A "rapid and sudden collapse"

When the U.S. Marines banned their soldiers from taking leave in Tijuana, Mexico, it was one of those little symbols that suggested the tempest of modern Mexico, a nation engaged in a brutal civil war pitting often corrupt government officials against major drug cartels seeking free passage and safe haven in that border nation. The above headline, taken from a recent Pentagon report, is the worst-case, but very possible end-game for Mexico’s government if it is unable to stem the tide of this drug war. The recent headlines are filled with horrific stories; a recent story depicted one “cleaner” who apparently disposed of over 300 cartel murder victims in vats of acid.

The cartels have their fingers in almost every Mexican state, almost all police departments and at the highest levels of government everywhere. Estimates place the actual leadership of over 8% of the Mexican municipal governments directly in the hands of cartel leaders. Murder is as common as traffic accidents. CBS.com (Jan. 28): “[T]here's even more evidence the cartels are operating with near impunity as they wage bloody battle for control of lucrative smuggling routes into the U.S. It's only 28 days into the new year and already there have been 400 drug-related slayings across Mexico… Last year ended with a grisly flourish: 12 soldiers were found decapitated with this note: ‘For every one of us you kill, we'll kill 10.’”

Some states are dirtier than others, but none can compete with the vile corruption of Sinaloa, a state that rests on the Pacific. The December 28, 2009 Los Angeles Times presented this little vignette: “Yudit del Rincon, a 44-year-old lawmaker, went before the state legislature this year with a proposition: Let's require lawmakers to take drug tests to prove they are clean. Her colleagues greeted the idea with applause. Then she sprang a surprise on them: Two lab technicians waited in the audience to administer drug tests to every state lawmaker. We should set the example, she said. They nearly trampled one another in the stampede to the door, Del Rincon recalled.”

The escalation in this drug war, which has decimated tourism and made life or ordinary citizens living hell, was precipitated by a crack-down initiated by Mexico’s President Felipe Calderon; Mexico’s cartels retaliated with their own militias, getting tip-offs of raids and strategies from their huge cadre of well-paid and highly corrupt officials within the government. Violence exploded, making much of Mexico too dangerous to travel.

It’s easy to overlook this instability, a notion we usually save for countries like Pakistan – where its Western Tribal District is not even under any sort of meaningful government control… but this is Mexico, literally a two hour plus drive from my home in Los Angeles. Imagine a narco-terrorist country with a long border with the U.S.

Shortly before his inauguration, President Obama met with Calderon to explore America’s involvement in solving this very threatening situation. We already supply over $400 million for equipment, software and training for use in this drug war, but Mexico wants to step-up the intelligence-sharing, direct cooperation and financial aid from the U.S. Given the potential consequences, I can’t disagree, bad economy notwithstanding. It is vastly less expensive to stop this drug war on the other side of the border.

I’m Peter Dekom, and I approve this message.

Pain?

“All told, [Wall Street] bonuses fell 44 percent last year, from $32.9 billion in 2007, the largest decline in dollar terms on record…” to a paltry $18.4 billion! (January 29^th New York Times). Boy do I feel sorry for those poor folks! These bonuses are for just participating in “deal flow,” regardless of overall profitability, that’s how Wall Street traders, investment bankers, and the like get paid. Yup, the same financial institutions that are hoarding taxpayer bailout cash and, for the banks, cheap Federal Reserve loans… these same funds and banks that have stopped investing and lending, yet have supported and participated in some of the biggest layoffs in American history.

Oh, they made sure the Federal funds were not used in the bonus pool (the Feds are checking to be sure), and a few CEOs and other top managers have waived their bonuses (or were required to do so as a condition of accepting Federal money), but Wall Street has always been about rewarding your “managing directors” – often in the hundreds or even thousands of senior financial managers in the larger financial institutions – even if the top echelon corporate management don’t get to participate (because the Feds won’t let them) and even as many of these financial institutions themselves had wildly unprofitable years. The Times: “[The 2008 bonus pool] was the sixth-largest haul on record, according to a report released [January 28^th] by the New York State comptroller…”

“Lucian A. Bebchuk, a professor at Harvard Law School and expert on executive compensation, called the 2008 bonus figure ‘disconcerting.’ Bonuses, he said, are meant to reward good performance and retain employees. But Wall Street disbursed billions despite staggering losses and a shrinking job market… ‘This was neither the sixth-best year in terms of aggregate profits, nor was it the sixth-most-difficult year in terms of retaining employees,’ Professor Bebchuk said.”

They argue that this is the only way they can keep the “best and the brightest.” I guess that would be the same “best and the brightest” that got us into this mess, created toxic derivatives, supported a credit rating system that simply overlooked obvious flaws in favor of fat fees for issuing favorable opinions and generally created an environment of overpaid and underperforming executives using outmoded pay systems that were developed in an era where up was the only direction for markets and home prices to go. They say that Wall Street salaries are modest and that the pay is really measured in the bonus pool… Did anybody ask if perhaps those “modest” six or seven figure salaries were more than enough for a horrific performance in a horrific year?

In a world where the new theme is accountability, it might be nice to see those in the private sector most responsible for this “managed depression” being held to a new standard that is in fact linked to success and profitability, not tradition. For those who cry against government regulation, for free market forces to correct obvious imbalances, please explain to me how a down market with a losing corporation can permit such an anomaly?!

I’m Peter Dekom, and I am indeed outraged.

Long-Term Lite?

Everyone – both sides of the aisle – agree that this crashed economy needs some serious remedies, and fast. But there are growing feelings, Republican and Democratic alike, which address a concern that the $819 billion bailout bill (the American Recovery and Reinvestment Plan passed by the House on the 28^th without a single Republican vote ) has too many elusive and questionable short-term band aids – like individual tax cuts/rebates that represent a very transitory and questionable impact on a soured economy – and lack the longer-term job-creating efforts that were so heavily stressed earlier in the discussions about a stimulus package – only a small part of this massive package is allocated to the much-touted effort to build and repair infrastructure (for example, out of $825 billion, there is only $30 billion set aside for roads and bridges, $9 billion for public transit and $1 billion for inter-city rail transportation… less than 5% of the total).

The January 28 Washington Post summarized this disappointment with the tax policies with a quote from Rep. Peter A. DeFazio (D-Ore.): "Every penny of the $825 billion [the earlier valuation of the plan] is borrowed against the future of our kids and grandkids, and so the question is: What benefit are we providing them? What are we doing for the country? It's the difference between real investment that will serve the nation for 30, 50 years and tax cuts, and that's a very poor tradeoff… I go to my district and people say, 'Yeah, I can use 10 extra bucks a week, but I would rather see more substantial investment.' We've gone through a couple bubbles that were borrowing and consumer-driven. We want a recovery that's solid and based in investment and productivity, and that points us at building things that will serve us decades to come."

The Post also presented a similar view from the other side of the aisle: Rep. John L. Mica (Fla.), the ranking Republican on the transportation committee, who suggested that the administration’s infrastructure component was "almost minuscule." He noted that "They keep comparing this to Eisenhower, but he proposed a $500 billion highway system, and they're going to put $30 billion [in roads and bridges]... How farcical can you be? Give me a break."

Administration officials (most notably Lawrence H. Summers, Obama's chief economic adviser) claim that investing in infrastructure is being delayed because of their perception that there is a lack of “shovel ready” projects, but many feel betrayed that the “big promise” of infrastructure development has all been abandoned in this budget proposal. Other fundamental long-term issues are being addressed; energy efficiency is getting $50 billion, and there are allocations of $20 billion to begin the process of making medical healthcare records more centralized, uniform and efficient, $15.6 billion in Pell grants for college students, $6 billion for modernizing college buildings and more for scientific research.

Education is the big winner as the proposed stimulus package, according to the January 28 New York Times, “would shower the nation’s school districts, child care centers and university campuses with $150 billion in new federal spending, a vast two-year investment that would more than double the Department of Education’s current budget.” Education is the cornerstone of our future, money very well spent.

Of the immediate and necessary arenas of the spending proposal is the “$300 billion in aid for laid-off workers and budget-strapped states (for food stamps, temporary health coverage, increased unemployment benefits, Medicaid funding, schools and police), expenditures that many economists agree will enter the economic bloodstream quickly and trim further layoffs by state governments.” (The Post) Some first aid is obviously necessary, and one would also hope that the remaining TARP money can be used in significant part to stop the continuing plunge of home values, possibly incorporating programs presented in earlier blogs.

But with tax cuts guzzling $275 billion, it would seem that some if not all of this money could be allocated to more relevant and sustainable job-creation and long-term infrastructure development that would represent the genuine legacy of a successful rescue plan. What’s your opinion?

I’m Peter Dekom, and I approve this message.

The “Hand of Friendship”

President Obama symbolically gave the first television interview (telecast on January 27^th) of his new administration to the Dubai-based Al Arabiya satellite news channel – a message aimed at the Islamic world, particularly the Middle East. According to an AOL poll, more Americans than not were bothered by this interview, and statements from the President that he was raised in the largest Muslim nation on earth, Indonesia, and had Muslim relatives, did little to assuage many in U.S. who are still wondering where this President’s sympathies truly lie. Many Jewish Americans, uncomfortable enough with his desire to effect a more balanced approach to the Israeli-Palestinian conflict, were particularly disturbed as to the President choice of a “first interview.”

True to his campaign rhetoric, Obama begins his public communication with the outside world with the philosophy that we should engage in dialogue with those who might oppose us or who in fact do oppose us. By declaring that “Americans are not your enemy” and asking for a mutual engagement of the Islamic world “based on mutual respect and mutual interest,” Obama began a process to defuse a political and military quagmire that still threatens to embroil the United States in further unaffordable conflicts in a region ripped apart with passionate fundamentalists who view America as the embodiment of everything they despise. In short, he is attempting to give the vast moderate Muslim majority a reason not to follow the radical, anti-American path that seems to have enticed them in recent years.

His support for Israel was clear: “Israel is a strong ally of the United States. They will not stop being a strong ally of the United States. And I will continue to believe that Israel's security is paramount. But I also believe that there are Israelis who recognize that it is important to achieve peace. They will be willing to make sacrifices if the time is appropriate and if there is serious partnership on the other side.” And as he outlined the clear threats that Iran’s saber-rattling and nuclear ambitions posed for the region, if not the world, Obama also indicated a willingness to open a dialogue with this terrorist nation.

He assessed the potential for resolution of the Israeli-Palestinian problem, amplified by the recent conflict in Gaza: “It's going to be difficult; it's going to take time.... What we want to do is to listen, set aside some of the preconceptions.... And I think if we do that, then there's a possibility at least of achieving some breakthroughs. I think it is possible for us to see a Palestinian state - I'm not going to put a time frame on it - that is contiguous, that allows freedom of movement for its people, that allows for trade with other countries, that allows the creation of businesses and commerce so that people have a better life.”

As al Qaeda strongman, Ayman al-Zawahiri recently decried Obama derisively as the Black servant of the White American leadership, calling for Muslim unity against the American devil, Obama, in his interview, responded that this terrorist group’s rhetoric seemed “nervous,” defensive and “bankrupt” for a new world order. Indeed, changing the face of America – the perception of a global bully into a global citizen (yet still in support of her allies, while more patient with those who disagree with her policies) – requires a face so different than what has been seen as traditional leadership that our traditional enemies are literally unable to muster a coherent attack against their old American nemesis.

If Obama is able, with the force of his persona and his words, to change the perception of America as a threat so as to make the recruitment of anti-American terrorists that much more difficult, how many billions of dollars and thousands of American lives will that save? What’s the cost if his efforts fail? That we are no worse off than we are now? And if he succeeds, even in part? In this economy, I still know a bargain when I see it.

I’m Peter Dekom, and I approve of this approach.

A Plague of Caterpillars

New home construction is at a virtual standstill. Even with massive infrastructure spend promised by the Obama stimulus package that is wending its way through Congress, the construction industry in general is slammed like never before. The January 19^th New York Times: “‘The reality is, we’re seeing conditions in home construction and home finance that are the worst since the Depression,’ said Steve Fritts, associate director of risk management policy at the Federal Deposit Insurance Corporation, the government agency that insures bank deposits.”

It gotten so bad that small builders who are current on their bank loans (have not been late or delinquent on a single payment) are still getting their loans called because of bank fears that the underlying collateral (the project under construction) just cannot support the loan. The same Times article: “Dave Brown, one of [Tempe, Arizona’s] best-known home builders, had kept his head above water through the housing downturn, not missing a single interest payment on his loans. Skip to next paragraph

“So he was confounded a few months back when one of his banks, spooked by the decline in his company’s revenue, suddenly demanded millions of dollars in additional collateral to continue carrying loans on his projects.

“He was unable to come up with the money, and in October, JPMorgan Chase foreclosed on five of his developments. Shortly thereafter, Brown Family Communities, 33 years in the business, decided to shut its doors.” The story is being repeated all across the nation, but the job loss that once centered on the financial, automotive and construction sectors is rapidly moving across the entire economy. My own state, California, just announced an unemployment rate of 9.3% (higher in my local community, Los Angeles, at 9.9% without even counting folks who can only find part-time employment or have given up looking).

The sheer numbers of workers being let go is staggering. On January 26^th, Reuters posted this horrific note: “[Earth-moving equipment manufacturer, Caterpillar, Inc.,] said that it would cut about 17,000 workers and buy out 2,500 others, to reduce costs in the face of what it predicted would be the weakest year for business since the end of World War Two.” Bad is getting worse.

Those who favor tax credits as a solution should truly focus on what such credits would mean to a corporate world that has no profits against which to apply most of those credits, does not really want to hire additional workers to use up more raw materials for products they cannot sell, and exactly how that last round of tax credits to individuals, back in the spring of 2008, really didn’t do much at all to spur people to spend more money – they pretty much did what those hoarding banks are doing with any money they can get their hands on; they paid down their debt or just salted the cash away.

If we can hit bottom by the third quarter, we will have done “well,” but doing well means that between now and that “bottom,” the numbers across the board are just going to stay bad. Good news appears to be nothing more than “less bad” than we expected. How are you going to get from “here” to “there”? It’s a question being asked at every level in this nation and most of the rest of the world.

I’m Peter Dekom, and I’m concerned too.

The Quickest Fixes

Aside from the time limits that require rule reversals to the Bush administration’s last minute flurry of regulatory activity to slow the ability of the Obama administration to enforce regulations – including executive orders such as the ones pulling back environmental requirements or job safety mandates (but there are literally hundreds of these “last minute” attempts) – and the obvious immediate political issues ranging from Iran’s expansion of nuclear capacity and its support for Muslim radicalism, the Israeli-Gaza matter (even with Israel’s troops withdrawn) and the wars in Iraq and Afghanistan, the economy obviously needs action immediately.

With half of the TARP money currently on the table, there are several actions that could help stop the economic hemorrhaging of America. This cash, along with some necessary immediate economic legislation, is what we need in the next few weeks.

While President Obama’s January 24^th video presentation focused on his longer-term goals for his proposed $825 billion stimulus package, including laying in new infrastructure, upgrading educational and student loan programs, investing in technology research, building a new healthcare system and otherwise reigniting our moribund economy, these programs will take time to implement. “This is not just a short-term program to boost employment,” he noted, “It’s one that will invest in our most important priorities like energy and education, health care and a new infrastructure that are necessary to keep us strong and competitive in the 21st century.”

The administration has also announced additional initiatives to reign in executive compensation, create a central clearinghouse for derivatives and creating an immediate body of new regulations to oversee the black hole of hedge fund investments. Great longer term goals, but we need some strong short-term steps as well… and fast.

First, we need to stop the foreclosures for at least 90 days. The legislation for the government “super-bank” – a modern day Resolution Trust Corporation that I have already blogged about – need to be vetted and created. We need to stop the accumulation of vacant and unsellable housing, and if the feds buy these and other non-performing or under-performing assets, they can also get the right to require the lenders they are buying them from to lend again, cut executive bonuses, etc. They can resell these assets in a controlled, longer term structured release that would be appropriate as the economy solidifies, thus recouping taxpayer money as much as possible.

Legislation is also necessary to create the super-bank can also empower the government to require originating banks (or their buyers) to be responsible for restructuring real estate loans, even if they sold the loan package to another entity. The Obama administration can deploy a good chunk of the remaining TARP money to fund (to the lending bank) the underwater part of loans that are capable of still performing (not loans that people couldn’t afford in the first place), take a very small piece of the upside from the ultimate sale of the house (whenever that occurs… probably not more than 5-10%), and cap the interest rate on ordinary loans at 5% and on jumbos at 6% (but not mega-mansions!).

Further, as the government bails out the bigger financial institutions – looks like the Bank of America is next (the government shoved Merrill Lynch into them, and it seems like that was not necessarily good for the B of A) – it should become more proactive in those banks, opening the credit doors as they acquire increasing and often controlling interests in these banks. If some immediate action does not solve the plunge in the value of the larger banks, the government will effectively wind up having nationalized these behemoths, an administrative nightmare that could distract our focus from so many other necessary programs.

For a limited time (six months to a year), the government should also guarantee interbank lending so that the old syndication packages that fueled businesses to stay in business (and keep jobs going) can be reinstated. Some interest rate management is required, since the borrowing rates even for the minimally available lending (10%-20%) appear to be deal killers to many companies. It’s about keeping as many jobs in tact as possible. To most people, these “banking issues” sound like financial solutions far removed from their everyday experience, but if lending doesn’t begin to flow into normal business channels at viable interest rates, the resultant job loss will be staggering.

While there is a mass of required actions, short term stabilization of the housing markets and releasing job-saving business credit appear more easily addressed with a few well-placed and immediate steps. The ultimate payoff of initiatives such as these will do much to reach the beginning of the end of this horrific “managed depression.”

I’m Peter Dekom, and I approve this message.