Back from China

I just spent about 4 days in China, in Hangzhou specifically. It still amazes me how common China's national bird, the construction crane, is. And how many McMansions there are.

Heads I Win, Tails I Win

Previously I wondered aloud why, for example, Ken Lewis, CEO of Bank of America, still has a job, amidst soaring unemployment. He ran his company into de facto bankruptcy, drove the stock price into a ditch, required massive infusions of taxpayer support, and overpaid for Merrill Lynch. If he were a plumber the house would be flooded, sewage would come out of the shower head, and there'd be no hot water. Yet he still has a job, and thousands of competent plumbers are collecting unemployment insurance.

Lewis is not just an isolated example. Why do most of AIG's corporate risk officers still have jobs? If they worked for an automobile manufacturer, they would have failed to notice that a metal knife blade affixed to the steering wheel and pointing at the driver might pose a safety hazard.

Then there's the case of Jake DeSantis, one of the 377 vastly overpaid geniuses at AIG's Financial Products group, the one that destroyed the company. He wrote a New York Times Op-Ed explaining why he still deserved a bonus. Matt Taibbi tears him a new orifice.

These cases are not isolated. They are common, even typical. Executive compensation has been totally decoupled from shareholder interests. And it's the taxpayers who own many of these companies now, or should if public officials were acting in taxpayer interests instead of grabbing money from public coffers and sending it to Wall Street, even without equity stakes.

We don't have a market economy. We have a kleptocracy, more akin to Putin's Russia or Marcos's Philippines. (I am in general agreement with Simon Johnson.) Obama is trying to get FDIC-like authority to take financial institutions into receivership if they are insolvent, and there's also a proposal that shareholders vote directly on executive compensation rather than leave such important matters to a board of directors. (Speaking of which, why, in corporate America, is a shareholder, who does not return his proxy, surrendering his vote to the current Chairman and Board, to vote as they please? If shareholders support current management, then they should have to vote as such. If they don't vote, they shouldn't count for any side.) Obama's budget proposal also helps make the tax code more progressive and close loopholes such as hedge fund compensation taxes. All these policies will help, but they won't be enough, and of course the kleptocracy is fighting them. After all, when you don't have the talent to make money the old fashioned way (by earning it), why not steal it?

AIG Monstrosity

AIG is an absolute horror now, if it wasn't already. The whole situation is blowing up in the young Obama Administration's face. For example, I doubt the President can explain why several AIG employees received million-plus retention bonuses...after leaving the company.

So what now?

Congress will pass some type of legislation raising income taxes on financial industry employees working at zombie companies. Unfortunately that legislation won't cover non-U.S. nationals who worked at AIG's London office, and there are plenty of those. The President should also ask U.K. authorities to do the same. That's the short-term fix for this narrow issue.

The President should also fire both Timothy Geithner and Lawrence Summers. They're done. It's time for a new team already. Then bring in Bill Seidman and Paul Volcker, veterans from the last banking crisis. (They are change we can believe in.) And give them carte blanche to place financial institutions into full and proper receivership, not this half-assed AIG-style receivership-without-the-benefits. It's your mess now, President Obama, so man up and take control. Didn't you read any book about FDR?

As the AIG situation so wonderfully illustrates, there are a bunch of contracts that need to be broken, starting with multi-millionaire employment contracts that are still rewarding many employees who would otherwise be guilty of criminal fraud on any other planet. Instead we are living in this "New Democrat" ideological fantasy that socialism (massive and continuing subsidies to zombie companies) is really capitalism. It's exactly the opposite! Meanwhile, the Secretary of the Treasury is cutting backroom deals with his Wall Street buddies so they can avoid the fair consequences of their mismanagement. This all stinks, and it's long past time to put these institutions into Swedish-style receivership. Otherwise it looks like we're going to have a new scandal every week.

Do you really want a new financial scandal every week, President Obama? Do you really want to spend the rest of your presidency defending the actions of de facto criminal Wall Street managers? Shut this stupidity down, now, and start with AIG, before this crisis cripples your presidency.

Larry Summers Suggests Buying Stocks

Lawrence Summers, Director of the U.S. National Economic Council, spoke at the Brookings Institution on March 13. In his remarks he pointed out that, after adjusting for inflation, the Dow Jones Industrial Average this past week dipped to the same level it was in 1966. "While there could be many ways to question this calculation, that the market would be at essentially the same real level as it was in 1966 when there were no PCs, no Internet, no flexible manufacturing, no software industry, and when our workforce was half and our net capital stock was a third of what it is today, may be regarded by some as the sale of the century."

I'm glad Professor Summers qualified this calculation. Economists generally believe that, at least in the long run and on average, the prices of financial assets (like stocks) depend on the net present value of expected future profits. (I'm oversimplifying, but only slightly.) The past is the past: PCs, the Internet, software, etc. are all reasons why investors in, say, the early 1970s could be bullish about future earnings growth and, thus, stocks. They are not reasons now.

So what events and innovations will generate future earnings growth in the U.S. economy? It's something I worry about practically every day at work, to make sure we're focused on real, sustainable growth. From our perspective that includes gaining marketshare, as long as it is profitable. Unfortunately too many actors in the U.S. economy focused on financial gimmicks to generate false bubble "growth," and we now better understand that true growth was limited.

Out of curiosity I looked at the composition of the Dow Jones Industrial Average in 1966. Here were the 30 listed companies at that time: Allied Chemical (now part of Honeywell), Aluminum Company of America (now Alcoa), American Can (now part of Rio Tinto Alcan), AT&T, American Tobacco (divided and now owned by other tobacco companies), Anaconda Copper (now only a Superfund environmental liability for BP), Bethlehem Steel (now part of Arcelor Mittal), Chrysler (now owned by Cerberus Capital Management), Du Pont, Eastman Kodak, GE, General Foods (now part of Kraft), General Motors, Goodyear, International Harvester (now Navistar), International Nickel (now Vale Inco), International Paper, Johns-Manville (now part of Berkshire Hathaway), Owens-Illinois Glass, Procter & Gamble, Sears Roebuck, Standard Oil of California (now Chevron), Standard Oil of New Jersey (now ExxonMobil), Swift & Company (now part of JBS S.A.), Texaco (now part of Chevron), Union Carbide (now part of Dow Chemical), United Aircraft (now United Technologies), U.S. Steel, Westinghouse Electric (now split up, with broadcasting as part of CBS), and Woolworth (now Foot Locker). Notice something interesting? There's not a single financial services company on the list. It really was an "industrial" average. With the exception of Sears and Woolworth (and possibly AT&T), every company on the list made something physical. In later years the Dow would add American Express (1982), J.P. Morgan (1991), Travelers (1997, which later became part of Citigroup), AIG (2004), and Bank of America (2008).

Why Are These CEOs Still Employed?

Vikram Pandit, CEO, Citigroup.

Ken Lewis, CEO, Bank of America.

Japanese Depression?

Economists are now forecasting that Japanese real GDP contracted by an astounding 12 percent in the 4th quarter of 2008, year to year. The government will report the GDP number on Monday.

UPDATE: It's bad. Very, very bad: -12.7% annual rate in Japan's 4Q2008. Nouriel Roubini tallies the global economic collapse: -3.8% for the U.S., -6% for the Eurozone, -8% for Germany, -16% for Singapore, and -20% for South Korea.

Japan's Economic Woes

Like much of the rest of the world, Japan is experiencing serious economic problems. Toyota, NEC, Hitachi, Panasonic, Sony, Mizuho Financial Group, and Honda are among the firms reporting record losses and/or (usually and) laying off thousands of workers. Japan's export-driven economy is struggling against both weak demand (at home and abroad) and a particularly strong yen.

These economic challenges certainly make working in Japan even more interesting. Our customers have always looked to reduce costs, but now there seems to be some more serious thinking about how they can improve operational efficiencies. Previously "unthinkable" structural changes are now more likely. More assumptions are questioned and rethought.

Companies are appreciating at least one unique attribute of IBM mainframes: they typically become less expensive if your business declines. That's due to something called Variable Workload License Charge (VWLC). If your transaction and batch volumes decline, you pay a lower software charge, automatically. Nothing else in IT behaves that way, so the mainframe becomes even more valuable in this environment. For this reason and several others, in both bad times and good times it's a good time to have at least one IBM mainframe.

Praise for the MacBook

After using Apple's "unibody" MacBook (what MacRumors.com calls "Revision F") for a little over a month, I'm ready to say it's a fine piece of engineering and one of the best machines I've ever owned.

It's not perfect. Apple chose a slightly mediocre LCD screen, but at least it's LED-backlit. It'd be real nice to have an ExpressCard/34 slot, which is missing. (That'd help cope with the lack of Firewire, wide area wireless, and memory card slot.) I cannot get LEAP wireless to work consistently, and I have to reboot to switch between wireless and wired ethernet for some reason, so I'm still trying to figure out Mac OS X's networking. Also, the MacBooks are a bit overpriced, especially the 2.4 GHz model. (I don't really understand why anybody would buy the 2.4 GHz model. The 2.0 GHz model is a much better value, particularly if you can shop around and get at least some small discounts and/or rebates.)

All that said, the aluminum MacBook seems to be a rugged and reliable machine. It runs cool to the touch (Apple chose some good CPUs), the touchpad works very well (once you get used to it), the weight is reasonable (4.5 lbs.), performance is good (including graphics performance), the keyboard is nice, battery life seems quite reasonable, and it "just works."

Infrastructure Now

Rachel Maddow and Rep. Peter DeFazio (D-Oregon) are exactly right.



The U.S. government really needs to put its foot down on the public capital investment gas pedal right now. And specifically that means repairing existing infrastructure, not building new roads and bridges which only promote more oil consumption. Rail is the area that needs the biggest investment, including especially real high-speed rail. Let's start with a transcontinental line from New York to Los Angeles via Chicago, Denver, and Las Vegas, also building out the Los Angeles to San Francisco line that California voters approved. And let's sketch out an initial national network map for high-speed rail, to start thinking about the second phase.

Municipal water and sewer systems need urgent investment, to eliminate leaks and improve sanitation. Superfund sites should get cleaned up more quickly and completely. Airports, particularly small airports, need help to repair decaying runways and upgrade safety systems. And there should also be an integrated national plan to preserve existing airports and build a few new ones in areas of clear geographic need. For example, Chicago needs a new urban reliever airport closer to downtown. Cities need sensibly targeted urban renewal funds, to expand green space and support high density, mass transit-friendly redevelopment. Pollution control is desperately needed, especially for coal-fired plants and industries. Utility grids need more investment, especially if they will need to support new electric vehicles. Public utilities need funds to build new nuclear plants and other non-greenhouse gas energy plants. (Yes, I said nuclear.) Wetlands preservation and restoration is vital to restoring ecosystems and protecting against flooding. And, with all of this (and more), why not throw a few dollars toward artists who can help make this infrastructure more beautiful?

The U.S. need jobs, both in the short term and in the long term. There's no better policy prescription than for the federal government to spend aggressively in these and similar areas. Let's hope sanity prevails in Washington. Otherwise, the recession will be deeper and longer than necessary.

UPDATE #1: Just to give you some idea of what should be possible with real high-speed rail, a pure, dedicated ~300 Km/h dual track line (with some intermediate station sidings, such as Cleveland, Des Moines, Omaha, etc.) should be able to provide New York to Chicago nonstop express service in 4 hours, Chicago to Denver in 5, Denver to Las Vegas in 3.5, and Las Vegas to Los Angeles in well under 90 minutes. (Those would be your express stops on the fastest through trains, adding Omaha when phase 2 gets built.) For those of you who say that coast-to-coast doesn't make sense, keep in mind that coast-to-coast is the most efficient because it provides the most possible city pairs addressing the needs of the maximum number of travelers. It's much like how Southwest Airlines runs its planes. Also, in many places the high-speed rail station should be co-located with major airports or at least co-located with direct mass transit connections to those airports.

UPDATE #2: A "phase 2" high speed rail line might trace the other diagonal across the country, from Miami to Seattle, probably via cities such as Orlando, Atlanta, Nashville, St. Louis, Omaha (for interchange with the first line), and Portland. (There aren't a whole lot of cities on the great circle between Omaha and Portland, though.) After that there would be obvious built-out options, such as from San Francisco to Portland and an extension from Seattle to Vancouver. But that core "X" pattern probably yields the highest value and the most national of networks as quickly as possible. It makes possible and reasonable trips like Seattle to Cleveland, Miami to Denver, Las Vegas to Atlanta, etc.

Citizenship

Last month the Italian government recognized my mother as an Italian citizen. Which means, as an adult, I now have a year to file an Italian citizenship application of my own if I choose.

It's a fascinating story, and at some point I'll relate more details.