Wednesday Night #1390

T H E  R E P O R T

Maureen Farrow paid an unexpected – and most welcome – visit, contributing immensely to the financial/economic education of those present, and inciting some sprightly dialogue with those of a less capitalist persuasion.                  

The Financial crisis
The current bear market crisis is secular rather than cyclical in nature, based on a diminution of confidence.  Secular bear markets normally have a lifespan of seventeen years and require active intervention for the stabilization of the financial system and to keep it intact. [See the Economist article The Big Bear for full explanation]
More and more commentary is based on sentiment rather than fact, but this is in itself not bad, given that confidence is at issue.
The problem in the United States has been so acute that the measures being taken had difficulty keeping up with it. The run on banks has been stabilized and the long recovery phase is expected to begin in 2010 and take about eight years.  The flight into U.S. currency is understandable because of the problems with other world currencies and explains the reason gold prices are falling.
This is the first truly global financial crisis we have seen and it is transformational – it will change our society, our economic systems and our behaviour – and we can be sure that the newly regulated (or re-regulated) financial services sector will not look the same, nor will it be allowed to venture into the kind of instruments that have contributed to the rise and fall of the sector. There will have to be a global response in terms of standards. The good news is that the authorities, including the Americans, appear to have realized that this must be dealt with through comprehensive and complementary rather than the stop-gap measures that were taken during the first days.
One of the great political surprises has been the Phoenix-like emergence of Gordon Brown as a powerful international voice, and the UK as a model for Europe and others. But, given his long experience as Chancellor of the Exchequer, we should not be overly surprised. Charismatic he is not, but his steadiness and wisdom count for far more today.
This is also a currency crisis [or,as Paul Krugman reminds us, The mother of all currency crises].
Finally, the indebtedness of the consumer is so great that it seems impossible to recover from this recession with any speed.

The presidential campaign
One wonders why anyone would want to be president of the United States in the current situation. That being said, it is encouraging to see the Brains Trust that Obama has assembled: Paul Volcker, Robert Rubin and Larry Summers all give great credibility to his economic policies. (Opinions are divided on Warren Buffet, although everyone acknowledges his astute investment performance.). Presuming that Obama is elected and given the world sentiment in his favour (Global Electoral College), it may be assumed that there will be a  positive world-widereaction, triggering a lifting of spirits with a sense of renewed optimism if not confidence, and providing the needed impetus for change in world sentiment in the markets, setting the slow recovery in motion.

Compensation
In retrospect, in addition to problems of unsecured loans, sub-prime mortgages and derivatives, Boards of directors have not been effective risk managers.  Whether or not it is an underlying issue financially, people find it incomprehensible that while investors suffer, CEO’s flourish – and traders receive bonuses based only on the fact that they have been trading like mad.  One suggestion that has been floated is that CEO compensation in the U.S. should not exceed that of the President of the United States ($400,000 salary and lots of perks like the White House, Camp David and Air Force One paid for by the taxpayer). Increased transparency in these questions may well put a stop to the exaggerated salaries and the methods of calculating bonuses; regulation is likely not the answer, as a cap on senior executives’ earnings potential will have a counterproductive effect and companies want and need to retain good executives. Where improvements can be made is in long-term compensation based on good performance. Another approach is to regulate through taxation, but that requires a global tax regime.

Canada
Canada is in a much better state than is the United States.  We have been running surpluses and can thus afford to run deficits if necessary.  We have the ability to invest the money required in areas like infrastructure that will make us more competitive in the future.  Canada has the best commodity base in the world geopolitically and commodity prices will certainly return slowly to their former level.
Although Canada’s financial system is different from that of the United States and sound, and has come through relatively unscathed by the crisis in confidence, we must work to get the system on track, especially in inter-bank loans.  Canada has indeed taken steps to guarantee bank deposits and bank lending as a measure to enhance confidence, rather than as an unmanageable problem and is working to induce provincial governments to do so with credit unions.
The question remains, how do we encourage our companies to flourish here? We need a climate that fosters R&D innovation and manufacture of value-added products , which implies favourable a tax regime. Aside from the centers that flourish around universities – Waterloo and RIM being a classic example -, the fragmented nature of the country and the small domestic market militates against an overall success rate.
Defeated post World War II Germany had to rethink the economy and the social contract that emerged is largely responsible for the country’s success.  Measures taken at that time, including the composition of boards with union and bank representation became and remain the most important impetus to the recovery of that country as the preeminent exporter of value-added products, e.g. the car industry, machinery and equipment – a model that other countries would do well to emulate. One notable contributor to this success is the independent  Max Planck Institute, the non-profit science and technology research organization funded by the federal and state governments.

China
Production in China was curtailed, declining by 12% last year due to the required efforts at air purification measures in anticipation of the Olympics.  A ten percent decline is anticipated this year and perhaps 8.5% next year, which would mean that there will still be sufficient job creation.

Unions
Do unions have a role to play in economic recovery?  Yes and no. The nature of unions has changed dramatically since the days when they were established to protect the uneducated country people and immigrant workers.  Most unions today are no longer in large factories, although they remain in the aeronautical, automotive and petrochemical industries, but they dominate the public sector.
Should there be vast discrepancy in the perceived worth of people? Is it right that the Wal-Mart worker receives only minimum wage, while professionals receive much more?  This is how  we measure the value of investments in skill sets, and the contribution individuals make to society.

The F-1
Mayor Gérald Tremblay, Quebec Economic Development Minister Raymond Bachand and federal Minister of International Trade Michael Fortier have gone off to London to meet with F1‘s Bernie Ecclestone in the hope of having Montreal’s Grand Prix reinstated on the F-1 calendar. Some question whether the taxpayers should bear the high cost of the event, while others remind us that it brings between $75 and $80 million in sales tax to Quebec’s coffers – more than all the other festivals together. It also attracts a tourism sector that otherwise would not come to Montreal. More news to come.

Gazette strike
The impending strike of Gazette editorial, advertising and sales staff at Montreal’s only Anglophone daily newspaper has seen Marketing and Sales outsourced to Winnipeg and there is a proposal to move copy editors headline writers and page lay-out activities to a non-union shop in Hamilton.  It appears that Canwest’s National Post is planning a two-page insert on Montreal, hardly a viable alternative for the readership – or advertisers – of the Anglophone and Allophone population of the Montreal market. There are also reports of offers to journalism students to fill in for striking reporters.  Will this be an opportunity for a new paper – or an expanded version of one or more Montreal weeklies?  Or will readers turn more and more to the Internet to supplement listening and viewing habits?

T H E  I N V I T A T I ON

There was a time – until quite recently – when we aspired each week to fulfilling our mission “to entertain, inform and occasionally comment on a wide range of subjects of interest to us and to the many participants in and contributors to the Wednesday Night Salon”. However, the entertain part is becoming increasingly difficult as there is nothing even faintly amusing about current events. Levity is out (even Tina Fey’s portrayals of Sarah Palin are so accurate as to be depressing) and lugubrious is in. There is no longer the satisfaction of seeing some greed-driven money manager served his just desserts, when we know that the digestif will be the indigestible loss of jobs or pensions for countless thousands.
We need look no further than today’s bulletin points from the Financial Times (see below). Even China is experiencing an economic growth slowdown with serious internal and external ramifications. And we are not convinced that we should be thrilled about India joining the space race.
Tuesday’s Foreign Policy Brief tells us:
Japan and France announced new bailout measures, and Pakistan and Iceland turned to the IMF for aid. The U.S. Treasury Department is said to be encouraging more mergers in the banking sector.
Things will likely get worse, however, before they get better. The markets remain extremely volatile, and one U.N. agency predicts the financial crisis will wipe out 20 million jobs around the world.
We are not sure how to react to the news of the International Aid Summit hosted by President Bush, but we like the tenor of his remarks as reported by AP “Amid the continuing global economic crisis, the Bush administration said Tuesday it’s more important than ever for the United States and other developed countries to honor their commitments to foreign assistance.”
Even poor Milton Friedman is caught up in the crisis, as faculty at the University of Chicago try to stop the university from naming a new research center after him using the argument that the gesture would compromise the academic integrity of the university because his world view has been largely discredited. Sic transit Gloria mundi, indeed.
Is there anything to cheer about? For some of us, yes (this is almost as divisive as the Liberal Party leadership): Obama now has a 10-point lead according to the Wall Street Journal/NBC poll, not to mention that very encouraging endorsement from Colin Powell,  and  Maude Barlow has been named the first UN Water Advisor; we also were quite pleased with M. Sarkozy’s performance in Québec last week, he seems to have successfully annoyed Pauline Marois and Jacques Pariseau – what more could we ask? Finally, to all the naysayers about Canadian technology and innovation, Terry Jones, our relentless science & technology bloodhound, forwarded the news that McMaster University unveils world’s most advanced microscope and that McGill physicists find a new state of matter in a ‘transistor’ This discovery could have momentous implications for the development of new electronic devices.
See also WednesdayNight.com for breaking news, profound thoughts, or details on these and other topics.

Depressing links from the Financial Times to follow if you like:

Fed offers $540bn to prop up money funds
Oct 21 2008 20:57
The US Federal Reserve said it would finance up to $540bn in purchases of short-term debt from money market mutual funds to shore up a key pillar of the US financial system 

Oil cartel divided over level of cuts
Oct 21 2008 20:36
Opec is expected to slash oil production as it faces its biggest test in more than a decade but its members’ divergent circumstances mean the decision on how much to cut is difficult 

UK ‘entering recession’, says Bank governor
Oct 21 2008 22:42
Mervyn King has given his gloomiest assessment of Britain‘s economic prospects since taking charge of the Bank of England in 2003, warning about the risk of another sharp decline in sterling

IMF warns business as EU outlook worsens
Oct 21 2008 12:11
European businesses will suffer a sharp contraction in credit next year as the full consequences of the global crisis unfold for non-financial companies, the International Monetary Fund has predicted

2 Comments on "Wednesday Night #1390"

  1. Antal Deutsch October 22, 2008 at 8:17 am · Reply

    I have a few comments on the Milton Friedman item. Not “faculty”, but some faculty members far from Economics, who never liked Friedman’s world view in the first place, are creating publicity trading on the ignorance of the lay public and some journalists to blame a downturn in the business cycle on the late Nobel laureate. I do not feel qualified to analyze Friedman’s life work, but the following points are obvious:
    1. Friedman, in “The Monetary History of the United States” makes the central point that the Fed turned the 1929 recession into the Great Depression by failing to provide adequate liquidity to the economy. Following from that, it is reasonable to conclude that Friedman would now be advocating, pointing at his own results as his authority, the current policies of the central banks in the major Western countries.
    2. Friedman used to argue that politicians do more harm than good in matters of economic policy. We now have ample evidence that pressure was put, by Democratic politicians during the Clinton Administration on the two FM giants to buy paper backed by subprime mortgages, so as to allow those too poor to buy a house to share in the American Dream. If the giants create a market for junk paper, people will act on the incentives provided (Adam Smith) and Wall Street will supply junk paper. All of this was the trigger of the current downturn.
    3. Ever since people began to comprehend what Keynes wrote about, perhaps thirty years after his death, no serious economist would argue that there will be no more business cycles. Friedman would merely plead with governments not to make matters worse. Tony
    Antal Deutsch, Professor of Economics

  2. The Princess October 22, 2008 at 8:22 am · Reply

    As usual, it depends on the side of the fence upon which one sits. A lot of so called ‘experts’, you know, the money market ‘experts’ who counselled everyone to re-finance their homes to invest In the stock market in order to have a ‘balanced portfolio’ i.e., get more commission out of their ignorant greedy clients, or those of us who sat back and watched over the years with a cynical eye to the whole thing knowing it smelt of previous financial debacles from 20 years ago….does anyone remember the savings and loans? Some people I know made $100million by buying in the trough in that fiasco.
    As always, when someone sells stock at a loss, someone else is buying it to make money…the only difference is the one doing the buying for the most part is being silent about it, and the one doing the moaning is the one selling off due to an article in a newspaper (they have papers to sell, n’est ce pas?…) so the more sensational they can make them the better… sells more papers.
    During difficult times people tend to start new business, which if one checks the economic indicators, is the largest growth area internationally…so…it is a bad time, or a good time? As usual, it is in the eye of the beholder.

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