Yesterday, Reilly White posted an excellent piece of writing detailing the excesses of the latest incarnation of a Depression Era agricultural policy that masks corporate welfare in the guise of aid to “small farmers.” I refer, of course, to the Farm Bill. Yesterday, the House passed this legislation by a vote of 318-106 and the Senate followed suit today, passing the bill by an 81-15 margin. All three presidential candidates wisely made themselves scarce from the Senate floor, dodging a politically difficult decision. President Bush is expected to veto the bill but, given the margins of victory in each House, it will be easily overturned and enacted into law sans Bush’s approval.

Forty-seven million Americans have no health insurance today. As of 2006, almost thirty-seven million Americans lived at or below the federal poverty line, to say nothing of the millions more who struggle to survive with incomes that don’t meet the technical definition of “poverty.” Nationally, we are $9 trillion in debt and our major entitlement programs are facing critical shortfalls over the next thirty to forty years. Yet, we still see fit to lavish $307 billion of unnecessary aid on farmers who are now earning record profits from high commodity prices and we do so with overwhelming political support. Excuse the cliché, but where’s the outrage?

There is a fascinating commentary in today’s edition of the Wall Street Journal advocating the use of the Strategic Petroleum Reserve as a counter-cyclical tool to negate the pricing policies of the Organization of Petroleum Exporting Countries, OPEC.  Lincoln Anderson, an economist with a Boston-based finance firm, argues that the 701 million barrels of oil stocked up in the SPR are excessive and could be better used by adding supply to the U.S. market.  The goal would be to shave a little off the roughly $120 price tag for a barrel of crude.  Should OPEC increase production in the face falling demand, as it has done periodically, the SPR could purchase excess oil and work as a price support for the market.

The idea is that this sort of policy could lead to a little more stability in U.S. energy markets, easing the pain in times of high prices while ensuring that large price drops don’t distort the market and shift demand away from nascent sources of alternative energy.  Anderson believes a minimal reserve of no less than 120 million barrels of oil could be kept in the SPR at all times, an amount he states is greater than any one time drawn down in the SPR’s history.

This argument strikes me as an interesting one…one worth thinking about, given severity of the present energy mess we find ourselves in.  At the same time, I remain skeptical of the price-setting power he attributes to OPEC.  His own article cites the fact that OPEC’s control of oil production has declined from 52% in 1973 to only 40% today.  More importantly, he doesn’t take into consideration the ever-growing demand for energy in China and India, which may have more to do with today’s high prices than the cartel’s production policies.  Thoughts, anyone?

In 1968, long-time American Airlines CEO C.R. Smith retired with this statement: “These days no one can make money on the goddamn airline business. The economics represent sheer hell.”

Forty years on, it would be difficult to find an airline executive who disagrees with him. There are a lot of things that separate the airline business from nearly every other; it has the all the union-grinding labor disputes common in large manufacturing firms, with the added panache of providing services that are as despised for their inadequacy as they are a crucial component of national infrastructure. And by the way, planes also make excellent missiles.

When Delta and Northwest took the monumental but unsurprising move two months ago to merge, their $10.5 billion in combined 1^st quarter earnings losses seemed to seal the deal. Most of this absurd loss is due to writedowns on the companies’ respective valuations; however, it still begs the question: what could they possibly have to gain from one another?

Airline bigwigs cite economies of scale, for one. Not only by pooling together their meager resources of peanuts, biscuits, and four ounce sodas – but ultimately saving on fuel costs, the most relevant cost issue for the airliners. Opinion seems to be divided between laissez-faire capitalists who reckon that the merger is crucial to prevent a collapse of either company, and populist ideologues who foresee a chain reaction of airline mergers and universally high priced airline tickets.

But there are other costs, too. Atlanta-based Delta already has plans to consolidate the combined companies’ headquarters in the more spacious Atlanta-Hartsfield Hub, an annoyance to both Minneapolis-based Northwest as well as Minnesota’s political elite, who are worried about the pending loss of jobs from the state.

CQ Politics points out here that while the advocacy groups on both sides are getting busy consolidating their efforts, the failed 2001 bid of United Airlines and US Air remains fresh in the minds of many. John Ashcroft, while not exactly the poster-child for the anti-corporate agenda, called the planned merger uncompetitive.

What can we expect from a Delta-Northwest merger? Not much. The combined companies, even if able to hold onto the coveted ‘Largest Airliner’ status, will not become profitable overnight; nor, for that matter, will competition be hampered significantly in major consumer markets.

Ding ding, here comes Northwelta.

In the 1946 Christmas Saga It’s a Wonderful Life, George Bailey famously refuses a buyout and job offer by Mr. Potter’s rival Bank with a sparkle and kick of American idealist oratory. Now if only today’s banking institutions could afford to be so magnanimous.

Capital reserves at most banks have been retreating over the last few months – so much so, that many banks are finding themselves in desperate need of capital to shore up their balance sheet and meet regulatory requirements. The tricky part in today’s market is that mergers, buyouts, and large-scale stock acquisitions, the once reliable three-car emergency capital train, has been all but derailed by the past year’s subprime mortgage debacle and the ensuing credit crunch.

And to make matters worse, it’s 1^st quarter earnings week in banking country. To combat a $171 million quarterly loss, National City Bank (America’s 10^th largest bank) reported today that it will raise $7 billion in additional capital by issuing 126.2 million shares of common stock and nearly 64,000 preferred shares at $100,000 each. It would have been more convenient for the bank to find a buyer (few Banks are large and hungry enough to swallow NationalCity, even in a good market), and no doubt its shareholders might be wincing at the dilution of their already volatile shares, which have declined in value from $38 to $6 in the past year.

Bank of America, while still in the black, reported a 77% decline in net income from last year. Citigroup, the largest American bank, reported a $5.1 billion loss this quarter after a $15 billion dollar write-down of similar sub-prime losses. The bank is expected to maintain a satisfactory capital position despite the losses, having raised $30 billion in recent months from a diverse cadre of foreign investors, including a $7.5 billion cash injection (taken with much hullabaloo) from Abu Dhabi. Domestic capital (while preferable) was simply not forthcoming, investors having fled the market like President Mugabe from democratic responsibility.

What does this mean for the credit market as a whole? With less capital to spare, Banks will become more finicky to whom they lend to – this has already occurred in the real estate market, and a continued credit tightening should be expected well through this year. Today’s Wall Street Journal reported a front-page article on Sovereign Bank, a large regional thrift that was hit particularly hard by a poor investment push into nationwide automotive lending (more on that later).

Smaller banks will also find it increasingly hard to maintain a strong capital base in the current market. Given the circumstances, it seems that cushy job working for Mr. Potter doesn’t look so bad right now.

]]> http://americanus.wordpress.com/2008/04/21/please-step-into-my-office-mr-potter/feed/ 1 rufuscoltraine http://americanus.wordpress.com/2008/04/14/hungry-hungry-humans/ http://americanus.wordpress.com/2008/04/14/hungry-hungry-humans/#comments Mon, 14 Apr 2008 13:14:45 +0000 Shaun http://americanus.wordpress.com/?p=46 ]]>

Most Americans are fortunate to have economic woes that are limited to plummeting mutual funds or, at worst, a mortgage default.  In many other parts of the world, the big concern is scraping together enough money to buy a few kilos of rice as food prices continue rising; up 83% now over the last three years. Prices are approaching crisis levels and the potential now exists for increasing amounts famine and deepening poverty worldwide as a result.  World Bank chief Robert Zoellick made headlines this week by admonishing the developed world to tackle the growing food crisis by contributing another $500 million to food relief efforts.  Thus far, only about half that amount of money has been pledged and it is worth remembering the a “pledge” is no guarantee that aid money will actually be delivered.

The Economist points out that the problem being faced is fundamentally one of distribution, since there is more than enough food to go around if we could get it to all the places it is needed.  Moreover, hunger per se is not the greatest development challenge to be faced down, but rather malnutrition, which is much harder to combat because doing so often requires a raft of reforms in basic institutions for health, education, and sanitation.  Just doling out grain isn’t enough.  Either way, change will depend in part on the willingness of wealthy countries to address the development challenges on the ground and change market distorting agricultural policies.

In the United States Congress is jumping into action to tackle the challenge.  Of course, by “jumping into action” I mean making policy with no regard for the global picture and by “tackle the challenge” I mean lavishing billions of dollars on agribusiness.  In Washington, it happens to be that magical time when a new farm bill is being put together to provide all manner of subsidies and benefits to the mythical American small farmer.  According to reports on the as yet incomplete legislation, those benefits could run to $600 billion over ten years.  Why does the agriculture industry need aid if commodity prices are sky high, you may ask?  Quite simply, they don’t.  But the massive “farm lobby” will see to it that federal largess keeps flowing to its constituents and keeps distorting the global marketplace, making it harder for farmers in poor countries to compete and work their way out of indigence.

Perhaps the most appalling aspect of U.S. agricultural policy, and one highlighted by Zoellick, is role of biofuels in raising food prices.  The farm bill includes a number subsidies to promote the use of ethanol as an “eco-friendly” fuel alternative.  U.S. ethanol comes mostly from corn; corn which would otherwise be eaten and which is now much more expensive because of the new demand alternatives to gasoline.  How much corn?  Well, the choice is assuaging your conscience for that Hummer by filling the tank with ethanol…once…or feeding one person for a year.  With apologies to Iowa, I think we may need to start looking elsewhere for alternative fuels.