AIG, prompted by the insurance giant’s record US$61.7-billion quarterly loss. Then there’s the Dow Jones Industrial Average plunging below 7,000 and the S&P/TSX composite dipping under 8,000 this week—the first time either index has been in that neighbourhood since 1997.

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Econowatch

By Steve Maich - Friday, February 27, 2009 at 5:00 PM - 0 Comments

As they have so often over the past few months, General Motors and Chrysler—the two most troubled of Detroit’s automakers—were at centre stage of the economy this week. The two companies outlined their plans for survival, which include a request for close to US$56 billion in emergency government aid. Up to $10 billion is to come from Ottawa and the Ontario government. The rest is expected to come from Uncle Sam.

In return for this public largesse, the automakers promise to maintain some manufacturing capacity in Canada, but it’ll be nothing like the glory days. GM has said it will cut its Canadian workforce to 7,000 by the end of next year (down from 20,000 in 2005), and will shut down more than 200 dealerships across the country. Chrysler wasn’t so detailed with its plans, but there is little doubt the cuts will be similarly drastic.

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Ending the myth of the frugal Canadian

By Steve Maich - Monday, February 16, 2009 at 1:40 PM - 2 Comments

One of the most comforting and oft-repeated truisms of this financial crisis is that, as bad as things are, we Canadians are far better off than our neighbours in the United States. This is generally and unquestioningly attributed to the fact that Canadians are more responsible and modest than Americans. Most importantly, we never ran up the massive debt loads that are typical south of the border. And so, we smugly shake our heads at the mess in America and congratulate ourselves on our culture of restraint.

Well, so much for all that.

Turns out that while we were happily soaking in the myth of the frugal Canadian, we were celebrating at the malls and treating ourselves to new home theatre systems and a few extra fancy restaurant meals. The global consulting giant Deloitte issued a report on Canada’s debt levels last week, and though it received only passing attention, it should have been more than enough to blow up our smug self-image for good. According to the report, Canada’s household debt-to-disposable-income ratio now exceeds that of the U.S. As of the middle of last year, the typical Canadian household now owes a little more than 1.3 times its annual disposable income, whereas the average American household owes a little over 1.2 times its income. That’s all debt, including mortgages, when compared to our income after taxes and interest costs.

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Are labour unions a blessing or a curse?

By Steve Maich - Wednesday, February 11, 2009 at 11:10 AM - 25 Comments

Depending upon who you choose to believe, labour unions are either a central cause of North America’s current economic troubles, or the only viable escape from them.

Robert Reich took up the pro-union banner last week. In a column in the Los Angeles Times, the professor of public policy at UC Berkeley and former labour secretary under Bill Clinton argued that unions formed the bedrock of America’s economic emergence, and that their decline over the past two decades has coincided with the collapse of the typical American’s standard of living. Harkening back to the good ol’ days of poodle skirts and drive-ins, Reich explained that “good pay meant more purchases and more purchases meant more jobs. At the centre of this virtuous circle were unions.”

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Take a pay cut to save jobs? No thanks.

By Steve Maich - Monday, February 2, 2009 at 1:28 PM - 5 Comments

When President Barack Obama made his inaugural address to the world last week, he included an explicit appeal to the virtue of generosity and sacrifice to help restore the economy to health. It is “the selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours,” he said.

The message was particularly potent in light of our current economic doldrums. The awful toll of layoff notices continues to mount across North America and around the world. Over two million Americans have lost their jobs since this recession began and last week, within 48 hours of Obama’s stirring address, Microsoft, Intel and IBM revealed plans to cut thousands more. In Canada, layoffs topped 100,000 in November and December alone.

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The four faces of Nortel’s descent

By Steve Maich - Friday, January 23, 2009 at 8:01 PM - 2 Comments

It’s over. Yes, there are court hearings, and restructuring negotiations and yet more layoffs ahead, but all of that is epilogue. Nortel Networks is in bankruptcy, and for the millions of Canadians who went along for the nauseating ride, it’s over.

When the news landed last week, it didn’t exactly qualify as a shock. Recessions cull the weakest from the herd first, and it’s been clear for some time that Nortel was sickly and lame. For the past five years, the company has made news for only three reasons: management turmoil (four CEOs in eight years); firing workers (approximately 65,000 jobs cut since 2001); and accounting scandals (five plus nine equals . . . what again?). But for the thousands who’ve already lost their jobs, the many more who surely will, the shareholders whose savings were vaporized bit-by-bit, and the universities that rely on research funding from the company, the anticipation did little to cushion the blow.

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Get in the game

By Steve Maich - Wednesday, January 21, 2009 at 10:50 AM - 0 Comments

The future of televised sports will quicken your pulse. It’ll give you shivers. It’ll also, occasionally, make you want to throw up. But they’re working on that part.

Last week, amid little fanfare and only modest advance billing, Sony, Fox and a California company called 3ality Digital publicly demonstrated their live, 3-D broadcasting technology, beaming the national championship of U.S. college football to select movie theatres across the United States. And while the matchup between the Oklahoma Sooners and Florida Gators won’t be remembered as a classic, it will still go down in history.

Broadcasters like to promise coverage that is “better than being there,” but now they have a tool that puts that claim within reach. In 3-D, viewers get the sensation of standing in a huddle on the sidelines at Dolphin Stadium; hitting a gap at full speed in front of 80,000 screaming fans; or hauling in a 50-yard bomb in the end zone. Let us state categorically that watching elite football in rich high-definition and three dimensions is, for the most part, totally awesome. Those tight shots of players and coaches huddled on the sidelines? It’s like you’re standing five feet away, doling out Gatorade. Bone-crushing hits and diving catches? You might as well be standing out there in pads, watching the play unfold around you.

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Accounting can be a dirty business

By Steve Maich - Wednesday, January 21, 2009 at 8:50 AM - 0 Comments

Accountants and pornographers are seldom associated in the public’s mind. One group is generally considered the epitome of dull conservatism and the other the embodiment of titillating debauchery. One group does everything in well-deserved obscurity. The other does everything in public view. But in the last issue of The Atlantic, a rare but important connection between the two industries was made explicit.

Francis Koenig is just 33 years of age but he’s already a well-regarded veteran of the hedge fund business, and last year he launched a new fund focused on the world of . . . ahem . . . adult entertainment. AdultVest’s assets are said to include equity stakes in everything from movie studios and websites to strip clubs and legal brothels. According to Koenig, the fund is up 50 per cent in the past year. That would be a stellar return any time, but against the backdrop of the global economic crisis and plunging stock markets worldwide, it is nothing less than mind-boggling.

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Why it’s time to set Conrad Black free

By Steve Maich - Thursday, January 8, 2009 at 2:10 PM - 80 Comments

Conrad Black just spent his first Christmas in a U.S. federal prison, and if the thought of that gives you pleasure, then you’re not going to have much use for the next 900 words. This is an argument in favour of Black, but not exactly in his defence. This is an appeal to pragmatism, and perhaps to mercy, because sometimes pragmatism and mercy are essential elements of justice. This is an argument for why Conrad Black should be released from prison, if not now, then soon. Not because he’s innocent, but because there is nothing more to be achieved from his incarceration. It is a waste—of money, of potential—and it’s time to wrap it up.

The U.S. president is entitled to pardon or commute the sentence of any federal prisoner. The last days of any administration often see a bonanza of executive leniency, and Black has applied to have his penalty reduced. Most Canadians are hostile to the idea—a recent poll showed more than 70 per cent are glad to see Black languish in the joint for the full term of his sentence—and it’s easy to understand why. Black is not a terribly sympathetic figure and presidential pardons seem arbitrary and undemocratic. But P.S. Ruckman, an associate professor at Rock Valley College in Illinois, is a leading expert on the pardon power, and he believes it is “an essential part of the U.S. justice system.” First, because it provides a check on the power of the judiciary, but also because it allows justice to be more “precise.” In a system dominated by procedure, strict rules of evidence and rigid sentencing grids, justice is often a blunt force. The pardon system allows for a more subjective test of fairness.

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What you don’t know can hurt a lot

By Steve Maich - Monday, December 29, 2008 at 9:00 AM - 2 Comments

As is so often the case in the complicated and opaque world of hedge funds, it is not yet entirely clear what happened at Sextant Capital Management. But if the allegations levelled by the Ontario Securities Commission are accurate, it went something like the plot of a Dan Ackroyd movie from the ’80s.

According to the OSC, a former dentist by the name of Otto Spork set up a private investment vehicle back in 2006 called the Sextant Strategic Opportunities Hedge Fund. About 240 Canadian investors, most of them in Ontario, handed about $22 million to Mr. Spork and his associates at Sextant. And for the most part, they have been very, very happy. At the end of November, Sextant was boasting of a 170 per cent return in the past 12 months, and a stunning 730 per cent return since the fund’s inception a few years ago.

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Lend…or else

By Steve Maich - Friday, December 19, 2008 at 9:44 AM - 35 Comments

Finance minister Jim Flaherty has delivered what sounds suspiciously like an ultimatum to Canada’s banks, to lower lending rates and pump more consumer credit into the system.
It’s understandable enough, but it raises a couple of questions. What evidence does Ottawa have that the banks are refusing to make loans, at reasonable rates, to people who deserve them? And if the ultimatum is “lend or else…” the obvious question is “or else what?”

The banks are clearly approaching full-on rebellion at the Bank of Canada’s strategy to re-inflate the economy (refusing to pass on fthe full impact of interest rate cuts etc.), but it’s not clear how much leverage Ottawa has in this case. The banks are sitting back and refusing to do the things that got us into this mess in the first place. We’re going through a period in which credit is tight for very good reasons. We don’t want or need Ottawa pushing the banks to behave like Citigroup or worse, Wachovia.

Guts, foresight and Edward ‘Ted’ Rogers

By Steve Maich - Monday, December 15, 2008 at 9:00 AM - 1 Comment

In business circles, calling somebody “a shooter” used to be a mark of high regard. Shooters were gutsy, bold and willing to take risks that others would not. The term has fallen out of popular use in Canada, perhaps in part because we have so few true shooters anymore. These days our Titans tend, for the most part, to be low-key strategists adept at protecting the franchise and building brands, but not overly concerned with conquering new ground or placing themselves at the forefront of emerging industries.

Ted Rogers, CEO of Rogers Communications—the company that owns this magazine—died last week after a long struggle with heart problems. It would be tempting to say that Rogers was a shooter, but that wouldn’t take the full measure of the man. To put his achievements into perspective, it’s best to turn to the words of an anonymous industry analyst who spoke about Rogers’ amazing career in a profile for the Financial Post, back in 1989—when his greatest successes hadn’t even yet been realized. “He pioneered FM radio, cable and cellular telephone in this country. That’s not just an accident,” the analyst said. “Someone once said to me that Ted Rogers is a real shooter. He’s not a shooter; he’s a marksman.”

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The Sad Reality facing General Motors

By Steve Maich - Friday, December 12, 2008 at 10:16 AM - 38 Comments

The Congressional plan to bail out the Detroit auto industry died a swift death last night, but the White House may yet swoop in with a unilateral bailout of its own. Reports surfaced this morning to suggest that the Treasury Department, on the authority of the President (and presumably the U.S. Fed) would tap the $700 billion fund to bail out Wall Street in order to get enough cash to Detroit to keep the companies afloat until next year.

That, of course, would finally destroy any notion that the U.S. Government is actually operating with a coherent plan. I know, I know…nobody really believed that anymore anyway. But the Trouble Asset Recovery Plan (TARP) was first supposed to buy up bad mortgage assets, then got converted into a giant bank account to buy bank stocks, and now, apparently, it might also branch out into the car business. This, dear friends, is what’s known as making it up as you go along.

Unlike my friend Andrew Coyne, I’m a little more sympathetic to the idea that governments can lend a helping hand to industry in times of trouble. That said, these bailout plans are disasters in the making. The best explanation of why can be found here (a column from a month ago in the Wall Street Journal by Michael Levine.) Continue…

Eugene Arthur Forward 1920-2008

By Steve Maich - Thursday, December 11, 2008 at 12:00 PM - 10 Comments

Eugene Arthur Forward was born on Nov. 23, 1920, in Montreal, the ninth of 10 children to factory labourer Hugh Forward and his homemaker wife, Helen. The family lived a modest existence in south Montreal until Eugene was nine years old. That year, his father died and the family fell on hard times. In the midst of the Great Depression, Eugene quit school in the sixth grade, and began delivering groceries for two dollars a week, at age 11. Later, he worked as a carpenter’s assistant and finally, as an apprentice tool-and-die maker with the Marconi Co.

When Canada entered the Second World War, Eugene, like thousands of young Canadian men, was drawn by the promise of adventure and a bigger paycheque. He signed up with the Victoria Rifles of Canada in August 1940. In 1942, his life would change forever when he volunteered to join an elite, joint Canada-U.S. force of paratroopers. In Helena, Mont., the unit became known as the First Special Service Force, and trained in parachuting, mountain warfare and sabotage.

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Did GM "betray" America?

By Steve Maich - Monday, December 8, 2008 at 9:52 AM - 21 Comments

This morning marks a watershed moment in the history of GM: It has decided to dispense with spin and throw itself on the mercy of the North American People. Continue…

500,000 U.S. Job Losses

By Steve Maich - Friday, December 5, 2008 at 10:02 AM - 7 Comments

Sometimes all you can really say is “ouch.” Over half a million jobs lost in November in the U.S., bringing the total jobs cuts this year to 1.9 million. A couple of weeks ago when David Rosenberg said he thought there would be 3 million U.S. job losses before this crisis is over, that sounded excessive. Not anymore. I am making a personal rule to stop doubting David’s forecasts about how bad this could get.

What does this mean to Canada? It means there’s a broad-based consumer recession happening in the United States
and that will have serious implications across almost every sector of the Canadian economy. that doesn’t mean we’re going to have a million job losses, but it certainly mean we’re going to take a hit. In fact, those losses are just beginning to roll in – with 71,000 cut in November, a terrible number, especially bad in Ontario.

Our economy has a few things going for it, but the stock market’s deep recent losses tell you that the market is still expecting things to get sigificantly worse before they get better. On the brightside: if you’re in a secure job, with a manageable debt load and some savings, the next year is going to be a fantastic year to get amazing bargains. Houses, cars, electronics…you name it.

I got your stimulus right here

By Steve Maich - Monday, December 1, 2008 at 9:55 AM - 10 Comments

In today’s Financial Post, Jackie Thorpe provides some much-needed perspective on the current debate in Ottawa over the Conservatives’ fiscal update, and specifically the need for a stimulus package to save the economy.

To anybody tempted to accuse the Tories of being do-nothing malingerers on the economic file, she presents chapter and verse on billions in planned tax cuts, a planned surge in infrastructure spending, and a $75 billion credit lifeline to ensure the banks can keep lending. The bottom line: there’s already plenty of stimulus in the pipeline. Now, everybody shut up and let it work.

JT makes a pretty persuasive case. I still maintain the CPC has been pretty awful at communicating a coherent message on the economy. I’d also argue that the move to cut off funding to the parties (though a sound idea in principle) just ended up looking incredibly petty and opportunistic. Their various climb-downs now make them look weak rather than collaborative. Nevertheless – this whole controversy is supposed to centre on the question of whether Ottawa is doing enough to support the economy. And on closer inspection it would seem that they probably are. It’s easy to run around and say “we need stimulus!” But it’s much harder to articulate exactly what we need that we haven’t already got coming.

Feeling queasy on the oil & gas express

By Steve Maich - Monday, December 1, 2008 at 9:00 AM - 1 Comment

This summer, when global oil prices surged to an apocalyptic US$150 a barrel and filling up the gas tank began to feel like making a mortgage payment, radio call-in shows were in an uproar. My voice mail fielded almost-daily invitations to answer questions on “the oil crisis” for one station or another. That invariably meant coming ear-to-face with the public’s visceral fury. In three months, the oil price had shot up by 50 per cent and had more than doubled in less than a year. Anybody with a car and a furnace was ready to lash out—at “greedy speculators,” at Alberta, at billionaire oil barons, even at innocent journalists cheerfully answering their questions out of the goodness of their heart.

How, they asked, could prices change so fast? And why? Why!? Why dammit!!

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Figuring out Stephen Harper's math

By Steve Maich - Friday, November 28, 2008 at 9:59 AM - 29 Comments

Puzzling. How could it be that a government headed by an economist could be so out of step with economic authorities around the world? As Heather Scoffield lays out nicely in the Globe this morning, every other major economy in the world is being flooded with cash and other goodies from their governments and central banks. But Canada has opted for austerity and funding cuts.

Perhaps it’s that Harper and Flaherty, like Andrew Coyne, have no time for Keynesian economics. But if that were the case, why would they hold out the carrot of possible stimulus down the road. If it’s bad policy now, if the key objective is to maintain a surplus in 2008, why would deficits and increased spending suddenly become okay later in 2009?

Perhaps the cynics are right that Harper is trying to trigger a political crisis of some sort, forcing a snap election or trying to shift blame for the inevitable economic pain onto his opponents. I can’t quite bring myself to believe he’d be that cynical and reckless. But then again, I live in Toronto and have a bad habit of underestimating the pettiness of professional politicians in Ottawa.

How bad will it get?

By Steve Maich - Thursday, November 27, 2008 at 9:00 AM - 50 Comments

Last week brought another massive plunge on world stock markets, followed by yet another government bailout of a troubled bank—this time a US$300-billion lifeline from the U.S. Federal Reserve to Citigroup. The S&P/TSX Composite index has now dropped by 44 per cent since June, wiping out more than four years of market gains, and marking the sharpest decline for Canadian stocks on record. Millions are wondering and worrying about job security, the value of their homes and what’s happening to their dreams of retirement.

With North Americans now embarking on the biggest shopping season of the year, the economy is at a critical point, and Maclean’s assembled five of Canada’s brightest financial minds to answer some of the most pressing questions in the air: Continue…

Is this the future? Don’t bet on it.

By Steve Maich - Monday, November 24, 2008 at 9:00 AM - 10 Comments

There has been much said and written lately about the “millennial generation,” the latest group of kids who are about to revolutionize the workplace and the economy. Don Tapscott, the futurist and business professor who’s been rhapsodizing about the potential of technology for decades, is out with his latest book, Grown Up Digital: How the Net Generation is Changing Your World—a 300-page valentine to the teens about to enter the workforce, a group he has branded the “Net geners.”

“The kids are more than alright,” he writes. “As the first global generation ever, they are smarter, quicker, and more tolerant of diversity.” Look at them surf the Internet! Watch them multi-task! They are truly a wonder to behold! Etcetera, etcetera, on and on.

A slightly more nuanced appraisal of this generation comes from Wall Street Journal writer Ron Alsop, in his new book The Trophy Kids Grow Up: How the Millennial Generation is Shaking Up the Workplace. Like Tapscott, Alsop sees the millennials (defined as all those born between 1980 and 2001) as more dynamic, ambitious and tech savvy than any previous generation. He at least nods to their less savoury aspects—their rampant narcissism and poor attention span, for example. But ultimately he figures that it’s incumbent on employers and managers to bend to the whims of this new crop of employees, not the other way around. And that’s convenient, because that’s just what the kids think too! Continue…

How the loonie caught China’s flu

By Steve Maich - Thursday, October 30, 2008 at 12:00 AM - 0 Comments

The good people in China’s ruling Communist party would like to assure everyone that everything is perfectly fine with their economy, thank you very much. They’d also like you to know that they have a deep and abiding respect for human rights; they share your concerns about the atrocities in Darfur, and all that stuff about Tibet is just a misunderstanding. But all that can wait. There are scurrilous rumours about that China’s vaunted economic awakening is coming off the rails, and Beijing is determined to stamp them out.

Under the headline “China’s economy has ability to recover from slowdown,” the state-owned news agency last week rounded up experts from such renowned institutions as the Center for Strategic and International Studies of Indonesia and the Vietnam Cooperative Alliance to express their undiminished confidence in China’s continued prosperity. It was an unfailingly upbeat assessment of China’s latest economic data: “Nothing to see here. Please move along.”

It’s another recent article that’s garnering more attention of late, however. This one appeared in the Far Eastern Economic Review, titled “The Great Crash of China.” In it, Brian Klein of the Council on Foreign Relations takes readers on a whirlwind tour through China’s emptying manufacturing districts, its plunging stock markets (the Shanghai index is down 67 per cent since January), and the rising anxiety among suddenly unemployed consumers. “Guangdong province alone, the heart of China’s low-cost manufacturing base, has seen half of the shoe manufacturing industry close shop (over 2,200 factories) this year,” Klein reported.

As it turns out, that’s not even the hardest-hit industry. According to recent report in Singapore’s Straits Times, more than 67,000 small and mid-sized companies have gone out of business in the first nine months of this year, including over half of China’s 7,000-plus toy makers. GDP growth has slowed for five consecutive quarters, and the economy is now expanding at its slowest pace since the 2003 SARS crisis. Official estimates (which tend to present the most optimistic view of the situation) now peg the annual growth rate at nine per cent, which sounds huge until you consider that the economy grew 12 per cent last year, and must grow by at least eight per cent in order to provide enough new jobs to China’s burgeoning class of young urbanites pouring into the job market each month. Unemployment is edging higher, and industrial output has slowed to a six-year low.

Japan, and the end of ‘buy and hold’

By Steve Maich - Friday, October 24, 2008 at 12:00 AM - 0 Comments

At the time, few people bothered to listen to what Yoshimi Watanabe had to say about the deepening U.S. credit crisis. In retrospect, that’s a shame.

“If there is a big hole in the bottom of a bathtub, no matter how much water you keep adding, you will never have enough hot water,” he explained to an Associated Press reporter in Tokyo. Fixing that big hole, he said, would require drastic action, primarily from the U.S. government and Federal Reserve, but also from lawmakers and central banks around the world—sharp interest rate cuts, flooding the market with liquidity, and hundreds of billions of dollars in public money to clear bad debts from major banks.

Now, of course, all this sounds obvious. But what makes Watanabe’s prescription impressive is that he delivered it last April, five months before Henry Paulson and Ben Bernanke realized that they were sitting—cold, naked and wet—in a rapidly draining tub. Their unprecedented effort to plug the leak has pretty much followed Watanabe’s recipe word for word.

How did he see this coming? And how could he have so accurately predicted the scope of the rescue plan that would be needed? Because Watanabe is the financial services minister for the government of Japan, meaning he’s the politician largely responsible for trying to manage an economy that is still rebuilding from its own disastrous credit bubble, which exploded almost 20 years ago. He’s been watching this particular horror movie for a long time now, and while he doesn’t know how it ends, he’s in a good position to fill us in on all the plot points we might have missed while the U.S. was merrily inflating its own market bubbles.

Back in the 1980s, Japan was the undisputed rising star of the world markets. Between 1985 and 1989 the Nikkei stock index almost quadrupled in value, driven by the astonishing success of its international exporters like Sony, Toyota, Nikon and Hitachi. And as wealth flooded into the country, the value of real estate soared. In the late 1980s, apartments in Tokyo’s exclusive Ginza district ran for 50 million yen per square metre. As British market analyst Mark Shipman once noted, that meant that if you put a dollar bill on the floor in a Ginza apartment, the space that it covered was worth around US$10,000. Put another way, a 600-sq.-foot apartment would run you close to US$80 million.

The Japanese people and their corporations went right on investing in their own economic miracle, and they did so by piling on astonishing levels of debt. When the bubble popped in 1989, the government repeatedly insisted that it was only a minor correction, that everything would soon return to normal. It didn’t, and the Japanese wasted years trimming interest rates down to zero, and offering one useless stimulus package after another. Meanwhile, the economy stagnated for a decade. Japanese companies were stuck with debts that they could never hope to repay, but the banks just kept rolling over their old loans into new ones, because if they admitted that the companies were essentially bankrupt, then the banks themselves would have to admit that they too were insolvent.

“Japan’s property and stock market bubbles burst. That implosion was worsened by a banking crisis and excess corporate debt. Nearly 20 years later, Japan is still struggling,” Stephen Roach, chairman of Morgan Stanley Asia, warned last March in another prescient appraisal of America’s economic woes. “An equally lethal interplay between the bursting of housing and credit bubbles is now at work in the United States.”

Facts and fairy tales of Paulson’s bailout

By Steve Maich - Thursday, October 9, 2008 at 12:00 AM - 0 Comments

Politics and business are full of convenient myths and useful fictions—that democratic government is driven primarily by the will of the people, for instance. Deep down we suspect these things aren’t exactly true, but they help keep the system moving.

These little delusions have their uses, but there are times when it’s important to focus on cold, hard truths. And when public officials decide they are going to spend close to a trillion dollars of taxpayer money to rescue a slew of private financial institutions from their own foolhardy misadventures, it’s time to cut the bull. Last week, the U.S. Congress approved Henry Paulson’s controversial US$700-billion bailout plan, after the House initially rejected it just four days earlier. How did they manage that abrupt about-face? In part, they did it by offering a handful of handy myths, designed to make Main Street feel better about funding a gargantuan economic do-over for the titans of Wall Street.

The first of these myths revolves around the idea that the plan will save the economy from the deep and painful recession lurking around the corner. For the average person on the street, this is the whole point of the Paulson plan, but even a cursory glance at the most recent economic data blows this hopeful idea sky-high. On the very day that the House of Representatives was ratifying the bailout, the U.S. Labour Department reported that 159,000 Americans lost their jobs in September—the worst one-month plunge in more than five years. That brought total job losses in the U.S. to 760,000 so far this year. The “official” unemployment rate is holding steady at 6.1 per cent, but that doesn’t really tell the whole sad story. When you include people who have given up actively looking for a job (known in government jargon as “discouraged workers”), unemployment now stands at 11 per cent—the highest since 1994. U.S. manufacturing activity slipped in September to its lowest level since the month after the 9/11 terrorist attacks. Josh Shapiro, an economist for MFR Inc. in New York, broke the bad news in a note to clients on Friday: “A consumer-led recession is upon us, and it promises to be a serious one.”

Pulling out of this funk won’t begin until people get confident enough to start buying houses again. Even if Paulson’s bailout can clear the decks for banks to restart lending, there will be precious few people eager to make a big investment when the economy is in the tank. The more people lose their jobs, the more foreclosures we will see, and the more prices are likely to fall. As of July, house prices in 20 major U.S. markets had fallen 16.3 per cent in a year and are still dropping, amid a record number of foreclosures.

Well, even if it can’t save America from a recession that’s already begun, proponents of the rescue say at least it will strike a major blow against the greed and excesses of Wall Street. They point to the bill’s prohibition on fat executive severance deals as proof. This too is a fantasy. The bill only prevents new golden parachutes for executives at companies taking part in the bailout. Washington can’t go back and abrogate existing employment contracts, so executives who already have their deals inked (which they all do) will still walk away with millions whenever they choose to quit, retire or get fired.