Good Bye Mr. Chernin

Andrew Edgecliffe-Johnson writes about Peter Chernin as the FT's man in the news.

Chernin recently announced he is leaving News Corp. Perhaps he is frustrated being the prime minister when only blood relatives can aspire to be king or queen. Mr. Murdock's generation of heirs through serial monogamy might have contributed.

Not everybody's golden parachute includes the start up of your own independent production company.

Down with Bono; Up with Kiva

Why is Africa such an economic basket case? Is there hope for the Dark Continent? Are Hollywood celebrities and foreign aid destroying Africa? For a non conventional answer listen to Dambisa Moyo, an economist with degrees from all the right places and until recently a Mistress of the Universe for Goldman Sachs (no she doesn't resemble Sherman McCoy or Tom Hanks who was physically miscast as him in the movie. The movie still worked in its own right.) Dambisa Moyo says no aid, no celebraties, and if you want to finance jobs, cut out the middlemen and women through microfinance like kiva.org.

"I wish we questioned the aid model as much as we are questioning the capitalism model. Sometimes the most generous thing you can do is just say no."

Economic Policy: Where Do We Stand Now?

The economy won President Barak Obama his job and the economy is the focus of his agenda. Given the speed of events, it is not too early to assess the administration's economic policy and the key issues confronting us.

The administration's economic policy is a three legged stool. The first leg is the new bank rescue package; the second is its trade policy; and the third is the stimulus package. By the end of last week it already seemed a bit wobbly.

Treasury Secretary Timothy Geithner has the lead on the first two and he had a rough week.


Preventing a banking collapse is crucial. How do we prevent the debacle on Wall Street from destroying the banking system which must fund economic recovery? It was the collapse of the banking system that was the biggest reason an ordinary recession in 1929 turned into the Great Depression.

Geithner introduced the administration’s bank rescue plan on Tuesday and how did security markets react? They dropped like a rock. The stock market fell 4.6% in the first half hour after his speech was released. Bond prices fell. Markets around the world followed suit. Martin Wolf, the associate editor and chief economics commentator at the Financial Times (London), asked "Has Barack Obama’s presidency already failed?" Geithner’s plan lacked specifics and gave no indication that it would work.

Back to the drawing board.

The second leg is trade policy. Protectionism is a monster that must be caged. Trade is so crucial, but seems to be the most backburner of issues in the news. How do we avoid a return to the trade wars of the 1930s? The collapse of world trade was the second most important reason the 1929 recession turned into the Great Depression. The U.S. passed the Smoot-Hawley Tariff in 1930, Canada promptly retaliated before the law was even enacted. One nation after another tried to steal trade from the others by devaluing its currency and/or raising tariffs. As each tried to pull itself up by pulling down its mates, they all crashed to the floor. The nineteenth century's great age of globalization came to a final end. Will we learn from the past? For as Ben Franklin put it, "We must all hang together, gentlemen...else, we shall most assuredly hang separately."

America must lead the battle against protectionism. So far the new administration has been more a source of worry than leadership. As candidate Obama, the President advocated protecting American jobs on the campaign trail. That doesn't help. Congress tried loading the stimulus package with "Buy America" provisions. Even before being confirmed as the new Treasury Secretary, Geithner started out bashing China, but then had to backpedal when the finance ministers of the G-7 (i.e., the main economies) met in Rome. Peer pressure? After all, China's $581 billion stimulus package might do more to help slow the global downturn than Congress's many headed monster. Japan's decline at a double digit annual rate (see yesterday's posting) emphasizes how this is a global economic downturn with each country's decline feeding its falling domestic demand back to its trading partners.

And the third leg is the stimulus package: How do we get the economy jump started? Here the administration left the job of putting a stimulus package together to Congress, an institution whose approval ratings rank below those of former President Bush and used car dealers. The result is a package many people doubt will do the job but will blow up the deficit. It managed to unite the Republican opposition, no mean feat.

So even as the President basks in his Congressional victory on the stimulus package, his economic team is licking its wounds after a tough week. Managing economic policy is proving more difficult than campaigning against the status quo.

Monetary Policy: Meanwhile the Federal Reserve faces the daunting task of being ready to turn on a dime once (should I say "if") normality returns to financial markets. The explosion of the Fed's balance sheet poses major threats to its ability to conduct policy. When it turns the corner of the banking crisis and maybe sooner, the Fed faces the Sylla of a run on the dollar and the Charybdis of exploding inflation. That we should have a Ben Bernanke as Fed Chairman at this peculiar time and place seems providential. I do not envy him.

I must add Ben Bernanke to my ever lengthening list of causes to pray for.

Bigggest Quarterly Japan's GDP Drop Biggest Since 1974

Australia's News.com.au reports, "Japan's economy shrank at an annualised pace of 12.7 per cent in the fourth quarter of 2008 - its worst performance since 1974 - as the recession deepened, official figures showed.

"Asia's largest economy contracted by 3.3 per cent in the three months to December from the previous quarter as exports and factory output slumped due to the global economic crisis."

GDP declined for the third straight quarter as the world economy pulled Japan's economy down: "Exports plunged 13.9 per cent from the previous quarter as demand for Japanese cars, electronics and other goods slumped in recession-hit overseas economies."

Inflation is Bad, What about Asset Price Inflation?

You may be surprised to know who wrote "By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some." The author is one of the finest economists of the twentieth century, an economist much mistreated by both his enemies and his followers, John Maynard Keynes. The quotation is from one of my favorite books, The Economic Consequences of the Peace. (Thurston Veblen reviewed the book with an ideological prism that seems quaint in retrospect.)

Note Keynes was an inflationist only in the starkly deflationary post-World War I Britain which returned to the Gold Standard at the pre-war parity. This policy forced Britain into a difficult deflation of prices and a real economic adjustment of heart wrenching dimensions. The alternative was to have Britain devalue the pound, undermine London's position as the world's capital market, and effectively default on its war debt (i.e., "Here we will pay you back the war debt, but with pounds that buy less in gold.") Britain chose economic and human disaster over financial disaster, although the choice was less obvious than my words suggest.

Why is inflation bad? It creates arbitrary redistributions of wealth and it distorts incentives. The lesson our current financial custodians fail to understand is that over expansions of credit sometimes result in the inflation of asset prices rather than the inflation of commodity prices: it inflates the prices of stocks rather than flows. But that also is unfair. They may perceive that positive conclusion. What they may fail to understand is its normative implication that asset price inflation is bad: that it too creates arbitrary redistributions of wealth and distorts incentives. Anyone who doubts that should look to the asset price bubbles of the late 1980s (house prices in New England and California); the dot com bubble of 1995-2000; and the housing bubble of 2004-6. Each created arbitrary redistributions of wealth. Each distorted incentives and created a misallocation of resources. Misallocations of resources can not be undone without pain.

In 2002 through 2004, Alan Greenspan worried about deflation: Commodity prices might fall! As the comedian in the Catskills might say, "We should have been so lucky already!"

Corrections made 1/31/2011

Unemployent Goes to 7.6%; 2008 Payrolls Revised Down

This morning's employment report from the Bureau of Labor Statistics (BLS) shows a drop in payroll employment of almost 600,000 and the unemployment rate jumping to 7.6%.

Surprise, surprise, the BLS revised their estimates of payroll jobs in 2008 by about 350,000! The BLS's method for truing up the jobs data can not help but fail during recessions. Accuracy when the economy is in trouble does not appear to be high on its priority list. The latest revisions do not appear to have changed the timing of the recession as recorded in the data. The unemployment rate hit bottom in the spring, 2007 and payrolls peaked in November/December, 2007. When we can lay our hands on more details than are available in the press release, we can be more precise.

Closer to home, aerospace employment fell some 9,000 in January. This does not necessarily reflect the flood of layoffs announced in general aviation this past week (Cessna, Hawker-Beechcraft, and Bombardier.)

Do the Austrians help Understand History?

Here is Thomas E. Woods, Jr. with a perspective on history based on Austrian Business Cycle Theory:



You can also read his "What Austrian Economics Can Teach Historians" on the Ludwig von Mises Institute website.

Plain Vanilla Banks Must Wax and Wall Street Must Wane

John the Baptist told his disciples, "He must increase, but I must decrease." (John, 3:30.) I doubt we will see the same humility from the Masters of the Universe, those investment bankers whose universe has come crashing down on all of us.

The harsh reality is that commercial banks must wax while Wall Street wanes. Over the last fifty years security markets have grown enormously at the expense of plain vanilla banking. Wall Street's juggernaut has finally ended and the whole world is suffering from the hangover. The metaphor is apt: early British visitors of India coined the term, "juggernaut" to describe their highly colored description of Hindu processions. They maligned Hindus as drugged frenzied fanatics who in the processions for their Lord of the Universe would throw themselves under the cart wheels to be crushed in the insane state of their delirium. Does that sound like the buyers of many financially engineered securities?


John Kay with his usual perspicacity and disdain for cant, advises us to "Wind down the market in five-legged dogs."

What's that you say? Read on:

"Abraham Lincoln posed the question: “How many legs does a dog have if you call a tail a leg?” Honest Abe’s answer was four. A tail is still a tail even if you call it a leg.

"The world of finance is a bit more complicated, but not much. How can a package of loans be worth more than the sum of their individual values? The amount borrowers pay is just the same even if you call the loans an asset-backed security or a collateralised debt obligation."

As usual his analysis is good economics and good sense. Do read it all.

One implication is that both the City of London and Wall Street will have to shrink, but that, in my opinion, is a good, necessary, but painful reality.

To quote John Kay's conclusion: "The objective should not be to revive the originate and distribute model of banking, which has demonstrably failed, but to secure its orderly winding down. Banks should retire to the traditional and profitable business of taking deposits to make loans: the business we want them to do and the business they really understand. The British government plans to provide insurance for new asset-backed securities. That is like helping a junkie to detox by guaranteeing drug supplies until the local dealer resumes normal service."

Is 2009 the Year the Credit Crunch Crimped the Aircraft Industry?

2007 was a boom year for the airline industry. The new year is so far characterized by caution and layoffs that are shedding the workers the industry just hired last year.

The Wall Street Journal's Daniel Michaels and David Pearson report that "Airbus, which just finished a record year of plane deliveries, is now preparing contingency plans to cut production if demand for jetliners weakens significantly." They cite Airbus Chief Executive Tom Enders as their source.

Furthermore Boeing and Airbus are building plans to offer customers financing, never an appealing choice. This bitter pill is to be swallowed because financing for new plans has dried up along with so much other credit. Mr. Micahels and Mr. Pearson quote Bertrand Grabowski, a managing director of German bank DVB Bank SE, "Airbus and Boeing definitely will have to cut production because there will be aircraft that cannot be funded." DVB Bank SE funds aircraft purchases.

Still more evidence that Wichita's economy is becoming more vulnerable to the global economic forces that have laid most major economies low.