The Great Depression of 2008?

So how do we avoid a repeat of the 1930s? It may not be possible to dodge it altogether but there is no reason it has to be that bad for that long. An economic depression is usually defined as a severe downturn that lasts several years. If you are retired and depending on your 401K the downturn is probably already severe. The market didn’t fully recover from the 1929 crash until 1954. That’s longer than most people can expect to be retired. If you live in Phoenix and your major asset is your house, that’s tanked too. If you’ve lost your job this is a tough time to be trying to find a new one. Those things alone will almost certainly translate to major losses for a lot of people and they will be permanent for some of us. Those of us who don’t have to sell anything to meet expenses any time soon should thank our lucky stars and think about living within our means for a while. We should also be paying close attention to what the government is doing. I would argue that the last depression was in large part caused and prolonged by bad government policy. If we have another one, we can look to the same source.

We’ve learned at least one lesson. The Federal Reserve is pumping money into the economy like crazy and they can be expected to continue doing that for as long as money is tight. Uncle Sam did the opposite eighty years ago with disastrous results. But two lessons we haven’t learned. We are clamoring for higher taxes on corporations and individuals, and for protectionist trade legislation. Both of those things are really awful ideas. We live in a global economy and trade is its life blood. These are tough economic times by anyone’s definition. If we are to get through them international trade will play a very large role. And Americans don’t need handouts so much as jobs, good jobs, and I don’t mean government jobs. We tried that in the 1930s too. So did Stalin. He kept at it, we backed off, and as they say the rest is history. We need those jobs in the private sector and that means private investment. The last thing we should be doing is discouraging investment with higher taxes on those most able to invest. One new lesson we ought to learn too. Our economy runs on energy, cheap, reliable, plentiful energy. It’s there, government really doesn’t have to do anything about it except get out of the way but we do need to stop this insane idea of deliberately driving up liquid fuel prices in order to discourage use of the internal combustion engine. Clean them up? Certainly, but we need those engines and the engines need fuel.

Here is what I propose. There are at least three free trade pacts gathering dust on congressional tables. Pass them. Get serious about the Doha Trade Talks. Renegotiate NAFTA? Yes. Expand it to include the rest of the Americas. Send the world a message that the world’s most vibrant economy is still open for business. We’ve been scaring our trading partners half to death for the last two years with our protectionist rhetoric. We’ve got some confidence building to do. Make the Bush tax cuts permanent. The impending expiration is like an anvil around the necks of a lot of business owners. We need those businesses to be growing. Making the cuts permanent would be a big boost. Stop this foolish talk about windfall profits taxes and start encouraging the development of alternative energy supplies, all of them, not just the favored few that have the blessing of the extremist environmental lobby. That means wind, solar, shale oil, clean coal, algae culture, nuclear power, and anything else that comes along and shows promise. We have the wherewithal to supply all our energy needs at affordable prices from domestic sources. Do it. Do it cleanly but do it. We don’t want to see another depression.

Something to Fear

We’re hearing the D word a lot lately. Most pundits and economists say it can’t happen again. A few say it needn’t. But could it? Recent events bear scary parallels to 1929. Proposed remedies have a New Deal look to them. In 1933 Franklin Roosevelt famously said “…the only thing we have to fear is fear itself...” As it turned out the country did indeed have something else to fear. It had a new president with a virtual blank check and a lot of bad ideas. Will Rogers commented that Roosevelt could set fire to the capital and people would say at least he lit a match under somebody. He lit a lot of fires but the depression dragged on at least until 1940, when WWII finally pulled us out of it. The rest of the world might be forgiven if they preferred an even longer depression.

In this day of panicking markets we might do well to remember the role government played in that dark time, some lessons learned, and some not. To be sure Roosevelt inherited the depression. Herbert Hoover signed the protectionist Smoot Hawley Act that took things from bad to worse. A worldwide wave of retaliatory tariffs ensued with a disastrous collapse in trade. Hoover also presided over a restrictive monetary policy in deflationary times, with dollars so scarce that cities and states were reduced to issuing script as instruments of barter. But if Roosevelt didn’t cause the depression, his policies prolonged it for another eight years. Every positive move he made had unintended consequences that made matters worse. He raised farm prices by taking crop land out of production at a time when hunger was a serious concern. Land owners prospered, especially large land owners, but millions of tenant farmers and share croppers were forced off the land. Some of them starved. He put people to work with massive public works projects and raised taxes on the wealthy to pay for them. Private investment dried to a trickle. Nobody wanted to take risks if they were to absorb losses while the government confiscated profits. Unemployment soared. He brought in a brain trust. Some of its members idolized the central planning they had seen in Stalin’s Soviet Union. Roosevelt built the Tennessee Valley Authority and tried to propagate the model across the country to monopolize electric power generation. When the Supreme Court began to resist New Deal programs the president tried to stack it with friendly justices. Had he succeeded we might well have gone the way of the Russians. And so it went. Roosevelt himself was wildly popular, elected for three more terms. The depression continued through his first two.

So what have we learned? Not much it seems. People worry so we advocate brakes on international trade, forgetting what happened the last time we did that. At the first sign of trouble we pour government money into tax credits for favored industries, forgetting our history there too. We have begun to invest massive public funds directly into private banks. Other troubled industries are lining up for similar treatment. Politicians talk about windfall profits taxes and higher rates for the wealthy and we cheer them on. Our Treasury Secretary is supposedly a near genius. So were the members of Roosevelt’s brain trust. The Chairman of the Federal Reserve, a student of the Great Depression, was before Congress last week inviting them to embark on a new round of interventions reminiscent of the 1930s. His predecessor, probably the most renowned central banker in a generation, now says he was wrong to trust in free market correcting mechanisms through his decades of prosperity. Is there reason to think government will get it right this time? Or do we again have something to fear besides fear itself?

License to Steal

Remember Eddie Chiles? He was mad as hell and wasn’t going o take it any more. It’s time the rest of us got mad. Corporate managers have been taking us to the cleaners and getting away with it for years. I don’t mean Enron executives. They got caught in their fraud and went to jail. I mean the people who do it legally and the boards of directors who allow it or even encourage it. One CEO after another has trashed his company and walked away with a king’s ransom. Stockholders lose fortunes, employees lose jobs and dreams, departing managers get rich, boards pay no price at all, and in many cases tax payers foot much of the bill. We’ve established a pattern here and in this day of the 401K it affects enough of us that it’s time to rethink some corporate governance practices. I’m not normally in favor of more regulation but this has been broken for far too long.

The list is long and brings back a lot of painful memories right here in North Texas. Harding Lawrence bankrupted Braniff in 1982 and retired to the Caribbean with his millions while the airline shut down, buried under a mountain of debt. A couple of years later Edwin McBirney partied Sunbelt Savings into a failure that cost taxpayers about $2 billion. The whole Texas S&L industry eventually collapsed leaving the freeways lined with half finished townhouse complexes and a few individuals wealthy, having gotten their money swapping the properties back and forth among themselves. In 1998 Les Alberthal left EDS with a severance package of $35 million, though the stock price was well off its highs of two years earlier and it was clear the company’s business model was in trouble. A series of management teams followed. None of them really managed to turn the company around though they all did quite well personally. Now the company has been sold at a fire sale price and is going through one more round in a lengthy series of layoffs. There have been many such stories. The common thread is that everybody loses except senior management and the boards that are supposed to be overseeing them. Once an executive gets control of a major corporation the rapine begins and too often continues until there is little left.

I don’t object to seeing these people do well while their companies prosper, though I do think their compensation is often excessive. My issue is that they do so well whether the company does or not. Nobody represents shareholders or employees, and now, one more time, not taxpayers. We are seeing stock market instability unrivaled since the Great Depression. I am hearing that D word more than at any time I can remember. We are bailing out banks, brokers, and insurance companies left and right at staggering expense. At the root of it all are managers who made bad bets using other peoples’ money and faceless boards of directors who are not being called to account.

Reform should begin where the problems do, with corporate boards. In theory they are elected by shareholders. In practice they are typically appointed by management, the wrong way around. My suggestion is institutional investors (mutual funds, retirement funds, etc.) be required by law to form director nominating committees and vote in proportion to their holdings. Individual investors whose stock is held in street name can be represented by their brokers if they do not exercise proxies or vote themselves. All of this should be done independently of management. Corporate officers should be prohibited from naming or serving on their own boards. Directors should report at least annually to the committees that nominated them. Anybody have a better idea?

The Trouble with Boone is

Boone’s wrong. We can’t substitute wind and gas for foreign oil, at least not for the bulk of it. I’m surprised his plan hasn’t gotten more critical analysis but aside from questions about his financial stake in it I can’t find much. He’s right about one thing. We are about to make massive investments in wind whether it makes sense or not. But wind comes with some serious drawbacks that haven’t been seriously addressed, including that it is unreliable, costs too much, and will require enough new transmission right of way to generate serious political opposition. The Department of Energy goal of generating 20% of our electricity from wind by 2030 may be achievable but it is pretty ambitious.

Natural gas has its problems too, especially as a major substitute for the liquid fuels we derive from petroleum today. For one thing we are already using all of it we can lay our hands on. Any more will require us to either import it or generate it synthetically. DOE expects a staggering 900 of the next 1000 US power plants to be powered by gas. The idea that we can also divert large quantities to transportation uses is preposterous. Even if we could we would be talking about another massive investment in infrastructure. As with wind, the current distribution system isn’t set up for it.

Besides, there are better alternatives, including coal in the near term, shale oil, and ultimately algae culture. They all have their environmental detractors but reasonable objections can be overcome at tolerable costs. All can produce gasoline, diesel, jet fuel, and heating oil more cleanly than today’s processes. Those fuels are the most important uses of petroleum. All can use existing delivery infrastructure and power existing engines without modification. And all are available domestically in ample supply. The suggestion that we can’t drill our way out of this makes sense only if we restrict ourselves to petroleum and even there we have enough untapped capacity to make a difference.

The environmental worm seems to have turned, driven into remission by last summer’s $4 gasoline. Since then congress has allowed long standing restrictions on off shore drilling to expire along with prohibitions on shale oil extraction. Al Gore is in the news saying there is no such thing as clean coal and advocating civil disobedience to prevent its development but he’s on the wrong side of that argument. Both presidential candidates are for it. China and India will each use coal-to-liquid technology whether we do or not. One of the beauties of current methodology is it works with low grade coal which includes most of India’s. It can also help clean up mountains of slag and coal residue left over from a century and a half of mining in America’s Appalachia. The $700 billion credit market rescue package congress passed two weeks ago included hefty new subsidies for both coal and shale oil despite objections from the environmental lobby. You can bet more is coming. Self proclaimed greens have only themselves to blame for what I see as a sea change in public opinion. They cheered while gasoline prices soared and real people suffered. Now we are staring at an impending global recession that may rival anything we can remember. Some buzzards are coming home to roost.

Mr. Pickens will win his gamble on wind only because of government subsidies. Those won’t be entirely wasted but we’d be better off spending the money elsewhere. As for gas, he may make some more money there too but it will be because of the mad rush to gas for power generation we’ve experienced over the past few years, not from new uses. He’d better not wait too long. We appear to be finally ready to make real progress toward energy independence. Wind and gas will have real but minor roles to play.

Barbarians at the Gate

For Roman Catholics today is the Feast of Our Lady of the Rosary. At Mass this morning our homilist reminded us of the feast’s origin. Given the current financial meltdown, it’s worth recalling that bit of history. In the fall of 1571 Christendom faced an existential threat from the Ottoman Empire. Constantinople had fallen more than a century before. The Black Sea was an Ottoman Lake. All of Asia Minor, most of Southern Europe, and North Africa were Ottoman. Turkish ships raided almost at will in the Northern Mediterranean. Ottoman conquest seemed unstoppable and word came that a Turkish fleet had been formed to take Italy. As Dominicans met in Rome to pray the Rosary, a Christian fleet met and defeated the Turks at Lepanto. It was one of the most decisive naval battles ever. Pope Pius V set aside the date to honor Our Lady of Victory. We’ve since changed the name but still celebrate the anniversary.

In light of all that it seems trite for pundits and some officials to be calling the present crisis existential. I can’t find a reason to panic. Gas prices are still through the roof but rush hour traffic doesn’t seem to have slowed. I don’t see as many brand new SUVs as I did but I’m still seeing them with temporary license plates. Somebody is buying. I’ve heard so much about a crunch I checked my credit union web site. They are offering their normal range of loans at good rates and asking for the usual collateral. Just to be sure I called and asked. Yep, they are still lending. Adjustable rate mortgages run from 4.7% to 5.7%. I’m not sure I know anybody that has a sub-prime mortgage. I’m still getting those credit card offers in the mail. My retirement portfolio is down but that has happened before. Every bit of financial advice I ever got was to keep at least several months cash on hand and never invest money in the stock market I expect to need any time soon. If a bear market lasts very long Lynne and I will have to tighten our belts but if we can’t eat caviar we won’t be reduced to cat food either. Housing prices may have dropped but our house isn’t for sale. Unemployment is up but it has been worse.

Now don’t get me wrong. For a good part of our marriage we lived from one paycheck to the next and a sudden job loss could have meant big trouble. That’s happening to more and more people right now and I can relate to them. My point is I don’t see that a credit squeeze is affecting me personally very much, at least not yet. My friends don’t share financial details with me but if it’s affecting them it isn’t obvious. They are more likely to complain about gasoline prices. Church contributions are steadier than they were after the telecom bust. If there are dramatic changes in lifestyle in our community I don’t see them. Nor do I see the end of the world as we know it.

A lot of very smart people say we have a serious economic problem and a big bailout package is in order. I have to go along though I confess it makes me wince when I hear congressmen and senators justifying it (as several have) because their local used car salesmen are complaining. It seems to me a matter of principle that banks in trouble with bad investments should be allowed to fail. Otherwise solvent banks experiencing a run on deposits can borrow from the Fed, can’t they? Isn’t that what the Fed is for?

Sixteenth century Christians had cause for concern. Ottomans and Arabs before them had been very nearly invincible for nine centuries. More that half of Christendom had been lost. Their biggest enemy was fear. One naval victory went a long way toward turning that around. So did prayer. Fear is our number one enemy today too. Prayer might be in order once more. I plan to thank God for what I have and try not to worry.

Caesar’s Wife

If she were a judge Gwen Ifel would have been expected to recuse herself. But journalists don’t hold themselves to that sort of standard. It isn’t clear to me they hold themselves to any standard at all. If you missed it she is writing a book, expected to be published on inauguration day, on “the age of Obama.” If he wins the election, she stands to profit. If he loses the book will likely be a flop. She doesn’t see a conflict of interest with her role as moderator in last night’s vice-presidential debate. After ignoring the issue for several days her program, The News Hour on PBS finally acknowledged the controversy but didn’t quite admit to any conflict. Excepting a few conservatives, and there aren’t many of those, most of her colleagues went along.

Ifel didn’t tell the Commission on Presidential Debates about the book. I can’t find the commission’s reaction in today’s news but I doubt it would have mattered. This is the organization that scheduled the first presidential debate on a Friday football night, effectively ensuring that several million family and community oriented folks would not be watching. Why do you suppose they did that? Surely not to get the largest or most representative audience and, it occurs to me, not to get a lot of the suburban and small town people more likely to support John McCain. Who are these commissioners anyway? How did they get control of these debates? But those are questions for another day.

I don’t remember another occasion when the media in general were quite so blatant in their political bias. The closest I can recall was their reaction to the Clarence Thomas Supreme Court nomination. Opposition to a conservative is one thing, but the idea of a black man leaving the liberal plantation is quite another. They still haven’t forgiven him. Even today I rarely see a reference to him without an accompanying snide remark. The Sarah Palin coverage goes well beyond that and I’m not quite sure why. I suppose it has something to do with her sudden appearance on the scene as a wife, mother, and successful politician who doesn’t fit the feminist mold.

Lynne and I missed the first debate too. We were in Japan on a long planned vacation. It was quite an exotic destination for us and we had a marvelous time. We also had limited access to TV and the internet. Our news source was pretty much restricted to The International Herald Tribune, which of course is owned by the New York Times. It could be mistaken for a news letter from the Democratic National Committee. The NYT maintains a pretense of objectivity though I doubt anyone takes them seriously. The IHT seems to have dropped even the pretense. So has PBS.

Or maybe not. Sometimes I think they are so convinced of their moral high ground they are unaware of their own hypocrisy. They aren’t ignoring Gwyn Ifel’s financial interest in the outcome of this election. They don’t see that it has any bearing. But reputations are fragile things. Like Caesar’s wife they must be above suspicion. Ifel claims to value hers. If so, at the very minimum she should have disclosed the book deal before agreeing to serve as debate moderator. It would have been better to decline. By doing neither she has compromised her own integrity as well as those of The News Hour and the debate commission. That none of them see the issue is commentary on the sad state of our modern news outlets. They like to dismiss criticism as mere media bashing, but if they want to understand why the public holds them in such low regard they need look no further. We expect them to hold strong views and to express them openly in opinion pieces. We do not approve however when they contaminate the news with bias.