:LPE:

With the deal in place, and several of the relevant issues being raised here already, a brief comment on the direction of “conditions” of the bailout.

There is a firm focus in, say, the Globe, on the CAW and the cost of unionized labour, this time in comparison to U.S. compensation. The big issue south of the border is an insistence by papers to quote the 70-something dollars per hour compensation figure — one that inaccurately includes payments in respect of current retirees in active worker compensation. The next set of comparisons are wage packets, union versus non-union, Canada versus U.S.

It is remarkable, the amount of time devoted to labour wage rates, compared to, for example, management compensation in the auto sector, or any wage rates in the financial sector. We know management in the auto sector is paid two and three times as much as their foreign counter-parts, and have overseen a massive loss in market share and, it seems, driven their businesses to bankruptcy. Where is the examination of those decisions and that kind of job performance?

The financial sector has received possible 10x the amount the auto sector will receive in government financial aid or stimulus, and has been subject to almost none of the same scrutiny. Why not?

We know from the globalization discourse and the free trade theory that labour wages here are competing, directly and indirectly, with those in say Mexico or India. But this does not seem to be the case for management. Why not? And there is no serious analysis of the relationship of senior management to their own “productivity.”

It’s not really unexpected: Globe reports.

About $3.5B in credit lines to banks in case their losses under the “private” ABCP workout needs it. So, to date, here is what we have:

->conduits or financial intermediaries selling junk securities backed by sub-prime mortgages:
->banks under-writing same;
->credit rating agencies rating it safe as cash;
->securities tanking and everyone getting ready to sue banks for the negligent advice;
->a “workout” to make everyone take a haircut;
->a condition for banks to participate is that everyone gives up any right to recover, even if they do not have a vote on the deal being drafted;
->the Supreme Court changing bankruptcy law to permit it to happen;
->the government guaranteeing a portion of the re-scheduled debts to ensure banks will participate.

It might be the right economic outcome, but it stinks otherwise, and it provides next to no incentive to avoid the same mistake in the future. Of course, the sellers will tell you that this can never happen again…

Say what you like aboutHugo Chavez, at least he nationalizes companies that make money.

Konrad Yakabuski calls Danny Williams’ seizure of NFLD assets “socialist”, although what he means is “acting unilaterally without consultation”, sort of like Harper government. Socialist countries do not have a monopoly on unilateral or arbitrary state action. Heck, the freest country in the world gave us the doctrine of pre-emptive strike and suspended habeaus corpus.

But it is interesting the epithets that come out in an emergency: maybe Yakabuski also wants to call Danny Williams a separatist and a threat to democracy.

That is more or less what was reported today in the Globe. Janet McFarland and Karen Howlett report that “pesnion plan experts” who are un-named but “lawyers and pension consultants” state that proposed measures by the Ontario government to organize temporary relief are “likely to fail”.

It would be useful if the paper named the “experts”, else how to evaluate their expertise, which is deeply in question given their statements as reported.

The Ontario government proposal is to extend credit to companies plans in the form of re-scheduling their debts owed to pension plans, on the condition that members, who bear the risk those debts will not be paid by the company, consent to the extension of credit.

The consent requirement has worked in Canada in other provinces and in similar situations, e.g., consenting to a distribution of surplus, or in a restructuring by Air Canada in 2004. Furthermore, where members are represented by a union, a union can speak on behalf of members, vastly reducing the time required to obtain consent. The same applies to retirees who participate in retiree groups. A casual glance at available statistics show that about 70% of pension plan members are represented by unions or in a plan associated with a union. A full half of members are in a plan administered at least in part by representatives of members. The odds seem very good that consent will be obtained.

Why these experts claim it is “likely to fail” is not explained. We could take the objection one step further and assume these experts believe the debts should be restructured without consent. That is, lenders should be giving credit to companies in trouble, without even the right to consent to giving that credit.

This is the equivalent of saying the government should implement rules requiring a bank to give you a mortgage without the bank’s consent or ability to put conditions on the loan: it’s patently absurd.

The Canadian Banking Association has been reading its Sun Tzu: no crisis without an opportunity to profit. Today made its proposal for reforming the financial sector: bring in more corporate tax cuts, to, in their words, help stem the downsizing in the financial sector. (They also ask for a single securities regulator: no argument here.)

The tax cut is uninspiringly familiar, and, as a document intended to map out the future of the financial sector, rermarkable for what it omits, such as an analysis of what went wrong in the credit markets, and the role of banks as financial intermediaries. Canadian banks do seem to have weathered considerably better than their U.S. counter-parts, and reasons for this would be useful to explore.

From a policy perspective, the tax componewnt is also probably bad advice. Tax on capital and on high incomes is considered progressive and part of the progressivity in our system. Making it less progressive (e.g., shifting taxes to those with less ability to pay) is poor tax and social policy. Tax cuts are also less efficient forms of government expenditure than other more direct measures, and this is likely to be even more so in the financial sector, where incomes are higher and the propensity to save (not spend) and ability to take savings offshore is much higher. In one economists words, it is like “pushing a string”. Current levels of taxation did not seem to inhibit growth in this sector the past 10 years, and the causes of the job losses in this sector are arguably not due to the corporate tax rate, but to a combination of de-or under-regulation and imprudent management.

And it should be remembered that the banking sector has already had a massive public stimulus in the form of low cost borrowing from the central bank, ability to use junk assets as collateral on borrowing, nationalization of bad mortgages, they may get a ABCP bailout from the Canadian feds, and, from the U.S., injections of capital or protections for their business losses down there. They don’t want for stimulus.

The Globe reports today that Crawford’s Committee is now asking the provinces, as well as the feds, to pony up $9.5B guarantees for any losses that materialize on ABCP (he steadfastly suggests that these guarantees will only be used if there are losses). That’s $9.8B in guarantees in a $32B deal — about a third.

Like any of the other bailouts, any more public money thrown at this problem should come with appropriate oversight for the spending of public money, and right now, exactly the opposite of “appropriate oversight” are the terms of the privately-brokered deal. We would expect — demand — that a $9.8B program of, say, mortgage guarantees or bank deposits come with safeguards and structural changes to ensure that it didn’t happen again, as well as a significant review of the actors who caused it to happen in the first place. Individual investors are barred legally from any such investigation through prosecution, because the deal suspends all rights of investors to bring their case to court. It is fair enough to limit private rights — if there is some appropriate forum or action taken, or a public investigation, which to date, there is not. In the words of the market economists, that is $9.8B of moral hazard (or more) being tossed at a conflicted and dysfunctional corporate paper system, and the feds and the provinces punting the issue to each other in the hopes of not being blamed, or having to pay. If the deal requires public money to effect — then it has to be opened up and meaningful public oversight introduced.

I admit I never thought I’d see the day, but editorial policy in the Globe today more or less admits that tax cuts do not necessarily cause economic growth (through consumer spending, the “trickle down”), at least, not in these circumstances. Many economists agree as does — as the Globe points out — evidence from the U.S. this year.

The insight has not penetrated the C-Suite survey of Canadian boardrooms, though, who continue to lobby for tax cuts as a key part of a government stimulus package. Apparently 89% would like to see tax cuts (versus other stimulus methods, including “deficit spending” and “infrastructure” and “training”). Perhaps they have to parrot bad macroeconomic policy as part of their job descriptions.

Note, however, the C-suite survey participants all agreed that freer markets would not solve the credit crisis or the recession: that was a job for social spending.

A rather staggering little admission is buried in the end of this Post article, to the effect that Henry Paulson advised Congress that he would not be using bailout funds to make direct equity injections into banks, and pushed for oversight controls (including no limits on executive compensation) on that basis. His staff were at the time preparing to do exactly what he said he would not do, and then subsequently, did. Eventually some limits on executive compensation were included as conditions, but as the article makes clear, these have not been effective and are not likely to be enforced. From the Washington Post.

at least the “power talks” part. As succinct a summary of why financial firms are not attracting the same oversight or conditions as are real economy firms. From the New York Times.

It appears that to make the deal work, it will take government guarantees of the losses. Or some of them, the details were not clear, when Purdy Crawford asked the Feds to guarantee losses ABCP issuers or purchasers may face. That isn’t clear either. It really ought not to be surprising, as the taps have been on for a number of financial intermediaries and those funds have not come with any real strings attached. I suppose the part that irks about this particular request is that the real “guilty” parties in the ABCP saga are being protected from any consequences of their actions by court orders (in a “private” plan of arrangement) and now it seems that government money will go even further in bailing out those who created this mess and profited from it. It would all be worth it if we didn’t hear the term “free market” again in our lives, but that was not part of the deal.