As my readers know, in my previous recent posts on this subject, I have very mixed feelings about the appropriateness of a federal bailout, but believe that a highly conditional loan based bailout is inevitable, given the clear support of the majority of members in Congress, the Bush Administration, and Obama's transition team. From a pragmatic perspective, I think it's a reasonable option under present circumstances. I want to make several more points that I think are called for at this point.
1. The three U. S. auto companies (GM, Ford, and Chrysler) don't deserve a bailout of any kind, certainly not the management team, the board of directors, or the stockholders. One can argue that the non-management employees deserve some government help. The industry's problems are not really their fault. It's a question of whether bankruptcies or properly structured loan packages best serve the interests of the country and the needs of our national economy, given our worsening recession and fast increasing unemployment numbers.
2. In my view Chrysler should preferably be required to be rescued by its controlling shareholder, Cerberus Capital Management, or to be acquired by Ford or GM, given its much smaller size and more urgent and serious problems. That would eliminate the need to look at CEO Nardelli's request for a $7 billion loan by the end of the month and probably another request next spring. It would also provide an opportunity to remove excess overhead expenses from the industry.
3. Our senior government spokespersons supporting a conditional bailout should remind the public and their critics in government that what's being considered is not a grant or an equity infusion, but a loan and/or line of credit with interest that is expected to be repaid within several years.
4. In event that Chrysler is not initially rescued by Cerberus or acquired by Ford or GM, Cerberus should be required to inject new cash equity of at least $1 billion into Chrysler, reducing the company's need to no more than $6 billion, and should find acceptable private sector guarantors for any loan by the government for the remainder. This might convince Cerberus that a sale to Ford or GM might be preferable.
5. I was not impressed with CEO Wagoner's statement in presenting his plan to Congress that GM may trim its lineup of cars and trucks from 60 models to 40. I would think a much smaller number of models, say 20 or 25, would be much more sensible in terms of improving manufacturing efficiencies and minimizing overhead.
6. Government bailout financing should be collateralized by acceptable assets to at least 50% of the credit commitments made to reduce the risk. Interest rates and commitment fees should be similar to what a major bank would charge for similar risk. The loans and lines of credit should be senior obligations repayable before any other loans or bonded indebtedness. The financing should also be subject to a formal credit agreement like any bank would require.
Friday, December 5, 2008
Tuesday, December 2, 2008
Afghanistan War Strategy
I am pleased that President-Elect Obama has recently confirmed he still is committed to withdrawing U. S. troops from Iraq on a responsible basis within 16 months from taking office next month, a plan and timetable that has been approved by the Iraqi government. However, I have very mixed feelings about his plan to support a substantial increase in our current troop strength in Afghanistan, especially considering our serious economic recession, our huge federal budget deficit, and great funding needs here at home.
As a reminder, our war there began in October 2001 as the military operation called "Operation Enduring Freedom," launched by the U. S. and the U. K. in response to the September 11, 2001 Al Qaeda attacks on our country. The stated purpose of the invasion was to capture Osama bin Laden, destroy Al Qaeda, and remove the Islamic radical Taliban regime which had provided support and safe harbor to Al Qaeda. In 2002 a second operation, under a coalition called the International Security Assistance Force (ISAF), was initiated to stabilize the country. NATO took control of ISAF in 2003. While the U. S. and our coalition allies, particularly the U. K., were successful in removing the Taliban regime, we have not yet after seven years succeeded, as far as we know, in killing or capturing bin Laden or destroying Al Qaeda, though, fortunately, a number of their senior commanders have been eliminated.
There are three other highly troubling factors. The current government, led by President Hamid Karzai since an election in 2004, is fragile with limited political or military control outside the capital, Kabul. Secondly, despite major initiatives to stop it, the country has experienced record-high illegal production of poppies from which heroin is made, and trading the heroin is a multi-billion dollar business which is providing major funding for the Taliban and local warlords whose loyalty to the government is also generally fragile. Thirdly, the Taliban insurgents seem to have recently regained some of their political and military strength, in part as a result of some dissatisfaction with Karzai's government and the poppy eradication initiatives that have damaged economic livelihoods of many of the 32.7 million population.
The ISAF coalition currently has a total of 50,700 troops in Afghanistan, of which 20,600 or 41% are from the U. S. The U. K. has the second largest contingent with 8,330 troops. Third is Germany with 3,310 troops. Several other countries, mostly European plus Canada, have a smaller representation. Including National Guard units, the U. S. had a total of 48,250 troops there as of October 2008. Afghanistan itself has approximately 76,000 active military personnel, most of whom are in their National Army and the remainder in their fairly small air force.
I have mixed feelings about the plans to add something like 10,000 more U. S. troops for a number of mostly obvious reasons. While I would be very happy to see a stable, democratic Afghanistan, free of Taliban and Al Qaeda insurgents, I'm not at all sure that this is plan is consistent with our original mission and that we should be committing large additional resources to what in effect is to a large extent essentially nation-building. We are already doing the bulk of the "heavy lifting" in terms of troops committed and casualties, with 555 killed out of a total of 1,016 suffered by the total coalition since 2001. U. S. costs are currently running at approximately $2.4 billion monthly and no doubt will increase substantially with the additional troops. While it would be very desirable to eliminate their impact and influence, I think it's a real stretch to think that the Taliban are a meaningful threat to our national security.
What would be my advice to President-Elect Obama? It must start with a careful review by his national security team and General Petraeus of our mission and current strategic priorities in the country. This review and its conclusions should also incorporate a realistic cost/benefit analysis from the U. S. perspective. Our main focus should be killing or capturing bin Laden and his senior deputies, destroying Al Qaeda, and training Afghan forces. We should place a high priority on minimizing the exposure of our troops to dangerous operations to the extent possible and consistent with our updated mission and priorities. We should continue to put due pressure on Pakistan to support our mission by clamping down on insurgent recruiting and training camps, as well as more closely monitoring their border with Afghanistan for Al Qaeda and Taliban fighter movements.
Importantly, we should also use renewed, better planned diplomatic initiatives with other Asian countries for military and financial resources to more fairly share the burden of fighting terrorism and stabilizing Afghanistan. I'm thinking especially of China, India, Russia, Indonesia, Saudi Arabia, the Emirates, and even Iran, all of whom should have a national security and strategic interest similar to ours in the region, though we clearly have noteworthy political differences on other important issues. This should be a major priority for Hillary Clinton as our new Secretary of State, supported by President Obama's national security team.
As a reminder, our war there began in October 2001 as the military operation called "Operation Enduring Freedom," launched by the U. S. and the U. K. in response to the September 11, 2001 Al Qaeda attacks on our country. The stated purpose of the invasion was to capture Osama bin Laden, destroy Al Qaeda, and remove the Islamic radical Taliban regime which had provided support and safe harbor to Al Qaeda. In 2002 a second operation, under a coalition called the International Security Assistance Force (ISAF), was initiated to stabilize the country. NATO took control of ISAF in 2003. While the U. S. and our coalition allies, particularly the U. K., were successful in removing the Taliban regime, we have not yet after seven years succeeded, as far as we know, in killing or capturing bin Laden or destroying Al Qaeda, though, fortunately, a number of their senior commanders have been eliminated.
There are three other highly troubling factors. The current government, led by President Hamid Karzai since an election in 2004, is fragile with limited political or military control outside the capital, Kabul. Secondly, despite major initiatives to stop it, the country has experienced record-high illegal production of poppies from which heroin is made, and trading the heroin is a multi-billion dollar business which is providing major funding for the Taliban and local warlords whose loyalty to the government is also generally fragile. Thirdly, the Taliban insurgents seem to have recently regained some of their political and military strength, in part as a result of some dissatisfaction with Karzai's government and the poppy eradication initiatives that have damaged economic livelihoods of many of the 32.7 million population.
The ISAF coalition currently has a total of 50,700 troops in Afghanistan, of which 20,600 or 41% are from the U. S. The U. K. has the second largest contingent with 8,330 troops. Third is Germany with 3,310 troops. Several other countries, mostly European plus Canada, have a smaller representation. Including National Guard units, the U. S. had a total of 48,250 troops there as of October 2008. Afghanistan itself has approximately 76,000 active military personnel, most of whom are in their National Army and the remainder in their fairly small air force.
I have mixed feelings about the plans to add something like 10,000 more U. S. troops for a number of mostly obvious reasons. While I would be very happy to see a stable, democratic Afghanistan, free of Taliban and Al Qaeda insurgents, I'm not at all sure that this is plan is consistent with our original mission and that we should be committing large additional resources to what in effect is to a large extent essentially nation-building. We are already doing the bulk of the "heavy lifting" in terms of troops committed and casualties, with 555 killed out of a total of 1,016 suffered by the total coalition since 2001. U. S. costs are currently running at approximately $2.4 billion monthly and no doubt will increase substantially with the additional troops. While it would be very desirable to eliminate their impact and influence, I think it's a real stretch to think that the Taliban are a meaningful threat to our national security.
What would be my advice to President-Elect Obama? It must start with a careful review by his national security team and General Petraeus of our mission and current strategic priorities in the country. This review and its conclusions should also incorporate a realistic cost/benefit analysis from the U. S. perspective. Our main focus should be killing or capturing bin Laden and his senior deputies, destroying Al Qaeda, and training Afghan forces. We should place a high priority on minimizing the exposure of our troops to dangerous operations to the extent possible and consistent with our updated mission and priorities. We should continue to put due pressure on Pakistan to support our mission by clamping down on insurgent recruiting and training camps, as well as more closely monitoring their border with Afghanistan for Al Qaeda and Taliban fighter movements.
Importantly, we should also use renewed, better planned diplomatic initiatives with other Asian countries for military and financial resources to more fairly share the burden of fighting terrorism and stabilizing Afghanistan. I'm thinking especially of China, India, Russia, Indonesia, Saudi Arabia, the Emirates, and even Iran, all of whom should have a national security and strategic interest similar to ours in the region, though we clearly have noteworthy political differences on other important issues. This should be a major priority for Hillary Clinton as our new Secretary of State, supported by President Obama's national security team.
Monday, December 1, 2008
Auto Industry Bailout - Supplement II
The CEO's of GM, Ford and Chrysler will apparently fly back again to Washington, D. C. tomorrow to reconvene with key members of Congress and the Administration to present their new business plans and presumably a more compelling case for their urgent requests and supporting information for a large federal bailout. Although they likely will encounter significant skepticism from many in the Congress, most probably a conditional bailout at some level will ultimately be approved, given general encouragement from both the Bush Administration and Obama and his transition team. No doubt the substantial political contributions from the UAW and other labor unions made to Obama's election campaign and the Democratic National Committee will be a contributing factor in the outcome.
Nevertheless, I'm hopeful that the influence on the UAW and other labor unions will be limited, given some of the major reasons why our auto manufacturers have performed and competed so poorly, especially in recent years. One of those major reasons has, of course, been the great difference in labor costs between the UAW staffed auto companies, GM, Ford and Chrysler, and the non-union labor of the foreign owned auto companies' plants in the U. S. In a very convincing editorial opinion in today's respected Wall Street Journal under the title "America's Other Auto Industry," it indicated the gap in hourly average costs, was as much as $29 or 40%, largely due to the cost of job benefits separate from take-home wages. That's a substantial disadvantage for the American companies.
Another related reason for the poor performance has been the UAW's insistence in labor negotiations that certain model cars must be made in the U. S. rather than in foreign facilities with lower labor costs which would enable the Detroit Three to be more successful.
Certainly these factors must be taken fully into account in the bailout discussions, requiring very material concessions by the UAW in order both for the CEO's business plans to be found credible and a realistic and sustainable rescue and bailout to be approved.
Nevertheless, I'm hopeful that the influence on the UAW and other labor unions will be limited, given some of the major reasons why our auto manufacturers have performed and competed so poorly, especially in recent years. One of those major reasons has, of course, been the great difference in labor costs between the UAW staffed auto companies, GM, Ford and Chrysler, and the non-union labor of the foreign owned auto companies' plants in the U. S. In a very convincing editorial opinion in today's respected Wall Street Journal under the title "America's Other Auto Industry," it indicated the gap in hourly average costs, was as much as $29 or 40%, largely due to the cost of job benefits separate from take-home wages. That's a substantial disadvantage for the American companies.
Another related reason for the poor performance has been the UAW's insistence in labor negotiations that certain model cars must be made in the U. S. rather than in foreign facilities with lower labor costs which would enable the Detroit Three to be more successful.
Certainly these factors must be taken fully into account in the bailout discussions, requiring very material concessions by the UAW in order both for the CEO's business plans to be found credible and a realistic and sustainable rescue and bailout to be approved.
Sunday, November 30, 2008
Littering: An Unacceptable Social Plague
Even though it's not generally considered a major problem in most circles, one of my biggest pet peeves for a great many years is littering, all kinds of litterering, but especially that involving cirgarette butts and chewing gum. I know society has more important problems to deal with, especially now, with our poor national economy, high unemployment, large number of home foreclosures, and financial crisis, as well as a continuing high level of serious crimes. However, I'd still like to see a comprehensive, well thought-out and effective action plan with teeth developed and implemented at a number of different levels. Our ultimate goal, though realistically it will not be easy to achieve, should be to eliminate littering permanently as a significant issue in this country.
Littering is a very meaningful problem for many different reasons. First of all, it is very unsightly and has an adverse impact on our ability to fully enjoy the scenic beauty of our country and the attractiveness of the places we work, live and shop. To me this is reason enough for our society to pay good attention and act on this issue. However, there are several other important reasons. Studies demonstrate that littering can often be harmful to wildlife, which can mistake litter for food. It can also be a big nuisance and even harmful to us. Accidently stepping on discarded chewing gum is one of the biggest nuisances to my mind. Stepping on a discarded banana peel can cause one to slip and fall, and potentially sprain or break a leg or hip, especially for elderly people.
There are three additional fairly obvious reasons why littering is an issue worthy of more attention. Picking up litter can cost state or local municipalities a significant amount of money, to the extent unpaid volunteers or prisoners cannot be recruited to do the job. Cigarette butts not completely put out and thrown out of vehicle windows, or dropped by pedestrians on a street can cause, and have caused, dangerous and expensive fires destroying homes and businesses and occasionally leading to human and pet casualties. Finally, littering is completely unnecessary and represents a careless, anti-social and selfish act. Afterall, trash cans are generally available and most cars have ashtrays.
Some facts may help support some of my points. According to the non-profit group Keep America Beautiful, cigarette butts account for as much as one-third of all litter in the U. S. 370 billion filtered cigarettes smoked in this country each year result in 135 million pounds of butts littering the landscape, particularly on city streets, parking lots and on our beaches. (The significance of the filters is that they are made of a plastic-like material called cellulose acetate which is not biodegradable.) In terms of the environmental impact of littering, studies show discarded plastic bags can be expected to last as long as 10-20 years, aluminum cans 80-100 years, glass bottles an incredible 1 million years, and plastic bottles "indefinitely."
A Texas study concluded that prime litterers are males, all youth under 25, smokers, and frequenters of bars and fast food restaurants. Most offenders who are caught apparently settle out of court. For limited littering, offenders typically face a monetary penalty depending on proven income and/or a specified number of hours picking up litter or other community service. Jail is a very rare punishment.
Based on my limited research, littering is a social activity we generally learn from parents and pass on unconsciously to children. The existing presence of litter is a influential instigator of more littering. Lax law enforcement due to higher priorities and inadequate police and security staffing is reportedly a contributing factor. A residential area primarily consisting of home owners typically has less littering than an area where home renters predominate. Litter laws, enforcement efforts, and prosecutions definitely help to curtail littering. None of this surprises me.
What more can be done? Litter control is usually, and should be, a local or state issue, as opposed to federal. Nevertheless, the President-Elect could in his inauguration speech or subsequently in a press conference spend a few minutes to outline an initiative to work with state and local authorities to come up with a limited cost, coordinated effort to compile and distribute a listing of litter control successes that have surfaced in various states and communities. It wouldn't have to be a federal project. President Obama could propose that the state governors handle this and advise him in due course how the federal government could play an effective supporting role, without any substantial financial contribution. His support and involvement could add needed leadership and visibility to a government sponsored anti-litter initiative.
It would also be helpful for this initiative if President Obama would declare, in this connection, that the federal government would shortly establish a serious anti-litter "clean up America" campaign implemented by their employees on all federal properties, including military bases, in the country. Private companies should be encouraged to initiate similar programs without a need for government subsidies or tax incentives.
Parents need to rethink whatever littering habits they may have, and the importance of their example as key role models, with a view to favorably influencing the behavior of their children. Churches, community groups, non-profit agencies, and, importantly, the media can play constructive inspirational, educational and supporting roles in this endeavor.
I'd also like to see local government officials, prosecutors and court judges review their anti-litter policies, enforcement actions, and sentencing guidelines, comparing them with other towns and cities which have had more success, and making appropriate adjustments to improve outcomes. Finally, individuals, acting alone or as volunteers as part of a non-profit group, remember there are about 305 million of us in total, can make an important contribution. I think admiringly of my deceased sister who very regularly picked up and carried out other people's litter when hiking and camping in our many attractive wilderness areas. I have tried to follow her good example by picking up and disposing of litter dropped by golfers on a number of public courses I play on. It is both surprising and quite irritating to me that so many golfers, most of them adults, litter so much, when with few exceptions there are trash cans on every tee where most of the littering seems to take place.
Littering is a very meaningful problem for many different reasons. First of all, it is very unsightly and has an adverse impact on our ability to fully enjoy the scenic beauty of our country and the attractiveness of the places we work, live and shop. To me this is reason enough for our society to pay good attention and act on this issue. However, there are several other important reasons. Studies demonstrate that littering can often be harmful to wildlife, which can mistake litter for food. It can also be a big nuisance and even harmful to us. Accidently stepping on discarded chewing gum is one of the biggest nuisances to my mind. Stepping on a discarded banana peel can cause one to slip and fall, and potentially sprain or break a leg or hip, especially for elderly people.
There are three additional fairly obvious reasons why littering is an issue worthy of more attention. Picking up litter can cost state or local municipalities a significant amount of money, to the extent unpaid volunteers or prisoners cannot be recruited to do the job. Cigarette butts not completely put out and thrown out of vehicle windows, or dropped by pedestrians on a street can cause, and have caused, dangerous and expensive fires destroying homes and businesses and occasionally leading to human and pet casualties. Finally, littering is completely unnecessary and represents a careless, anti-social and selfish act. Afterall, trash cans are generally available and most cars have ashtrays.
Some facts may help support some of my points. According to the non-profit group Keep America Beautiful, cigarette butts account for as much as one-third of all litter in the U. S. 370 billion filtered cigarettes smoked in this country each year result in 135 million pounds of butts littering the landscape, particularly on city streets, parking lots and on our beaches. (The significance of the filters is that they are made of a plastic-like material called cellulose acetate which is not biodegradable.) In terms of the environmental impact of littering, studies show discarded plastic bags can be expected to last as long as 10-20 years, aluminum cans 80-100 years, glass bottles an incredible 1 million years, and plastic bottles "indefinitely."
A Texas study concluded that prime litterers are males, all youth under 25, smokers, and frequenters of bars and fast food restaurants. Most offenders who are caught apparently settle out of court. For limited littering, offenders typically face a monetary penalty depending on proven income and/or a specified number of hours picking up litter or other community service. Jail is a very rare punishment.
Based on my limited research, littering is a social activity we generally learn from parents and pass on unconsciously to children. The existing presence of litter is a influential instigator of more littering. Lax law enforcement due to higher priorities and inadequate police and security staffing is reportedly a contributing factor. A residential area primarily consisting of home owners typically has less littering than an area where home renters predominate. Litter laws, enforcement efforts, and prosecutions definitely help to curtail littering. None of this surprises me.
What more can be done? Litter control is usually, and should be, a local or state issue, as opposed to federal. Nevertheless, the President-Elect could in his inauguration speech or subsequently in a press conference spend a few minutes to outline an initiative to work with state and local authorities to come up with a limited cost, coordinated effort to compile and distribute a listing of litter control successes that have surfaced in various states and communities. It wouldn't have to be a federal project. President Obama could propose that the state governors handle this and advise him in due course how the federal government could play an effective supporting role, without any substantial financial contribution. His support and involvement could add needed leadership and visibility to a government sponsored anti-litter initiative.
It would also be helpful for this initiative if President Obama would declare, in this connection, that the federal government would shortly establish a serious anti-litter "clean up America" campaign implemented by their employees on all federal properties, including military bases, in the country. Private companies should be encouraged to initiate similar programs without a need for government subsidies or tax incentives.
Parents need to rethink whatever littering habits they may have, and the importance of their example as key role models, with a view to favorably influencing the behavior of their children. Churches, community groups, non-profit agencies, and, importantly, the media can play constructive inspirational, educational and supporting roles in this endeavor.
I'd also like to see local government officials, prosecutors and court judges review their anti-litter policies, enforcement actions, and sentencing guidelines, comparing them with other towns and cities which have had more success, and making appropriate adjustments to improve outcomes. Finally, individuals, acting alone or as volunteers as part of a non-profit group, remember there are about 305 million of us in total, can make an important contribution. I think admiringly of my deceased sister who very regularly picked up and carried out other people's litter when hiking and camping in our many attractive wilderness areas. I have tried to follow her good example by picking up and disposing of litter dropped by golfers on a number of public courses I play on. It is both surprising and quite irritating to me that so many golfers, most of them adults, litter so much, when with few exceptions there are trash cans on every tee where most of the littering seems to take place.
Friday, November 28, 2008
Auto Industry Bailout - Supplement
On November 16th I published a post indicating I had very mixed feelings about a federal taxpayer bailout, but could reluctantly support one along the lines suggested by President-Elect Obama with some additional conditions. It now looks virtually certain that bailout legislation will be seriously and urgently pursued, based on a scheduled meeting next week between key members of Congress and the three major company CEO's who will supposedly be presenting their plans for the U. S. industry's rescue and restructuring.
Industry spokespersons over the past week have been claiming that one or more of the big three companies may run out of money as soon as the end of December, much sooner than previously represented and thereby underlining their case for increased urgency for the prospective bailout. I'm skeptical of the validity of the timing claim, but it's indicative of the obviously poor senior management and board of directors performance over many years. As I commented in my very recent post on the pending Citigroup bailout, the Bush Administration and Congress, as well as Obama's transition team, which certainly will be involved, any bailout plan must include a significant number of appropriate key personnel changes on the management teams and on the boards, especially for those members who have been serving for several years or more. This is a no-brainer and hopefully will be acted upon!
The evidence of the incredibly poor management and board performance is everywhere to be found, has been going on for decades, and is definitely not primarily due to the current eonomic recession and financial crisis, though those have greatly harmed the industry and accelerated their present dire position. Of course, one of the more important early evidence components was their overly generous, poorly negotiated labor agreements with the United Auto Workers, which has significantly impaired the industry's ability to compete well with several foreign manufacturers, primarily those in Japan and South Korea, with Toyota clearly being in the lead among those. Another obvious piece of evidence is their sizeable loss in marketshares, their poor operating performance and greatly reduced stock prices in recent years.
I can also point to their marketing and advertising strategies. Earlier this year on a three week trip to the Midwest, my wife and I had occasion to rent a small Chevy Cobalt in Minneapolis. I had never heard of the car before. The Avis representative told me the car would get fuel economy at about 30 miles to the gallon. We liked the car and were impressed that over roughly 4,000 miles of driving on freeways and in towns we actually got an average of 36 miles per gallon. Until watching a football game on TV yesterday, I cannot recall seeing any ads for the Cobalt on TV, or in several magazines and newspapers we subscribe to. Amazing to me! However, on the other hand, I've seen dozens of ads for the Cadillac Escalade, GM's full-size, luxury SUV at a much higher price and much lower mileage. I recognize that the profit margin is probably much higher on the Escalade, but doesn't it strike you that GM has apparently done relatively little to advertise the much more fuel efficient Cobalt for which there must be a much larger market?
GM, Ford and Chrysler management could learn a lot more from relatively successful auto companies like Toyota, Nissan, Honda, Subaru, and Volkswagon, some of whom, like Toyota, are operating profitable auto plants in the U. S. However, we should acknowledge that the foreign owned plants are generally benefiting from running newer more efficient facilities, lower cost non-union labor, and regional tax incentives in places like Tennessee and other southern states. They could also learn from successful non-industry companies like Southwest Airlines, and corporate investors and turnaround entrepreneurs like Warren Buffett and Carl Icahn, respectively.
It won't be long before we'll know the specific shape and structure of the bailout. Hopefully it won't unduly benefit current management and shareholders, there will ultimately be some reasonable returns to the taxpayers from the sale of the government's equity holdings and repayment of any loans, and the bailout will eventually prove successful in terms of a sustainable, profitable, very competitive, though probably smaller auto industry.
Industry spokespersons over the past week have been claiming that one or more of the big three companies may run out of money as soon as the end of December, much sooner than previously represented and thereby underlining their case for increased urgency for the prospective bailout. I'm skeptical of the validity of the timing claim, but it's indicative of the obviously poor senior management and board of directors performance over many years. As I commented in my very recent post on the pending Citigroup bailout, the Bush Administration and Congress, as well as Obama's transition team, which certainly will be involved, any bailout plan must include a significant number of appropriate key personnel changes on the management teams and on the boards, especially for those members who have been serving for several years or more. This is a no-brainer and hopefully will be acted upon!
The evidence of the incredibly poor management and board performance is everywhere to be found, has been going on for decades, and is definitely not primarily due to the current eonomic recession and financial crisis, though those have greatly harmed the industry and accelerated their present dire position. Of course, one of the more important early evidence components was their overly generous, poorly negotiated labor agreements with the United Auto Workers, which has significantly impaired the industry's ability to compete well with several foreign manufacturers, primarily those in Japan and South Korea, with Toyota clearly being in the lead among those. Another obvious piece of evidence is their sizeable loss in marketshares, their poor operating performance and greatly reduced stock prices in recent years.
I can also point to their marketing and advertising strategies. Earlier this year on a three week trip to the Midwest, my wife and I had occasion to rent a small Chevy Cobalt in Minneapolis. I had never heard of the car before. The Avis representative told me the car would get fuel economy at about 30 miles to the gallon. We liked the car and were impressed that over roughly 4,000 miles of driving on freeways and in towns we actually got an average of 36 miles per gallon. Until watching a football game on TV yesterday, I cannot recall seeing any ads for the Cobalt on TV, or in several magazines and newspapers we subscribe to. Amazing to me! However, on the other hand, I've seen dozens of ads for the Cadillac Escalade, GM's full-size, luxury SUV at a much higher price and much lower mileage. I recognize that the profit margin is probably much higher on the Escalade, but doesn't it strike you that GM has apparently done relatively little to advertise the much more fuel efficient Cobalt for which there must be a much larger market?
GM, Ford and Chrysler management could learn a lot more from relatively successful auto companies like Toyota, Nissan, Honda, Subaru, and Volkswagon, some of whom, like Toyota, are operating profitable auto plants in the U. S. However, we should acknowledge that the foreign owned plants are generally benefiting from running newer more efficient facilities, lower cost non-union labor, and regional tax incentives in places like Tennessee and other southern states. They could also learn from successful non-industry companies like Southwest Airlines, and corporate investors and turnaround entrepreneurs like Warren Buffett and Carl Icahn, respectively.
It won't be long before we'll know the specific shape and structure of the bailout. Hopefully it won't unduly benefit current management and shareholders, there will ultimately be some reasonable returns to the taxpayers from the sale of the government's equity holdings and repayment of any loans, and the bailout will eventually prove successful in terms of a sustainable, profitable, very competitive, though probably smaller auto industry.
Tuesday, November 25, 2008
Citigroup Bailout
Until the last several weeks, a majority of Americans had probably not heard of Citigroup, or at least did not have much of an idea of what kind of company it was. Following recent news about a massive federal bailout, many more now know. What's going on, what should be going on, and what can be learned from this situation?
Citigroup, based in New York, with assets at year end 2007 of $2.19 trillion, revenues of $159 billion, total staff of about 358,000, and an incredible 200 million customer accounts, has been operating the world's largest financial services network spanning as many as 107 countries. The company has been one of the world's largest players domestically and internationally in consumer banking, corporate banking , private wealth management, investment banking, credit card issuance, travel services, and many kinds of insurance. However, their senior management and board of directors have not served them well. The company essentially grew out of control due to poor management and got greatly caught up in the current economic recession and financial crisis. One of their major problems is that, like the case with many other financial industry companies, they've ended up holding several hundred billion dollars of bad, so-called"toxic" assets, which are not worth very much at present.
While Citigroup reported net earnings in 2007 of roughly $3.6 billion, far less than in 2006, they reported a loss of $2.8 billion for the third quarter of this year alone, and no doubt will have a huge loss for the year as a whole. Their stock has fallen from a 52 week high of $35 a share to a low of $3.05 and has recovered a little in recent days to a present level of about $6 a share. As a result, their market capitalization has fallen dramatically. Since it has been a stock widely held by both institutions and individuals, its great reduction in value has had a major adverse impact on investment portfolios across the board. Bankruptcy has been a serious possibility that many experts have felt could have widespread negative repercussions on other large financial institutions and the economy as a whole.
Due to widespread concern with a potential bankruptcy, the Bush Administration, generally supported by President-Elect Obama's transition team, as I understand it, has approved a very substantial federal bailout announced late last Sunday, consisting primarily of a capital injection of $20 billion and a loss sharing agreement on a $306 billion pool of some of their bad assets, under which three government agencies, and we taxpayers, are exposed to $249 billion of bailout costs. The capital injection will be in the form of preferred shares paying an 8% dividend. This bailout is on top of the $25 billion capital injection by the U. S. Treasury under the $700 billion Troubled Asset Relief Program (TARP) announced last month.
Obviously we're talking about a huge amount of taxpayer support to help a very major financial institution which has been poorly managed for at least several years, even though the company reported substantial earnings through 2006. Financial industry and congressional supporters of Citigroup's rescue and bailout by the federal government believe that this action is needed to help restore confidence and stability in our financial markets, to unclog frozen lending pipelines, and that Citigroup is just too big to fail. These supporters may well be correct, but surprisingly there seem to be many very critical elements apparently missing from this bailout. However, I may have just missed hearing about them, because I was trekking in Nepal for half of October.
Missing from my vantage point as a career banker, to start with, is a requirement to provide a compelling business plan demonstrating specific actions senior management will take, and how these should enable the company to successfully compete in the current global economy. The plan should also provide credible financial projections that will allow government negotiators and monitors to calculate what risk-adjusted returns the government can expect for their investments. If Citigroup and its advisors cannot provide a compelling plan with credible projections, the bailout should be seriously reconsidered and perhaps should not go forward without substantive adjustments. But it's virtually certain this won't happen. The bailout will go forward.
Furthermore, what about Citigroup's senior management and its board of directors who, as a group, have performed poorly? Government negotiators decided not to push for the ouster of CEO Vikram Pandit, because he didn't take up his position until last December, although he was there in charge when it became clear that the sub-prime mortgage crisis was brewing. What about all the others? Should not at least some of them be replaced, both on the management team and on the board? To what extent is that happening? It's not, according to an editorial piece in the respected Wall Street Journal yesterday. Reportedly, not a single senior manager or director will be let go as a condition of taxpayer assistance!
A large number of key board members have been in place for many years, and therefore cannot argue they cannot be held accountable. Former Treasury Secretary Robert Rubin has been on Citigroup's board for ten years, for much of that time as chairman of their executive committee. Chairman Sir Win Bischoff has held senior positions in the company since 2000. Six other directors have served for more than ten years. Didn't they know what was going on? Why not?
I trust there won't be any bonuses paid out to members of management for their work in 2008, but that should be checked. There should also be an independent review and appropriate adjustments of senior management salaries, severance payment agreements, and retirement benefits, considering their individual responsibilities for the company's problems. Is that taking place?
What can we learn from this bailout, considering the implications and huge taxpayer costs? First, our government, representing the voters and taxpayers, cannot, and should not, rescue every failing company, even if it's very large and in a key industry. Second, as almost everyone agrees, we need more, intelligent oversight, regulation, and effective coordination with the other major industrial countries to minimize the possibility that a similar financial crisis can happen again. Third, given the widespread belief that Citigroup is "too big to fail," perhaps the government should review existing antitrust laws and enforcement practices to see what steps should be taken to keep companies in key industries from growing too big and dominant. Fourth, since this seems to be a common problem in failed companies, we need to have established stronger and clearer accountabilities, with appropriate enforcement, for board members of public companies. Finally, the new Obama Administration, working with the Congress, needs to put together a prudent plan for how they should deal with any more very large failing companies, including specific requirements for any financial support.
With the Bush Administration technically still in the lead for another seven weeks or so, our federal politicians will gain some good practical experience dealing with the CEO's and their advisors of General Motors, Ford, and Chrysler in the weeks ahead.
Citigroup, based in New York, with assets at year end 2007 of $2.19 trillion, revenues of $159 billion, total staff of about 358,000, and an incredible 200 million customer accounts, has been operating the world's largest financial services network spanning as many as 107 countries. The company has been one of the world's largest players domestically and internationally in consumer banking, corporate banking , private wealth management, investment banking, credit card issuance, travel services, and many kinds of insurance. However, their senior management and board of directors have not served them well. The company essentially grew out of control due to poor management and got greatly caught up in the current economic recession and financial crisis. One of their major problems is that, like the case with many other financial industry companies, they've ended up holding several hundred billion dollars of bad, so-called"toxic" assets, which are not worth very much at present.
While Citigroup reported net earnings in 2007 of roughly $3.6 billion, far less than in 2006, they reported a loss of $2.8 billion for the third quarter of this year alone, and no doubt will have a huge loss for the year as a whole. Their stock has fallen from a 52 week high of $35 a share to a low of $3.05 and has recovered a little in recent days to a present level of about $6 a share. As a result, their market capitalization has fallen dramatically. Since it has been a stock widely held by both institutions and individuals, its great reduction in value has had a major adverse impact on investment portfolios across the board. Bankruptcy has been a serious possibility that many experts have felt could have widespread negative repercussions on other large financial institutions and the economy as a whole.
Due to widespread concern with a potential bankruptcy, the Bush Administration, generally supported by President-Elect Obama's transition team, as I understand it, has approved a very substantial federal bailout announced late last Sunday, consisting primarily of a capital injection of $20 billion and a loss sharing agreement on a $306 billion pool of some of their bad assets, under which three government agencies, and we taxpayers, are exposed to $249 billion of bailout costs. The capital injection will be in the form of preferred shares paying an 8% dividend. This bailout is on top of the $25 billion capital injection by the U. S. Treasury under the $700 billion Troubled Asset Relief Program (TARP) announced last month.
Obviously we're talking about a huge amount of taxpayer support to help a very major financial institution which has been poorly managed for at least several years, even though the company reported substantial earnings through 2006. Financial industry and congressional supporters of Citigroup's rescue and bailout by the federal government believe that this action is needed to help restore confidence and stability in our financial markets, to unclog frozen lending pipelines, and that Citigroup is just too big to fail. These supporters may well be correct, but surprisingly there seem to be many very critical elements apparently missing from this bailout. However, I may have just missed hearing about them, because I was trekking in Nepal for half of October.
Missing from my vantage point as a career banker, to start with, is a requirement to provide a compelling business plan demonstrating specific actions senior management will take, and how these should enable the company to successfully compete in the current global economy. The plan should also provide credible financial projections that will allow government negotiators and monitors to calculate what risk-adjusted returns the government can expect for their investments. If Citigroup and its advisors cannot provide a compelling plan with credible projections, the bailout should be seriously reconsidered and perhaps should not go forward without substantive adjustments. But it's virtually certain this won't happen. The bailout will go forward.
Furthermore, what about Citigroup's senior management and its board of directors who, as a group, have performed poorly? Government negotiators decided not to push for the ouster of CEO Vikram Pandit, because he didn't take up his position until last December, although he was there in charge when it became clear that the sub-prime mortgage crisis was brewing. What about all the others? Should not at least some of them be replaced, both on the management team and on the board? To what extent is that happening? It's not, according to an editorial piece in the respected Wall Street Journal yesterday. Reportedly, not a single senior manager or director will be let go as a condition of taxpayer assistance!
A large number of key board members have been in place for many years, and therefore cannot argue they cannot be held accountable. Former Treasury Secretary Robert Rubin has been on Citigroup's board for ten years, for much of that time as chairman of their executive committee. Chairman Sir Win Bischoff has held senior positions in the company since 2000. Six other directors have served for more than ten years. Didn't they know what was going on? Why not?
I trust there won't be any bonuses paid out to members of management for their work in 2008, but that should be checked. There should also be an independent review and appropriate adjustments of senior management salaries, severance payment agreements, and retirement benefits, considering their individual responsibilities for the company's problems. Is that taking place?
What can we learn from this bailout, considering the implications and huge taxpayer costs? First, our government, representing the voters and taxpayers, cannot, and should not, rescue every failing company, even if it's very large and in a key industry. Second, as almost everyone agrees, we need more, intelligent oversight, regulation, and effective coordination with the other major industrial countries to minimize the possibility that a similar financial crisis can happen again. Third, given the widespread belief that Citigroup is "too big to fail," perhaps the government should review existing antitrust laws and enforcement practices to see what steps should be taken to keep companies in key industries from growing too big and dominant. Fourth, since this seems to be a common problem in failed companies, we need to have established stronger and clearer accountabilities, with appropriate enforcement, for board members of public companies. Finally, the new Obama Administration, working with the Congress, needs to put together a prudent plan for how they should deal with any more very large failing companies, including specific requirements for any financial support.
With the Bush Administration technically still in the lead for another seven weeks or so, our federal politicians will gain some good practical experience dealing with the CEO's and their advisors of General Motors, Ford, and Chrysler in the weeks ahead.
Sunday, November 16, 2008
Saving the U. S. Auto Industry
One of the biggest and most controversial issues to be discussed and negotiated next week in Washington, D. C. is whether and how the U. S. taxpayers should help our three major auto industry manufacturers, General Motors, Ford and Chrysler, with a large financial bailout in order to give them a better chance to survive and thereby to save hundreds of thousands of jobs.
GM seems to be leading the very weak industry in lobbying aggressively with federal officials for urgent help, suggesting bluntly in recent weeks that without government aid the company will probably have to file for bankruptcy some time next year, and that this would cause a massive chain reaction causing irreparable harm to the entire industry and consequent further damage to the U. S. economy as a whole. It's quite obvious that the Democratic leadership in Congress plans to move forward with bailout legislation already this week. Senate Majority Leader Harry Reid has indicated he will move forward with a bill which would give the auto industry access to the $700 billion Troubled Asset Relief Program (TARP) approved by the Congress last month to help ailing banks and other financial firms.
The Bush Administration and quite a few Republican senators reportedly will oppose this bill. President Bush instead has urged the Congress to speed up releasing $25 billion in already approved loans to the auto industry and dropping pending requirements that these loans be used specifically to help the industry retool their factories to meet higher fuel economy standards.
President-Elect Obama indicated in a "60 Minutes" interview played yesterday that, while he would not normally support a bailout to any private sector company, these are extraordinary times with our economy in crisis, and he would therefore support federal aid under certain conditions. These would include, as I recall, an agreement by the principal stakeholders (management, shareholders, bondholders, and the United Auto Workers) that would provide the government and taxpayers reasonable assurance that the company should have an ability to operate successfully in the longer term.
Personally I have very mixed feelings about any federal bailout, though I acknowledge that a bankruptcy by either GM or Ford would likely be such that the industry as we know it today would likely collapse. However, even in that case I'm confident that a new smaller and more focused auto industry would arise through initiatives of entrepreneurs and private equity funds. The main problems with a bailout, as I and many others see it, are that it's very difficult to be certain that a bailout will succeed, that much more money will not be needed later, and that it would make it much more difficult politically to say no to other important industries needing bailout assistance.
That said, I'd be reluctantly open to supporting a bailout along the lines proposed by Barack Obama, but with some more substantive stronger conditions. I'd want to have the bailout subject to a limited industry study and an associated compelling business plan written by neutral experts, agreed to in writing by senior representatives of all the stakeholders, and approved by the U. S. Senate and the President. It wouldn't be easy, but that work could be done in three months if put on a fast track by the key players. I'd also want the bailout to include a meaningful equity stake, say 25-40%, for the government on behalf of U. S. taxpayers. Whether it also would make sense to require some interest or dividend returns to the government I don't know, but would leave to the negotiators, and clearly that issue would depend on the specific structure of any deal arrived at.
Finally, while less important than the first two conditions, there should be specific limits to executive management compensation for existing personnel, but not necessarily if new management is brought in. Salary compensation should in either case be relatively modest, but meaningful financial incentives should be incorporated to provide adequate inducements for success.
GM seems to be leading the very weak industry in lobbying aggressively with federal officials for urgent help, suggesting bluntly in recent weeks that without government aid the company will probably have to file for bankruptcy some time next year, and that this would cause a massive chain reaction causing irreparable harm to the entire industry and consequent further damage to the U. S. economy as a whole. It's quite obvious that the Democratic leadership in Congress plans to move forward with bailout legislation already this week. Senate Majority Leader Harry Reid has indicated he will move forward with a bill which would give the auto industry access to the $700 billion Troubled Asset Relief Program (TARP) approved by the Congress last month to help ailing banks and other financial firms.
The Bush Administration and quite a few Republican senators reportedly will oppose this bill. President Bush instead has urged the Congress to speed up releasing $25 billion in already approved loans to the auto industry and dropping pending requirements that these loans be used specifically to help the industry retool their factories to meet higher fuel economy standards.
President-Elect Obama indicated in a "60 Minutes" interview played yesterday that, while he would not normally support a bailout to any private sector company, these are extraordinary times with our economy in crisis, and he would therefore support federal aid under certain conditions. These would include, as I recall, an agreement by the principal stakeholders (management, shareholders, bondholders, and the United Auto Workers) that would provide the government and taxpayers reasonable assurance that the company should have an ability to operate successfully in the longer term.
Personally I have very mixed feelings about any federal bailout, though I acknowledge that a bankruptcy by either GM or Ford would likely be such that the industry as we know it today would likely collapse. However, even in that case I'm confident that a new smaller and more focused auto industry would arise through initiatives of entrepreneurs and private equity funds. The main problems with a bailout, as I and many others see it, are that it's very difficult to be certain that a bailout will succeed, that much more money will not be needed later, and that it would make it much more difficult politically to say no to other important industries needing bailout assistance.
That said, I'd be reluctantly open to supporting a bailout along the lines proposed by Barack Obama, but with some more substantive stronger conditions. I'd want to have the bailout subject to a limited industry study and an associated compelling business plan written by neutral experts, agreed to in writing by senior representatives of all the stakeholders, and approved by the U. S. Senate and the President. It wouldn't be easy, but that work could be done in three months if put on a fast track by the key players. I'd also want the bailout to include a meaningful equity stake, say 25-40%, for the government on behalf of U. S. taxpayers. Whether it also would make sense to require some interest or dividend returns to the government I don't know, but would leave to the negotiators, and clearly that issue would depend on the specific structure of any deal arrived at.
Finally, while less important than the first two conditions, there should be specific limits to executive management compensation for existing personnel, but not necessarily if new management is brought in. Salary compensation should in either case be relatively modest, but meaningful financial incentives should be incorporated to provide adequate inducements for success.
Wednesday, November 12, 2008
Public Education
Understandably, President-Elect Obama's top priority during the current transition, aside from putting together his White House team and his Cabinet, and the first weeks and months of his administration beginning on January 20th, is working urgently with the Congress to try to fix our dismal economy. Given its great impact on virtually all of us, most Americans would agree with this prioritization. From what we can understand from his recent speeches and interview comments from his newly selected Chief of Staff, Rahm Emanuel, Obama's other senior priorities for at least the first several months of his term include review and probable revision of our military missions in Iraq and Afghanistan, healthcare, energy policy, and public education. I want to dedicate this post to the latter.
It is very hard to argue that our public education system, primarily for K-12 schools, should not be a senior priority for our next president. In February 2005 Microsoft founder Bill Gates at a conference of the National Governor's Association went so far as to say that "Training the workforce of tomorrow with today's high schools is like trying to teach kids about computers on a 50 year old mainframe." Strong words, but given his stature they deserve serious reflection. I don't know, but suspect he thinks the same comment would still apply today.
What's the main evidence that we have major problems with our about 95,000 K-12 public schools in this country, especially in our larger urban schools? To start with, we have high drop-out and unacceptably low graduation rates in too many schools. In a recent year only 48% of students in one of the country's largest school districts, Los Angeles Unified, graduated within four years of starting as freshmen! That's terrible. My research indicated that 75-80% of the 2.2 million people in our federal, state and local prisons a few years ago were high school drop-outs! That's costing us a fortune in cprison and other related criminal justice expenses. Our students are in general doing poorly in critically important math and science classes and, reportedly, are doing worse in test results than students in many of the other industrialized nations we are competing against in the current global economy. Apparently as many as 44% of 9th graders in L. A. Unified a few years ago flunked beginning algebra classes! We should be very concerned with that.
What's causing these very poor and unacceptable results in many of our schools? As a great many administrators, teachers and parents know, the causes are many and they have been widely discussed and written about. Some of the main causes include overcrowded classes, inadequate school facilities, teachers who are not fully qualified, starting teacher salaries which are too low, unmotivated students, negative impact of inner city gangs, poor classroom and schoolyard discipline, and insufficient student fluency in English. However, in my opinion, equally important causes include poor parenting and expectations for student achievement by parents, administrators, and teachers which are too low. Funding inadequacy may be a factor to some extent, but I'm not yet convinced it's really a major factor relative to most of the others mentioned.
What should be done to correct the situation we have? As one would expect, there are many different opinions. Some sincere people believe the primary need is just to fully fund the No Child Left Behind Act (NCLB) of 2001. Others say eliminate the U. S. Department of Education and leave education up to the states and local administrators. Neither of those would really accomplish much of what is needed. President-Elect Obama made a rather compelling speech on education in Dayton, Ohio on 9/9/08. I support many of his ideas. Here is my partial take as a former student in California public schools many years ago, parent of two children and grandparent of two children, all of whom have attended public schools in California, one who has family members and close friends who are teachers in K-12 public and private schools, and who has done a fair amount of research on the subject:
1. Determine how we can save a great deal of money and make our current system much more efficient and streamlined by examining whether we really need all the bureaucratic layers we now have in place and giving more authority and accountability to school principals and teachers.
2. Make an investment in quality early childhood education, initially at no cost to low income parents and partially subsidized for middle income parents. (I believe high income parents to a significant degree already provide this to their young children.) This should give all children a much better start as they enter K-12 schools.
3. Make sure that all math, science and technology teachers have the appropriate educational and training qualifications to effectively teach these subjects. Right now too many teachers apparently do not have the right qualifications. For example, many majored in English, history or sociology in college, yet are teaching high school math without an adequate math educational background.
4. Increase starting salaries for teachers, now averaging $30,000 to $35,000, excluding $10,000 to $12,000 in value of benefits granted, by 15-20%, especially for fully qualified and experienced math, science and technology teachers. One of the reasons for this is to attract better teachers who can make much more money in the private sector in many cases. Another reason is to reduce high teacher attrition, which is very costly for the school system. Also seriously consider instituting a reasonable merit compensation system for high performing teachers to be administered by the school principal, with awards perhaps subject to concurrence of one or two school board members.
5. End the current still common practice of social promotions under which undeserving students graduate or are promoted to the next higher grade, misleading parents and diluting the value of a diploma.
6. Establish a clear written code of conduct for students to be posted on school bulletin boards and distributed to parents or guardians at the beginning of each school year. Code violators should be subject to suspensions from classes, school activities or school for a short, longer, or permanent term, depending on the gravity of the offense and the number of prior violations.
7. Parents should also be provided with a letter from the school principal advising specifically what is expected and recommended of them to help their children get a good education. Issues to be covered should include such as homework completion, adequate studying, getting adequate sleep, limiting time watching TV and playing video games, participation in parent/teacher meetings, and communicating their educational expectations.
8. Extend school hours by 1-2 hours daily to provide more time for teaching, using the school or public library, and study/homework completion at school, where there probably are fewer distractions.
9. Try to set up week-end and summer internships with local companies and non-profit agencies to provide work experience, income, and career planning opportunities for students in good standing.
10. In concert with parents and local city officials try to identify mentoring and tutoring resources for needy students, especially those with one-parent and recent immigrant families.
Schools should also work with parents, city officials and the local police to see what more can be done to minimize gang and criminal activities in or near the schools and residential neighborhoods. This is usually not a problem in most suburbs and smaller towns, but it's definitely a big problem in most larger cities, especially where there are sizable minority and recent immigrant populations. Once most, if not all, of the above steps have been taken and allowed to work, we should determine what additional funding, if any, might be needed and what sources might potentially be available.
It is very hard to argue that our public education system, primarily for K-12 schools, should not be a senior priority for our next president. In February 2005 Microsoft founder Bill Gates at a conference of the National Governor's Association went so far as to say that "Training the workforce of tomorrow with today's high schools is like trying to teach kids about computers on a 50 year old mainframe." Strong words, but given his stature they deserve serious reflection. I don't know, but suspect he thinks the same comment would still apply today.
What's the main evidence that we have major problems with our about 95,000 K-12 public schools in this country, especially in our larger urban schools? To start with, we have high drop-out and unacceptably low graduation rates in too many schools. In a recent year only 48% of students in one of the country's largest school districts, Los Angeles Unified, graduated within four years of starting as freshmen! That's terrible. My research indicated that 75-80% of the 2.2 million people in our federal, state and local prisons a few years ago were high school drop-outs! That's costing us a fortune in cprison and other related criminal justice expenses. Our students are in general doing poorly in critically important math and science classes and, reportedly, are doing worse in test results than students in many of the other industrialized nations we are competing against in the current global economy. Apparently as many as 44% of 9th graders in L. A. Unified a few years ago flunked beginning algebra classes! We should be very concerned with that.
What's causing these very poor and unacceptable results in many of our schools? As a great many administrators, teachers and parents know, the causes are many and they have been widely discussed and written about. Some of the main causes include overcrowded classes, inadequate school facilities, teachers who are not fully qualified, starting teacher salaries which are too low, unmotivated students, negative impact of inner city gangs, poor classroom and schoolyard discipline, and insufficient student fluency in English. However, in my opinion, equally important causes include poor parenting and expectations for student achievement by parents, administrators, and teachers which are too low. Funding inadequacy may be a factor to some extent, but I'm not yet convinced it's really a major factor relative to most of the others mentioned.
What should be done to correct the situation we have? As one would expect, there are many different opinions. Some sincere people believe the primary need is just to fully fund the No Child Left Behind Act (NCLB) of 2001. Others say eliminate the U. S. Department of Education and leave education up to the states and local administrators. Neither of those would really accomplish much of what is needed. President-Elect Obama made a rather compelling speech on education in Dayton, Ohio on 9/9/08. I support many of his ideas. Here is my partial take as a former student in California public schools many years ago, parent of two children and grandparent of two children, all of whom have attended public schools in California, one who has family members and close friends who are teachers in K-12 public and private schools, and who has done a fair amount of research on the subject:
1. Determine how we can save a great deal of money and make our current system much more efficient and streamlined by examining whether we really need all the bureaucratic layers we now have in place and giving more authority and accountability to school principals and teachers.
2. Make an investment in quality early childhood education, initially at no cost to low income parents and partially subsidized for middle income parents. (I believe high income parents to a significant degree already provide this to their young children.) This should give all children a much better start as they enter K-12 schools.
3. Make sure that all math, science and technology teachers have the appropriate educational and training qualifications to effectively teach these subjects. Right now too many teachers apparently do not have the right qualifications. For example, many majored in English, history or sociology in college, yet are teaching high school math without an adequate math educational background.
4. Increase starting salaries for teachers, now averaging $30,000 to $35,000, excluding $10,000 to $12,000 in value of benefits granted, by 15-20%, especially for fully qualified and experienced math, science and technology teachers. One of the reasons for this is to attract better teachers who can make much more money in the private sector in many cases. Another reason is to reduce high teacher attrition, which is very costly for the school system. Also seriously consider instituting a reasonable merit compensation system for high performing teachers to be administered by the school principal, with awards perhaps subject to concurrence of one or two school board members.
5. End the current still common practice of social promotions under which undeserving students graduate or are promoted to the next higher grade, misleading parents and diluting the value of a diploma.
6. Establish a clear written code of conduct for students to be posted on school bulletin boards and distributed to parents or guardians at the beginning of each school year. Code violators should be subject to suspensions from classes, school activities or school for a short, longer, or permanent term, depending on the gravity of the offense and the number of prior violations.
7. Parents should also be provided with a letter from the school principal advising specifically what is expected and recommended of them to help their children get a good education. Issues to be covered should include such as homework completion, adequate studying, getting adequate sleep, limiting time watching TV and playing video games, participation in parent/teacher meetings, and communicating their educational expectations.
8. Extend school hours by 1-2 hours daily to provide more time for teaching, using the school or public library, and study/homework completion at school, where there probably are fewer distractions.
9. Try to set up week-end and summer internships with local companies and non-profit agencies to provide work experience, income, and career planning opportunities for students in good standing.
10. In concert with parents and local city officials try to identify mentoring and tutoring resources for needy students, especially those with one-parent and recent immigrant families.
Schools should also work with parents, city officials and the local police to see what more can be done to minimize gang and criminal activities in or near the schools and residential neighborhoods. This is usually not a problem in most suburbs and smaller towns, but it's definitely a big problem in most larger cities, especially where there are sizable minority and recent immigrant populations. Once most, if not all, of the above steps have been taken and allowed to work, we should determine what additional funding, if any, might be needed and what sources might potentially be available.
Wednesday, November 5, 2008
Post-election Reactions
I was not at all surprised that Senator Obama won to become the President-elect, but I didn't think he would win by that huge of an electoral vote margin. As almost everyone knows, he won big for several rather obvious reasons. The majority of Americans have been very disappointed and unhappy with the Bush Administration, as evidenced by the historic low public opinion polls for the President. Senator McCain had difficulty disassociating himself from the President, given his status as a Republican, his voting record in the Senate, and his consistent support for the widely unpopular and very costly Iraq War. Thirdly, the recent emergence of our depressed economy as the most important issue in the minds of the great majority of voters, and his inability to convince most voters that he had an effective plan to turn it around, greatly hurt him.
However, not so well known, perhaps, a very important factor in Obama's victory, as I alluded to in my previous post, was the widely acknowledged view that Obama's team ran one of the most disciplined and effective presidential campaigns in recent memory. McCain's team did not. The well-known conservative political commentator, Bill O'Reilly, on his radio show yesterday said McCain's team conducted a "chaotic" campaign, especially in dealing with the media. In part, O'Reilly apparently came to this harsh conclusion because of the team's erratic and too frequently negative ad focus and their shielding of Sarah Palin from the media, presumably because she had the questionable performances on one or two major media interviews, especially the one with Katie Couric on September 24th. I know there are differences of opinion on this, but I'm one of the many who think his selection of Palin as a running mate also had a net negative impact on his campaign, even though it apparently energized many in the conservative wing of his party. In my view, there were a number of stronger candidates available, including Governor Mitt Romney.
As was broadly expected, Obama gave a very appropriate and effective victory speech last night, acknowledging that he and his supporters have a great deal of hard work to do in the months and years ahead, that progress in fulfilling campaign promises will take time and require a substantial level of bipartisan support, but expressing confidence that working together we will "get there" and succeed. I was also very impressed with McCain's concession speech and President Bush's fairly brief remarks from the Rose Garden this morning. They both pledged full cooperation for the upcoming transition and, in McCain's case, in trying to work with the new administration in solving many of the country's problems from the Senate. Though one would expect that at a time like this, their remarks were gracious and positive, and good to hear. It gives Americans and our friends abroad reasons to be cautiously optimistic about the future.
All of that said, Obama faces a highly challenging period over the next several months, a period filled with high expectations by his followers. He will have to carefully balance those expectations with the financial and political realities on the ground. There will be little time for rest and relaxation. I would guess that his initial priority is to select a White House Chief of Staff and immediately thereafter his Cabinet, the three most important probably being his Secretary of State, the Secretary of the Treasury, and his National Security Advisor. Current Treasury Secretary Henry Paulson has made it clear he would like to have his replacement available as soon as possible to work closely with him on the federal plan to rescue our financial markets and our economy in general. I hope Obama's new Treasury Secretary takes him up on that.
It is a very historic time, and few would disagree that President-elect Obama will shortly be the most important and influential person, not only in the country, but in the entire world. Aside from his staffing, his top priority must be our nation's economy. Next, I'd think it would be meeting with his national security advisors, military leaders and General Petraeus to discuss our missions and strategies for Iraq and Afghanistan, and combating worldwide terrorism. I'm sure he'll early on want to meet with the leaders of all our major allies abroad, but another top priority must be to try to mend our critical relationship with Russia, given our mutual interests in so many important areas, including nuclear non-proliferation and fighting terrorism.
It will be extremely interesting to follow what Obama does and how he and Joe Biden perform. I'm certain he will not meet the expectations of all his constituents, but I think he has a good chance to be successful, particularly if he is able to get a reasonable level of support from congressional Republicans on major legislative initiatives.
However, not so well known, perhaps, a very important factor in Obama's victory, as I alluded to in my previous post, was the widely acknowledged view that Obama's team ran one of the most disciplined and effective presidential campaigns in recent memory. McCain's team did not. The well-known conservative political commentator, Bill O'Reilly, on his radio show yesterday said McCain's team conducted a "chaotic" campaign, especially in dealing with the media. In part, O'Reilly apparently came to this harsh conclusion because of the team's erratic and too frequently negative ad focus and their shielding of Sarah Palin from the media, presumably because she had the questionable performances on one or two major media interviews, especially the one with Katie Couric on September 24th. I know there are differences of opinion on this, but I'm one of the many who think his selection of Palin as a running mate also had a net negative impact on his campaign, even though it apparently energized many in the conservative wing of his party. In my view, there were a number of stronger candidates available, including Governor Mitt Romney.
As was broadly expected, Obama gave a very appropriate and effective victory speech last night, acknowledging that he and his supporters have a great deal of hard work to do in the months and years ahead, that progress in fulfilling campaign promises will take time and require a substantial level of bipartisan support, but expressing confidence that working together we will "get there" and succeed. I was also very impressed with McCain's concession speech and President Bush's fairly brief remarks from the Rose Garden this morning. They both pledged full cooperation for the upcoming transition and, in McCain's case, in trying to work with the new administration in solving many of the country's problems from the Senate. Though one would expect that at a time like this, their remarks were gracious and positive, and good to hear. It gives Americans and our friends abroad reasons to be cautiously optimistic about the future.
All of that said, Obama faces a highly challenging period over the next several months, a period filled with high expectations by his followers. He will have to carefully balance those expectations with the financial and political realities on the ground. There will be little time for rest and relaxation. I would guess that his initial priority is to select a White House Chief of Staff and immediately thereafter his Cabinet, the three most important probably being his Secretary of State, the Secretary of the Treasury, and his National Security Advisor. Current Treasury Secretary Henry Paulson has made it clear he would like to have his replacement available as soon as possible to work closely with him on the federal plan to rescue our financial markets and our economy in general. I hope Obama's new Treasury Secretary takes him up on that.
It is a very historic time, and few would disagree that President-elect Obama will shortly be the most important and influential person, not only in the country, but in the entire world. Aside from his staffing, his top priority must be our nation's economy. Next, I'd think it would be meeting with his national security advisors, military leaders and General Petraeus to discuss our missions and strategies for Iraq and Afghanistan, and combating worldwide terrorism. I'm sure he'll early on want to meet with the leaders of all our major allies abroad, but another top priority must be to try to mend our critical relationship with Russia, given our mutual interests in so many important areas, including nuclear non-proliferation and fighting terrorism.
It will be extremely interesting to follow what Obama does and how he and Joe Biden perform. I'm certain he will not meet the expectations of all his constituents, but I think he has a good chance to be successful, particularly if he is able to get a reasonable level of support from congressional Republicans on major legislative initiatives.
Sunday, November 2, 2008
Presidential Election Conclusions
The great majority of political pundits think Barack Obama will be our next president. I agree with them. The great majority of American voters seem to be increasingly tired of two long years of campaigning, much of it negative, and the incredible levels of fundraising we have seen, and will be glad the election will be over after November 4th. I agree with them as well.
I've also been concerned with the many campaign promises made by both Senator Obama and Senator McCain that they most likely will not be able to deliver on because on their own they don't have the constitutional authority, might not have adequate bipartisan support in Congress, or the needed federal funding availability, given the huge and growing budget deficit, worrisome national debt level, our very weak economy, ongoing expensive war commitments in the Middle East, and promises to push for lower income taxes and tax credits. Realistically, whether Obama or McCain win, to govern in this environment, the next president will have to prioritize the legislative agenda, make concessions to gain enough support, and defer action on a number of campaign promises.
And this doesn't even take directly into account several highly important national issues which were not given all that much attention in Obama and McCain's campaigns and the media covering them: Social Security, Medicare and Medicaid, and public education, all big ticket issues of great interest to a significant majority of Americans. It has also been quite surprising to me that there has been so little talk in the campaigns about a substantive reform of our archaic and unnecessarily complex and expensive income tax system. I know that tax attorneys and tax accountants are very happy with the present system, because it provides them a good living. But my guess is that most taxpayers don't see it that way.
While I have some concerns with both candidates, I think the country will be best served by the election of Obama. It is true that he has limited governing experience, but so does McCain. The smooth and effective way his campaign has been managed, supports the view that he is a good manager, with capability to be a well performing executive. A significant number of senior military men and women, including especially Colin Powell, have endorsed him and believe he will be a very capable Commander-in-Chief. That should give us some comfort. Like most presidents, I'm quite confident that he will surround himself with a highly experienced team of national security, military, economic, foreign policy and domestic policy advisors. While he has been repeatedly branded as a socialist and liberal leftist, I believe he will be a pragmatic problem solver, listening to his advisors, and that he will govern from the center, similar to Bill Clinton. His judgment, intellectual capacity, superior communication skills, and his level-headed presidential bearing during his campaign make up for his relatively limited resume.
No one should question McCain's courage, honor, patriotism, or devotion to public service. However, I have been concerned with many of his comments on foreign policy, including his inclination to seriously consider going to war against Russia and moving to kick the Russians out of the G8, the group of major industrialized countries. Instead of provoking the Russian leadership, such as President Bush has done with the expansion of NATO and missile defense systems in eastern Europe, we need to pursue a dialogue path towards strategic cooperation on higher priority issues like fighting terrorism, combating global warming, energy conservation, and nuclear non-proliferation. I also question McCain's continuous, unrealistic insistence that "victory" in Iraq must still be our primary goal, implying that this should be so regardless of costs, whether human or financial. It seems to me, instead, that our primary goal should be a stable, democratic Iraq that can defend itself against insurgents and any external enemies, to be achieved as soon as possible with a very limited level of further U. S. financial expenditures and casualties.
If it wasn't clear at the beginning of these presidential campaigns, it must be clear now, that the U. S. does not have the resources, or public support, to police the world and solve the planet's problems largely by ourselves. We have to work more closely with allies and friends, as well as the near super-powers (Russia, China and India, and possibly later on, Brazil). Going to another war must be a very last resort. We also need to focus more on our domestic priorities, including rebuilding our public infrastructure, energy independence, K-12 public education, healthcare, and putting Medicare and Social Security on a more solid financial footing.
The next president is inheriting an incredibly serious, complex and challenging set of major unsolved problems, perhaps more so than any other president-elect in recent history. To be successful he will need to all his analytical, negotiation and communication skills, a highly effective team of experienced advisors, a great deal of bipartisan support in the Congress, strong support from our allies, the media and the American people, and, yes, also some measure of good luck.
I've also been concerned with the many campaign promises made by both Senator Obama and Senator McCain that they most likely will not be able to deliver on because on their own they don't have the constitutional authority, might not have adequate bipartisan support in Congress, or the needed federal funding availability, given the huge and growing budget deficit, worrisome national debt level, our very weak economy, ongoing expensive war commitments in the Middle East, and promises to push for lower income taxes and tax credits. Realistically, whether Obama or McCain win, to govern in this environment, the next president will have to prioritize the legislative agenda, make concessions to gain enough support, and defer action on a number of campaign promises.
And this doesn't even take directly into account several highly important national issues which were not given all that much attention in Obama and McCain's campaigns and the media covering them: Social Security, Medicare and Medicaid, and public education, all big ticket issues of great interest to a significant majority of Americans. It has also been quite surprising to me that there has been so little talk in the campaigns about a substantive reform of our archaic and unnecessarily complex and expensive income tax system. I know that tax attorneys and tax accountants are very happy with the present system, because it provides them a good living. But my guess is that most taxpayers don't see it that way.
While I have some concerns with both candidates, I think the country will be best served by the election of Obama. It is true that he has limited governing experience, but so does McCain. The smooth and effective way his campaign has been managed, supports the view that he is a good manager, with capability to be a well performing executive. A significant number of senior military men and women, including especially Colin Powell, have endorsed him and believe he will be a very capable Commander-in-Chief. That should give us some comfort. Like most presidents, I'm quite confident that he will surround himself with a highly experienced team of national security, military, economic, foreign policy and domestic policy advisors. While he has been repeatedly branded as a socialist and liberal leftist, I believe he will be a pragmatic problem solver, listening to his advisors, and that he will govern from the center, similar to Bill Clinton. His judgment, intellectual capacity, superior communication skills, and his level-headed presidential bearing during his campaign make up for his relatively limited resume.
No one should question McCain's courage, honor, patriotism, or devotion to public service. However, I have been concerned with many of his comments on foreign policy, including his inclination to seriously consider going to war against Russia and moving to kick the Russians out of the G8, the group of major industrialized countries. Instead of provoking the Russian leadership, such as President Bush has done with the expansion of NATO and missile defense systems in eastern Europe, we need to pursue a dialogue path towards strategic cooperation on higher priority issues like fighting terrorism, combating global warming, energy conservation, and nuclear non-proliferation. I also question McCain's continuous, unrealistic insistence that "victory" in Iraq must still be our primary goal, implying that this should be so regardless of costs, whether human or financial. It seems to me, instead, that our primary goal should be a stable, democratic Iraq that can defend itself against insurgents and any external enemies, to be achieved as soon as possible with a very limited level of further U. S. financial expenditures and casualties.
If it wasn't clear at the beginning of these presidential campaigns, it must be clear now, that the U. S. does not have the resources, or public support, to police the world and solve the planet's problems largely by ourselves. We have to work more closely with allies and friends, as well as the near super-powers (Russia, China and India, and possibly later on, Brazil). Going to another war must be a very last resort. We also need to focus more on our domestic priorities, including rebuilding our public infrastructure, energy independence, K-12 public education, healthcare, and putting Medicare and Social Security on a more solid financial footing.
The next president is inheriting an incredibly serious, complex and challenging set of major unsolved problems, perhaps more so than any other president-elect in recent history. To be successful he will need to all his analytical, negotiation and communication skills, a highly effective team of experienced advisors, a great deal of bipartisan support in the Congress, strong support from our allies, the media and the American people, and, yes, also some measure of good luck.
Sunday, September 21, 2008
U. S. Financial System Crisis
From a financial, economic and political standpoint, in the the last week or two we have witnessed perhaps the most serious and far-reaching crisis facing the country since the years of the Great Depression in the 1930's. While many important, necessary but controversial corrective steps have been taken by the federal government, it's still far too early to see how this will end up and how our economy is likely to fare the rest of this year and in 2009. An economic depression or continuance of the de facto recession are still both possibilities.
The majority of leading economists and financial market observers have placed primary blame on overly aggressive, high-risk taking, greedy and imprudent mortgage lenders and investment bankers who unwisely were confident that home values would continue to rise for an extended further period. The mortgage lenders, such as Countrywide Financial and Washington Mutual (WaMu), very successful for a number of years, made aggressive loans requiring inadequate or even no down payment to frequently unsophisticated borrowers who in many cases could not afford the loans they were granted. Many of these loans were risky, rate adjustable loans with initial 'teaser' rates to make the loans appear more attractive to borrowers. Blame also has been fairly placed on inadequate oversight and outdated regulation by federal agencies, including the SEC, FDIC, Treasury Department and the Federal Reserve System (the Fed).
Investment bankers, many with weak balance sheets, made a big, initially profitable business of purchasing the mortgage loans without much analysis and securitizing them into so-called mortgage-backed securities, and selling them to institutional investors, including insurance companies, pension funds and other banks. To a great extent the investment banks purchased the mortgages by borrowing a great deal of money from the larger banks, putting a lot of debt on their books and thereby leveraging their balance sheets. They also used cash they had on hand, which began to impair their liquidity.
This worked out very well for several years, until home prices began to fall significantly in many of the country's key housing markets towards the second half of 2007 and this year, the result being that a high percentage of the mortgage loans became larger than the current market value of the homes securing the loans. This understandably caused a lot of anxiety among the lenders who became pressured to recognize substantial losses on their income statements, impairing credit ratings, and initiate foreclosure proceedings against the great number of homeowners involved. Another negative factor was a rising unemployment rate caused by a number of factors: a dramatic slowdown in construction activity; globalization, including corporate outsourcing to purchase products and components abroad, especially from China, where they could be made much more cheaply; and initiatives by U. S. companies to reduce expenses to better compete through laying off people and employing more technology and productivity-enhancing measures.
All this led to a lack of liquidity, poor credit availability, declining stock and bond markets, and an overall crisis of confidence in our financial system threatening our economy and that of our allies abroad. A team led by Treasury Secretary Paulson and Fed Chairman Bernanke concluded that immediate and drastic government intervention was needed and they acted decisively in a series of high-level meetings. As most of us know, the outcome included so far the bankruptcy of Lehman Brothers, one of the major investment banks; government takeover/bailout of Freddie Mac and Fannie Mae, the huge mortgage buyers; the takeover/bailout of AIG, the country's largest insurance company; the Bank of America's takeover of Merrill-Lynch, one of the other major investment banks; and the plan led by Paulson and Bernanke for the federal government to purchase up to $700 billion of "toxic", high-risk and illiquid investments held by investment banks and commercial banks, including the infamous mortgage-backed securities.
The only two major independent U. S. investment banks left at present are Morgan Stanley and Goldman Sachs. Morgan Stanley has apparently entered into merger talks with Wachovia, one of our largest commercial banks, and over the weekend the Fed agreed to convert the two of them into better regulated traditional bank holding companies.
Most of our political leaders and market analysts seem to support the government intervention as led by Paulson and Bernanke, although great concern has been raised by many of the dangerous precedent this has set, the great concentration of political and economic power involved, and the liability and debt load facing the country and the taxpayers. However, the consensus key objective is quickly restoring confidence and stability to our financial and housing markets. Importantly there is also a general conclusion that this intervention will likely have a very restrictive impact on the next presidential administration to carry out its political agenda.
As a former career banker, I generally agree with all these points. Given the impressive track record and resumes of Paulson and his highly experienced lieutenants, it will not be easy for critics to make a compelling case that a different course should have been pursued. As Paulson conveyed in an interview over the weekend, the decisions made were very difficult and complex and definitely involved controversial issues, but there was no good option. That said, it's probably a fair criticism that Paulson, his Treasury colleagues, supported by the regulators, should have anticipated the looming problems sooner and acted sooner. Paulson, after all, has been in office since July 2006. Moreover, his boss, President Bush, has been in office for nearly eight years.
The Executive Branch and the Congress now need to work on an urgent, constructive, and bipartisan basis to complete the overhaul to our financial system, including overseeing completion of the initiatives taken to date, and, over the next several months, prudently updating and streamlining regulatory oversight of our commercial and financial institutions.
Completion of the initiatives includes particularly Congressional action with respect to the pending $700 billion rescue plan proposed by Paulsen and Bernanke. Congressional leaders have acknowledged that they need to move fairly quickly, but are anxious to reassert their authority and include provisions for oversight, fairness and support for deserving homeowners and taxpayers, as well as limits to executive compensation at the institutions who have gotten themselves into trouble by poor management.
Given the urgency of the need to restore confidence in the markets, and the importance of structuring the right legislation for reform, the best approach might be to agree to a two-part solution. This would cover, initially, timely approval by Congress this week of the primary components of the Paulsen/Bernanke plan with limited tweaking and delay, and then, secondly, a subsequent broadly supported, comprehensive financial system reform bill hopefully to be signed into law by the next president after pragmatic deliberations and productive hearings by the Congress.
The majority of leading economists and financial market observers have placed primary blame on overly aggressive, high-risk taking, greedy and imprudent mortgage lenders and investment bankers who unwisely were confident that home values would continue to rise for an extended further period. The mortgage lenders, such as Countrywide Financial and Washington Mutual (WaMu), very successful for a number of years, made aggressive loans requiring inadequate or even no down payment to frequently unsophisticated borrowers who in many cases could not afford the loans they were granted. Many of these loans were risky, rate adjustable loans with initial 'teaser' rates to make the loans appear more attractive to borrowers. Blame also has been fairly placed on inadequate oversight and outdated regulation by federal agencies, including the SEC, FDIC, Treasury Department and the Federal Reserve System (the Fed).
Investment bankers, many with weak balance sheets, made a big, initially profitable business of purchasing the mortgage loans without much analysis and securitizing them into so-called mortgage-backed securities, and selling them to institutional investors, including insurance companies, pension funds and other banks. To a great extent the investment banks purchased the mortgages by borrowing a great deal of money from the larger banks, putting a lot of debt on their books and thereby leveraging their balance sheets. They also used cash they had on hand, which began to impair their liquidity.
This worked out very well for several years, until home prices began to fall significantly in many of the country's key housing markets towards the second half of 2007 and this year, the result being that a high percentage of the mortgage loans became larger than the current market value of the homes securing the loans. This understandably caused a lot of anxiety among the lenders who became pressured to recognize substantial losses on their income statements, impairing credit ratings, and initiate foreclosure proceedings against the great number of homeowners involved. Another negative factor was a rising unemployment rate caused by a number of factors: a dramatic slowdown in construction activity; globalization, including corporate outsourcing to purchase products and components abroad, especially from China, where they could be made much more cheaply; and initiatives by U. S. companies to reduce expenses to better compete through laying off people and employing more technology and productivity-enhancing measures.
All this led to a lack of liquidity, poor credit availability, declining stock and bond markets, and an overall crisis of confidence in our financial system threatening our economy and that of our allies abroad. A team led by Treasury Secretary Paulson and Fed Chairman Bernanke concluded that immediate and drastic government intervention was needed and they acted decisively in a series of high-level meetings. As most of us know, the outcome included so far the bankruptcy of Lehman Brothers, one of the major investment banks; government takeover/bailout of Freddie Mac and Fannie Mae, the huge mortgage buyers; the takeover/bailout of AIG, the country's largest insurance company; the Bank of America's takeover of Merrill-Lynch, one of the other major investment banks; and the plan led by Paulson and Bernanke for the federal government to purchase up to $700 billion of "toxic", high-risk and illiquid investments held by investment banks and commercial banks, including the infamous mortgage-backed securities.
The only two major independent U. S. investment banks left at present are Morgan Stanley and Goldman Sachs. Morgan Stanley has apparently entered into merger talks with Wachovia, one of our largest commercial banks, and over the weekend the Fed agreed to convert the two of them into better regulated traditional bank holding companies.
Most of our political leaders and market analysts seem to support the government intervention as led by Paulson and Bernanke, although great concern has been raised by many of the dangerous precedent this has set, the great concentration of political and economic power involved, and the liability and debt load facing the country and the taxpayers. However, the consensus key objective is quickly restoring confidence and stability to our financial and housing markets. Importantly there is also a general conclusion that this intervention will likely have a very restrictive impact on the next presidential administration to carry out its political agenda.
As a former career banker, I generally agree with all these points. Given the impressive track record and resumes of Paulson and his highly experienced lieutenants, it will not be easy for critics to make a compelling case that a different course should have been pursued. As Paulson conveyed in an interview over the weekend, the decisions made were very difficult and complex and definitely involved controversial issues, but there was no good option. That said, it's probably a fair criticism that Paulson, his Treasury colleagues, supported by the regulators, should have anticipated the looming problems sooner and acted sooner. Paulson, after all, has been in office since July 2006. Moreover, his boss, President Bush, has been in office for nearly eight years.
The Executive Branch and the Congress now need to work on an urgent, constructive, and bipartisan basis to complete the overhaul to our financial system, including overseeing completion of the initiatives taken to date, and, over the next several months, prudently updating and streamlining regulatory oversight of our commercial and financial institutions.
Completion of the initiatives includes particularly Congressional action with respect to the pending $700 billion rescue plan proposed by Paulsen and Bernanke. Congressional leaders have acknowledged that they need to move fairly quickly, but are anxious to reassert their authority and include provisions for oversight, fairness and support for deserving homeowners and taxpayers, as well as limits to executive compensation at the institutions who have gotten themselves into trouble by poor management.
Given the urgency of the need to restore confidence in the markets, and the importance of structuring the right legislation for reform, the best approach might be to agree to a two-part solution. This would cover, initially, timely approval by Congress this week of the primary components of the Paulsen/Bernanke plan with limited tweaking and delay, and then, secondly, a subsequent broadly supported, comprehensive financial system reform bill hopefully to be signed into law by the next president after pragmatic deliberations and productive hearings by the Congress.
Saturday, September 20, 2008
Fuel Economy Standards
As almost everyone knows, the high cost of gas and diesel fuel for our vehicles, and our depressed economy and much tighter household budgets, are inducing the majority of owners to think more about the cars they buy and be more selective in their driving habits. Furthermore, political developments around the world, including especially the terrorist activities of Islamic radicals, have made most of us supportive of the U. S. moving forward toward much greater energy independence, particularly when it comes to the Middle East as a supplier. Energy independence is, in fact, an increasing national security issue.
To help deal with these issues, President Bush's Administration and the Congress has approved tougher fuel economy standards, despite resistance from the domestic auto industry and its suppliers. In an energy bill passed last year, auto manufacturers for vehicles (cars and light trucks) sold in the U. S. must comply with a fleet-wide average standard of 31.6 miles per gallon by 2015 and 35 miles per gallon by 2020. The standards are managed by the Department of Transportation and the Environmental Protection Agency (EPA) administers the testing program that generates the fuel economy data.
The EPA has recently reported that the average performance of new 2008 model cars and light trucks for vehicles sold was 20.8 miles per gallon, obviously a great deal lower than the 2015 and 2020 standards. Not surprisingly, the Japanese manufacturers had the best performance, with an average of 23.6 mpg for Honda, 23.4 for Toyota, and 21.2 for Nissan. General Motors had an average of only 19.6 mpg, Ford 19 and Chrysler had 18.9.
One can argue whether there should be any mandated standards. The domestic auto industry, libertarians and many other conservative voters would probably prefer to leave fuel efficiency standards to be entirely voluntary, up to the market, to buyers and sellers, without government interference. There is something to be said for this view. However, these are not "normal" times. As a pragmatic moderate, in view of the importance of moving toward energy independence, I think mandated fuel efficiency standards are appropriate, and probably are not aggressive enough.
It's my understanding that there are currently more than 100 different models offered for sale which can get 30 mpg or better for highway driving, somewhat less for in town driving. A few months ago my wife and I rented a new Chevy Cobalt in Minneapolis, drove about 4,000 miles, mostly on highways, but got an impressive 36 mpg. on average with good comfort and without any special effort.
It is widely recognized that General Motors, once one of the largest and most successful manufacturers in the world, has been performing very poorly for many years in terms of sales and financial results. GM reported a $15.5 billion net loss for its second quarter, continuing a string of losses. They are in very serious financial straits. They just announced that they intend to draw down the remaining $3.5 billion of an existing $4.5 billion secured revolving credit facility to boost liquidity and help them pay payroll and other bills.
With the above background, it was therefore very striking and telling that I read in the L. A. Times last Friday that GM was promoting their new 2009 Cadillac CTS-V, a car priced at an estimated $65,000, with 556 horsepower, and EPA measured fuel economy of 14 mpg in the city and 18 on the highway! One of its big features is that it can go from 0 to 60 mph in 4 seconds. I suppose there is a small market for a car like this and perhaps the profit margins are better than on many of their other models. However, I don't see how this car is what GM needs to recover financially and help them achieve the mandated fuel economy standards. Why don't they promote a car like the Chevy Cobalt?
To help deal with these issues, President Bush's Administration and the Congress has approved tougher fuel economy standards, despite resistance from the domestic auto industry and its suppliers. In an energy bill passed last year, auto manufacturers for vehicles (cars and light trucks) sold in the U. S. must comply with a fleet-wide average standard of 31.6 miles per gallon by 2015 and 35 miles per gallon by 2020. The standards are managed by the Department of Transportation and the Environmental Protection Agency (EPA) administers the testing program that generates the fuel economy data.
The EPA has recently reported that the average performance of new 2008 model cars and light trucks for vehicles sold was 20.8 miles per gallon, obviously a great deal lower than the 2015 and 2020 standards. Not surprisingly, the Japanese manufacturers had the best performance, with an average of 23.6 mpg for Honda, 23.4 for Toyota, and 21.2 for Nissan. General Motors had an average of only 19.6 mpg, Ford 19 and Chrysler had 18.9.
One can argue whether there should be any mandated standards. The domestic auto industry, libertarians and many other conservative voters would probably prefer to leave fuel efficiency standards to be entirely voluntary, up to the market, to buyers and sellers, without government interference. There is something to be said for this view. However, these are not "normal" times. As a pragmatic moderate, in view of the importance of moving toward energy independence, I think mandated fuel efficiency standards are appropriate, and probably are not aggressive enough.
It's my understanding that there are currently more than 100 different models offered for sale which can get 30 mpg or better for highway driving, somewhat less for in town driving. A few months ago my wife and I rented a new Chevy Cobalt in Minneapolis, drove about 4,000 miles, mostly on highways, but got an impressive 36 mpg. on average with good comfort and without any special effort.
It is widely recognized that General Motors, once one of the largest and most successful manufacturers in the world, has been performing very poorly for many years in terms of sales and financial results. GM reported a $15.5 billion net loss for its second quarter, continuing a string of losses. They are in very serious financial straits. They just announced that they intend to draw down the remaining $3.5 billion of an existing $4.5 billion secured revolving credit facility to boost liquidity and help them pay payroll and other bills.
With the above background, it was therefore very striking and telling that I read in the L. A. Times last Friday that GM was promoting their new 2009 Cadillac CTS-V, a car priced at an estimated $65,000, with 556 horsepower, and EPA measured fuel economy of 14 mpg in the city and 18 on the highway! One of its big features is that it can go from 0 to 60 mph in 4 seconds. I suppose there is a small market for a car like this and perhaps the profit margins are better than on many of their other models. However, I don't see how this car is what GM needs to recover financially and help them achieve the mandated fuel economy standards. Why don't they promote a car like the Chevy Cobalt?
Wednesday, September 17, 2008
Republican Convention
On August 29th I published a post on the Democratic Convention held in Denver. It's therefore appropriate that I now belatedly publish a post on the Republican Convention held in St. Paul, Minnesota in the first four days of September.
Republicans and many Independents no doubt felt it was a highly successful convention, highlighted by the impressive speech delivered by John McCain's very recent Vice President nominee, Governor Sarah Palin from Alaska. The apparent success seemed to be evidenced by the post-convention bounce in the polls given to the McCain-Palin ticket showing them virtually even, and in some polls slightly ahead of Obama and Biden. There is little doubt that Ms. Palin has energized Republican Party supporters and, at least for the time being, raised the confidence of Mr. McCain and his campaign staff.
However, just as the Republicans have been quite critical of Barack Obama's experience at the top of the Democratic ticket, which has not been an unexpected or unjustified charge, criticism has been raised by both Democrats and even some Republicans of Ms. Palin's experience. As a reminder, she served on the city council and later as mayor of the small town of Wasilla with a population of around 7,000 when she served, and for the past twenty-two months has served as governor of the state, apparently quite successfully, based on her widespread popularity up there. Her experience and qualifications are more important than in most presidential elections for two fairly obvious reasons: first, the relatively advanced age (72) and previous health issues of Mr. McCain, and second, the extremely serious economic and international issues currently facing the country.
Ms. Palin's qualifications will be tested in her October 2nd scheduled debate with Joe Biden and expected interviews with a number of TV and radio talk show hosts over the coming weeks. There will likely be some challenging questions about foreign policy and national security issues, as well as on her questionable recent comments on support for and against the "Bridge to Nowhere" and pursuit of earmark legislation for a variety of Alaskan projects. While she's a smart and impressive woman in many respects, she will most probably not get a pass on foreign relations expertise because of Alaska's long border with Canada and the fact that one can see a Russian island from an Alaskan island or peninsula across the Bering Strait.
One thing that particularly concerned me on this subject, although it was not incorrect, was her widely publicized recent statement, in a recent interview with ABC News anchor Charles Gibson, that we may have to go to war with Russia. I'm not sure she understood that that was a highly provocative statement for a candidate for vice president to say at a time like this when resumption of the Cold War we had with the Soviet Union is a real and serious possibility.
In any case, I suspect it will be, surprisingly, a very close election and many experienced political analysts believe it will come down to how the candidates do in the upcoming debates and the voting in three critical states: Michigan, Pennsylvania, and Ohio.
It is very unfortunate for the American people that under our present system so much time and effort needs to be spent on endless fundraising and negative campaigning, despite earlier promises to take the high road, and expensive TV advertising that frequently contains erroneous and misleading statements about the opposition's viewpoints. Both major campaigns are guilty to varying degrees. It is tradition to say the American people "deserve better," and we do. However, it's a fact that to a significant extent, it's also our own fault, because much too high a percentage of our people don't vote (close to 45% on average in national elections!) and don't contact their elected representatives to convey their views on important issues.
Republicans and many Independents no doubt felt it was a highly successful convention, highlighted by the impressive speech delivered by John McCain's very recent Vice President nominee, Governor Sarah Palin from Alaska. The apparent success seemed to be evidenced by the post-convention bounce in the polls given to the McCain-Palin ticket showing them virtually even, and in some polls slightly ahead of Obama and Biden. There is little doubt that Ms. Palin has energized Republican Party supporters and, at least for the time being, raised the confidence of Mr. McCain and his campaign staff.
However, just as the Republicans have been quite critical of Barack Obama's experience at the top of the Democratic ticket, which has not been an unexpected or unjustified charge, criticism has been raised by both Democrats and even some Republicans of Ms. Palin's experience. As a reminder, she served on the city council and later as mayor of the small town of Wasilla with a population of around 7,000 when she served, and for the past twenty-two months has served as governor of the state, apparently quite successfully, based on her widespread popularity up there. Her experience and qualifications are more important than in most presidential elections for two fairly obvious reasons: first, the relatively advanced age (72) and previous health issues of Mr. McCain, and second, the extremely serious economic and international issues currently facing the country.
Ms. Palin's qualifications will be tested in her October 2nd scheduled debate with Joe Biden and expected interviews with a number of TV and radio talk show hosts over the coming weeks. There will likely be some challenging questions about foreign policy and national security issues, as well as on her questionable recent comments on support for and against the "Bridge to Nowhere" and pursuit of earmark legislation for a variety of Alaskan projects. While she's a smart and impressive woman in many respects, she will most probably not get a pass on foreign relations expertise because of Alaska's long border with Canada and the fact that one can see a Russian island from an Alaskan island or peninsula across the Bering Strait.
One thing that particularly concerned me on this subject, although it was not incorrect, was her widely publicized recent statement, in a recent interview with ABC News anchor Charles Gibson, that we may have to go to war with Russia. I'm not sure she understood that that was a highly provocative statement for a candidate for vice president to say at a time like this when resumption of the Cold War we had with the Soviet Union is a real and serious possibility.
In any case, I suspect it will be, surprisingly, a very close election and many experienced political analysts believe it will come down to how the candidates do in the upcoming debates and the voting in three critical states: Michigan, Pennsylvania, and Ohio.
It is very unfortunate for the American people that under our present system so much time and effort needs to be spent on endless fundraising and negative campaigning, despite earlier promises to take the high road, and expensive TV advertising that frequently contains erroneous and misleading statements about the opposition's viewpoints. Both major campaigns are guilty to varying degrees. It is tradition to say the American people "deserve better," and we do. However, it's a fact that to a significant extent, it's also our own fault, because much too high a percentage of our people don't vote (close to 45% on average in national elections!) and don't contact their elected representatives to convey their views on important issues.
Monday, September 1, 2008
Energy Independence and Foreign Policy
Recent troubling international events, involving especially Russia, secondarily Iran and Venezuela, have made it even more urgent for the U. S. to work more closely with our allies to deal with serious threats from these three oil and gas producing major players and accelerate movement towards a high degreee of energy independence. It's not necessary to be 100% independent, but I think we need to be at least 80%, and preferably 100% when it comes to the Middle East. If need be, we can rely on any relatively small emergency shortfall on more drilling from domestic wells, conservation, and a temporary release of some of the oil in our Strategic Petroleum Reserve, now with an inventory of more than 700 million barrels.
These events, as most of us know, include particularly Russian aggression in the little neighboring country of Georgia, threats to Turkey for allowing U. S. naval vessels to enter the Black Sea, implicit threats to Western Europe for generally supporting the U. S. in discussing sanctions against Russia for their aggression, support to Iran for developing their nuclear energy development, and potential threat to Russia to expel the country from membership in the exclusive G8 group of developed countries. These events are strategically highly sensitive because many European countries are very dependent on substantial imports of oil and gas from Russia, the U. S. needs Russian cooperation on dealing with international terrorism and the multiple threats posed by Iran. Furthermore, no one wants a return to the Cold War.
Iran, of course, is believed to be very possibly developing nuclear weaponry that could be a major threat to the entire Middle East, particularly Israel, and is causing a great deal of trouble with our current mission in Iraq. Venezuela's Chavez is establishing suspicious alliances with Iran and Russia, is a trouble-maker in our ally Columbia, and seemingly taking steps to corral oil producers Ecuador and Bolivia into their political camp. Finally, another troubling Latin American event is clear evidence that Russia has now decided to renew a major relationship with Castro's Cuba, most probably to irritate the U. S. and serve as an aggressive reaction to many of our somewhat provocative diplomatic and military actions in eastern Europe and other former Soviet Union republics.
All of these events, and their prospective economic and political consequences, make it obvious that moving boldly and urgently towards a high degree of energy independence is critical for both the U. S. and our European allies, from whom we can learn a lot. As an example, France gets 16% of their energy from renewable resources, compared to about 6% for the U. S., and gets 87.5% of their electric power production from their 59 nuclear plants. Germany has the world's largest solar power installation at Hemau, a small town in southern part of the country, and is among the world's leaders in the percentage of energy consumption obtained from solar. Little Denmark was 99% energy dependent in 1973 at the time of the Arab oil embargo. Now, after developing a comprehensive energy plan, Denmark gets 20% of their total energy needs from electricity generated by wind turbines, and the proportion is growing annually. The cost of this electricity has been reduced by 75%since 1970. Biomass energy and conservation are other important parts of their energy plan. We can also learn from Brazil's success in becoming independent with their ethanol production from sugar cane, supporting their oil resources.
Fortunately both Senators McCain and Obama support some level of energy independence. McCain indicated in a recent comprehensive speech on his energy plan in Las Vegas that he is committed to "strategic independence by 2025." Obama said in his nomination acceptance speech last Thursday that he is committed to independence from Middle East oil within the next ten years. However, both candidates need to get more specific and ambitious. I don't really know what McCain means by "strategic independence" and, it seems to me, 17 years is too long a timeframe. In terms of Obama's commitment, I'd agree that independence from the Middle East should be a priority, but I'm also concerned with a high level of independence from Venezuela, Nigeria, Algeria, and Indonesia. Canada is the only major exporter I think we can consider reasonably secure and reliable.
As I indicated in an earlier posting, we need a urgent and comprehensive national energy plan that includes the above goals for independence and very significant roles for several environmentally sensitive and cost sensitive options: natural gas, nuclear, clean coal refining technology, hydroelectric, solar, wind and biomass sourced power. There is no reason why we can't over the next 10-12 years, like Brazil, France and Denmark, increase our energy consumption from renewable sources from our current 6% to at least 15% and a target of 20% in 15 years. Achieving these realistic goals will serve us well in terms of national security, dealing effectively with global warming, preserving our environment, as well as the critical economic benefit of generating millions of badly needed new, well-paying "green" jobs.
It is also critical that we pursue well thought-out ongoing diplomacy and dialogue with Russia as well as China, the two other super powers, much as we don't like their form of government, the way they treat their own people, and many of their actions. No nation will win if a serious Cold War develops between Russia and the U. S. or between China and the U. S. We need to try to maintain our military supremacy, but, with very limited exceptions, pragmatic diplomacy and dialogue must be exhausted, before we launch a military option.
These events, as most of us know, include particularly Russian aggression in the little neighboring country of Georgia, threats to Turkey for allowing U. S. naval vessels to enter the Black Sea, implicit threats to Western Europe for generally supporting the U. S. in discussing sanctions against Russia for their aggression, support to Iran for developing their nuclear energy development, and potential threat to Russia to expel the country from membership in the exclusive G8 group of developed countries. These events are strategically highly sensitive because many European countries are very dependent on substantial imports of oil and gas from Russia, the U. S. needs Russian cooperation on dealing with international terrorism and the multiple threats posed by Iran. Furthermore, no one wants a return to the Cold War.
Iran, of course, is believed to be very possibly developing nuclear weaponry that could be a major threat to the entire Middle East, particularly Israel, and is causing a great deal of trouble with our current mission in Iraq. Venezuela's Chavez is establishing suspicious alliances with Iran and Russia, is a trouble-maker in our ally Columbia, and seemingly taking steps to corral oil producers Ecuador and Bolivia into their political camp. Finally, another troubling Latin American event is clear evidence that Russia has now decided to renew a major relationship with Castro's Cuba, most probably to irritate the U. S. and serve as an aggressive reaction to many of our somewhat provocative diplomatic and military actions in eastern Europe and other former Soviet Union republics.
All of these events, and their prospective economic and political consequences, make it obvious that moving boldly and urgently towards a high degree of energy independence is critical for both the U. S. and our European allies, from whom we can learn a lot. As an example, France gets 16% of their energy from renewable resources, compared to about 6% for the U. S., and gets 87.5% of their electric power production from their 59 nuclear plants. Germany has the world's largest solar power installation at Hemau, a small town in southern part of the country, and is among the world's leaders in the percentage of energy consumption obtained from solar. Little Denmark was 99% energy dependent in 1973 at the time of the Arab oil embargo. Now, after developing a comprehensive energy plan, Denmark gets 20% of their total energy needs from electricity generated by wind turbines, and the proportion is growing annually. The cost of this electricity has been reduced by 75%since 1970. Biomass energy and conservation are other important parts of their energy plan. We can also learn from Brazil's success in becoming independent with their ethanol production from sugar cane, supporting their oil resources.
Fortunately both Senators McCain and Obama support some level of energy independence. McCain indicated in a recent comprehensive speech on his energy plan in Las Vegas that he is committed to "strategic independence by 2025." Obama said in his nomination acceptance speech last Thursday that he is committed to independence from Middle East oil within the next ten years. However, both candidates need to get more specific and ambitious. I don't really know what McCain means by "strategic independence" and, it seems to me, 17 years is too long a timeframe. In terms of Obama's commitment, I'd agree that independence from the Middle East should be a priority, but I'm also concerned with a high level of independence from Venezuela, Nigeria, Algeria, and Indonesia. Canada is the only major exporter I think we can consider reasonably secure and reliable.
As I indicated in an earlier posting, we need a urgent and comprehensive national energy plan that includes the above goals for independence and very significant roles for several environmentally sensitive and cost sensitive options: natural gas, nuclear, clean coal refining technology, hydroelectric, solar, wind and biomass sourced power. There is no reason why we can't over the next 10-12 years, like Brazil, France and Denmark, increase our energy consumption from renewable sources from our current 6% to at least 15% and a target of 20% in 15 years. Achieving these realistic goals will serve us well in terms of national security, dealing effectively with global warming, preserving our environment, as well as the critical economic benefit of generating millions of badly needed new, well-paying "green" jobs.
It is also critical that we pursue well thought-out ongoing diplomacy and dialogue with Russia as well as China, the two other super powers, much as we don't like their form of government, the way they treat their own people, and many of their actions. No nation will win if a serious Cold War develops between Russia and the U. S. or between China and the U. S. We need to try to maintain our military supremacy, but, with very limited exceptions, pragmatic diplomacy and dialogue must be exhausted, before we launch a military option.
Friday, August 29, 2008
Executive Compensation
Shareholder groups, a number of politicians, financial analysts and many members of the media have justifiably been criticizing what's felt to be excessive executive compensation for several years. The criticism is especially understandable at a time when millions of average middle-class working Americans have lost their jobs, the economy has been weak, hundreds of thousands have or are about to lose their homes, are struggling to pay their bills, and are very worried about financing their retirement. Why is this an issue worthy of debate? It's because it's usually harmful and not fair to the other shareholders, and can be harmful to the company. Also it looks bad, can damage morale among the other employees and can bring negative publicity to the company, as well as potentially adverse attention by regulators and legislators.
Supporting information is that the median CEO compensation in 2005 was a total of $13.5 million, compared to something like $50,000 for the average worker. In 1991 the average large company CEO earned 140 times the average worker, whereas in 2003 the average CEO received 500 times what the average worker made. Does that sound reasonable and fair, a step in the right direction?
I was reminded about this issue when I read an article in the L. A. Times this morning about the $72 million compensation package awarded to CEO Larry Ellison of Oracle Corporation, the $18 billion revenue Redwood City, California headquartered multinational company specializing in business software products, especially database management systems. As is quite common for CEO compensation packages, a high percentage of the Ellison package, about $59 million, was represented by the value of stock options granted. What was a little unusual, perhaps, was that Ellison requested this package from his company's three person board of directors' compensation committee. Officially they approved it because they thought it was reasonable and justified. However, I'm sure they didn't want Ellison to be unhappy, given his strong control of the company and their likely happiness with their own compensation arrangements, which Ellison is undoubtedly in a position to change.
Notable examples of past excessive compensation packages include the $141 million received by Reuben Mark, the CEO of Colgate-Palmolive some years ago; the $139.5 million retirement package awarded to Dick Grasso, the Chairman & CEO of the New York Stock Exchange back in 2003; the $153.8 million awarded to James Kilts, CEO of Gilette, for supporting the big merger with Procter & Gamble; and the $570 million by Michael Eisner, CEO of Walt Disney, earned in 1998 through exercise of millions of stock options granted him.
One of the challenges facing critics is clearly defining what is excessive when to comes to CEO compensation packages. As a benchmark I would submit that any amount above $10 million annually, except in some rare extraordinary circumstances, should at least tentatively be termed excessive. Another thing is that the government doesn't have any authority to approve or disapprove compensation packages in the private sector. It's up to the the company's board of directors or its compensation committee in the case of CEO's and to the CEO and his fellow executives in the case of workers, unless a union contract governs worker salaries and benefits.
What's happened recently? Since the many, widely publicized compensation scandals over the past ten years, the SEC has mandated much more disclosure of compensation packages for the top executives. That development, plus embarrassment of board members at the negative publicity, and increasing pressure by larger shareholder groups, has led to a great deal more sensitivity by boards and their compensation committees to work towards curbing blatant excesses. One type of generally unjustifiable excess has been the practice in many cases of approving bonuses and salary increases even when a company has reported operating losses and had had a poor year or barely broke even in a mediocre year.
Another development was the passage in the House of Representatives in April 2007 of H. R. 1257, the Shareholder Vote on Executive Compensation Act. This mandates that public companies must ensure that shareholders are allowed an annual nonbinding advisory vote on executive compensation plans. This also applies now to a situation where a company awards what's called a "golden parachute" package (a great deal) when negotiating the purchase or sale of the company.
What else is being discussed, or could be done to limit excessive compensation, aside from more pressure from larger shareholder groups and the media? One thing, quite likely under an Obama Administration and a Democrat controlled Congress, is higher tax rates, perhaps including an alternative minimum amount, and higher capital gains taxes, for peole earning more than, say, $250,000 annually. Another significant development would be legislation limiting the compensation amounts that would be deductible as an expense for the employer for corporate income tax purposes.
Supporting information is that the median CEO compensation in 2005 was a total of $13.5 million, compared to something like $50,000 for the average worker. In 1991 the average large company CEO earned 140 times the average worker, whereas in 2003 the average CEO received 500 times what the average worker made. Does that sound reasonable and fair, a step in the right direction?
I was reminded about this issue when I read an article in the L. A. Times this morning about the $72 million compensation package awarded to CEO Larry Ellison of Oracle Corporation, the $18 billion revenue Redwood City, California headquartered multinational company specializing in business software products, especially database management systems. As is quite common for CEO compensation packages, a high percentage of the Ellison package, about $59 million, was represented by the value of stock options granted. What was a little unusual, perhaps, was that Ellison requested this package from his company's three person board of directors' compensation committee. Officially they approved it because they thought it was reasonable and justified. However, I'm sure they didn't want Ellison to be unhappy, given his strong control of the company and their likely happiness with their own compensation arrangements, which Ellison is undoubtedly in a position to change.
Notable examples of past excessive compensation packages include the $141 million received by Reuben Mark, the CEO of Colgate-Palmolive some years ago; the $139.5 million retirement package awarded to Dick Grasso, the Chairman & CEO of the New York Stock Exchange back in 2003; the $153.8 million awarded to James Kilts, CEO of Gilette, for supporting the big merger with Procter & Gamble; and the $570 million by Michael Eisner, CEO of Walt Disney, earned in 1998 through exercise of millions of stock options granted him.
One of the challenges facing critics is clearly defining what is excessive when to comes to CEO compensation packages. As a benchmark I would submit that any amount above $10 million annually, except in some rare extraordinary circumstances, should at least tentatively be termed excessive. Another thing is that the government doesn't have any authority to approve or disapprove compensation packages in the private sector. It's up to the the company's board of directors or its compensation committee in the case of CEO's and to the CEO and his fellow executives in the case of workers, unless a union contract governs worker salaries and benefits.
What's happened recently? Since the many, widely publicized compensation scandals over the past ten years, the SEC has mandated much more disclosure of compensation packages for the top executives. That development, plus embarrassment of board members at the negative publicity, and increasing pressure by larger shareholder groups, has led to a great deal more sensitivity by boards and their compensation committees to work towards curbing blatant excesses. One type of generally unjustifiable excess has been the practice in many cases of approving bonuses and salary increases even when a company has reported operating losses and had had a poor year or barely broke even in a mediocre year.
Another development was the passage in the House of Representatives in April 2007 of H. R. 1257, the Shareholder Vote on Executive Compensation Act. This mandates that public companies must ensure that shareholders are allowed an annual nonbinding advisory vote on executive compensation plans. This also applies now to a situation where a company awards what's called a "golden parachute" package (a great deal) when negotiating the purchase or sale of the company.
What else is being discussed, or could be done to limit excessive compensation, aside from more pressure from larger shareholder groups and the media? One thing, quite likely under an Obama Administration and a Democrat controlled Congress, is higher tax rates, perhaps including an alternative minimum amount, and higher capital gains taxes, for peole earning more than, say, $250,000 annually. Another significant development would be legislation limiting the compensation amounts that would be deductible as an expense for the employer for corporate income tax purposes.
Democratic Convention
There can be little doubt that almost every Democrat, and the majority of objective Republicans and Independents, would agree that the Democratic Party put on a very good show and had a highly successful convention in Denver these past several days.
Of course, the key factor was probably the unqualified and effective endorsements of Barack Obama and Joe Beiden by Hillary Clinton and former president Bill Clinton, which should have the impact of convincing most of Mrs. Clinton' supporters to vote for this ticket in November. A second key factor was Obama's expected dynamic and compelling acceptance speech at the end.
I'll now mention some other things I liked that were quite effective, in my opinion, and then I'll point out a few things that could have been handled better.
One of the well-known, heavy and understandable emphases in John McCain's campaign has been on the apparent differences between the two principal presidential contenders in the area of national security expertise, military experience, and presumed competence to serve as commander-in-chief. It was therefore effective that the convention organizers arranged for about two dozen retired generals and admirals to come on stage in full support of Obama. Their spokesman, a retired general, mentioned that he had traveled extensively recently with Obama to several countries in Africa and the Middle East, meeting national leaders, and he was highly impressed. Another symbolic positive, from the Democrats's perspective, was that Susan Eisenhower, granddaughter of former Republican five star general and U. S. president Dwight D. Eisenhower, a highly regarded business consultant noted for her expertise on the Soviet Union and the energy industry, came out to confirm her personal support of Obama.
One of the things that bothered me with almost all the speakers, including Obama, was the definite impression that the great many things he would do as president to put the country "on the right track," were virtual promises of actions, as if he didn't need the approval of Congress or, with some issues perhaps, support in the Supreme Court. I know that most voters know that Congress has to approve all federal legislation, and that their needed support may be implied, but it still bothers me and the concern could so easily have been covered in very few words. I also know that this implicit exaggeration of presidential authorities is not at all unique to Democrats. It seems it's a pattern followed by almost all politicians in this country.
Another thing that bothered me, and probably the majority of Republicans and Independents, as well as many Democrats, was that no mention was made, as I recall, of any pledge to balance the federal budget, and there was only limited clarity on how Obama and Beiden would pay for all their many policy positions. Again, this seems to be a common situation with politicians, especially presidential candidates.
Of course, one of the ways Obama will try to pay for his programs is to end the war in Iraq, costing at least $10 billion monthly, and bring our troops home as soon as possible. However, he acknowledged firmly that he plans to add a lot of troops in Afghanistan and spend much more to pursue and find Bin Laden and his lieutenants. He also plans to spend a lot of money to rebuild our military, provide tax credits for alternative energy development, hire and increase pay for teachers, and provide universal health care, among many other expensive programs. When one factors in a tax cut for the bulk of our 305 million population, it's an important question how this will be paid for without adding to our annual deficit and the federal debt. It's not viable to expect that a tax increase for the very rich will cover the shortfall. They have very smart tax attorneys who will figure out how to minimize their larger tax bites.
This reminds me, it also bothered me that I don't recall any of the speakers, including Obama, talk about the need to greatly reform our current ridiculous, expensive, and overly complicated federal tax system. It could be that I just missed hearing it, but I don't think so. Certainly Obama didn't mention it. I find this amazing. The complete reform our tax system, which affects everybody, is a genuine no-brainer. Well, it will be interesting now to see how the Republican Convention in Minneapolis goes. Certainly it was quite surprising to me that McCain has just picked Alaska Governor Sarah Palin as his choice for Vice President.
Of course, the key factor was probably the unqualified and effective endorsements of Barack Obama and Joe Beiden by Hillary Clinton and former president Bill Clinton, which should have the impact of convincing most of Mrs. Clinton' supporters to vote for this ticket in November. A second key factor was Obama's expected dynamic and compelling acceptance speech at the end.
I'll now mention some other things I liked that were quite effective, in my opinion, and then I'll point out a few things that could have been handled better.
One of the well-known, heavy and understandable emphases in John McCain's campaign has been on the apparent differences between the two principal presidential contenders in the area of national security expertise, military experience, and presumed competence to serve as commander-in-chief. It was therefore effective that the convention organizers arranged for about two dozen retired generals and admirals to come on stage in full support of Obama. Their spokesman, a retired general, mentioned that he had traveled extensively recently with Obama to several countries in Africa and the Middle East, meeting national leaders, and he was highly impressed. Another symbolic positive, from the Democrats's perspective, was that Susan Eisenhower, granddaughter of former Republican five star general and U. S. president Dwight D. Eisenhower, a highly regarded business consultant noted for her expertise on the Soviet Union and the energy industry, came out to confirm her personal support of Obama.
One of the things that bothered me with almost all the speakers, including Obama, was the definite impression that the great many things he would do as president to put the country "on the right track," were virtual promises of actions, as if he didn't need the approval of Congress or, with some issues perhaps, support in the Supreme Court. I know that most voters know that Congress has to approve all federal legislation, and that their needed support may be implied, but it still bothers me and the concern could so easily have been covered in very few words. I also know that this implicit exaggeration of presidential authorities is not at all unique to Democrats. It seems it's a pattern followed by almost all politicians in this country.
Another thing that bothered me, and probably the majority of Republicans and Independents, as well as many Democrats, was that no mention was made, as I recall, of any pledge to balance the federal budget, and there was only limited clarity on how Obama and Beiden would pay for all their many policy positions. Again, this seems to be a common situation with politicians, especially presidential candidates.
Of course, one of the ways Obama will try to pay for his programs is to end the war in Iraq, costing at least $10 billion monthly, and bring our troops home as soon as possible. However, he acknowledged firmly that he plans to add a lot of troops in Afghanistan and spend much more to pursue and find Bin Laden and his lieutenants. He also plans to spend a lot of money to rebuild our military, provide tax credits for alternative energy development, hire and increase pay for teachers, and provide universal health care, among many other expensive programs. When one factors in a tax cut for the bulk of our 305 million population, it's an important question how this will be paid for without adding to our annual deficit and the federal debt. It's not viable to expect that a tax increase for the very rich will cover the shortfall. They have very smart tax attorneys who will figure out how to minimize their larger tax bites.
This reminds me, it also bothered me that I don't recall any of the speakers, including Obama, talk about the need to greatly reform our current ridiculous, expensive, and overly complicated federal tax system. It could be that I just missed hearing it, but I don't think so. Certainly Obama didn't mention it. I find this amazing. The complete reform our tax system, which affects everybody, is a genuine no-brainer. Well, it will be interesting now to see how the Republican Convention in Minneapolis goes. Certainly it was quite surprising to me that McCain has just picked Alaska Governor Sarah Palin as his choice for Vice President.
Monday, August 4, 2008
California Budget Impasse
Under the California Constitution the State Legislature is obliged to approve the annual state budget for the period July 1st to June 30th by a minimum two-thirds vote of its members by June 30th. It is now about five weeks past the deadline and a budget has not yet been passed! In the last twenty years the budget has only been passed on time four times! Critical state services cannot be funded without an approved budget. The state will run out of money by the end of September at the latest, if no budget is passed. Folks, this is serious, ridiculous and unacceptable!
The most recent budget draft calls for general Fund expenditures of roughly $101 billion and total state funds expenditures of roughly $141 billion. As a reminder, the three largest categories of expenditures are K-12 Education, Health and Human Services, and Higher Education. Right now, based on projected state revenues, it looks like we will have a budget shortfall of between $14.5 billion and $15.2 billion!
Somehow the budget shortfall must be eliminated in the next week on a bipartisan, reasonable and pragmatic basis, and the final balanced budget must be approved by a two-thirds majority. Then the governor must sign off.
Governor Schwarzenegger and legislative leaders met in his office yesterday to try to settle the stalemate we now have without success. To deal with the impending crisis and put more public pressure on the legislature, the Governor laid off more than 10,000 state employees and issued another executive order to temporarily cut the wages of other employees to the federal minimum wage of $6.55 an hour. This was probably not entirely fair, but might have been necessary as a needed wake-up call.
The media, the voters and the Governor need to urgently and loudly make it clear to the legislative leaders that, to correct this major problem, we all favor a constitutional amendment requiring a budget to be balanced annually and on time. If this is not accomplished, the amendment will mandate that legislative members will receive no salary at all until the budget is balanced and approved. Reinstatement of salaries will not be retroactive. Lists of those not voting in favor of the final majority will be widely published and voters will be encouraged to make every effort not to reelect any of them. We can work to have the amendment on the ballot in November, if need be. Another step to be considered for the future is changing the requirement for budget approval to a majority vote, rather than the current two-thirds.
Carried out effectively, the above actions ought to get the attention of the party leaders and their colleagues. We are accountable for our actions. We are paying for their high salaries and benefit packages. They are our public servants. Finally, they need to be accountable for their actions and inactions! This is a no brainer!
The most recent budget draft calls for general Fund expenditures of roughly $101 billion and total state funds expenditures of roughly $141 billion. As a reminder, the three largest categories of expenditures are K-12 Education, Health and Human Services, and Higher Education. Right now, based on projected state revenues, it looks like we will have a budget shortfall of between $14.5 billion and $15.2 billion!
Somehow the budget shortfall must be eliminated in the next week on a bipartisan, reasonable and pragmatic basis, and the final balanced budget must be approved by a two-thirds majority. Then the governor must sign off.
Governor Schwarzenegger and legislative leaders met in his office yesterday to try to settle the stalemate we now have without success. To deal with the impending crisis and put more public pressure on the legislature, the Governor laid off more than 10,000 state employees and issued another executive order to temporarily cut the wages of other employees to the federal minimum wage of $6.55 an hour. This was probably not entirely fair, but might have been necessary as a needed wake-up call.
The media, the voters and the Governor need to urgently and loudly make it clear to the legislative leaders that, to correct this major problem, we all favor a constitutional amendment requiring a budget to be balanced annually and on time. If this is not accomplished, the amendment will mandate that legislative members will receive no salary at all until the budget is balanced and approved. Reinstatement of salaries will not be retroactive. Lists of those not voting in favor of the final majority will be widely published and voters will be encouraged to make every effort not to reelect any of them. We can work to have the amendment on the ballot in November, if need be. Another step to be considered for the future is changing the requirement for budget approval to a majority vote, rather than the current two-thirds.
Carried out effectively, the above actions ought to get the attention of the party leaders and their colleagues. We are accountable for our actions. We are paying for their high salaries and benefit packages. They are our public servants. Finally, they need to be accountable for their actions and inactions! This is a no brainer!
Sunday, August 3, 2008
Energy Policy Actions
We have many well-known quite serious problems facing our country right now as well as the majority of individual American families. Of high importance among these are very high energy prices for such basic and vital products as gas for our cars, diesel for some cars and most of our trucks and buses, jet fuel for the plane fleets of our airlines, and heating oil and natural gas for our homes. Of course, the high energy costs are also serving to produce much higher food prices, due to their impact on manufacturing and distribution costs. All of these induce consumers to reduce spending, save less, and worry more being able to pay their bills, keep their homes, and adequately prepare for retirement.
At the same time the major oil companies are reporting huge, record earnings. The largest of all, Exxon, reported an incredible $11.68 billion for the recently concluded second quarter! That's after paying all their expenses, including taxes. BP earned $9.47 billion, Royal Dutch Shell earned $8.6 billion. Chevron, America's second largest oil firm, earned over $5 billion for their last fiscal quarter. Many find these profits "obscene," given what's going on.
What to do? As I said in my posting on energy policy back in December 2007, government, businesses and individual families all have an important role to play, and this is a critical issue to be given high priority by the next Administration. This is especially so when one also takes into account such related important issues as energy independence, national security, increasing world-wide pollution, and global warming.
The federal government needs to put together a well thought-out, comprehensive national strategic plan for energy that will get strong bipartisan support in the Congress. But that will probably take at least six to twelve months and will have insignificant impact in the short run. The federal government can also approve limited environmentally sensitive oil drilling in ANWR in northern Alaska and off our coasts, especially in the Gulf, the states permitting. The government can also try to induce the oil companies to drill more onshore under existing federal land leases. However, these steps, which I would support, are only likely to impact supply and prices over the intermediate or longer term.
The federal government could also try to get approval for a windfall profit tax on the oil companies, but it's not clear that would serve to lower energy prices. In fact, it might lead oil companies to increase prices. Senator McCain supports a one-time suspension of the 18.4% federal tax on gas sales. That likely would temporarily reduce retail gas and diesel prices, but it would only save average drivers no more than an estimated $10-15, and also reduce badly needing funding for our highways and bridges. Further, according to many leading economists, it would add to oil company profits, because many drivers would buy more gas.
In the short run, only individual families can realistically take steps to help lower gas prices and directly reduce the amounts they themselves are spending on gas and other energy products. And this is already happening. It's not rocket science. The laws of supply and demand many of us learned in Economics 101 generally work fairly well. More and more drivers are driving and flying less than they used to when prices for gas were much lower. They are car pooling more when commuting to and from work. They are not buying poor mileage SUV's and pick-up trucks, but choosing instead good mileage hybrids and economy sedans. Many people are also working with their electric power and gas utility firms to get tips on reducing expenses for heating and cooling their homes.
When demand is reduced and supply is unchanged, prices tend to fall. Of course, because there is a global market for oil, and demand in recent years has grown dramatically in large developing countries like China, India, and Brazil, falling domestic demand doesn't always reduce prices. Rising foreign demand can have more impact than falling domestic demand. This factor will likely be with us for the indefinite future. Nevertheless, even if prices do remain high or go higher, consumers can help themselves by buying lesser quantities.
I will readily acknowledge, however, that this will increasingly be very difficult for airlines, trucking firms, cab drivers and others like them for whom fuel is such a critical and large expense. Unfortunately, many of these will go out of business. Others in these industries, who are very well managed and innovative, will find ways to survive and even prosper. Southwest Airlines, who successfully hedged their projected fuel expenses, is a good example of this.
The above said, I think the oil companies could do a better job in communicating with the media and the public about this whole subject. Perhaps the media and the public could work together to try to convince them to give consumers a break for the next six months or so by lowering their prices voluntarily. However, such pressure would probably be more effective if it were supported by larger shareholder groups, like pension funds, mutual fund families, and major insurance companies.
At the same time the major oil companies are reporting huge, record earnings. The largest of all, Exxon, reported an incredible $11.68 billion for the recently concluded second quarter! That's after paying all their expenses, including taxes. BP earned $9.47 billion, Royal Dutch Shell earned $8.6 billion. Chevron, America's second largest oil firm, earned over $5 billion for their last fiscal quarter. Many find these profits "obscene," given what's going on.
What to do? As I said in my posting on energy policy back in December 2007, government, businesses and individual families all have an important role to play, and this is a critical issue to be given high priority by the next Administration. This is especially so when one also takes into account such related important issues as energy independence, national security, increasing world-wide pollution, and global warming.
The federal government needs to put together a well thought-out, comprehensive national strategic plan for energy that will get strong bipartisan support in the Congress. But that will probably take at least six to twelve months and will have insignificant impact in the short run. The federal government can also approve limited environmentally sensitive oil drilling in ANWR in northern Alaska and off our coasts, especially in the Gulf, the states permitting. The government can also try to induce the oil companies to drill more onshore under existing federal land leases. However, these steps, which I would support, are only likely to impact supply and prices over the intermediate or longer term.
The federal government could also try to get approval for a windfall profit tax on the oil companies, but it's not clear that would serve to lower energy prices. In fact, it might lead oil companies to increase prices. Senator McCain supports a one-time suspension of the 18.4% federal tax on gas sales. That likely would temporarily reduce retail gas and diesel prices, but it would only save average drivers no more than an estimated $10-15, and also reduce badly needing funding for our highways and bridges. Further, according to many leading economists, it would add to oil company profits, because many drivers would buy more gas.
In the short run, only individual families can realistically take steps to help lower gas prices and directly reduce the amounts they themselves are spending on gas and other energy products. And this is already happening. It's not rocket science. The laws of supply and demand many of us learned in Economics 101 generally work fairly well. More and more drivers are driving and flying less than they used to when prices for gas were much lower. They are car pooling more when commuting to and from work. They are not buying poor mileage SUV's and pick-up trucks, but choosing instead good mileage hybrids and economy sedans. Many people are also working with their electric power and gas utility firms to get tips on reducing expenses for heating and cooling their homes.
When demand is reduced and supply is unchanged, prices tend to fall. Of course, because there is a global market for oil, and demand in recent years has grown dramatically in large developing countries like China, India, and Brazil, falling domestic demand doesn't always reduce prices. Rising foreign demand can have more impact than falling domestic demand. This factor will likely be with us for the indefinite future. Nevertheless, even if prices do remain high or go higher, consumers can help themselves by buying lesser quantities.
I will readily acknowledge, however, that this will increasingly be very difficult for airlines, trucking firms, cab drivers and others like them for whom fuel is such a critical and large expense. Unfortunately, many of these will go out of business. Others in these industries, who are very well managed and innovative, will find ways to survive and even prosper. Southwest Airlines, who successfully hedged their projected fuel expenses, is a good example of this.
The above said, I think the oil companies could do a better job in communicating with the media and the public about this whole subject. Perhaps the media and the public could work together to try to convince them to give consumers a break for the next six months or so by lowering their prices voluntarily. However, such pressure would probably be more effective if it were supported by larger shareholder groups, like pension funds, mutual fund families, and major insurance companies.
Saturday, August 2, 2008
U. S. Foreign Policy, Part II
The Bush Administration is continuing to make what I view as major foreign policy blunders and the presumptive Republican Party nominee, Senator John McCain, seems to be prepared to make another related big one, should he be elected President in November. The issues for this posting primarily relate to the U. S. sponsored eastern European missile defense system, NATO expansion and the G8 countries, and concerns our relationships with Russia and China.
In April of this year I published a posting on U. S. foreign policy, emphasizing that our relationships with Russia and China should, in the area of foreign affairs, rank among the top priorities for the country's next president. Very few foreign policy experts would disagree with this. It's therefore hard to understand what the Administration has been doing recently and what Senator McCain is apparently urging.
Like it or not, Russia and China are already, or will be in the near future, among the world's super powers, together with the U. S. Russia must be considered a super power because of their large and powerful military establishment, their vast energy production and reserve levels, and their sizeable nuclear weapons arsenal. China should be considered because of their fast growing military might, their leading manufacturing prowess, their very large economy with incredibly strong financial muscles, and the world's largest population at 1.3 billion.
The U. S. badly needs their ongoing strong support in dealing effectively with many of the world's most important issues. These include, among others, combatting world-wide terrorism, containing Iran and North Korea, nuclear non-proliferation, global warming, international pollution, trade, providing aid to poor countries, population control, and energy conservation and independence.
Why then has the Administration knowingly greatly angered and provoked the Russian government by negotiating with Poland and the Czech Republic to build missile defense system shields in those countries. Arguing that the shields are necessary to repel potential missile attacks from North Korea and Iran is not very credible.
The same goes for plans to continue to expand NATO from its current nineteen members to add a greater number of countries from the former Soviet Union, including the sensitive country of Ukraine. NATO was established in 1949 among countries primarily bordering the north Atlantic as a international security alliance against the threat of the old Soviet Union. The Soviet Union fell apart in 1991, and most of the recent new member countries and those now short-listed for membership lie many hundreds of miles from the Atlantic.
Senator McCain has recently made it clear in his campaign for president that he favors expelling Russia from the exclusive club of G8 countries which includes, besides Russia, Canada, the U. S., the U. K., France, Germany, Italy, and Japan, in addition to the European Union. The reported reason for his view is that he wants to penalize them for "poor behavior," including the several autocratic steps taken in recent years by Russia's dominant leader, Vladimir Putin. While we have reason to be unhappy with some of the steps he has taken, we're not going to have a good chance to get their needed cooperation on the above more important issues if we were to work towards expelling Russia from the G8. Isn't this a no-brainer?
A number of foreign policy experts, including noted author and columnist Fareed Zakaria, have stated they strongly disagree with Senator McCain's position on Russia and even propose that China be seriously considered for G8 membership. Given China's virtual super power status, I agree with them, though the G8 countries were intended at the outset of the group's formation in 1973 to be reserved for major industrialized democracies. While China certainly qualifies as a major industrialized country, it clearly is not a democracy. Nevertheless, given the importance of the global issues that currently face us, China should definitely be considered for membership. It's a matter of realism and pragmatism over ideology.
In April of this year I published a posting on U. S. foreign policy, emphasizing that our relationships with Russia and China should, in the area of foreign affairs, rank among the top priorities for the country's next president. Very few foreign policy experts would disagree with this. It's therefore hard to understand what the Administration has been doing recently and what Senator McCain is apparently urging.
Like it or not, Russia and China are already, or will be in the near future, among the world's super powers, together with the U. S. Russia must be considered a super power because of their large and powerful military establishment, their vast energy production and reserve levels, and their sizeable nuclear weapons arsenal. China should be considered because of their fast growing military might, their leading manufacturing prowess, their very large economy with incredibly strong financial muscles, and the world's largest population at 1.3 billion.
The U. S. badly needs their ongoing strong support in dealing effectively with many of the world's most important issues. These include, among others, combatting world-wide terrorism, containing Iran and North Korea, nuclear non-proliferation, global warming, international pollution, trade, providing aid to poor countries, population control, and energy conservation and independence.
Why then has the Administration knowingly greatly angered and provoked the Russian government by negotiating with Poland and the Czech Republic to build missile defense system shields in those countries. Arguing that the shields are necessary to repel potential missile attacks from North Korea and Iran is not very credible.
The same goes for plans to continue to expand NATO from its current nineteen members to add a greater number of countries from the former Soviet Union, including the sensitive country of Ukraine. NATO was established in 1949 among countries primarily bordering the north Atlantic as a international security alliance against the threat of the old Soviet Union. The Soviet Union fell apart in 1991, and most of the recent new member countries and those now short-listed for membership lie many hundreds of miles from the Atlantic.
Senator McCain has recently made it clear in his campaign for president that he favors expelling Russia from the exclusive club of G8 countries which includes, besides Russia, Canada, the U. S., the U. K., France, Germany, Italy, and Japan, in addition to the European Union. The reported reason for his view is that he wants to penalize them for "poor behavior," including the several autocratic steps taken in recent years by Russia's dominant leader, Vladimir Putin. While we have reason to be unhappy with some of the steps he has taken, we're not going to have a good chance to get their needed cooperation on the above more important issues if we were to work towards expelling Russia from the G8. Isn't this a no-brainer?
A number of foreign policy experts, including noted author and columnist Fareed Zakaria, have stated they strongly disagree with Senator McCain's position on Russia and even propose that China be seriously considered for G8 membership. Given China's virtual super power status, I agree with them, though the G8 countries were intended at the outset of the group's formation in 1973 to be reserved for major industrialized democracies. While China certainly qualifies as a major industrialized country, it clearly is not a democracy. Nevertheless, given the importance of the global issues that currently face us, China should definitely be considered for membership. It's a matter of realism and pragmatism over ideology.
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