Globalization

AIG Gets More Money, Agrees to Split Up

What the global financial system is going to look like in a few months is anyone's guess.  From the FT:

AIG will on Monday announce a radical plan to break itself up after 90 years as a global insurance conglomerate by ceding control of its two largest divisions to the US government in exchange for a $30bn-plus lifeline.

The move, aimed at helping the stricken insurer absorb the blow of huge losses, is the third time in five months AIG has been bailed out by the authorities. Coming shortly after the third government rescue of Citigroup, the decision to save AIG could fuel mounting public anger.

Or as Jake wrote the other day, welcome to The Dukes of Moral Hazard. Be sure to read Joe Nocera's great piece about AIG from yesterday's NYTimes.

Is this now nationalization by another name?  

Dispatches From A New Political Era

I've been in Washington for 16 years now, coming as many did with President Clinton back in 1993.  I have seen a lot of changes in my time here, but the rate of change we are witnessing today is breathtaking.  Just take a look at a few of the headlines today from a vastly changed political and societal landscape:

Economy Shrinks at Staggering Pace

Obama Announces Iraq Withdrawal Plan

AIG Faces Possible Breakup

Part of Denver's Past, the Rocky Says Goodbye

Broadcast TV Struggles to Stay Viable 

Obama's Greenhouse Gamble

Top Officials Expand Dialogue on Race

Playing With Fire In Pakistan

'Great Society' Plans for the Middle Class

The Bill That Could Break Up Europe

There are large and systemic changes underway here in the US and around the world. 20th century challenges, institutions, ideologies, economics, media and even racial understanding are being swept away.   A new global political era is surely emerging now, unfolding in front of us, one that our new President is both responding to and attempting to shape.  The President's ambitious budget this week was itself the most powerful examples of how much our politics is in the process of changing.  

I end my quick morning post with an excerpt from Joe Nocera's column from the New York Times today.  Nocera has been writing as intelligently as anyone about the financial and economic crisis, and this column, Propping Up A House of Cards, is an absolute required read: 

Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.'s sorry status as the most crippled of all the nation's wounded financial institutions. The recent quarterly losses suffered by Merrill Lynch and Citigroup - "only" $15.4 billion and $8.3 billion, respectively - pale by comparison.

At the same time A.I.G. reveals its loss, the federal government is also likely to announce - yet again! - a new plan to save A.I.G., the third since September. So far the government has thrown $150 billion at the company, in loans, investments and equity injections, to keep it afloat. It has softened the terms it set for the original $85 billion loan it made back in September. To ease the pressure even more, the Federal Reserve actually runs a facility that buys toxic assets that A.I.G. had insured. A.I.G. effectively has been nationalized, with the government owning a hair under 80 percent of the stock. Not that it's worth very much; A.I.G. shares closed Friday at 42 cents.

Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes, by which time the company will almost surely have been broken into pieces, with the government owning large chunks of it. A quarter of a trillion dollars, if it comes to that, is an astounding amount of money to hand over to one company to prevent it from going bust. Yet the government feels it has no choice: because of A.I.G.'s dubious business practices during the housing bubble it pretty much has the world's financial system by the throat.

If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks "will face their own capital and liquidity crisis, and we could have a domino effect." A bailout of A.I.G. is really a bailout of its trading partners - which essentially constitutes the entire Western banking system. 

More Signs of Trouble Ahead

From the NYTimes:

The economy at the end of last year contracted at a far faster rate than initially estimated, a government report released Friday said, suggesting that the recession may be deeper and more severe than recent projections have indicated.

The country's gross domestic product fell at an annualized rate 6.2 percent in the last quarter of 2008, the steepest decline since the 1982 recession. Economists are expecting a similar drop in the first quarter of 2009.

"What a ghastly report," said John Ryding, chief economist at RDQ Economics. "This will almost certainly be the longest postwar recession, and now potentially the deepest one as well."

The Globalization of the Movies

In her comments last night Penelope Cruz offered up a wonderful recollection.  When she was young, as a child in Spain, she would stay up late - yes very late - to watct the Oscars.  It was a night, she said, where the whole world came together, as one.  In this time of global economic struggle and fear it was a compelling way to start the night.  

To get a window into how global Hollywood and the movie business has become consider that the host of the Oscars last night was Australian, as was the Best Supporting Actor. Ms. Cruz won her statue for a bi-lingual role in an American film that took place in Spain.  Best Actress went to a Brit, and of course, the big winner of the night was Slumdog Millionaire, about, well, you know by now.   The lone American up there last night for the big ones - Sean Penn, for Best Actor.

It reminded me a litle bit like watching a European soccer match.  Each time my kids and I watch a Barcelona or Man U match we send up spending time looking at a globe, trying to locate places like Cameroon as the players now are truly from all over the world, and these teams wildly globally integrated.  We often wonder how the coaches and players talk to one another, what language is common to them all.  

No complaining about all this from this source, just something powerful to remark upon.  It reminds us that at this moment when protectionism and tribalism might very well start to make a comeback in our global life, there are powerful forces of integration and "flatness" that will be hard to overcome.  As Ms. Cruz said last night, that powerful sense of being one with the world is what sticks with her to this day. 

But it also does reflect what Fareed Zakaria has callled the "rise of the rest."  While America does still stand tall throughout the world, the rest of the world is in the process of figuring out our game.  For us to stay ahead, to stay pre-eminent, we will - all of us - have to try much much harder in the years ahead.  Global competition has increased on all fronts, and this idea - that we must do more, raise our game - must be one of the more powerful sentiments driving our "recovery" in the years ahead. 

Sunday Roundup: China's weakening economy, Lessons from Japan, On Liberalism

A selection of things I found interesting this weekend. From the Economist

A SMALL stretch of land, a two-hour drive from end to end, reveals much about the economic transformation of a vast country. This slice of southern China runs from Guangzhou, the old treaty port reserved for foreigners before Mao expelled them, to Shenzhen, the city established after Mao's death as an experiment in private enterprise. Over the past decade it has become one of the world's fastest-whirring economic engines-a global hub in the manufacture of clothing, shoes and electronics-serviced by tens of millions of migrant workers.

Now the region is undergoing an equally remarkable contraction. In the past year thousands of factories, perhaps one-third to one-half of the total, have closed. Reliable statistics are hard to come by, not least because many factories operate in a legal netherworld, but the severity of the slump is plain. The flow of migrants has gone into reverse. Some of the newly unemployed have stuck around (and a few have started a new industry: street crime). The lucky ones have found work at factories that moved inland, although at lower pay.

On the road through Dongguan, a sprawling industrial city roughly halfway between Guangzhou and Shenzhen, building after building-residential as well as industrial-displays red banners advertising its availability. Local agents say there is no interest from buyers. A lack of demand for whatever a factory might make is part of the explanation. So is concern about the quality of properties for sale: a lot of factories were put up in a hurry and have been maintained poorly if at all. And so is the nebulousness of Chinese property laws. Purchasers cannot be sure that what they buy they will truly own.

The rapid collapse of economic activity around Dongguan indicates that China's private companies are being subjected to the same battering as their counterparts in many other countries. Yet it also raises questions about the long-term survival of many of these companies. They have been among the most dynamic components of China's fast rise towards prosperity. Their turmoil may be transient. Then again, there are also worries that it is in fact tied to profound flaws in the Chinese economy.

From a New York Times piece today about lessons from Japan's Lost Decade

As recession-wary Americans adapt to a new frugality, Japan offers a peek at how thrift can take lasting hold of a consumer society, to disastrous effect.

The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japan's economy.

Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming '80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.....

"Japan is so dependent on exports that when overseas markets slow down, Japan's economy teeters on collapse," said Hideo Kumano, an economist at the Dai-ichi Life Research Institute. "On the surface, Japan looked like it had recovered from its Lost Decade of the 1990s. But Japan in fact entered a second Lost Decade - that of lost consumption."

The Japanese have had some good reasons to scale back spending.

Perhaps most important, the average worker's paycheck has shrunk in recent years, even after companies rebounded and bolstered their profits.

That discrepancy is the result of aggressive cost-cutting on the part of Japanese exporters like Toyota and Sony. They, like American companies now, have sought to fend off cutthroat competition from companies in emerging economies like South Korea and Taiwan, where labor costs are low.

To better compete, companies slashed jobs and wages, replacing much of their work force with temporary workers who had no job security and fewer benefits. Nontraditional workers now make up more than a third of Japan's labor force.

Sounds a little too familiar for my taste.  As I wrote recently in a series of posts about Spend? Save? I still think the economic narrative being used in Washington today does not adequately take into account what happened to the incomes of everyday Americans during the Bush Recovery.  Jake Berliner also posted on this subject last week.  

And finally, Leon Wieseltier, writing in the New Republic

Can liberalism still explain itself? Does it remember its concepts and its words? It has been many decades since liberalism could fall back upon the power of platitudes; the platitudinous authority now belongs to the other side. Cliche may represent a failure in literature, but in politics it is the evidence of a philosophy's success. The repudiation of George W. Bush is not in itself a renovation of liberalism, and neither is the apotheosis of Barack Obama. The public has not yet broken the grip of the conservative discourse that has dominated America for a generation. Consider the insane headline on Newsweek's cover, "We Are All Socialists Now": an exclamation of its inner Hannity, as if the president is preparing to abolish private property or expropriate the means of production. All that is happening, comrades, is that our democratically constituted central government is acting to protect the whole of our economy by taking over, for a period, a part of our economy. But second natures, which are made more by culture than by thought, are not easily extinguished. Sean Wilentz was shrewd to contain the Clinton years in his recent study of "the age of Reagan," because Bill Clinton's inglorious role in the history of liberalism was to teach it to sleep with its enemy. Insofar as his renunciation of ideology was the revival of an experimental frame of mind about public policy, the good sense of "best practices," it was a welcome turn; but it was also a lousy defeatism about the war of ideas, a loss of interest, or of nerve, about first principles. On the day that Clinton pragmatically announced that "the era of big government is over," liberalism forgot itself. Pragmatism has a dark side. The allure of pragmatism was lost on the conservatives, of course. They sought power so that they could act on what they believed. And when they got their chance, they ran the republic down in almost all its aspects. We must not draw the wrong conclusion from the rubble. The problem was what they believed, not that they believed. 

Amen to that I say.  

I visited this subject in a recent post, The Utter Bankruptcy of Today's Republican Party and agree with Mr. Wieseltier that the President must make the choice the nation has in front of it much starker.  It is possible for our new President to love the sinner but hate the sin; to work with Republicans but reject their irresponsible and reckless approach to governing.  To accept their failed notions as a price for cooperation is a steep steep price for the nation to pay at this time where our great national project is dig ourselves out of the whole they dug for all of us.

Economic Recovery? No, Just Pass the Cannoli

On Wednesday I went on Fox News to talk about the stimulus.  Or so I thought.  Fox anchor Neil Cavuto ended up spending more time talking about cannoli and weight loss than the struggle of every day people and the American economy.  Check it out:

 

The Choice: Recovery vs. Drift and Decline

Each day you can feel the media and the public grow slightly more aware of the gravity of the economic problems facing America and the world.   We are all still getting our arms around this economic moment, and like Paul Krugman's column today, the emerging conventional wisdom is the recovery is going to be long and hard - longer and harder than any other recession since the Great Depression.  I feel, each day, that it is more and more apparent that we are living in no ordinary time - that the decisions made by our leaders in the days ahead here and across the world will be ones of great consequence.  Ones that will lead to a prosperous and peaceful 21st century; ones reinforcing the drift of the moment, the inability of our politics to face our challenges forthrightly; ones that could indeed make matters much much worse. 

Tuesday night the President will address the nation from the Capitol.  Once again the nation, and the world, wlll be watching.  It will be a critical opportunity for our new President to lay out the challenges we face and the solutions he envisions.  I hope he takes the opportunity to more clearly define the choice we face.  For I don't think the choice is between forward and backward any more, or between progress and failed old ideas.  I think it is a graver choice, a starker choice, a much more serious choice - one of recovery, global stability and national greatness versus continued drift, global chaos and national decline.  

As the saying goes times of crisis are also times of great opportunity.  It is increasingly clear the task of the Obama Presidency will be a great one - to prevent the world and the US from sliding into economic and political chaos, to chart a domestic and global path for recovery, and to update the successful but aging geopolitical architecture forged by FDR and Truman for a new day and a new century.  No small tasks these.  But these are the tasks that are in front of us now.  To put it simply - it is time to remake and renew the world, to offer a "new politics" on a global scale.  

If history is any guide creating this new global architecture that allows us to better manage the collective challenges in front of us won't be easy, or without pain.  Mistakes will be made, years and nations lost.  But it is now the great challenge facing our nation, whose role in the world is different from the rest.  And it will now be at the very center of our politics for perhaps decades to come.  I am anxious to see how the President talks about all this on Tuesday night, the most important night yet of his already historic Presidency.  

Krugman Today

Earlier this week, the Federal Reserve released the minutes of the most recent meeting of its open market committee - the group that sets interest rates. Most press reports focused either on the Fed's downgrade of the near-term outlook or on its adoption of a long-run 2 percent inflation target.

But my eye was caught by the following chilling passage (yes, things are so bad that the summarized musings of central bankers can keep you up at night): "All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation."

So people at the Fed are troubled by the same question I've been obsessing on lately: What's supposed to end this slump? No doubt this, too, shall pass - but how, and when?

Read on. It isn't pretty.

Soros on the Global Economic Crisis

Last Thursday George Soros published a piece in the Huffington Post, an excerpt from his new book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.  To get a true sense of the difficulties ahead from one of the world's most creative thinkers, I recommend reading this piece, and picking up the book. From what I've read so far it is a very helpful guide to understanding what is happening today, and contributes some important ideas to the debate about what to do now.   I particularly like his thoughts on how to remake the domestic mortgage market.

The Huffington Post article begins:

The bursting of bubbles causes credit contraction, forced liquidation of assets, deflation, and wealth destruction that may reach catastrophic proportions. In a deflationary environment, the weight of accumulated debt can sink the banking system and push the economy into depression. That is what needs to be prevented at all costs.

It can be done by creating money to offset the contraction of credit, recapitalizing the banking system, and writing off or down the accumulated debt in an orderly manner. For best results, the three processes should be combined. This requires radical and unorthodox policy measures. If these measures were successful and credit started to expand, deflationary pressures would be replaced by the specter of inflation, and the authorities would have to drain the excess money supply from the economy almost as fast as they pumped it in. Of the two operations, the second is likely to prove both technically and politically even more difficult than the first, but the alternative--global depression and world disorder--is unacceptable. There is no way to escape from a far-from-equilibrium situation--global deflation and depression--except by first inducing its opposite and then reducing it.

The size of the problem is even larger than it was in the 1930s. This can be seen from a simple calculation. Total credit outstanding was 160 percent of GDP in 1929, and it rose to 260 percent in 1932 due to the accumulation of debt and the decline of GDP. We entered into the Crash of 2008 at 365 percent, which is bound to rise to 500 percent or more by the time the full effect is felt. And this calculation does not take into account the pervasive use of derivatives, which was absent in the 1930s but immensely complicates the current situation. The situation has been further aggravated by the haphazard and arbitrary way in which it was handled by the Bush administration. The public and the business community suffered a shock in the aftermath of the Lehman Brothers default, and the economy has fallen off a cliff. The next two quarters will show rapid deterioration.

To prevent the economy from sliding into a depression, President Obama must embark on a radical and comprehensive policy package that has five major components:

1. A fiscal stimulus package
2. A thorough overhaul of the mortgage system
3. Recapitalization of the banking system
4. An innovative energy policy
5. Reform of the international financial system

Read on here for more, or visit Mr Soros' website here.

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