Saturday, September 27, 2008

Interesting Reactions Worldwide - What Years of Neglect and Lack of National Policy is Creating

Remember, we've been talking about the Post-American era that is coming soon, where there is not 1 superpower [Aug 19: Coming Soon: A Post American World], but due to its self inflicted wounds and gluttony, the "Rise of the Rest" (Fareed Zakaria) will occur (if you are new to the blog I'd highly recommend reading this post from May) Remember, we are shouted at daily ("We're #1") that the US led the world into this mess, and we'll lead them out. I believe differently. This is such a deep rooted mess, the rest of the world will lead us out, not vice versa. We'll know in a few years but I wrote often in fall 2007 that we have a very inward looking ("if it doesn't happen in America, it doesn't matter") arrogance about us. So of course WE will lead the rest of the world out of this mess... no one else is strong enough. This is a global world, with competitors running at us hard and fast - the quicker we get out of our inward gaze and realize this - the better. Perhaps being taken down a few rungs will help us on that path... I hope so. But we'll see. We have very short memories.

We talked a few days ago about the reactions in Asia and Europe [Views of the US from Abroad] - remember during the late 90s Asian crisis we berated those "2nd world countries" for not allowing the free market to work, and to stop their darn government interference - take the pain and join us "in the light" as free market capitalists. If they did not, we would not allow the IMF (International Monetary Fund) to give them loans - that's what bullies do. Now it's biting us in the rear. From my reading in the online UK papers, a lot of Asians feel quite smug about what happened here now, and how we turned into hypocrites when we do not practice what we preach.

Before the meat of the post - remember we're the world's biggest debtor. We are hostage to our creditors - our creditors wanted us to nationalize Fannie/Freddie since they held the paper - they got what they wanted. Our creditors are now worried about us as a whole. Without our creditors our system collapses. Here is what our creditors are saying now
  • Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.
  • ``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''
  • Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.
  • China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added. ``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.'' (translation - we own you. You do what we want you to do - we sell our US debt holdings into the open market, and your dollar turns into toilet paper and your system fails. Did I mention we own you?)
  • Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said. (it's really no different than our energy policy. Ooops, did I say policy? I meant non policy. We don't control our destiny so when oil gets too high we send our VP to Saudia Arabia to beg for more oil outflow - the parallels are striking - begging those who support us to keep the flow (oil, debt) going - this is how it works when you have no national policy and every decision is made for a 4-6 year political cycle and "how can I pander and get re-elected" instead of a 20-30 year vision) ``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''
  • The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' ``This is paper and it may default and it will not increase China's national welfare.'' (scariest comment in the whole piece. Once more, if the rest of the world ever decides to stop buying our debt and financing our lifestyle and consumption - we're done - on our current path I think it happens within 15-20 years and the US defaults on its debt like some 3rd world banana republic but I'm an outlier on that one)
On to Europe - here are some interesting reactions from Germany.
  • Germany blamed the United States on Thursday for spawning the global financial crisis with a blind drive for higher profits and said it must now accept more market regulation and a loss of its financial superpower status.
  • German criticisms of Washington were echoed by leaders of governments from around the world meeting this week at the United Nations in New York. Many criticized the financial record of President George W. Bush's administration and warned that U.S. financial mistakes now threatened the global economy. It has emboldened voices in Europe, Latin America and elsewhere, who are uncomfortable with American-style capitalism and who want tighter regulation of markets.
  • German Finance Minister Peer Steinbrueck said the U.S. will lose its position as the world's undisputed financial ``superpower'' and called for a ban on speculative short-selling to help restore the global economy.
  • Steinbrueck, in a speech on the financial-market crisis to lawmakers in Berlin today, set out an eight-point plan urging greater regulation and larger capital reserves for banks. He championed the German banking system over its U.S. counterpart, dismissing the ``Anglo-Saxon'' model as having ``an exaggerated fixation on returns, along with a lack of political backbone to stand up to what he characterized as bankers’ greed. “Investment bankers and politicians in New York, Washington and London were not willing to give these up,” he said.
  • ``The long-term effects of the crisis are impossible to gauge,'' Steinbrueck said. ``One thing seems probable to me: The U.S. will lose its status as the superpower of the global financial system. The global financial system will become multipolar.''
  • Steinbrueck's comments underline a deepening divide between European and U.S. attitudes to the financial system and how to resolve the rout triggered by the worst U.S. housing slump since the Great Depression. European members of the Group of Seven leading industrial nations refused to back a U.S. bank-rescue plan Sept. 22, with Steinbrueck saying that the U.S. situation ``is not comparable'' to that in Germany.
  • Steinbrueck said that sovereign wealth funds and banks from Asia, the Middle East and Europe will play a bigger role in the new financial world. In the medium- and long-term, ``new pledges of voluntary action or self-regulation by the financial sector'' will not resolve the current crisis, he said. (hey, self regulation has worked like a charm so far!) ``That's not enough,'' he said in the speech. ``For me the important answer is stronger, internationally agreed regulation at the international level because the crisis goes beyond measures that can be taken by nation states.'' (yes but our financial firms have the lobbyists - so we'll agree to your international standards and higher regulation for a while but give it about 4 years and we'll loosen all the regulations we'll put into place slowly behind the scenes, and have a new disaster in about 8 years - it's all about the bottom line baby - those who pay, set the rules here - under our newly found socialist veneer, the self serving capitalist lives. Remember all those post Enron and Worldcom regulations??? Did it matter?? They were loosened once the fuss and attention turned to something else. You can't stop a capitalist where the compensation structure is set up to take the most risk to achieve generational wealth in just a few years - and by the time it blows up you're "golden parachuted" and someone else is left to clean the mess)
  • Steinbrueck, in his speech to the lower house of parliament, the Bundestag, blamed the U.S. as the source of the current crisis that will leave ``deep scars'' globally. ``The U.S. is the origin and the clear focal point of the crisis,'' Steinbrueck said, adding that the ramifications are now ``spreading worldwide like a poisonous oil spill.''
  • ``In my view, it's the irresponsible overemphasis on the `laissez>-faire' principle, namely giving market forces the most possible freedom from state regulation in the Anglo-American financial system.''
  • French President Nicolas Sarkozy, whose country holds the rotating EU presidency, has called for a global summit to overhaul what he has called a "crazy" financial system. (in the old days we could say "those damn socialists - why listen to them" - but frankly we are the damn socialists now so we can't use that excuse)
Note - this is not an anti-American rant. And it is so tiring to hear "why should they say anything because they would not even be around if we didn't save them in WWII" That excuse to ignore everyone in the rest of the world worked for the past 70 years - at some point it becomes useless. This is a "we need to stop being so arrogant and realize we're in a new interconnected world, and we don't have all the answers" rant. Or that we've build a system on excess and gains to fewer and fewer people (with no accountability) and eventually the dam bursts. Or if I'm anti-American for preaching such views, I guess so is Jack Welch.
  • Former General Electric Co Chairman and Chief Executive Officer Jack Welch said the U.S. economy faces a deep downturn in coming quarters, and he supports a proposed $700 billion government rescue package for the financial sector. "I now believe we are in for one hell of a deep downturn," Welch told the World Business Forum in New York on Wednesday, adding that the first quarter of 2009 will likely be "brutal."
  • Welch said mortgage lenders, legislators, investment bankers and others are all to blame for the crisis, which stemmed from easy credit and investors' appetite for yield. "The problem was money didn't cost anything," Welch said. "People took swings."
  • He likened the crisis to Agatha Christie's "Murder on the Orient Express," in which all the suspects turn out to be guilty; but he singled out the role of investment banks in the crisis. "We have to look at the damn investment bankers," he said. "They're playing with other people's money. The only penalty was a cut in their bonus, not their head."
Jack, that's what I've been saying - corporate America lives in a "heads we win, tails we win" executive compensation system. You take high risks, try to achieve as much compensation as possible by "beating the numbers" anyway possible and ride off in the sunset with generational wealth for your great grandkids. (hedge funds too) If you succeed - you make alot of money. If you fail - well - the outcome is NO different! You make a lot of money. The boards who determine your pay are filled with cronies, friends, and other CEOs! What a system!

There is no losing in our top echelon compensation culture and this is the result of it. Go ask Bob Nardelli and his $200M be bilked out of Home Depot. For getting fired. Anyone who argues against it is called a socialist and says if we don't pay these people the highest dollar then America will lose all its CEOs. Sure, why not - I mean terrible companies in Europe somehow are surviving by paying their CEOs far less - how are they competing globally without giving away the store to 2-3 men at the top? It's a wonder all those European and Australian and Asian companies are not bankrupt without paying their CEOs 275x the average worker. I mean 100x is outrageous - how can a CEO survive? Somehow in the US we had good companies in the 60s and 70s and 80s when CEOs did not make 250x the average wage of the worker. Somehow America did ok then? I know, I know - I'm a socialist for even bringing it up - but aren't we all now?

I've always said boxing would be a far better sport and regain its luster if it was "winner take all" - compensation systems can be tweaked for better outcomes. I've said, we'd have far fewer trials and need for lawyers (America has 80% of the world's attorneys) if the loser of the trial had to pay all costs. That would make people think twice about filing wasteful lawsuits. Compensation can help control outcomes - again. Why not the same for corporate CEO salaries? You know - if you had a terrible year - heck you only get paid $750,000. I know, it's a tough way to go through life and your kids would be shamed. Maybe a yacht would have to be sold. But if you had a great year you can make your normal $18M+
  • In 2007, the total compensation of chief executives in large American corporations was 275 times that of the salary of the average worker, the Economic Policy Institute, a liberal research organization, estimates. In the late 1970s, chief executive pay was 35 times that of the average American worker.
I will tell you, as Medicare costs increase, global inflation increases in the long run as more humans compete for the same resources ("World of Shortages" did not go away - it will be back once the world economies rebound), and wages are depressed in the US as corporations move jobs to cheaper locales or can keep a lid on employee costs by even the threat.... it is going to set up some serious strife in the coming decade among "rich" and "formerly middle class" as people see these type of compensation systems while they fall farther behind and lifestyles erode. We have moved from a more egalitarian society in the 50s, 60s, 70s to a much more 2nd world type where the few at the top control vast resources ("overlord" class). When the sheep are getting their 3.5% wages and inflation is 2% I guess they can be sated. But with either a whole class of services that will need to be cut, or a whole class of taxes imposed on the masses to keep up with our long term obligations.... on top of the excesses at the top... the potential for social unrest in the US will increase down the road. It's going to take a long time to build and we'll create a new bubble along the way first (like tech stocks, housing, et al) to create an illusion that "we all have a chance for riches together" but after the next "Black Swan" blows up maybe middle of next decade, we should be getting closer to a day of reckoning. We are just in preview stage with the anger and uproar over this $700B bailout. Again, our Medicare obligations which no one talks about because its a problem "for another day" ('kick the can' policymaking in the US) are going to make these dollar figures look like a walk in the park.

It's going to be an interesting 20 years ahead as the sheep finally are pushed to buck against "the system". Buckle up kids.

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