Monday, March 30, 2009

Obamanomics

I'm soliciting opinions. Is the Obama administration doing the right thing in dealing with the economy? I see some places where I believe the administration is fumbling and places where it is doing what it needs to do.

I'm nervous about the American auto industry, particularly when the administration seems to be making corporate decisions in exchange for stimulus money. Is conditioning the receipt of stimulus cash on the resignation of the CEO of GM prudent? I know the main argument in favor - that if we are going to take an ownership interest in a failing automaker, the government should act like a shareholder and be active in guiding the company. How far does this argument go, though? Will the Treasury Department decide what cars GM will sell? Will it help to price the vehicles? Will it dictate the number of employees GM needs to do all of this? I'm not sure the federal government has the expertise to make those kinds of calls. Even with an Auto Industry Czar, how can we be certain that our representatives will do a better job than institutional private investors who employ industry analysts that constantly track the health of a company.

Would it be a better use of stimulus money to encourage purchasers to buy American with larger tax credits, particularly for those buying smaller (let's face it, less profitable), more fuel efficient vehicles (including foreign makes that are built in the U.S.), or does that amount to naked protectionism that will result in a downward spiral of global protectionism?

I think about the old adage that a little knowledge can be dangerous. Because of the urgency of the problem (and the threat of bankruptcy that would leave unionized and non-unionized workers with very little protection) I am trying not be overly critical of an administration that works for the guy I voted for. I am suspicious of the Republican message that we ought to go down the bankruptcy road.

The big problem, beyond people being unable to afford any new car, much less an SUV, is that GM, Ford and Chrysler have never really crawled out of the trench of lower resale values and the widely-held perception that American cars are not nearly as reliable, well-built or fun to drive as Hondas, Toyotas and other Japanese and German brands. If they can change that perception, I think they can be profitable with or without federal assistance. No government program is going to change those perceptions.

What do you think?

Thursday, March 26, 2009

Bonus III

Click on the following link. It expresses my opinion on the Bonus furor better than anything I could write myself.

http://www.nytimes.com/2009/03/25/opinion/25desantis.html?_r=1&scp=3&sq=AIG%20&st=cse

This piece, published in the New York Times on March 25th, comes from an executive vice president at AIG who was involved in its financial products division. The upshot is this: he took a $1 per year salary and was promised a now-dreaded and reviled "retention bonus" to stay with AIG and attempt to help the company minimizes its losses in 2008. The author had nothing to do with the credit default swaps that were the primary cause of AIG's downfall.

Let's start with the premise that someone who makes a million dollars per year is not inherently evil or greedy. If I'm wrong, let's throw away all of our televisions because most of the folks we watch on major networks are earning that kind of money. After all, no one wants to be accused of being a hypocrite.

If we can get past that hurdle, what is really making us so angry about AIG retention bonuses? Is it the fact that most of us will never be offered one? Is it because we know all we need to know about the thousands of employees and what their role was at AIG (including the AIG guy who might have sold you car insurance)? Wouldn't we rather know more about the folks in the credit default swap game, at what level they worked (i.e., should we punish the administrative assistant who worked for one of the "bad guys"?) and from whom they got their marching orders?

It is quite possible that there are scores of AIG folks who are truly responsible for the mess they created. It is not remotely possible this mess was a conspiracy of thousands of employees.

To me, this was a case of a lazy government winking at or turning a blind eye to potential disaster. Bundling up and selling off mortgage risk as an investment product was clever indeed, but it took a lot more than AIG to make it all happen. It took shady real estate appraisers, mortgage brokers, banks and the purchasers themselves to get us where we are today. Sub-prime mortgages, backed by nothing more than a hope of ever-increasing real estate values and the ability of borrowers to keep flipping their property, were the ultimate modern scam. Much of what was happening should have been heavily regulated or criminalized. I've said it before, but I wouldn't waste much time worrying about AIG bonuses. I'd spend my time writing to my representatives in Congress and asking them to explain why they were either too disinterested to know what was going on or unwilling to do the politically unpopular thing and pass laws that might have kept a few million people from buying their dream house, but would have avoided millions of foreclosures. Don't expect them to express any remorse or regret. They'll tell you that you should be angry at AIG because that's easier. And no, your representatives will not return the campaign contributions from employees at AIG or any other financial institution.

Thursday, March 19, 2009

Bonus II

In an earlier post, I wrote about the announcement of Wall Street bonuses and got some thoughtful feedback from a couple of followers of this blog (see "Bonus" on this page). I don't think anyone (and I truly mean anyone) fully understands the compensation packages of many jobs, particularly where there is no contract (union or individual) to help make sense of it.

I do know that in a market economy like ours, it seems as if careers like public and private primary and secondary school teaching are undervalued from a compensation perspective. Why then do so many college graduates continue to choose to teach? If we reach back to the 1950s and 60s, it's easier to understand. Many other careers were practically closed off to smart, well-educated women. Nursing, teaching, social work and a very small number of other professions attracted most of the smartest female college graduates. The salaries were pathetically low by today's standards but without other meaningful opportunities, the market permitted school districts and religious institutions to get these young women (and quite a few men) to work for them for peanuts. But let's not forget that teaching has intrinsic rewards and has historically been one of the most stable, family-friendly jobs in the country. Defined benefit public employee pensions (often non-contributory) make retired teachers some of the best protected among our elderly. It's easy to say that they deserve that kind of protection because they chose to forgo opportunities to make more salary in another field but with reduced job security and increased risk of having a less generous retirement income.

The best and brightest women today can and do often choose to work in money management jobs, including investment banking, abandoning the notion of lifetime employment with one employer, lower pension guarantees, practically zero job security and punishing 80 hour work weeks. The annual bonus - whether delivered in cash or stock options - often accounts for 60-80% of their overall compensation. In the fat middle (the VP and AVP level where most of men and women in institutional finance work) much of the bonus gets socked away for retirement. I don't know what the average compensation is but in order for a 55 year old banker (who, by the way, likely has to pay 3-4 times the average for housing because they are forced to work in New York, Boston or Chicago) to buy an annuity that would provide them with a lifetime income equivalent to a teacher's pension, with continued health care coverage, would likely have to amass at least $1-2 million in cash. When one considers the 80 hour work weeks and the risk that bonuses paid in stock options might be worthless (ask a Bear Stearns employee who had all of his/her retirement accounts in now worthless company stock), it should surprise no one that these individuals can make a good case for getting a healthy end-year bonus if they have worked hard and followed the direction of the top company executives.

Men and women working in the auto industry, unlike public school teaching and investment banking, have increasingly gotten the worst of both worlds - decent but not spectacular hourly pay for current workers, a lower entry wage for new hires, but no guarantee of job security and a pension that might or might not include retiree health benefits, particularly if the auto manufacturer goes bankrupt. The old social contract with these workers died long ago. Even so, when the auto manufacturers asked for a bail out, many people reacted with disdain not just for the top executives but for the workers themselves. I suppose that we should have expected the workers to refuse to build gas guzzling SUVs because they should have known that crude oil prices would spike and the home mortgage industry would start an economic recession that would further reduce demand for the types of vehicles that had been so profitable for so long.

My point is this: we have collectively become the judge and jury of what an individual's work is worth, regardless of the product or service they deliver. That, my friends, is not how market capitalism works. I will agree that no one necessarily deserves a $20 million dollar bonus. I cannot agree that an exceptional employee in the ranks of middle management doesn't deserve a $1 million bonus even if the top company executives made mistakes in the overall direction of the company.

AIG made some egregiously poor institutional decisions - particularly in greedily selling "insurance" to banks that it could never have afforded to pay out if the economy went sour. But the middle managers who sold those products did nothing illegal and to the extent they did their part well, deserve the compensation promised to them. Teachers whose school boards and management give them a curriculum and blackboard still deserve their salary and pension benefits if they do their jobs acceptably, even if it doesn't translate into higher test scores. Auto workers who dutifully show up for work each day and drop 400hp engines into Hummers that get 9 mpg deserve their compensation even if the car can't be sold.

Bonuses didn't get us into this mess. Congress's utter failure to regulate the industry over the past decade is a big part of what got us here. I'll bet you that they wouldn't forgo their salary for failing to legislate away some of the legal but stupid things going on in the finance industry.

Friday, March 13, 2009

High School Fashion Police on the Beat

If you have a moment, go to the link below and read the story about a young woman, a lesbian, who wanted to wear pants to her prom but was told that she had to wear a dress or be banned from the event.

http://www.lemondrop.com/2009/03/13/lesbian-fights-for-her-right-to-wear-pants-to-the-prom/

I wonder if any of my friends - or anyone who reads this post - can tell me how it hurts anyone for a young woman to wear an outfit that nearly every female member of Congress and most corporate types wear every day (and evening). More to the point, is the school doing so well delivering a high quality education that it has the extra time to indulge in this sort of distraction - one that has nothing whatsoever to do with educating kids (except perhaps teaching intolerance).

I can imagine some of the arguments in favor of the ban: 1) that it mocks the entire event and ruins it for all the young women who want to wear a formal gown; 2) that it is inappropriate to politicize what should otherwise be a fun evening for 17 and 18 year olds who don't have many opportunities to look mature and glamorous. I, for one, trust that 17 and 18 year olds understand personal expression and don't care very much if a female classmate wants to wear a pant suit. Whatever political statement is being made became political when the school decided to ban it, not when the young woman went to buy her outfit.

In my lifetime, most female teachers were not permitted to wear pant suits until the early 1970s. Those rules were clearly rooted in a desire to promote a particular view of how women should dress as role models for female students. The problem is that high schools are perhaps the least qualified institutions on the planet to determine how women should dress.

If they looked around them, they would see that many successful adult women almost always wear pant suits. If schools want their graduates to have the opportunity to fully participate in the adult world, they need to help them develop a broader view of the world. The country's largest corporations and some of the best paid professions are not only comfortable with diversity but demand that their employees respect each other despite cultural differences in all sorts of arenas, including fashion choices. If we teach intolerance now, we will limit young women's opportunities for success in the real world. In short, bigots will be ostracized and will miss out on some really good places to work.

I count myself among many people who believe that our schools are overburdened and are asked to do things that parents and other caregivers should be doing at home. In this case, if the young woman does nothing lewd, the decision on attire ought to be made by students and their parents.

Wednesday, March 11, 2009

Got Credit?

The not-so-dirty little secret in the aftermath of the economic recession is that there are plenty of people with great credit scores that entitle them to - among other things - refinance their home mortgages at historically low rates, get more favorable rates on auto loans and on credit cards.

Sounds great, doesn't it?

It might not be so great if there is another tsunami of layoffs among those who currently have platinum credit scores and take advantage of all of the offers that are circulating. I have received no fewer than 5 solicitations each week to get all sorts of credit cards, cheap home equity loans, etc. I have shredded all of them, not because they aren't great deals, but because few folks realize that 1) each time you apply for new credit, there is a risk that your credit score will go down and 2) the temptation to use that credit when you get into trouble because of a layoff or a lower or non-existent bonus that you might have counted on.

You will undoubtedly get advice from far more sophisticated people than me and I make no claim to holding a degree in home economics, but I would take $20 to your local office supply store and buy a shredder so you can keep your available credit lines within your means to pay it and avoid identity theft in the process.

My very unscientific survey of friends I know at all points on the economic scale and observations of the traffic at local NYC retailers have convinced me that we're in the middle of this crisis, not the end, and that cash is king. I prefer to leave big borrowing to the companies that actually hire people. My purchase of a pendant light at Restoration Hardware won't save a job. You might argue that a million people doing the same thing will save jobs but I'm not so sure, particularly in an environment where companies with otherwise great fundamentals have weak stock prices because of a general panic about their future.

I know, as you do, that consumer spending is vital to keeping the U.S. economy stable. Perhaps the middle ground is to borrow modestly in order to add value (or retain value) to what you already have, provided you can pay it off in a couple of months, not years. (I'll hazard a guess that reupholsterers, house painters, furniture refinishers, electricians, landscapers, auto detailers and a few other skilled trades will agree with me that small improvements that are relatively inexpensive are much less likely to get borrowers into trouble.)

If you are lucky enough to earn enough money to meet your basic obligations without new injections of credit, maybe we could all wait until we actually need something to apply for it. That need might well turn out to be borrowing for education to get the skills to take jobs that will likely be created by the stimulus package. If you use it for living room furniture, it might not be there for tuition. If you try to sell your house, no one will care that you bought nicer furniture, anyway.

I'll give you a real life example: My sister is getting married in June of this year and the rehearsal dinner will happen under a huge tent in the back yard. My mother's house is 60 years old, in decent shape, but it hadn't had a full interior paint job in 7 years and she wanted to make her extra bedrooms more hospitable for out-of-town guests by making them into little suites, including painting the bathrooms. She bought old-fashioned, small tube (but new) televisions for $75 a piece (basic cable connections for a one-time installation fee of $40), some paintable consignment furniture and tons of wall paint and fabric. She enlisted me, my aunt and uncle to help make things look crisp and welcoming. For very little money (all payable with cash), you would never know that the house is as old as it is and I am convinced that if she ever wanted to sell the place, she won't regret making it more competitive with new construction.

The other choice would have been a complete overhaul that would have cost at least $20,000. No one would have noticed that the four of us did it ourselves in one marathon week for a very small fraction of the price (and, my aunt falling off a ladder - but she's okay). The bonus for me is that the project bound my family together even more closely that I would have predicted. We tried to use local retailers as much as we could. From an environmental perspective, we re-purposed almost everything in the house. A little imagination and a lot of determination go a long way.

It would be great to think that we could just take a break from the spending orgy for a few months and then go back to normal. I think we'll be better served by redefining what it means to do ambitious things and to redefine what really matters in the long run.

I would love to hear how my friends are doing on this front. It's never easy to shift gears so quickly but I think it's really possible for most middle class people to have a great life and great surroundings without killing themselves over how to pay for it all.

I'm available for painting parties. I only ask that you order thin crust pizza with peppers and onions and, if you can tolerate it, anchovies.

Wednesday, March 4, 2009

Limbaugh v. U.S.

Someone please tell me how Rush Limbaugh has become the putative leader of the Republican Party. Is it really possible that he hopes that the country slips into a long economic depression to satisfy his desire to tip the balance of power in D.C.?

It must be pretty easy for Mr. Limbaugh to bloviate about economic policy, notwithstanding his lack of any known undergraduate or graduate education on the subject. After all, he earns millions each year pandering to an audience that froths at the mouth at the mere suggestion of a Democrat on a local school board, let alone one in the White House.

Limbaugh, no matter what happens with the economy, won't lose his house in this mess and won't have to decide whether to forgo food in order to pay for prescription drugs. (I'll refrain from making too much of the drug addiction issue because it's not terribly fair, but I would think that someone who battled addiction would have at least some sympathy for people who tried to make wise choices about their lives but were unlucky or uninformed). Among his millions of listeners, a percentage will have all of their belongings moved onto the street over the next year. Some will resort to skipping life-saving medications in order to make a house payment on a house that they will likely lose to foreclosure anyway.

Mr. Limbaugh is entitled to his opinions. The Constitution has recently done a much better job of protecting the opinions of wealthy pundits than it has in protecting its average citizens from wiretapping or the right to establish families that just happen to be headed by two men or two women.

The sad part of all of this - at least to me - is that Rush Limbaugh gets more time on the air than hundreds of smarter, more thoughtful voices that may dislike Barack Obama's policy initiatives. His brand of vitriol is exactly what I am talking about when I started this blog.

I don't begrudge his economic success, nor do I think he has nothing to offer on policy debates.
I simply think that he crossed the line when he used his incredibly powerful position in the media to argue that it is better to suffer through a devastating, worldwide economic depression than it is to permit a Democrat to use all the tools available to him to blunt its impact or stop it altogether.

I think we should call on Mr. Limbaugh to lay out a comprehensive economic plan that includes estimates on home foreclosures, bank failures, access to health care, education and a host of other important issues. Let's hold him to the standard of a Presidential campaign. The country just made a decision in November on a general direction for the country. If he had a better argument, he should have run himself. I sincerely doubt he would have received 1% of the vote. That's what gives me a great deal of hope for the country. I might be wrong but I think that Mr. Limbaugh's appeal is much more about entertainment than it is about substance.

Do we really - as a nation - care about the party affiliation of the person who fixes the mess we're in right now? I doubt it.