:LPE:

Someone has to start a study of business news reporting of financial crises. It is amusing to see the NYT and the Globe begin within the last week or two, to earnestly report that there is a housing bubble in the US and Canada (and elsewhere), and to make increasingly dire predictions of its collapse.

It has been clear to any layperson tracking housing prices that there has been a housing bubble, and economists have been writing about it in mainsteam media for at least four years, after it emerged in about 2002. It doesn’t take any facility with math or 15 minutes of diligent research to find out that housing prices have historically risen more or less with inflation in the post-war era (on average), and that the 45% rise in prices since 2000 (more in some areas, less in others) was far more than the inflation rate in the same period. By any basic measure, that is a housing price bubble.

Business writers, who have more time and access to information than most of us, should have seen this bubble sooner, should have investigated its implications, and should have let their readers know.

Exactly why there is a sort of wilfull blindness to these things is what needs study: is it that any boom is considered inherently good (unless it is a boom in wage increases)? Is it is that business writers do not feel equipped to make judgements about economic trends, and so wait until they are nearly inevitable before making them news? Is it that they don’t know about these things? I’d like to know.

One thing is likely, though: if the market tanks quickly, watch how they report the “unexpected” impact of the burst of the real estate bubble.

A U.S. judge has ruled that the Northwest Airline employees may not strike while the airline is in insolvency proceedings (this in the U.S. is called Chapter 11). Insolvency proceedings are intended to permit the business to continue as a going concern. The employees are not permitted to (legally) strike to increase their wages during this period. You might think this was a break of fundamental civil and commerical rights of the employees.

Dean Baker makes an interesting analogy to make this point. Suppose the employees all belonged to a corporation instead of a union — outsource corp. The judge has just told outsource corp that is must continue providing services to an insolvent business, but it cannot set its own prices for its services, or even bargain them (now). If the business corporation broke the terms of the court order and decided not to do business with the airline anymore, employees of the corporation could go to jail.

So how many businesses do you think would put up with that? Not permitted to set prices, not permitted to withdraw services, risk of incarceration for violation of those conditions.

All this quite apart from the use of insolvency law to beat back unions and reduce the standard of living of employees.

The Globe has weighed in supporting the senior “bureaucrats in Ottawa” over the hollowing out question. Here’s the Link.

The editorial says (i) FDI created just as many head offices as it removed between 1999 and 2006, and (ii) foreign controlled head offices controlled 2/3 of head office employment in Canada and (iii) repeated the list of supposedly positive benefits of this situation, including better salaries, investment in R&D here, etc.

This editorial largely missed the issues.

First, the vast majority of “hollowing out” did not occur after 1999, but occured between 1985 and 1999 - most of that, before 1995. So the hollowing out had already occured, and what we are seeing how is just a smaller, after-effect driven, as everyone knows, by higher than usual commodity prices. Primary and secondary commmodity companies are being bought out. So, hollowing out has already occured, and what we are seeing now is one small part of that, not the whole story. Any statistics taken between 2000 and the present will not capture the full effect of what has happened.

Second, we would expect foriegn-controlled firms to control 2/3 of increases in head office employment in Canada. That is an effect of having decision-making power flow outside Canada. What that remarkable statistic also implies, is that there are far fewer Canadian firms creating head offices in Canada. On average, Canadian firms will hire more Canadian managers, make decisions with Canadian interests in mind, spend more resources locally, and a host of other incidential and follow-on effects. On average, foriegn-owned firms will not: they may spend some money and time here, but they will ultimately be more mindful of their home jurisdictions, the real decision-making power lies in those jurisdictions. Moreover, the profits reaped here will flow to those jurisdictions, and may also be spent elsewhere — emerging markets, for example, where labour is cheaper.

Third, the benefits the Globe points to I dealt with in the previous post.

Fourth, the contention that it “works both ways” is by no means an equal trade. As Canadian capital seeks beter returns overseas - in larger, more efficient markets - those who seek financing in Canadian markets will have to pay a higher premium, and the position of Canadian capital markets becomes weakened. Corporate Canada and especially those who earn their livelihood from producer services in those capital markets should be concerned. Why pursue a listing in Toronto when the NYSE, where you already employ lawyers, can do it cheaper?

The Globe reports the senior wonks at Industry Canada have weighed in on hollowing out — well, actually, they are not even senior wonks at IC - they are Montreal-based conservative thinktank wonks who were paid to say what they think anyway by IC in a “report”. The report says free trade is really good, and all those businessess being sold to foreigners does not pose a problem for the Canadian economy. Link.

Reports from conservative thinktanks are suspicious sources of “research”. I haven’t see it, but some of the conclusions listed in the Globe do not strike me as likely or robustly true. for example:

–foreign owners may invest in the local Canadian company, and may create jobs, and they may be higher-paying than others, but foreign owners will also be subject to pressures to invest in their home country, seek wage concessions without being as affected by them as in their home country, and can withdraw capital much more easily than Canadian owners can send it overseas

–as head offices move offshore, local companies no longer need as much int he way of producer services (finance, law, accounting, and the spin-off services they support)

–local charities see net descreases in donations, we think, because head offices usually control donations and they are under pressure to allocate donation budgets to their home countries or cities

–Canadian policy-makers appear to be utterly uninterested in controlling or managing the Canadian economy in any coordinated fashion: more FDI under quasi-constitutional agreements like NAFTA only ‘lock in’ this policy position. In other words, it is harder for them to change their minds, even if they wanted to, or circumstances changed.

–corporate profits are generally repatriated - not necessarily re-invested in local business. That is why these businesses are bought out - to get at their value. They could be re-organized, but when they turn profits, those profits are thought to be sucked out of Canada and into the home country of the owner. Tax law has a devil of a time dealing with so-called “transfer pricing”, and so there is a negative effect on tax revenues from Canadian productive resources.

–Canadian capital markets will suffer: why list on the TSX when your head office and all the money in the world is on the NYSE? The London exchanges are thought to be even more favourable these days. TSX lacks local business, and could atrophy. This could lead to a further erosion of alternative sources of capital for Canadian businesses.

There are further possible effects, and mere arguments over what could or could not happen are not really that productive. Corporate Canada should not so blindly accept the recommoendations of conservative Montreal thinktanks whose policies, if they continue, could do a lot of folks out of a job, and not just the line worker. Why have a block of CEOs in Canada when there can be a VP Canada in head office in New York?

After reading Kafka’s Metamorhpisis, “Gosh” said Garcia-Marquez, using in Spanish a word in English we may not, “that is just the way my gradnmother used to talk”.

And there is perhaps the best explanation of that literary category that does not exist; those who claim allegiance to it did not listen to their grandmothers.

The bonanza in mining company sales — to interests outside Canada — is once again interesting to watch, not just for the speculation that commodity prices engender. As long as the various land wars and speculative bubble in Asia continue, commodities look good. The increase in the value of commodities firms have created a spate of mergers with foreign buyers (although, in the age of globalization, query whether there is anything ‘foreign’ about any TNC anymore). The latest round of mining mergers is a good example.

What I wonder is, what will the seven sisters do for mining clients once the head office of Inco is moved to Sao Paolo, or Nevada? What will Davies, Stikemans, Torys and whoever else gets Inco work do when that client goes south? The consolidation of the 80s and 90s already saw most client base in Canada divided up, and the mergers in business law firms followed. It is generally thought that seven, or six is the fewest large law firms that can exist in the Canadian market without creating too many bald conflicts of interest. Now that client base is shrinking, and Torys’ is seeking to become a mid-tier US-based firm, what will the business law community do?

I have not read the Bill yet — by all accounts a dog’s breakfast — but Bush II signed into law the largest set of reforms of the US pension system in nearly 30 years. If you can believe the Globe’s reporting, which is copied from the Wall Street Journal, it requires defined benefit pension plans to be fully-funded on a going-concern basis within about eight years (over 30,000 plans are underfunded by nearly half a trillion on that basis today). The devil is in the details, of course, and those are devils I don’t know yet. Link.

There is strong irony in having a Republican, hispanic Attorney General claim that a federal court judge is “partisan” and “advancing a liberal agenda” by not permitting the government to spy on its citizens through illegal wiretaps. But the las member of the Bush II cabinet to display a sense of irony, if sometimes uninentionally, was Colin Powell, and he’s long gone. It was long ago in 2004 when Republicans supported the Rule of Law, that democratic institution that stopped governments from poking its nose into other people’s business, propping up welfare mums and otherwise trying to run things that free people would rather do without. No longer, it appears. Gonzalez, who is famous for his respect for international law, especially humanitarian aspects like the Geneva Convention, has appealed the decision and openly attacked the federal court judge who rejected his department’s argument that the Congressional powers provided the President by special resolution in 2001 permit him to suspend civil and other constitutional rights as he sees fit.

It is no mistake that the hottest legal theory at the moment is the work of Carl Schmitt. He is being read by every responsible graduate student in US (and Canadian) law schools. Look him up: he was the architect of the entire Nazi legal system.

Before we get to the sombre tones that normally accompany the title of this post, a little of the anger phase.

To whoever stole my iBook from the library last Friday at 12:20 p.m. You bottom-feeding slime, you nasty klepto shit, you unwanted amoral excrement. I curse you a year’s bad luck.

And, yes, long may you run, my trusty 14′ iBook g4, loaded with progs and pics and songs and poems and thoughts and several chapters of a treatise on the Canada Business Corporations Act. Run on in all your splendour and your glory, you, festooned with gigs of ephemera and all manner of species contrary to copyright. Long may you run, peeping whirring glowing with alacrity — though some may change your prefs or erase your carefully calibrated disk; long may you run, my little white right arm, my pen my face my happy trusty companion. We worked so many charms together, you and I. You, without which not; adieu old friend, adieu, long may you run.