Salon: How the World Works

A unified rightwing crackpot theory of the stock market

Andrew Leonard — Tue, 09 Feb 2010 14:34:00 PST

It is time to give right-wing propagandists some credit. Remember back in early March, when every new stock market low was blamed on Obama? Remember how silent the right immediately became when the stock market reversed course and embarked on a nine-month rally? It's taken a little while, but thanks to the hard work of Donald Luskin, a man whose record on getting things wrong in recent years almost matches Larry Kudlow's, we finally have an ingeniously brilliant new set of talking points for the right. Now Obama's failures can be blamed for both the market lows and market highs.

In an op-ed piece published Tuesday in the Wall Street Journal, (in which Luskin provides the Manichean service of representing the absolute antithesis of Elizabeth Warren's simultaneously published opinion piece,) the investment adviser first blames March's "horrific bottom" on the passage of the stimulus bill. Never mind that the U.S economy lost 2.1 million jobs in the first quarter of this year while GDP was declining at a six percent annual rate. In Luskin's world, investors only pay attention to politics, not the actual economy.

The haste with which the stimulus bill was enacted made it seem certain that the cap-and-trade energy tax, unionization "card check," mortgage "cramdown," and health-insurance nationalization would become law as soon as votes could be taken. It wasn't only the antigrowth implications of these initiatives that had investors terrified in March. It was the sheer recklessness with which they were being stuffed through the legislative pipeline under the Rahm Emanuel doctrine of never letting a good crisis go to waste. The crippling uncertainty of it all was making that crisis worse. Since then the market rally has tracked the demise, one by one, of all these initiatives, because investors could see that a political environment that had been far out of equilibrium was quickly finding its balance. Republicans stayed unified in their opposition, while in every case key Democrats lost their nerve.

Readers may now understand why economist Brad DeLong likes to call Donald Luskin "the stupidest man alive." Because in the universe most of us are living in, the stock market's nine-month rise came during a period in which health care reform steadily came closer and closer to passage. The high for the year came at almost exactly the same time the Senate was voting on its version of the bill! It was only after Scott Brown won election in Massachusetts and the Democrats lost their 60 vote majority that the stock market started to plunge. In other words, once the super-majority vanished, throwing the passage of all of Obama's initiatives into doubt, only then did Wall Street get nervous.

Luskin's argument is that Brown's victory presages a turn to anti-Wall Street populism by both Democrats and Republicans that the investor class finds distressing. But there's a much much simpler explanation than politics to explain the stock market rally. Since March, the economy has stabilized. The monthly rate of job losses has declined dramatically. GDP is growing again. The prospect that Wall Street's biggest banks would be forced to declare bankruptcy has receded. All these things, whether you like them or not, were in part the result of Obama's policies. Most non-ideological economy observers -- the kind of outfits that sell their analysis to discerning customers rather than try to get quoted on Fox News -- peg the stimulus as responsible for at least one to two points of GDP growth and for keeping unemployment from surging even higher than it already has. And as anyone one degree to the left of Luskin appreciates, Obama's policies towards the financial sector have been highly reassuring to the investor class -- which explains both the stock market rally and widespread bipartisan political anger.

A food stamp in every pot

Andrew Leonard — Tue, 09 Feb 2010 11:52:00 PST

As of last November, a record 38.2 million Americans were enrolled in the federal food stamp program (now known as the Supplemental Nutrition Assistance Program) according to figures released by the United States Department of Agriculture last Friday. (Thanks to The Big Picture for the link.)

That's one in eight Americans, and one in four children. During a fiscal quarter in which American GDP grew by 6 percent, the number of people joining the food stamp program was growing by more than 200,000 a month. And we have yet to reach the peak.

In President Obama's Fiscal Year 2011 budget unveiled two weeks ago, the White House predicted that the number of Supplemental Nutrition Assistance Program (SNAP) beneficiaries would rise from 40.5 million people in fiscal year 2010 to 43.3 million in fiscal year 2011.

Forty-three million people on food stamps in the United States of America.

AgWeek reports that the cost of the program will rise from $68.5 billion to $78.8 billion to account for the new food stamp recipients.

That's what's known as non-discretionary social welfare spending. The worse the economy gets, the more the government has to pay. The Obama administration also wants to increase USDA spending on child nutrition, while cutting subsidies to big farmers and crop insurance payouts. But as AgWeek's Jerry Hagstrom reports, "the president's budget is only a proposal, and both House Agriculture Committee Chairman Collin Peterson, D-Minn., and Senate Agriculture Committee Chairman Blanche Lincoln, D-Ark., said they had no interest in cutting farm bill programs. "

The credit card trust lesson

Andrew Leonard — Tue, 09 Feb 2010 09:21:00 PST

It is a symbol of how much I have come to distrust the financial institutions with which I do business that my first reaction when I opened a letter from Chase labeled "Important Information Regarding Changes to Your Account" was, OK, how is my credit card company trying to screw me this time?

But I was wrong. The letter informed me of positive changes to the terms of my Cardmember Agreement mandated by the Credit Card Act of 2009.

There are three main changes that will go into effect Feb. 22.

Payments greater than the minimum payment will now be applied to higher rate interest balances first, and then to lower interest rate balances. The opposite was previously true, because credit card companies would naturally prefer that your balance accrue where it will do you the most financial harm.
I now have 21 days from the close of each billing cycle to make my payment. Some credit card companies previously allowed for much smaller windows.
If I screw up and miss a payment or am late on a payment, Chase can and will apply a "penalty APR" that jacks up my interest rate. But now, if I make at least the minimum payment for six straight months, Chase must return me to my lower rate.

The credit card companies have complained that the changes ordered by Congress will depress their profits. Over the past year, they have hustled to institute new fees before the deadline. For example, Chase raised minimum payments and charged higher rates for balance transfers and cash advances on some accounts, and walked straight into a class action suit and the unwelcoming arms of New York state Attorney General Andrew Cuomo.

I'm sure there is an appropriate balance to be drawn between government regulation and the freedom of banks to do what they want. But the idea that we are anywhere near that line right now is just ludicrous. The banks did far more harm to their own bottom lines by irresponsible risk taking than is likely to be achieved by any imaginable financial regulatory reform. They simply have no credibility -- which was one reason why I had to read my five-page letter from Chase three times before I was sure it wasn't disguising any new charges.

Is this how a consumer economy is supposed to work? The banks see us as suckers and we see them as bloodthirsty parasites? Something isn't right, and Elizabeth Warren, indefatigably crusading for a Consumer Financial Protection Agency, gets to the heart of it in Tuesday's Wall Street Journal.

The consumer agency is a watchdog that would root out gimmicks and traps and slim down paperwork, giving families a fighting chance to hang on to some of their money. So far, Wall Street CEOs seem determined to stop any kind of watchdog. They seem to think that they can run their businesses forever without our trust. This is a bad calculation ... With their reputations in tatters, the CEOs have decided to go on the offensive in Washington. They might have had some thoughtful suggestions for how to better shape a consumer agency. Instead, they have unleashed lobbyists who are determined to do anything to kill the consumer agency ... This generation of Wall Street CEOs could be the ones to forfeit America's trust. When the history of the Great Recession is written, they can be singled out as the bonus babies who were so short-sighted that they put the economy at risk and contributed to the destruction of their own companies. Or they can acknowledge how Americans' trust has been lost and take the first steps to earn it back.

Tea party genius: Sen. Larry Kudlow

Andrew Leonard — Mon, 08 Feb 2010 16:01:00 PST

Could we really be so lucky? CQ Politics is reporting that "the movement to draft CNBC host Larry Kudlow to run against Sen. Charles Schumer (D-N.Y.) is charging full-speed ahead." A nation of econobloggers and political reporters holds its breath (and poison pen) in feverish anticipation.

It's not just that the prospect of an inveterate anti-tax, pro-supply-side ideologue with high name recognition running for the Senate in the media capital of the world would be the equivalent of a massive jobs stimulus plan targeted directly at the beleaguered news business. There's also the fun to be had detailing how one man could so consistently be so wrong when discussing his supposed specialty: the economy.

Of course, many, many people have been proven wrong over the last few years when asked to forecast the direction the economy is headed. Treasury secretaries, Federal Reserve chairmen, the CEOs of Wall Street's biggest financial institutions ... Pretty much everyone got something wrong at some point. But I defy you to find someone more spectacularly wrong, from the outset of the financial crisis right up to last month, than Larry Kudlow.

Our story begins in the summer of 2005, when Kudlow offered his thoughts in National Review on the sustainability of the housing boom in "The Housing Bears Are Wrong Again." The opening paragraph will live in infamy:

Homebuilders led the stock parade this week with a fantastic 11 percent gain. This is a group that hedge funds and bubbleheads love to hate. All the bond bears have been dead wrong in predicting sky-high mortgage rates . So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.

For those whose memories are short, let us review: The end of the boom and the collapse of the housing market did bring down the consumer, the economy, and the stock market, and would have sent most of the nation's biggest financial institutions into bankruptcy were it not for massive government intervention.

Kudlow's reason for optimism: Since the early 1970s, demand for homes had "far outstripped the supply of newly built residences." But as the (almost never wrong) blogger Calculated Risk pointed out three years later, Kudlow even managed to get that part cockeyed. From 1970-2005 "There were significantly more housing units built (57 million starts)... than new households formed (44.6 million)..."

Fast forward a year and a half, to December 2007, by which point the question of whether the housing boom was sustainable had been thoroughly settled. Now the question was: Whither the greater economy? Blogging at National Review's the Corner, Kudlow was definitive:

There is no recession. Despite all the doom and gloom from the economic pessimistas, the resilient U.S economy continues moving ahead -- quarter after quarter, year after year -- defying dire forecasts and delivering positive growth. In fact, we are about to enter the seventh consecutive year of the Bush boom.... There's no recession coming. The pessimistas were wrong. It's not going to happen ... Yes, it's still the greatest story never told.

The National Bureau of Economic Research later determined that the recession officially began in December 2007.

It gets better: In July 2008, Kudlow called a housing bottom. Wrong. That same month, he also declared:

"Phil Gramm was right: We are in a mental recession, not an actual recession. And the low-tax, free-trade, free-market, capitalist economy is a whole lot more resilient and durable than the pessimistas and declinists would have us believe."

In September 2008, the month that the economy effectively collapsed, Kudlow posted a prediction that falling oil prices would serve as a "tax cut" that would "solve" the problem of weak consumer purchasing power. That, in turn, would boost the overall economy and "for those of us who prefer to look ahead, through the windshield, the outlook for stocks is getting better and better." Incredibly, amazingly, almost hysterically wrong.

(In the same post, Kudlow also predicted that Sarah Palin would strengthen McCain's presidential campaign. Maybe we'll give him that one.)

We could go on. Searching the Internet for instances of Kudlow's wrongness is an exhausting task -- there's too much material to properly filter. But just as a coda, let's note that just last December he predicted a mini-boom in the stock market and declared that "there's a lot of upside left" in the rally that by that point had been cruising along for nine months. Of course, the market promptly tanked.

There are other reasons to find Kudlow's candidacy risible (not least of which is the revelation, per a post by Salon's new news editor, Steve Kornacki, that the Draft Larry Kudlow Committee's finance chairman is John Lakian, who has his own notorious troubled relationship with the truth). But one must still concede that a political career for Kudlow is not inconceivable. He worked in the Reagan White House, was chief economist at Bear Stearns, and was considered a rising conservative star before revelations of drug and alcohol abuse put him on the sidelines in the early '90s. His signature policy prescription -- cut taxes for everyone and everybody, in every situation, as a cure for every ill -- is standard Republican orthodoxy, so he'd fit in quite well with the current GOP.

So go ahead tea partiers: Draft Kudlow! New York's had a rough couple of years. The state deserves some fun.

The tax break that broke Wall Street

Andrew Leonard — Mon, 08 Feb 2010 11:45:00 PST

At Capital Gains and Games, Pete Davis argues that the tax code helped precipitate the financial crisis. Specifically, the corporate income tax deduction available for interest that accrues on debt encouraged companies to borrow money for their acquisitions and trading bets, instead of investing directly in equity.

It makes sense. If you can write off the interest payments on debt as a tax deduction, but have to pay taxes on the income generated by actual ownership of equity, you will be steered toward debt by the not-so-invisible hand of the tax code. Davis writes that "the corporate income tax deduction for interest produced a -6.4 percent tax rate on debt financed investments, while the double taxation of equity income (dividends and capital gains) produced a 36.1% tax on equity financed investments."

So Wall Street went mad for debt-financed investments. We all know how that turned out.

James Surowiecki wrote an excellent piece on the problem for The New Yorker last November, pointing out that previous proposals to eliminate the corporate interest deduction have gone nowhere, but suggesting that "we're in a different historical moment now: the perils of too much borrowing have never been clearer."

Surowiecki's implication is that maybe now, as we survey the wreckage, we have the freedom to make some reforms. But Pete Davis is less hopeful:

The hard part of tax reform is that you have to raise taxes on those getting the subsidies. There are far fewer of them than the many taxpayers who stand to get slightly lower tax rates, so Wall Street corporations will finance the lobbying to kill tax reform before it has to chance to prevent the next financial crisis. We'll end up with watered down quick fixes at best, and the roots of the next financial crisis will remain in the Tax Code.

The last two paragraphs encapsulate a theme that appears in nearly every consideration of the possibility of meaningful financial regulatory reform today. We are in a different historical moment. The pro-deregulation ideological consensus that reigned supreme for the last 30 years has been broken.

And yet this difference makes no difference. The Wall Street banking lobby seems just as powerful in Washington as it was before the crisis. Even worse -- after the Supreme Court ruling earlier this year throwing out restrictions on political spending by corporations, it may even be more powerful.

Hank Paulson: A not very good improviser

Andrew Leonard — Mon, 08 Feb 2010 09:38:00 PST

Disclaimer: I chose not to read "On the Brink," former Treasury Secretary Hank Paulson's memoir, because I suspected it would not be worth my time. After reading the early reviews, ranging from Max Abelson's annihilation of the book in the New York Observer to Daniel Gross's far more gentle treatment in the Washington Post, I feel confident I made the right call.

Gross writes that "On the Brink" provides "plenty of excellent color and detail," but "a surprising inability to see the big picture." And much of what he does tell us, we already knew. For example:

John McCain comes off worst of all: impulsive, ill-informed and counterproductive. "This was crazy," Paulson writes of McCain's decision to suspend his campaign in late September 2008 and demand a White House meeting on the bailout. At the climactic meeting in the Cabinet room, Obama spoke for the Democrats, delivering a "thoughtful, well-prepared presentation." But McCain? "When it came right down to it, he had little to say in the forum he himself had called."

We waited a year and a half for an insight that was apparent the week it happened?

Abelson observes that "On the Brink" "gives the spectacularly unsettling sense that world history is decided by an assortment of guys who are improvising, and may not be particularly good at it." This almost makes me think the book might be worth reading, after all, because understanding the improvisational nature of reality might be unsettling, but is also important. Nobody's got a plan -- they're just making it up as they go along!

But the kicker does not lend itself to enthusiasm:

Not only did Mr. Paulson "not have time for regret, recriminations, or second-guessing," but he doesn't use the newfound power of hindsight.... Surely he has more sophisticated and subtle insights into the ugliness of American finance, but he keeps them to himself. "

But if you are in the mood for a good, long, meaty read, I second Felix Salmon's recommendation to read Moe Tkacik's opus distilling the essence of the financial crisis in The Baffler.

Tkacik pulls together elements of 13 different books (but not including "On the Brink") on the crisis into a masterpiece, and I say this not just because she coins the phrase, "soft bigotry of subprime moral standards." She does a really good job of trying to figure out what it all means, and finishes with a great flourish.

And that is why so many journalists, economists, intellectuals and financiers now scramble to churn out books that for the most part read like the memoirs of people trying to make themselves feel less stupid. The current financial system was constructed to make us all feel stupid, and in the process of building it the architects allowed themselves to become stupid as well. That ignorance begat infantilization, which bred cowardice and systemic moral decay. The only sustainable way out is to reacquaint ourselves and our fellow citizens with the wisdom of asking stupid questions.

Beware the demonic polar bear of doom

Andrew Leonard — Fri, 05 Feb 2010 15:01:00 PST

Polar bears? Endangered? At risk from a warming planet?

Have you ever considered that it is the planet that might be at risk from a fully loaded ursine avenger?

Behold the polar bear of doom! Watch the demon sheep cower in fear.

(Much thanks to a tweet from Marty Cortinas. Some backstory can be found here).

A law to end all bailouts

Andrew Leonard — Fri, 05 Feb 2010 13:46:00 PST

Richard Shelby, the ranking Republican member of the Senate Banking Committee, responds to Chris Dodd's declaration of of reaching an "impasse" in his efforts to craft bipartisan consensus on financial regulatory reform.

"There are two bedrock principles on which I will not compromise: the safety and soundness of the financial system and taxpayer protection against bailouts. I fully support enhancing both consumer protection and safety and soundness regulation. I will not support a bill that enhances one at the expense of the other, however. In order to strike the appropriate balance they must be integrated with each other, not separated from each other. "Consumer protection is not the only issue that remains unresolved. We must craft a resolution regime that ensures taxpayers will never again bear the losses for risks taken in the private marketplace. I will not agree to any legislation until I am satisfied this goal is also achieved. "

The smartest thing to do would be dismiss Shelby's statement as mere boilerplate. Who could disagree with the principle that taxpayers never again bear the costs of bailing out Wall Street? Heck, if that's all that slowing progress down, I'm sure good men and women of sturdy resolve can come up with a satisfactory solution.

However, as Simon Johnson never tires of reminding us, simply coming up with a "resolution regime" for financial institutions run amok isn't going to solve the fundamental problem of having too-big-to-fail banks in the first place. If they're too big to fail, no "resolution authority" is going to simply wave away the damage that their collapse will do to the larger economy, no matter how smoothly their dissolution is handled. If we want to keep taxpayers from footing the bill, then we've got to reduce the size and interconnectedness of these institutions. But that, alas, doesn't seem to be the kind of thing that either Democrats or Republicans have the stomach for.

Baby, it's not cold outside

Andrew Leonard — Fri, 05 Feb 2010 10:23:00 PST

Has all the controversy about hacked e-mails, Indian glaciers and Chinese weather stations gotten you confused about what's really happening to the planet's temperature? Here's something to chew on: According to satellite temperature data compiled by the University of Alabama at Huntsville (UAH), January 2010 was "the warmest January in the 32-year satellite-based data record."

That quote comes from UAH scientist Roy Spencer, and it's worth taking note of, because some climate activists are pretty vehement about placing the former NASA climatologist among the leading ranks of willfully blind climate skeptics. For years, skeptics cited discrepancies between the satellite data compiled by Spencer and his colleague John Christy and temperatures from surface stations as proof that global warming wasn't happening. Indeed, in a follow-up post, Spencer notes that he was "surprised" at the readings for the lower troposphere, but concedes that they have been confirmed by sea surface temperature readings from January. The year is starting out at a pace that could make 2010 the hottest yet.

Spencer notes as a possible explanation the fact that we are in the middle of the biggest El Niño year since 1998, which was also a very hot year. So maybe it's just changes in ocean circulation rather than greenhouse gas emissions that are pushing temps up? Not so fast, says Joe Romm. Not only is this year's El Niño relatively mild compared to 1998's, but we are also currently experiencing "the deepest solar minimum in a century" and an unusual stretch of stratospheric dryness, both of which would be expected to keep temperatures down.

I'm guessing that Washington, D.C., currently getting buried by Snowpocalypse, isn't yet feeling the heat, but if temperatures do keep rising, the trend will get pretty difficult to ignore.

Excellent news: Dodd gives up on the GOP

Andrew Leonard — Fri, 05 Feb 2010 08:45:00 PST

A sign of backbone from Chris Dodd?

Congressional Quarterly reports:

Bipartisan negotiations over a financial regulatory overhaul are at an "impasse," Senate Banking Committee Chairman Christopher J. Dodd said Friday, adding " have instructed my staff to begin drafting legislation to present to the committee later this month.The Connecticut Democrat said in a statement that while the panel's ranking Republican, Richard C. Shelby of Alabama, "assured me that he is still committed to finding a consensus ... it is time to move the process forward."

Translation: The Republicans are refusing to budge on their determination to block any meaningful reform. And why not? They've made the political calculation that preventing the Obama administration from governing is their best electoral strategy -- and it's been working like a charm.

But in our dysfunctional government, an "impasse" may actually be a sign of progress. Bipartisan consensus in this Congress is impossible. Now is the time to bring a solid bill to the floor, and force Republicans to filibuster. If the Democrats want to have any chance of salvaging the midterm elections, they need to show voters that they are willing to fight.

The unemployment rate ... falls?

Andrew Leonard — Fri, 05 Feb 2010 06:01:00 PST

A surprise from the Bureau of Labor Statistics: The unemployment rate in January dropped from 10 percent to 9.7 percent, instead of rising to 10.1 percent, as had been predicted by the ever-unreliable "consensus" of economists who amuse themselves by trying to guess labor market ups and downs.

Non-farm payroll employment declined by 20,000, which one can consider either not too bad (especially compared to a year ago, when payrolls plunged by 779,000) or not too good (many economists were expecting a slight rise) or completely irrelevant: In the new report, the BLS adjusted November 2009's 4,000 upward tick to a whopping 65,000 jump, and December 2009's 85,000 decline to a big 150,000 drop. So who knows what to think of the new number? Added bonus: The figure is almost exactly the same as that reported by the ADP on Wednesday, which hasn't happened in recent memory. (And shouldn't, since the ADP only measures private payrolls, while the BLS includes government jobs.)

The big loser: construction, down by 75,000 jobs in January -- mostly due to the collapse of the commercial real estate market. But manufacturing was up, retail trade employment grew by 42,000, and the federal government added 33,000 jobs, including 9,000 temporary Census hires.

The ever popular "U-6" measure of unemployment, which puts together "Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force" fell, on a seasonally adjusted basis, from 17.3 percent to 16.5 percent.

Also worth noting, the BLS reported significant revisions to all monthly payroll data for the previous year, in some cases by as much as 100,000 downwards (March 2009). In the first three months of 2009, the BLS now estimates the economy lost more than 2.2 million jobs. I'm not sure, but I'm wondering if any U.S president in the last 100 years faced such an abrupt unemployment disaster in his first three months of office.

More analysis later today, as we try to figure out why exactly the unemployment rate dropped, even as job losses continued.

Andrew Cuomo takes on the banksters

Andrew Leonard — Thu, 04 Feb 2010 15:15:00 PST

In the grand tradition of his predecessor Eliot Spitzer, New York State Attorney General Andrew Cuomo is generating tons of publicity by whacking Wall Street with a big fat stick. But even if you are predisposed to dismiss the civil fraud suit his office filed Thursday against former Bank of America CEO Kenneth Lewis and former chief financial officer Joseph Price as political grandstanding designed to smooth Cuomo's path into the governor's mansion this November, the 90-page lawsuit still makes for some great reading.

We've got BofA executives, in sworn testimony, directly contradicting previous sworn testimony and then failing to "recollect" their earlier conversations with state investigators. That's kind of ballsy. We've got a BofA treasurer worriedly telling CFO Price that he didn't want to be talking some day in the future about the topic they were then discussing -- huge losses at Merrill Lynch -- "through a glass wall over a telephone." And we've got a mysterious smoking gun: the summary firing, without explanation, immediately following a shareholder's vote to approve BofA's acquisition of Merrill, of BofA's general counsel Tim Mayopoulos; the man, as described in the suit, "who knew too much."

The lawsuit charges Lewis and Price with a dazzling switcheroo.

In order to complete its deal [to acquire Merrill Lynch], Bank of America's management misled its shareholders by not disclosing massive losses that were mounting at Merrill Lynch so that the shareholders would vote to approve the deal. Once the deal was approved, Bank of America's management manipulated the federal government into saving the deal with billions in taxpayer funds by falsely claiming that they intended to back out of the deal through a clause in the Merger Agreement.

If true, that's a nice piece of work. First you hide the extent of how badly Merrill is hemorrhaging cash, so as to avoid scaring off your shareholders. Then, just one week later, you tell the federal government to fork over a cool $20 billion or you'll try to walk away from the deal. Making the matter even messier, you fire the guy most likely to advise that you should have disclosed Merrill's losses before the vote, and there's a paper trail indicating that your lawyers had advised you that you most likely would not be able to get out of the deal citing the Merger Agreement clause mentioned above. So, basically, you lied to your shareholders and then extorted the government with a brazen bluff.

On the disclosure issue, judging by the facts detailed in the complaint, Cuomo's case looks strong. There was ample evidence in the week before the shareholder's vote that Merrill's losses were accumulating at a startling pace. Mayopoulos told investigators that after consulting outside counsel, he had recommended disclosure, but then had changed his mind after becoming convinced that Merrill's probable losses were not out of range of what they had been over the past year. But the lawsuit alleges that Price and Lewis kept him in the dark as to the rapidly worsening state of Merrill's finances. And shortly after Mayopoulos found out how bad the numbers really were, he was fired.

Oddly, CFO Price can't remember a crucial meeting in which Mayopoulos recalls discussing the disclosure issue:

Question: On Monday, December 1st there is an entry for 2:00 with Tim Mayopoulos and Greg Curl. Do you recall that conversation looking at your calendar of that meeting? Price: I do not recall the specifics of that one. Question: Do you know if it related to Merrill Lynch? Price: I don't recall. Question: Do you know if disclosure issues regarding Merrill Lynch came up at that meeting with Mr. Curl and Mr. Mayopoulos? Price: I don't recollect the meeting.

Call me cynical, but Mr. Price sounds like a man with something to hide. Gregory Curl, BofA's head of corporate development, does Price one better.

Question: How is it that in April you testified that you had a specific conversation with Mr. Herlihy about disclosure, and today you testified about none? Curl: I don't recall that conversation about disclosure. Question: Earlier today, on the topic of disclosure, you said, "That's not part of my world," correct? Curl: Correct. Question: How was it part of your world on April 10, 2008, when you testified about it? Curl: I don't recall the conversation on December 3rd. I may have been mistaken. I don't recall that conversation on the 3rd.

It's one thing to have a fuzzy memory of a meeting or a phone call. It's another thing to contradict your own previous sworn testimony with a sudden bout of forgetfulness.

So what about the second part of the story -- the attempt to strong-arm the feds? Ken Lewis' story is that Merrill's losses didn't start to accelerate wildly out of control until the week after the shareholder's vote. Here's where the case gets a bit murky. BofA's position is that Merrill reported an addition $7 billion in losses in the week after the vote. But the lawsuit claims Merrill only registered $1.4 billion in new losses during that week. I foresee plenty of billable lawyer's hours accumulating while settling that question.

Almost lost in the narrative is one of the most shocking aspects of the whole affair. Just before the shareholder vote, Merrill accelerated paying out a mind-boggling $3.57 billion in bonuses -- to reward employees for the worst year in Merrill's history.

On top of everything, the Bank failed to tell its shareholders that, in addition to buying a company that would have destroyed the Bank without taxpayer aid, it was going to permit that company to pay the $3.57 billion in bonuses in a manner and at a time completely inconsistent with its prior practice.

The closing months of 2008 were a crazy time when all kinds of decisions, by both government officials and financial institution executives, were being made ad hoc and on the fly, on little sleep and under incredible pressure. One can even argue that despite the alleged fraud and extortion, the right outcome occurred -- if Merrill Lynch had not been bought by Bank of America, it surely would have followed Lehman down the drain, further imperiling the global economy.

But that's hardly an excuse for failing to disclose pertinent financial information to your shareholders, or attempting to squeeze the federal government during a moment of great national economic peril. It will be very interesting to see how this case proceeds.

Who loves Wall Street best?

Andrew Leonard — Thu, 04 Feb 2010 09:20:00 PST

In an e-mail blast sent out Thursday morning, Brad Woodhouse, Communications Director of the Democratic National Committee, promoted a new Wall Street Journal article, "GOP Chases Wall Street Donors," with some self-serving commentary:

The GOP is in bed with Wall Street, Bankers and Their Lobbyists -- In December they met with 100 Banking Lobbyists to stop financial regulatory reform and now they are shaking them down for cash. Next time you hear a Republican talk about sticking up for small businesses and middle class families -- hand them this article.

Really? Granted, the article does a good job of documenting how Republicans are trying to woo Wall Street cash by "striving to make the case that they are banks' best hope of preventing President Barack Obama and congressional Democrats from cracking down on Wall Street." And sure, that seems a remarkable misreading of public sentiment at the current time. Is the GOP really so eager to be seen as standing up to "Mr. Obama's efforts to curb pay and impose new regulations?"

But just as damning are the details on how the Democrats have been feeding off the Wall Street trough for decades. During the 2008 presidential campaign, Obama, reports the Journal, raised "$15 million in donations from people who worked in the securities and investment industry" -- almost double McCain's take. He took in nearly $1 million from Goldman Sachs alone.

And let's not forget such stout friends of the banking industry as Senate Banking Committee chairman Chris Dodd, a lifelong beneficiary of Wall Street largesse. Or the pack of Blue Dog Dems raking in cash while sitting on the House Financial Services Committee, where good regulations go to die.

To a hefty proportion of the electorate, Wall Street has already gotten good value in return for their donations to Democrats. Far from being the scourge of the financial sector, the White House and Congress have kept it afloat, while hardly bothering to punsh it with even a slap on the wrist. If the DNC wants voters to think that Democrats are tough on Wall Street, it's going to have to work a lot harder.

Trouble in Prius-land

Andrew Leonard — Thu, 04 Feb 2010 07:23:00 PST

Are we witnessing a momentous shift in the history of the auto industry? Toyota's massive recall of more than six million cars in the U.S. market, due to floor mat and accelerator pedal problems, has already seriously dented the carmaker's sales. Its handling of the crisis, from a P.R. perspective, is getting terrible reviews. Some analysts are warning that it could take a "generation" for Toyota to recover its reputation.

And now comes the news that the Japanese government has ordered an investigation of braking problems with the 2010 Prius, currently Japan's top-selling car. A Toyota representative is quoted by Bloomberg as stating that "the possibility of a recall is not zero." The Prius -- that icon of high technology -- may have a software bug in the braking system.

The Wall Street Journal reports that last fall, Toyota started receiving reports that in certain road conditions, the 2010 Prius experienced a slight delay switching from regenerative braking to hydraulic braking. So a decision was made to tweak some code.

In Toyota's first news conference on the emergence of the Prius brake complaints, Hiroyuki Yokoyama, Toyota's quality general manager, said that in late January it rewrote the braking-system software following an increase in complaints in December. The Prius cars assembled since then all carry the modified version of software in their braking systems, but the company has yet to decide on whether and how to rewrite the programs on the cars it has already sold, he added.

Let's put aside for now the unsettling realization that modern cars now bear an unsightly resemblance to beta versions of software. (How long before we're driving 80 miles per hour down the freeway and our car suddenly informs us that it needs to update the operating system?) It just can't be confidence boosting to owners of Priuses bought before late January that they are driving cars with buggy brakes. That doesn't really fit with the oft-praised "Toyota way."

The real news here is that Toyota's woes are a boon to U.S. automakers more helpful than anything the U.S. government could dream up. A crack in Toyota's heretofore invincible reputation for quality is something U.S. carmakers have been fruitlessly awaiting for generations.

Consider it a lesson in the contingent nature of economic fortune. Toyota's stumble will make Cash for Clunkers look like a bake sale. Who needs a bailout, when all you really have to do is wait for your fiercest competitor to drive off a cliff?

UPDATE: The U.S. Department of Transportation has launched its own investigation of Prius braking problems.

"The Chinese don't need 60 votes"

Andrew Leonard — Wed, 03 Feb 2010 15:32:00 PST

Lindsey Graham doesn't appear to be listening to the South Carolina Republicans who deem him a traitor to the GOP. He hasn't backed down on his support for climate change legislation -- if anything, judging by a speech he gave Wednesday in Washington, he's stepped it up. Of particular note, he even pushed back on President Obama's speculation during a town hall meeting on Tuesday that it was "conceivable" that a cap-and-trade bill might have to be considered separately from an energy bill.

I like the president. I'm having a hard time finding common ground but we're trying. One of the issues that I think we have some common ground on is trying to come up with a rational energy independence policy married up with climate change policy that will clean up the air but make money doing it and create jobs in the process ... There was this idea floating around yesterday -- don't know how serious it is -- that somehow it would be wise for Congress to do an energy bill only. I don't think that's wise. The reason I don't think that's wise is that "it is a kick the can down the road approach." It's putting off to another Congress what really needs to be done comprehensively. I don't think you'll ever have energy independence the way I want it until you start dealing with carbon pollution and pricing carbon. The two are connected in my view-- very much connected. The money to be made in solving the carbon pollution problem can only happen when you price carbon in my view. So if the approach is to try to pass some half-assed energy bill and say that is moving the ball down the road, forget it with me.

And if climate change and green jobs aren't enough of a motivator, how about the specter of Chinese competition!

At the end of the day we need a comprehensive approach that would allow this country to jump start its economy and lead the world to a cleaner environment. Every day we wait in this nation China is going to eat our lunch. The Chinese don't need 60 votes. I guess they just need one guy's vote over there -- and that guy's voted.

The Chinese don't need 60 votes. You know gridlock in the U.S. Senate is bad when a Republican senator compares it unfavorably with autocratic decision-making in the People's Republic of China!

Grist has the full transcript. I found myself nodding my head to it more than I have become accustomed to with the utterances of currently serving Republican senators. Which undoubtedly explains why the good citizens of South Carolina are so outraged.

How much gas do we pass?

Andrew Leonard — Wed, 03 Feb 2010 14:34:00 PST

Todd Woody's best-in-show coverage of the clean energy scene (which now appears at his Fortune-based blog Green Wombat, Grist, and The New York Times) continues today with an intriguing story reporting how California has begun installing high tech greenhouse gas detection meters across the state.

The purpose is to give regulators an improved handle on the precise source of emissions. As we grapple with climate change, the problem of measuring and locating emissions is an increasingly critical issue. As Woody points out in a companion piece, China's unwillingness to agree to emissions verification standards requested by the United States was a key reason why the Copenhagen climate talks broke down.

In the course of his story, Woody introduces Picarro, a Silicon Valley startup that manufactures the "analyzers" used to detect gas concentrations. Based in Sunnyvale, Picarro sells the analyzers for $50,000 a pop. If all goes well -- which for Picarro means, essentially, that the world takes seriously the challenge of climate change, and institutes some kind of cap-and-trade or carbon-tax mechanism that requires detailed analysis of exactly who is pumping what into the atmosphere -- then Picarro is looking at a solidly growing market. Imagine how many detectors China, now the world's largest producer of greenhouse gases, might need? Picarro is displaying exactly the kind of entrepreneurial spirit necessary to prosper on a hot planet.

Of course, if you pay attention to the climate skeptic blogosphere, you will currently find it more convinced than ever that global warming is a crock. Their latest cause celebre: New revelations in The Guardian that the director of the University of East Anglia's Climate Research Center, Phil Jones, may be in hot water over the accusations of scientific fraud having to do with Chinese weather station data.

A somewhat confused overview of the story is here. A detailed and fascinating breakdown of what actually happened is here. Of all the stories generated by the hacked climate change e-mail controversy this one has by far the most meat.

The key question, how much did urbanization contribute to rising temperatures in eastern China? If temperatures rose because previously rural weather stations were swallowed up by expanding megalopolises then some doubt is cast on whether that data supports theories of human-caused global warming. In an influential paper published in Nature in 1990, Jones argued urbanization was a minor, basically irrelevant factor. However, it has turned out very difficult to verify critical information about the Chinese weather stations -- including, for example, the question of whether those stations were physically moved over time, thus invalidating their readings. Jones's handling of the data, and his refusal of Freedom of Information act requests aimed at getting access to the data, doesn't look good.

HTWW is in full agreement with Jones correspondent Michael Mann when he refers to the skeptics as a "crowd of charlatans ... [who] look for one little thing they can say is wrong, and thus generalize that the science is entirely compromised. " But the more clarity we get about how Jones ran the Climate Research Unit the less it looks like how we'd like to see scientists conducting their business.

But I found the end of Fred Pearce's Guardian article recounting this story is particularly fascinating: Jones's most recent research at least partially invalidates his own earlier findings!

In 2008, Jones prepared a paper for the Journal of Geophysical Research re-examining temperatures in eastern China. It found that, far from being negligible, the urban heat phenomenon was responsible for 40 percent of the warming seen in eastern China between 1951 and 2004. This does not flatly contradict Jones's 1990 paper. The timeframe for the new analysis is different. But it raises serious new questions about one of the most widely referenced papers on global warming, and about the IPCC's reliance on its conclusions. It is important to keep this in perspective, however. This dramatic revision of the estimated impact of urbanization on temperatures in China does not change the global picture of temperature trends. There is plenty of evidence of global warming, not least from oceans far from urban influences. A review of recent studies published online in December by David Parker of the Met Office concludes that, even allowing for Jones's new data, "global near-surface temperature trends have not been greatly affected by urban warming trends."

Although I am pretty sure that Phil Jones's career as a scientist will suffer permanent damage as a result of the hacked e-mail revelations, I am heartened by the fact that his own research reexamining the data came to a different conclusion 18 years after the original study. Because that's how science should work. You keep crunching the data, you keep reexamining your assumptions, you expose it to mercilessl criticism. You improve the state-of-the-art.

And of course it always helps to have more data. So let a thousand Picarros bloom! Let a thousand weather stations contend! Let the skeptics wail away on the emerging scientific consensus with all their might. My suspicion is that their efforts will only end up making the case for global warming air-tight.

Why Goldman-Sachs has nothing to fear

Andrew Leonard — Wed, 03 Feb 2010 10:20:00 PST

Most serious discussion of the new proposals for regulating the financial sector floated by President Obama in January focuses on the problem that they are likely too weak. Felix Salmon and Yves Smith both have pointed out that the so-called Volcker rule restricting proprietary trading by banks that are backstopped by the federal government can be easily avoided by the likes of Goldman-Sachs.

The Volcker rule would reduce some risk taking, but not by the entities most likely to destabilize the global financial system. As Salmon bemoans, "My feeling is that the Volcker rule probably won't make its way into law, and that it'll be largely toothless if it does."

But if it's going to be "largely toothless," why are its prospects for making its way into law so meager? Could it be that Congress doesn't want to waste time on legislation that won't accomplish anything?

Not exactly. In the Senate, Obama's proposals are viewed, by influential members of both parties, as overkill.

The New York Times reports that Chris Dodd, D-Conn., despite avowing "strong support" for the Volcker rule, also seems to believe that attempting to pass it will kill any chance that reform legislation will pass.

Mr. Dodd, Democrat of Connecticut, added that the administration was "getting precariously close" to excessive ambition for the legislation. "I don't want to be in a position where we end up doing nothing because we tried to do too much," he said.

The Wall Street Journal catches him in an even more plaintive mood.

Mr. Dodd indicated Tuesday that he wasn't willing to act without Republican support for a financial-overhaul bill. "I don't want to go to the floor of the United States Senate begging for a 60th vote," he said.

Looking for bipartisanship? The Senate Banking Committee is full of it, with Republicans and Democrats speaking with one voice (also from the WSJ).

Also at Tuesday's hearing, several Republicans accused the White House of regulatory overreach. "What we're doing here is we're taking this financial reform, and we're expanding it beyond where we should be," said Sen. Mike Johanns (R., Neb.). "I just question the wisdom of that."

And there you have it: The White House's efforts to push financial regulatory reform manage to pull off a truly marvelous feat: The proposals are too weak to significantly guard against a repeat of the financial crisis, and too strong to get 60 votes in the Senate.

Mr. Corporation goes to Washington

Andrew Leonard — Wed, 03 Feb 2010 07:32:00 PST

"It's our democracy," declares public relations firm, Murray Hill Inc, in a press release explaining why the corporation is running for Congress. "We bought it, we paid for it, and we're going to keep it."

Within seconds of the Supreme Court's Jan. 22 ruling throwing out campaign finance restrictions on corporations, on the basis that their legal "personhood" gave them a constitutional right to freedom of speech, the Web swarmed with bitter commentary from (actual) human beings upset with the decision. One oft-retweeted joke: "Corporations will be allowed to marry each other before gay people." Also popular: Why not dispense with the whole charade of government and allow corporations to run for office directly?

Murray Hill Inc., a PR agency with a track record of representing union and environmental groups, has seized on this dissatisfaction and transformed it into pure comic gold. (Thanks to Catherine Rampell at the New York Times' Economix blog for the tip.)

Murray Hill Inc. plans on filing to run in the Republican primary in Maryland's 8th Congressional District. Campaign Manager William Klein promises an aggressive, historic campaign that "puts people second" or even third.

Philip K. Dick would be so proud. Watch the campaign ad, and laugh. Or cry. Or simply appreciate some great advertising for a public relations agency. Your choice.

Red California, blue California

Andrew Leonard — Tue, 02 Feb 2010 15:25:00 PST

Albeit small and tentative, signs are beginning to emerge that California's economy may finally be headed on a solid path towards recovery. The state's finances improved marginally in December -- General Fund revenues came in $481 million higher than estimates contained in the most recent budget had predicted.

But the recovery is highly uneven, reports the Wall Street Journal's Cari Tuna. Coastal California is on the upswing while the inland regions are mired in an ongoing slump.

Unemployment rates are dipping and home prices are rebounding in the San Francisco Bay area, which is driven by its technology industry and exports, and in coastal Southern California, where entertainment and other industries are starting to benefit from the economic thaw. But in the state's Central Valley and Inland Empire regions, where the downturn struck earlier and harder, unemployment rates are still rising and the battered construction industry keeps shedding workers.

There's an obvious reason for the disparity. The Central Valley and Inland Empire were epicenters for the most outrageous speculative excesses of the housing boom. In contrast, the San Francisco Bay Area and coastal Southern California feature highly diverse economies that weren't completely devastated by the collapse of a single sector.

There's also an intriguing political dimension to the bifurcated economic outcomes. The Bay Area and coastal California trend liberal, while inland California is far more conservative. And that's worth pondering, when we think about how California's woes have been seen through a political prism in the larger national debate. Conservatives like to portray California's busted budget and reeling economy as the logical outcome of over-reaching big government combined with overly restrictive regulations. Liberals point to the strait-jacket imposed by Proposition 13 arguing that the requirement for a two-thirds majority to pass tax increases makes the state almost impossible to govern effectively.

Complicating the issue is the fact that it is very, very hard to separate out the extent to which California is ungovernable, or governed badly, and the extent to which the state's woes are due to the normal gyrations of the business cycle. It could of course be both -- a perfect storm of a dysfunctional state smashing into a horrible recession. But it is at the very least ironic, and should be food for thought, that the liberal hotbeds of elites who might be willing to pay higher taxes in order to help fix the state's finances are a lot more flexible and economically vibrant than the conservative redoubts taking the brunt of the damage.

Are Geithner's days numbered?

Andrew Leonard — Tue, 02 Feb 2010 12:50:00 PST

Simon Johnson, the MIT economist newly named contributing business editor at the Huffington Post, published a scoop this morning:

The White House is floating, ever so gently, the notion that they are open to nominations for the position of "Tim Geithner's Successor."

Via e-mail Johnson told me only that the news came from "a very good source" and acknowledged that it might be "White House disinformation ... or some more complicated game.

Although I can construct a scenario in which Geithner's lack of enthusiasm two weeks ago for Obama's new banking regulatory initiatives, combined with his unpopularity with both the left and the right, might be encouraging the White House to look for ways to jettison him, it still seems like an awfully risky strategy, more likely to fuel perceptions of White House chaos than anything else.

For Johnson, the titillating leak mainly served as a segue into recommending that Tom Hoenig, president of St Louis Fed, be chosen as the next secretary of the Treasury. Hoenig, writes Johnson, has the right views on breaking up Too Big To Fail banks and would be the kind of straight shooter who could go toe to toe with Wall Street CEOs.

That's great. But Hoenig is also a noted inflation hawk who, just last week, was the only member of the Federal Open Market Committee to dissent from the position that the Fed needed to keep interest rates near zero for the foreseeable future. He's on record as worried that the stimulus will fuel inflation in the near term. Do we really want a monetary conservative as treasury Secretary with unemployment holding steady at 10 percent?

Johnson anticipates the criticism:

This hesitation is understandable although likely mistaken; you don't keep the federal funds rate essentially zero for long when nominal GDP is growing at more than a 6 percent annual rate. In any case, the issue is irrelevant for the Treasury job. The Treasury Secretary's responsibility in a modern administration is to run financial sector policy, meaning bailouts and how to avoid them. Peter Orszag has the budget and Ben Bernanke (gulp) holds the monetary tiller. What we desperately need is someone who can sort out our largest banks.

If we knew that GDP was going to keep growing at a 6 percent annual rate, well, OK then. But we don't. Quite the opposite: Optimistic projections for next year expect annual growth of around 2.5-2.7 percent. Pessimists see a double dip recession waiting just around the next quarter. What Obama needs most right now is help figuring out how to avoid that recessionary relapse and bring unemployment down. Is Hoenig the guy for that job?

Chris Dodd to GOP: I surrender

Andrew Leonard — Tue, 02 Feb 2010 09:48:00 PST

Paul Volcker is scheduled to appear before the Senate Banking Committee on Tuesday afternoon to explain his proposal to limit risk-taking by commercial banks -- the so-called Volcker Rule that would ban banks from engaging in proprietary trading with federally insured depositor money.

But if the Financial Times is to be trusted, the Volcker Rule is already dead on arrival, because Richard Shelby, the ranking Republican senator on the Banking Committee, doesn't like it, the Democrats no longer have 60 votes, and Chris Dodd, the chairman of the committee, wants to play nice.

Don't read any further if you have blood pressure issues.

From the FT:

A Dodd staffer said the senator is likely to quietly drop or modify many of the recommendations in the Volcker rule to ensure Republican support for regulatory reform. "Chris is retiring so he wants to end his career with an important regulatory reform bill and he wants to make the bill bipartisan," the staffer said. "He is not going to risk bipartisan support to make the White House happy."

I guess that answers the question about whether the lame duck Dodd has any intention of standing up and becoming a real leader, now that he doesn't have to worry about getting reelected. Do I even need to mention that the Republicans are also opposed to a Consumer Financial Protection Agency, increased taxes on the biggest banks, and tough derivatives regulation? Bipartisan support for financial regulatory reform by definition means that whatever passes the Senate will be the opposite of "important." It will be irrelevant.

As my colleague Alex Koppelman observes, "Senate Democrats have single-handedly disproven the idea that negative reinforcement can teach people not to do stupid things." Dodd's pusillanimous cave-in won't enhance his legacy. It will annihilate it.

UPDATE: Kirstin Brost, Communications Director, Senate Banking Committee, responds:

I don't know who [FT's] DealReporter spoke to, but they do not speak for Chris Dodd. Dodd strongly supports the Volcker rule. He joined Obama for the announcement and is holding two important hearings on the proposal this week -- one tomorrow with Volcker and a Treasury rep and a second on Thursday with business and academic experts.

Brost did not waste any time responding, but the proof will be in the legislation.

I am the Lorax: "Cease and desist"

Andrew Leonard — Tue, 02 Feb 2010 08:02:00 PST

How the World Works does not always thrill to the sight of lawyers representing dead writers in the act of enforcing intellectual property laws beyond the grave, but in the case of Dr. Seuss versus a coal-gasification startup with the effrontery to call itself "LoraxAg," I will make an exception.

The New York Times' Green Inc. blog has an update:

Colin Miner reports:

The company that protects the copyrights on the works of Theodor Geisel, better known as the children's book author Dr. Seuss, has sent a cease-and-desist letter to a Massachusetts company looking to get into the coal business under the name Lorax -- the title character of a story published in 1971. "There's no reason for them to use the term," said Karl ZoBell, the longtime lawyer for Dr. Seuss Enterprises, "except to purloin the good will attached to the book and use it for a company that appears to be the opposite of everything the book is about."

Miner does a good job of summarizing the story, but leaves out one key point. The first publication to report on LoraxAg's existence was Massachusetts High Tech, back last November. But according to Wonk Room's Brad Johnson, who who posted about the sacrilege last week, Dr. Seuss Enterprises did not have any idea LoraxAg even existed until Johnson called them up. Thus the cease-and-desist letter.

Give a hard-working blogger some credit, Mr. Paper-Of-Record!

(Thanks to reader Katherine Harrison for bringing the Green Inc. item to my attention.)

The next science superpower

Andrew Leonard — Mon, 01 Feb 2010 16:21:00 PST

Some data points culled from two recent articles on China, "Get Ready for China's Domination of Science," in New Scientist and "China is Leading the Race To Make Renewable Energy" in the New York Times.

Between 1995 and 2006, China's gross expenditure on R&D grew at an annual rate of 18 per cent.
China's university student population has "reportedly" grown from five million to 25 million in the last nine years.
According to data from a Thomson Reuters index of scientific papers from 10,500 journals, China's research output has grown from 20,000 articles in 1998 to 120,000 in 2009, second only to the 350,000 published by U.S. authors.
"Nearly 9 percent of papers originating from Chinese institutions have a US-based co-author."
China "produces 20 per cent of global output in materials sciences, with a leading position in composites, ceramics and polymer science and a strong presence in crystallography and metallurgical engineering."
China is the world's largest manufacturer of wind turbines and solar panels.

In his State of the Union speech, President Obama declared that "I do not accept a future where the jobs and industries of tomorrow take root beyond our borders."

But I don't think it's his choice. The U.S. government does not currently have the financial flexibility to pour resources into science, technology and education with Chinese-style determination. And judging by the long-term budget projections, by the time the U.S. finds its footing, China will be hard to catch.

Manufacturing recovery?

Andrew Leonard — Mon, 01 Feb 2010 11:54:00 PST

After a January full of not very encouraging economic indicators, February kicked off with some surprising numbers on manufacturing expansion that got the stock market excited and inspired numerous analysts to talk about the possibility that a sustainable recovery is under way. Should we be cheering?

On the surface the Institute for Supply Management's report on December's manufacturing economy looks good.

"The manufacturing sector grew for the sixth consecutive month in January as the PMI rose to 58.4 percent, its highest reading since August 2004 when it registered 58.5 percent. This month's report provides significant assurance that the manufacturing sector is in recovery. Both the New Orders and Production Indexes are above 60 percent, indicating strong current and future performance for manufacturing. This month, 13 of 18 industries reported growth, up from nine industries last month, and this is a good indication that the impact of the recovery is expanding."

BusinessInsider's spin: The report "blew away expectations." Everybody's excited. If manufacturing growth continues, companies will start hiring, and a reduction in unemployment will lead to renewed consumer spending, etc.

WallStreetGeek offers up a pretty big caveat, however. The primary factor propelling economic growth in the fourth quarter of 2009 was a slowdown in the pace of inventory liquidation. It's reasonable to assume that the boost in manufacturing can be largely attributed to restocking activity. But that's a one-time boost. Consumer spending growth in December was tepid, suggesting that once warehouses are refilled, it will take some time to empty them again.

It looks to us like inventory restocking from deeply understocked levels will serve the purpose of lifting the economy in Q4, and maybe into Q1 as well. Still, be aware that this is a trend seen oftentimes in economic cycle history, and oftentimes it is followed by a second dip into economic contraction once normalized inventory meets still sub par absolute demand. Given still high unemployment and cautious employers, we find no reason to forecast any other consequence for this cycle, and therefore, for 2010.

The Budget: Obama reality vs. Pawlenty fantasy

Andrew Leonard — Mon, 01 Feb 2010 08:36:00 PST

Within nanoseconds of the release of President Obama's new $1.6 trillion budget, Republicans started screaming about the White House's' "lip service" to concern about the deficit -- proof, once again, of the fantasy-land currently occupied by the GOP.

The numbers are big, for sure, and should alarm anyone already worried about the long-term sustainability of U.S. finances. But the fact is that this budget underlines the unpleasant reality we currently face. Looking forward, Obama's new budget includes significant tax increases, the end of two wars, a fully recovered economy, and that still won't bring the annual deficit down below $700 billion-$800 billion.

From the Wall Street Journal:

...the budget plan calls for nearly $1 trillion in tax increases on upper-income families -- largely through allowing Bush tax cuts to expire. Banks, bankers and multinational corporations would face new fees and levies. And oil companies would lose $39 billion in tax breaks... The two top income-tax brackets would rise to 36% and 39.6% from 33% and 35%. For families earning at least $250,000, capital-gains and dividend tax rates would rise to 20% from 15%. All totaled, upper-income families would face $969 billion in higher taxes between 2011 and 2020. Oil and gas companies would face $37 billion more in taxes over that stretch. Hedge-fund and private-equity traders who now see their fees taxed as capital gains would have their income taxed at income-tax rates, at a cost of $24 billion over the decade. And multi-national companies would pay an additional $122 billion on earnings overseas, a proposal Mr. Obama made last year that went nowhere amid furious business opposition.

With those plans in mind, let's turn to a balanced budget proposal from Minnesota Gov. Tim Pawlenty, a potential GOP presidential candidate in 2012. Pawlenty says the debate over the deficit "is no longer between competing political philosophies -- it is a matter of basic mathematics."

Pawlenty then calls for a balanced budget to the amendment to the Constitution and simultaneously recommends that "the Bush tax cuts should be made permanent and tax burdens on individuals and businesses should be further reduced."

So who exactly is it who doesn't have a handle on the math? As Bruce Bartlett observes in a blistering rebuttal to Pawlenty, the governor's numbers don't even begin to add up.

It's one thing to require a balanced budget when starting from a position of balance or near-balance. It's quite another when we are running deficits of over $1 trillion per year for the foreseeable future. Even if we were not in an economic crisis and fighting two wars and responding to a natural disaster in Haiti, a rapid cut in spending of that magnitude would unquestionably throw the economy into recession just as it did in 1937. It's doubtful that Mr. Pawlenty has any clue as to the composition of federal spending. In FY 2009 we would have had to abolish every discretionary spending program, including national defense, to balance the budget and that still wouldn't have been enough without a penny of higher revenues, as he insists. We would have had to cut more than $300 billion out of Medicare and Social Security as well. Good luck with that.

The fantasy that there is any path to budget stability without higher taxes is utterly deluded. But there's one point at which I have to diverge from Bartlett: He finishes his disembowelment of Pawlenty by claiming that his platform is too "transparently phony" for even "the right-wing tea party/Fox News crowd." I have no idea what makes him so confident on that point. The GOP, responsible for engaging in massive tax cuts, wars and a huge healthcare giveaway (the Medicare-D prescription drug benefit) without making a semblance of an effort to pay for any of them, is now campaigning as the party of fiscal responsibility. How much phonier can you get?

That's an illusion. Reality is the new budget. A budget that doesn't do nearly enough to stimulate the economy, because the hole the government already is in is so big it's almost impossible to see how we can climb out.

Osama bin Laden: Eco-terrorist

Andrew Leonard — Fri, 29 Jan 2010 10:58:00 PST

Osama bin Laden is one wily s.o.b. On the very same day that three Republican senators sent a letter to Majority Leader Harry Reid asking that their environment-ravaging No Cost Stimulus bill be added to a new jobs bill, the al-Qaida mastermind launched a sustained attack, broadcast on Al-Jazeera, blaming the United States for blocking action on climate change. If his goal was to further the state of paralysis currently afflicting the U.S. Senate, he will undoubtedly be successful.

In addition to opening up the continental shelf to increased offshore oil drilling and accelerating the exploitation of oil shale and tar sands resources, the No Cost Stimulus Act aims to boost the economy by weakening the environmental impact review process, the Clean Air Act, the Endangered Species Act, and forbidding the Environmental Protection Agency from classifying greenhouse gases as air pollution.

The bill is an environmentalist nightmare. Indeed, you'd be hard-pressed to figure out a way to faster accelerate the pumping of greenhouse gas emissions into the atmosphere than by enacting the Republican plan. I'm sure that bin Laden, squirreled away in Waziristan, is already working up a white paper explaining why the GOP platform is a blueprint for planetary disaster.

Of course nothing suits the right more than for bin Laden to expose himself as a treehugger. Drudge and Fox are shuddering with glee. Forget about your eco-terrorists! Now we've got real terrorists pushing for cap-and-trade! Al Gore and bin Laden, together forever.

The only thing more ridiculous than the GOP's No Cost Stimulus Act is a mass murderer parading his passion for Gaia. The two sides are made for each other, and their unholy matrimony will help assure that nothing worthwhile gets done.

Economy surges, nation yawns

Andrew Leonard — Fri, 29 Jan 2010 08:57:00 PST

In its first stab at measuring economic growth for the fourth quarter of 2009, the Bureau of Economic Analysis reported that gross domestic product rose at a seasonally adjusted annual rate of 5.7 percent. The number may not hold up through subsequent revisions -- 3rd quarter GDP growth was revised down twice -- but for now it's what we've got.

Most noticeable: the sound of almost no one cheering. You don't see a 5.7 percent growth rate in the U.S. every day -- the last time the U.S. economy grew that fast was in 2003. But you also don't tend to see such a lack of enthusiasm for good numbers.

The universal explanation for the subdued reaction is that GDP growth in the fourth quarter was driven by a slowdown in inventory liquidation. Earlier this year, businesses were sitting on warehouses full of goods that nobody was buying. So they stopped restocking. They cut so far and so fast that now they have no choice but to begin gearing up again, and that's responsible for more than half of overall growth.

There are some encouraging numbers. Business spending on equipment and software rose rapidly, a point reinforced by strong Windows 7-generated Microsoft earnings. But no one thinks that trend is sustainable unless consumers start buying again, and the evidence for that scenario is mighty thin. Consumer spending rose only 2 percent in the fourth quarter, representing a slowdown from the third quarter's 2.8 percent rise. And what we know about the economy so far this year is hardly encouraging. Judging from weekly jobless claims there hasn't been much improvement in the unemployment situation in January, and the residential housing market appears to be going backward.

The key number, per the Wall Street Journal: "In all of 2009, GDP fell 2.4 percent, the biggest drop for an entire year since 10.9 percent in 1946."

At the close of the worst year for the U.S. economy in more than six decades, Americans are cautious and scared. Without an improvement in the labor situation, they are unlikely to start spending at a rate that can sustain real growth. Congress needs to look inside these GDP numbers, realize how weak they are, and get a jobs bill to the president's desk, immediately.

The Lorax: "I speak for clean coal"

Andrew Leonard — Thu, 28 Jan 2010 16:29:00 PST

In these days of relentless political absurdity and unending economic travesty, you may sometimes feel as if your disgust meter has completely maxxed out. There's nothing left that will shock you, you might imagine, as you take a jaded swig of your martini and shrug wearily at the world's gaunt tapestry of injustice.

And then you learn that a coal-gasification start-up has -- without authorization -- named itself after Dr. Seuss' environmental icon, the ("I speak for the trees") Lorax, in the deluded belief that if Dr. Seuss were alive today, he'd be a crusader for clean coal. And suddenly, your disgust meter goes to 11!

Wonk Room's Brad Johnson brings us the word, via MassHighTech.com

The company, whose principals include Michael Sununu, the son of former New Hampshire governor John Sununu, has raised over $1 million in seed capital to build a high-sulfur coal factory. The name choice was a deliberate attempt to cloak their coal-and-chemical company as an eco-friendly venture:
And, yes, the name is inspired by the Dr. Seuss story, Farina said. "The Lorax is the protector of the truffula trees," he said. "We think this is the greenest use of coal."

War is peace. Freedom is slavery. Ignorance is strength. And the Lorax endorses clean coal.

Bernanke lives!

Andrew Leonard — Thu, 28 Jan 2010 12:53:00 PST

The Senate just voted to end debate on the reconfirmation of Ben Bernanke as Federal Reserve chairman. By a vote of 77-23, the motion for cloture passed, thus all but assuring a second term for Bernanke.

Depending on how you look at it, the margin is either pleasantly comfortable, given the speculation late last week that Bernanke might not get the 60 votes necessary to stop a potential filibuster. Or it's an embarrassing humiliation for both the chairman and President Obama, since it's been a long time since a sitting chair received so many nay votes while seeking reconfirmation.

UPDATE: The final "up-and-down" vote for confirmation: 70-30. Seven senators who voted to end debate declined to support Bernanke for a second term. According to Senator Bernie Sanders, I-Vt., the 30 nay votes was the most ever a Federal Reserve chairman nominee has ever received.

iPad lesson: Apple is in control

Andrew Leonard — Thu, 28 Jan 2010 11:24:00 PST

I never imagined a day when I might hear Apple described as a combination of "Microsoft and Intel rolled into one." It makes me feel dirty just thinking about it. But after sifting through the reams of media coverage generated by the iPad's launch on Wednesday, I'm beginning to think that the most interesting feature of the iPad, symbolically speaking, is Apple's decision to incorporate a proprietary microprocessor chip -- i.e., one designed by Apple -- in the iPad's design.

Jobs mentioned the chip -- dubbed the "A4" -- early on in his presentation at San Francisco's Moscone Center. That was noteworthy alone, as the perspicacious John Gruber observes, because Apple generally eschews public discussion of the technology specs of its products. (You wanna know what's in the iPhone? Buy one, and take it apart.)

So, clearly, Apple considers the A4 to be a big deal. Apple paid $278 million for a semiconductor start-up staffed by illustrious industry veterans in 2008, because the company wanted more control over the most important part (choose your favorite metaphor -- brains ... heart... lungs ...) of a computing device's hardware. That's not a game Microsoft or Google is playing, yet.

By all accounts, the chip dazzles. A common refrain coming from people who have had a chance to handle the iPad is that it is fast. Really, really fast. In a world where teenagers go nuts when "World of Warcraft" starts to suffer nanoseconds of lag, that virtue should not be underestimated as a selling point for new hardware. The most sublime user interface in the world is useless if Web pages render slowly or it takes ages to switch from app to app.

From a sheer engineering standpoint, Apple's ability to execute such an ambitious strategy is impressive. A superfast chip that is easy on the battery consumption is the ever-receding holy grail of microprocessor manufacturing. But in the context of the globalization of the computer hardware industry the feat is even more interesting.

The global chip industry is a model for how high-tech production chains have become distributed around the world. Outside of Intel, the notion of a vertically organized hardware company that owns and operates every aspect of production from design to manufacturing is archaic. Today, a fabless start-up in Palo Alto comes up with the specs (perhaps with help from Indian designers), a state-of-the-art foundry in Taiwan manufactures it out of raw silicon, a testing outfit in South Korea checks to see if it works, and then the finished product gets plugged into a device in some giant Chinese factory.

Five years ago, I explored the inner workings of the iPod as an introduction to globalization. More than most companies, Apple appeared exquisitely comfortable at the leading edge of this new industrial revolution.

And that's still true, to a certain extent. We won't know for a while exactly where the A4 is made or what strands of intellectual property licensed from other chip consortiums are incorporated in its DNA. My bet is that the A4 is still made in Taiwan. But so what? The decision to bring the chip's design in-house speaks to a desire for control so profound as to make the physical location of manufacturing meaningless. It is proof, in other words, that outsourcing production does not mean giving up ownership.

And it is that issue of control that is at the heart of most thoughtful critiques of the iPad (or iPhone, for that matter). The iPad is the antithesis of the open, infinitely configurable, general-purpose computer. As such it represents the apotheosis of a strain of Apple culture that's been apparent ever since the company made clear in the 1980s that cloning Apple hardware was unacceptable heresy. From the microprocessor to the fact that the device won't render Flash to the lack of multitasking or a USB port to the organization around "stores" (iTunes, iBooks) -- Apple's iPad is all about control. That's one reason why media companies are supposedly so gaga about the device. In their view, control equates to a potentially profitable business model.

Maybe it does, but only if users get something in return, which the New York Times had better remember. Apple's deal has always been that in return for giving up some freedom, the company will provide a fabulous user experience.

And I'm not sure why that isn't enough for the critics. Unlike Microsoft at its height, Apple is not crushing the life force out of its competitors and imposing its will on the marketplace via monopolistic tactics. It is succeeding by providing a popular choice. And in the current wide-open computing marketplace, there will always be other choices. The death of open computing is hardly imminent. Don't like a locked-down iPhone? Get a Google Nexus One and start hacking. Don't like the iPad? Someone will be manufacturing a cheap laptop in China that will do everything you could possibly want. It just might not be as slick and easy and fun to play with.

UPDATE: Even Hitler has issues with the lack of multitasking!