Megapundit: Where's our Obama?

By selley - Monday, November 17, 2008 at 1:25 PM - 15 Comments

Must-reads: Rosie DiManno on race statistics; Lawrence Martin on finding a new Speaker; Doug Saunders on waiting for a European Obama; Greg Weston on Jim Prentice’s new job; Jeffrey Simpson on bailing out the Detroit Three; David Frum on the GOP’s bleak future; Don Martin on Elizabeth May.

Change we don’t believe in
Sure, the Liberal party will soon “change.” But neither it nor Canada, the pundits lament, will Change.

Ignatieff vs. Rae vs. LeBlanc is precisely the leadership race the Liberals needed, L. Ian MacDonald opines in the Montreal Gazette. For one thing, he says, “it will keep costs down at a time when the party is broke.” But more to the point, it means “amateur hour is over.” The only two legitimate candidates understand their goal is to “unite the party, fill its campaign coffers, and win the next election,” and nothing else. No young people; no new ideas; no funny business.

The Gazette‘s Don Macpherson also handicaps the race for the leadership, suggesting—weirdly, in our view—that “because of the unfortunate timing of the current leadership race, Ignatieff starts off his second run risking unfavourable comparison with the charismatic [Barack] Obama.” This is particularly true in Quebec, he argues, where election fatigue has set in and there’s nothing remotely novel about Charest vs. Marois vs. Dumont. Fair enough, but who’s Ignatieff up against? Rae and LeBlanc, and then Harper? Which of those three juggernauts is going to out-Obama Iggy?

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Guess who has a plan to save the auto industry?

By Aaron Wherry - Friday, November 14, 2008 at 1:37 AM - 8 Comments

Neil Young. And yes, it includes a bailout.

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.”

Bailouts now, damn the consequences

By Jason Kirby - Monday, October 20, 2008 at 2:57 PM - 8 Comments

When you’re standing in the midst of an economic storm, it’s hard to see more than a few feet in front of you. The actions officials take to stem a crisis can have deep and profound consequences in the long run, but at the time, they may seem absolutely necessary. Following the Dot-Com crash and the 2001 terrorist attacks, the Federal Reserve under Alan Greenspan slashed interest rates to keep the economy from slipping into a long and painful recession. By 2004, the short-term rate was hacked to just 1 per cent. As we all know now, the move inflated the massive debt bubble that triggered the current economic crisis. It’s a common refrain to say Greenspan kept rates “too low, too long.”

Well, today Greenspan’s successor, Ben Bernanke, threw his support behind a second massive bailout package. That would be on top of $3 trillion in other stimulus measures the U.S. alone has enacted over the last month. So are these prudent measures to stave off a grave financial calamity? Or too much, too fast?

How to save banks and start trade wars

By Jason Kirby - Tuesday, October 14, 2008 at 1:37 PM - 8 Comments

Does anyone else find the following argument scary?

Canada’s banks are supremely healthy, best in the world even, and if we don’t throw them a massive taxpayer-funded lifeline right now, they’re going to be in serious trouble.

That, in a nutshell, sums up the sentiment being voiced by Finance Minister Jim Flaherty, Canadian bank executives and analysts at the moment. All over the world governments are injecting billions, nay trillions, of dollars to prop up their country’s biggest financial firms. The U.S. is buying $250 billion worth of shares in the likes of Citigroup, J.P. Morgan and Bank of America. Britain is shelling out $65 billion to help Royal Bank of Scotland and Lloyds. France is doing it. Germany is doing it. Even educated Swedes are doing it. The fear now is banks in those countries will be able to borrow funds at lower rates than Canadian banks, and that, in turn, will lead to higher borrowing costs and put Canadian businesses at a competitive disadvantage.

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What could you buy for $700 billion?

By Colin Campbell - Thursday, October 9, 2008 at 12:00 AM - 0 Comments

How much is US$700 billion? As we all know by now, it’s roughly the amount of money that U.S. government officials think is needed to rescue a ravaged economy from almost-certain collapse. We also know it’s a seven followed by 11 zeros. Even in those basic terms, it’s hard to wrap your mind around it. But there has been no shortage of attempts to put that mind-boggling number in terms normal folks can fathom.

Most often it’s expressed as $2,300 for every American person (and over $9,000 for a family of four). Last week, CNN informed viewers that it was enough to buy 2,000 McDonald’s apple pies for every American man, woman and child. That only raises another question—can a person even eat that much pie and live to tell about it?

Think of it this way: it’s 12 times Bill Gates’s fortune, explains Slate magazine, or the box office receipts of roughly 381 Titanic-sized blockbuster movies. How about the entire GDP of Florida? Yahoo News notes that it’s about $100 billion more than the amount spent on America’s social security system each year. Canadians might better wrap their minds around it this way: it’s the equivalent of 210 high-end hockey sticks for every person in the country. Or enough to buy every Canadian one medium Tim Hortons coffee every day for the next 45 years.

Some have sought to express it in terms of lost opportunities. Duncan Green, head of research for Oxfam International, notes on his blog that it would “clear the accumulated debt of the 49 poorest countries in the world twice over.” Oh, and it’s “enough to eradicate all world poverty for over two years.”

Then again, $700 billion looks relatively puny next to the overall U.S. national debt, which stands at more than US$10 trillion (for CNN viewers, that’s 29,000 apple pies for everyone). And it’s about the same amount of money that’s been spent on the Iraq war so far. In the end, it’s probably best to stick with a simple answer to the question. How much is $700 billion? It’s a lot.

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.

Freedom 95?

By Duncan Hood and Jason Kirby - Thursday, October 9, 2008 at 12:00 AM - 0 Comments

For more than a decade, Trish McAuliffe and her husband, Jim, have lived with a financial sword hanging over their heads.

Trish and Jim went to work for General Motors in Windsor, Ont., right around the same time in the early 1980s. It was 1996 when they got their first termination letters—notices that they would be put on “indefinite layoff” within a few months. They had a toddler and a baby at home, and had just bought a house. Jim, who was 31 at the time, came down with shingles, which his doctor attributed to extreme stress.

Their jobs were saved when thousands of older workers accepted voluntary buyouts, cutting down the number of layoffs. But soon, another termination notice arrived, then another, and another. Finally, in 2004, after years of flirting with financial ruin, the McAuliffes decided to move to Oshawa, Ont. GM was cutting back operations in southwestern Ontario, but had just invested $2.2 billion in its Oshawa facilities. They pulled up stakes, said goodbye to family and friends and moved four hours east in search of stability. They were in their new home for a year before the axe fell again, then again and again—three termination notices in about 36 months. Each time they received what amounts to a stay of execution. “We’ve had these death notices over us for three years now,” she says. “We’re terminally ill, but we haven’t died yet.”

But with the global economy now slinking inexorably toward recession and worldwide financial markets lapsing in and out of panic, Trish, now 47, admits she’s wondering if and when that next letter might arrive, and what it will mean when it does. She alternates between worry and resignation. Her kids are 13 and 14, and will be off to university soon. She knows that they’ll have to rack up significant debt to get a degree. She knows that if she and Jim lose their jobs, “the house will be the first thing to go . . . we’ll have to downsize.”

“It’s like a feeling of gut rot that sits in your stomach,” she says. “When you get the letter, it feels like people are pitying you. I hate that feeling. My kids hate it.”

It’s little comfort to know that in the past month, millions of Canadians have come to share her sense of dread. Canada’s stock market has plunged and all the latest economic numbers point to recession. This week economists confirmed that they expect Canada’s GDP to contract through the remainder of 2008 and the first few months of 2009. That certainly means more job cuts, less consumer spending and no end of anxiety.

What started as a brush fire among heavily indebted U.S. homeowners who bought wildly overpriced homes they couldn’t afford has grown and spread into an international conflagration that threatens the stability of the world’s biggest lending institutions, and every company that relies on credit to fund its operations. That, combined with the stunning market declines of the past two months, raises frightening scenarios for the millions of Canadians who, over the past 20 years, bought hundreds of billions of dollars in mutual funds, pouring their retirement savings into the stock market in the hope and belief that a generation of steady economic growth would translate into a retirement of beach vacations, summers at the cottage, and a hefty legacy left for the kids. Instead, millions find themselves with decimated retirement funds, declining real estate values and uncertain job prospects—all of it hitting at the very moment that they expected to be cruising toward an easier pace of life.

It used to be that McAuliffe, a third-generation auto worker, worried mainly about the next year’s mortgage payments, and whether she could afford to give her kids all the things they wanted. Now her fears are bigger, and more far-reaching. She worries for her job. “You know, I used to say I wouldn’t even get out of bed for $10 or $12 an hour. I really used to wonder how people survived on that kind of money,” she says. “Now sometimes I think I might just have to.” She’s desperately hoping she can hang on at GM until her pension kicks in five years from now. Even then, she wonders if GM can weather this storm to pay her retirement benefits.

It's going to get worse

By Steve Maich - Thursday, October 2, 2008 at 12:00 AM - 0 Comments

It may have been the oddest coalition of dissenters you’ll ever see: hard-core southern conservatives allied with ultra-liberal members of the Congressional Black Caucus, blue-collar Republicans from the Rust Belt, and a couple of dozen conservative Democrats known as the “Blue Dogs.” As a group they likely never agreed on anything before in their lives, and may never again. But they agreed on this—Treasury Secretary Henry Paulson’s US$700-billion plan to rescue Wall Street from a rising tide of toxic debts was a no go. And on Monday afternoon, 228 of them rejected the biggest private sector bailout in history and triggered the sharpest one-day plunge in world stock markets since the 1987 Black Monday crash.

Some said it was morally indefensible that ordinary taxpayers, many of them worried for their jobs, should have to foot the bill to support rich bankers whose idea of hardship is having to sell one of their vacation homes. Others complained the plan failed to address the root of the problem: millions of ordinary people declaring bankruptcy and facing foreclosure. With public opinion firmly against the deal, many simply opted to side with the voters and let the chips fall where they may. On his way out of the House of Representatives after the fateful vote, Rep. Steve Kagen, a Democrat from Wisconsin in the midst of a tough re-election fight, curtly explained his vote against the deal: “The bill does nothing for my constituents.”

The deal itself is not quite dead. Congressional leaders are meeting this week in hopes of reviving Paulson’s rescue plan, and many insist that some kind of bailout will get done, somehow. But with each passing day a more sobering reality is settling in: Washington’s intervention, whenever and however it might come, is already too late. Early Monday morning, Wachovia, the sixth-largest U.S. bank by assets, wilting under the strain of an estimated US$42 billion in bad loans, agreed to an emergency takeover by Citigroup. It is the sixth major American financial institution to crumple under its debt load in two weeks, and this week officials in Britain, Ireland, Iceland, France and Belgium all stepped in to shore up their own crumbling lenders.

Bailout or no bailout, America’s financial system is bucking under stresses that have been building for years, if not decades. The world’s biggest and most dynamic economy has been erected on a mountain of debt from the national government on down to the millions of ordinary families with hefty mortgages and wallets full of maxed-out plastic. America bought its vaunted standard of living on credit, and trading partners around the world profited wildly from its free-spending culture. Now the bill is coming due. Central banks around the world, led by the U.S. Federal Reserve, are pumping hundreds of billions into the system in hopes of keeping it moving. But that, even if it were combined with Paulson’s massive transfer of tax dollars to Wall Street, only buys a temporary deferral, not a solution.

“Everybody keeps saying if we do nothing, there’s going to be a severe recession. Yes. There is. There’s no way around it,” says Peter Schiff, president of Euro Pacific Capital in Connecticut. “We have to take our lumps. We’ve got to pay the price for all our reckless borrowing and spending.”

How painful will that bruising be? Worse than anything we’ve faced in our lifetimes, he says. He describes a depression that would forge a new world economic order, with sharply higher interest rates, a weaker American dollar, surging prices and shortages of consumer basics. These are the strains that can pull a society apart, and while not everyone believes it needs to get that bad, such warnings are fast gaining currency all over the world. There is no easy way out of the economic vice tightening around America, and all the many countries, like Canada, which rely on it for their own prosperity. Last week, with major banks failing, home foreclosures running at a rate of 10,000 a day and unemployment climbing steadily higher, it was clear that something big was happening. Something that is going to change the way we live for decades to come.

For a US$700-billion behemoth, there was a certain elegance to Henry Paulson’s financial rescue plan. A new federal agency called the Office of Financial Stability would buy hundreds of billions in distressed assets (mostly toxic mortgages) from ailing banks and hedge funds in hopes of defusing the spread of panic around the world. In return, taxpayers would receive an ownership stake in the bailed-out companies, along with provisions to discourage excessive executive pay at rescued firms and a promise that, if the program was still losing money after five years, the president would take steps to recover losses through new fees and taxes.

Damned if you bailout, damned if you don’t

By Colin Campbell - Tuesday, September 30, 2008 at 11:15 AM - 2 Comments

Last week, the $700 billion Wall Street bailout plan was universally panned as a horribly-bad, no-good idea. This morning, with that safety net yanked out from under the economy, criticism has swung to the U.S. Congress for its failure to approve the awful deal.  This is a no-win situation if there ever was one. 

One thing is painfully clear now: there really is no easy way out of this mess. The bailout may be a bad idea, but the alternative isn’t pretty either (if yesterday’s market free-fall was any indication). So here’s a question: what is the best case scenario? I tend to agree with this one, from the economists’ blog Marginal Revolution: “The American economy is in recession for two years and unemployment does not rise above eight or nine percent.”

What ‘socialism for the rich’ looks like

By Steve Maich - Thursday, September 25, 2008 at 12:00 AM - 0 Comments

Forest fires are extremely unpleasant, especially when viewed from up close. They’re scary and destructive and can be deadly for those caught in their path. But they’re also essential to the long-term health of any forest ecosystem. They clear out deadwood, control pests and disease, and return nutrients to the ground so that a new generation of growth can take hold.

The same is true of market crashes. They’re painful, frightening, and sometimes essential to purge the excesses and distortions created by long periods of growth and prosperity.

But accepting that idea in principle is easy. Embracing it in reality can be terrifying. Last week, the U.S. government and the titans of American finance looked out at the flames enveloping Wall Street and panicked.

Coming hot on the heels of a US$200-billion bailout of giant mortgage guarantors Fannie Mae and Freddie Mac, and a US$29-billion lifeline for distressed brokerage Bear Stearns, Treasury Secretary Henry Paulson launched a US$85-billion de facto nationalization of insurance giant AIG, followed by a temporary ban on short selling financial stocks (a method used by sophisticated investors to profit on market declines), and a US$180-billion credit line to shore up money market mutual funds. But Paulson’s audacious tax-payer-funded intervention wasn’t finished there. He also put together a plan to have the government clear bad debts from the balance sheets of America’s major financial institutions just as it did during the savings and loan crisis of the late 1980s. No exact price tag yet, but Paulson acknowledged the cost would run into the hundreds of billions of dollars. Taken all together this represents a sweeping redefinition of the relationship between private enterprise and public finance.

Paulson’s rescue of AIG was particularly shocking because it came just 48 hours after he refused a similar lifeline to the venerable brokerage Lehman Bros. In fact, Paulson said he never even considered bailing out Lehman, because it was not the role of government to backstop private companies that get into trouble all on their own. He reversed himself in AIG’s case because to fail to do so, experts said, would have triggered a massive global market panic, and almost certainly a stock market crash. Paulson’s actions, in other words, are based entirely on the cold calculus of pragmatism, rather than principle. Lehman was allowed to fail because it was too small to matter. AIG was saved because it was too big to abandon.

You might think that people would have a problem with this—that some might think principles and guiding philosophies are important, because they allow the world to anticipate and evaluate the ways that public officials will use public funds. But, by and large, the reaction to Paulson’s moves has ranged from laudatory to resigned acceptance. There are a few outraged voices—über-investor Jim Rogers decried the Fannie/Freddie bailouts as madness, insanity and “socialism for the rich,” pointing out that they have massively increased the American national debt to help “a bunch of crooks and incompetents.” But generally, even hard-core conservatives have fallen back on the “desperate times call for desperate measures” rationale.

The New Communism: A Citizen Blows a Bundle

By Andrew Potter - Tuesday, September 23, 2008 at 7:09 PM - 24 Comments

Amidst its excellent coverage of the big Wall Street bailout package, today’s NYTimes contained a full page ad that consisted of this simple caricature of Paulson, Bush, and Bernanke, portraying them as New Communists. It was accompanied by a short note saying that the ad was paid for by one Bill Perkins, of Houston Tx.

Here’s a scan I made of the caricature:

Paulson's folly

By Steve Maich - Monday, September 22, 2008 at 11:30 AM - 17 Comments

I’ll be writing a lot more about this in the upcoming issue, but at the risk of getting ahead of myself, I have to express my sadness at the goings on south of the border right now. The U.S. government is in the process of negotiating a bailout plan which will likely come in at close to double the cost of the Iraq war so far. We are told that this is regrettable but necessary in order to prevent worldwide financial Armageddon.

I’m not buying it. I think we have all been traumatized by ghost stories about financial calamities, and we are so frightened by them, that we will accept just about any lunatic policy proposal that promises to keep the boogey man at bay. Congress is debating a US$700 billion proposal to buy virtually worthless assets from hundreds of financial institutions that made out like bandits while the market was rising. The package will almost surely exceed a trillion dollars before it’s all settled. Nobody is even bothering to try to argue that this is right. Only that it is unavoidable. But is it? Continue…

AIG – Holy Moly

By Steve Maich - Tuesday, September 16, 2008 at 9:44 PM - 18 Comments

I am stunned, STUNNED at the news that the U.S. Federal Reserve and U.S. Treasury have kicked in US$85 billion to bail out AIG.

Just 48 hours after insisting that a bail out of Lehman Bros. was an absolute non-starter, Henry Paulson pulls a COMPLETE 180, and coughs up the cash to save AIG. The reason, apparentlly is pure pragmatism. Lehgman was allowed to fail because it could be allowed to fail. they made a calculated decision that Lehman was not big enough, or important enough to actually spark a market crash, and sure enough, this week’s modest sell off on the Dow proved them right. but they decided that AI with its $1 trillion in assets, and almost $30 billion in counterparty risk, would have brought worldwide trade in derivatives to a standstill and triggered a real, live old-fashioned freak out. And so, Uncle Sam bails the kids out of the drunk tank again.

Amazing. Absolutely amazing.  I never thought I’d see the day when the U.S. government essentially nationalized a major private company for the sake of minimizing fallout int he capital markets. I guess the Republicans just really really didn’t want a Black Monday in the middle of an election campaign.

That said – I can understand the dilemma Paulson is in. to fail to save AIG may well have triggered a huge market sell off, possibly global in nature, and it may well have brought lending to a halt and driven rates through the roof. Bad mojo all around.  But the precedent is just incredibly, staggeringly bad for the separation of government finances from private enterprise.

Mr. Paulson, GM and Ford are on the line, they have an urgent favour to ask.