An international institution you can like

The UN? NATO? The IMF? No, all of these have their problems, sometimes big ones, sometime small ones. But the WTO is A-OK in my book. Why? Because it is forcing the U.S. to accept free trade, whether we want to or not.

Most recently, today the EU and Canada announced that they will take advantage of the WTO's blessing to impose tariffs on some American exports (from MarketWatch). They are miffed over the so-called Byrd Amendment, a rule that in theory protects American companies from the effects of dumping but in practice seems to subsidize industries that just don't like foreign competition.

"Dumping" describes the practice of exporting a good to a market for sale at an unjustifiably low price. "Unjustifiably low" generally means "below the cost of producing the good." It is most often the result of subsidies to the producing industry in the exporting country, and since theoretically subsidies are bad, international trade agreements allow for anti-dumping rules, which most often take the form of a tariff on the offending goods. The Byrd Amendment allows affected companies (in practice, any company that complains loudly enough) to take a piece of the import-tariff pie collected as part of an anti-dumping policy.

So what's the problem? Dumping can be devilishly difficult to spot. Just look at aircraft manufacturers, subsidized to one degree or another by both the U.S. and the EU. Which is why this industry is not the subject of this current trade dispute. In the present case, the U.S. claimed there was dumping, while the WTO found there was not.

Which is probably true. And in fact, Bush has been trying to get the Byrd Amendment repealed for three years now, facing defeat each times at the hands of a Congress overly fond of pork. We can only hope the threat of these new tariffs will encourage Congress to keep kosher.

Tag, you're IT?

Just when you thought you were done digesting the latest round of GDP figures, InformationWeek chimes in with this interesting nugget: Growth in IT spending represented a not-insignificant component of overall GDP growth at the end of 2004.

This is a particularly interesting development for several reasons. Most obviously, increased business investment signals increased business confidence. If companies are starting to spend more vigorously on technological improvements, it means they are growing more optimistic about economic conditions down the road.

But it is also interesting because, if this trend continues, it signals that the economy has finally absorbed the massive wave of technological investment companies made in the late 1990s. The investment boom that fueled tech stock prices and built lovely mansions in Silicon Valley sowed the seeds of its own destruction in that the computers got bought faster than the buyers could figure out what to do with them. We've heard so much the past few years about rapidly increasing productivity, and this is part of the explanation -- it took a few years to harness those investments.

Now, however, businesses seem to be deciding that they've gotten as much as they can out of the technologies they have, and that now it might be time to buy more. All around a good sign.

MCI hotting up

First off, thanks to all you FOCEs for your patience during today's posting drought. I took a Cranky "Personal Day" this morning, and a Cranky Nap this afternoon. Now to make up for lost time:

Big news today on the continuing MCI saga. Yesterday it looked like there was a chance Qwest would not go gently in that good night of failed buyout attempts. Now we know for certain (Reuters via CNN).

And to judge by the analyst and investor quotes in that article, Qwest might just win (assuming it can mount its expensive proxy fight, in which it would bypass MCI's managers and go directly to shareholders for a vote on its merger proposal).

Even if, as I wrote yesterday, I'm skeptical about the virtues of a Qwest bid in the long term, it's not so surprising that the shareholders would jump at it. It is, after all, a big boon for them.

Be that as it may, the real significance of this story lies in its suggestion that we could be in for some entertaining telecom news as spring progresses.

Up, up and away?

Is that where earnings and stock prices are headed for the legacy airlines that have been struggling so badly over the past four years? You might almost start to think so after reading this brief item on MarketWatch.

As has become all too well known by now, the big boys on the tarmac have been suffering. The post-September 11 economic downturn cut into expensive business travel on which the airlines had come to rely for profits. Meanwhile, a rabbit-like proliferation of low-cost carriers (led by Southwest and, now, JetBlue) drove down fares in steerage class. All of which would have been bad enough even without the airlines' hugely expensive and economically outdated labor contracts.

Blue skies might be ahead now, however. Or might they not be? It's hard to tell. On the one hand, the airlines have been moderately successful in reducing their labor costs (two of them -- United and US Airways -- have been aided by bankruptcy court judges). But I have to wonder: In the past week, we also saw news that travel is picking up to pre-September 11 levels for the first time since the terrorist attacks. And there are signs that business travel is also increasing, and that corporate travel offices are more willing now than before to spring for more expensive seats.

The point being that only the next downturn will tell whether this round of cost-cutting "took." The pattern in the past has been for the airlines to panic during an economic downturn, and then wring their hands just long enough for the market to improve, letting them off the hook again. This has allowed them to perpetuate what seems in many ways to be an unsustainable business model. Only time will tell whether we see yet another wave of airline bankruptcies come the next down cycle in the wider economy.

I surrender: An MCI post

OK, I give up. No, I haven't been drinking French wine or eating French cheese. Out of sheer contrariness, I'd been steadfastly refusing to write about the war that's currently raging over the hearts and minds of MCI's directors and shareholders. And sure enough, it looked the the story was over when MCI agreed to accept Verizon's offer instead of a higher bid from Qwest.

But never fear, the saga isn't over yet. Qwest may not be quite ready to give up the ghost (so says AP, via Forbes.com).

If you haven't followed it closely, this story may seem rather odd. Qwest has consisently been making better offers to MCI's shareholders. So why are they willing to go to Verizon? Because even if, over the short term, Verizon's offers have been less appealing, over the long term the Bell grandkid offers the best shot for MCI. Its balance sheet is much healthier than Qwest's. It is already a major player in the wireless market (remember, MCI's efforts to emerge from the WorldCom fiasco have been hampered by the fact that it doesn't offer a wireless product in a marketplace where free national calling plans on cell phones are significantly eroding the business of traditional MCI-esque long distance companies). And, whereas Qwest's major national presence is a fiber-optic network that is already under fierce competitive pressure, Verizon doesn't have quite the same type of problem.

Which all matters to MCI shareholders because any deal is going to involve them receiving stock in the acquiring company. That stock is much more likely to be worth something down the road if it's Verizon stock instead of Qwest's. Thus, it is possible for what looks like an inferior offer on paper at this moment to be a better deal in the long term.

If I owned MCI stock, I would be hoping for the Verizon deal to go through. But then, I don't own MCI stock. So I will just happily continue to speculate with other people's money.

Justice may be blind...

...but is it deaf? Seems not. At least, David Souter knows what an iPod is. This was one of the big revelations in yesterday's oral arguments in MGM v. Grokster, which will decide the fate of peer-to-peer (P2P) Internet file-sharing.

The Cranky Economist may or may not have ever downloaded lots and lots of songs illegally via Napster and Kazaa, thus contributing to the bandwidth crowding on his college network when he was in school. I'll plead the Fifth. Although for the record, if I were to have done such a terrible thing, I would have disabled file-sharing from my own computer, thus welching off other people's music libraries while contributing nary an obnoxious European house dance song to the ether myself, thus incurring the wrath of European house DJs and my fellow alleged illegal file-downloaders alike. But this is all mere speculation.

The real problem is that I find myself siding with the recording industry on this one. When all is said and done, the songs are still copyrighted. And as someone whose day job is in the publishing world, I can attest to how important copyright is. Grokster's claim that there are many legitimate uses for its product would be slightly more credible if the whole online edifice weren't marketed quite so explicitly as a vehicle for illegally downloading copyrighted materials. Although some economists are still debating the extent of the economic damage the P2P phenomenon has caused to the record labels, at the end of the day that's irrelevant. The law is the law.

Ironically, I think the recording industry and the artists are in trouble whatever the outcome of this case. If they lose, they will continue to lose sales to online downloads. You just can't compete with free, especially when your product is so darn expensive. But if they win, I'm willing to bet that sales continue slipping. With so many more outlets for entertainment spending, high CD prices are just not a sustainable business model. For the past couple years, the labels have been able to blame competition from Napster, Kazaa and Grokster for their poor results. If the Supreme Court rules against the P2P networks, that crutch will disappear. Obscenely overpaid artists might find the value of their contracts slipping to slightly more reasonable levels. Will they be in the poor house? Probably not. But they may need to turn to starring in frivolous MTV reality shows to make the spare change to support their lavish lifestyles.

Letting the Wolf in

It's official: Wolfowitz is cleared to become the new president of the World Bank (from the FT).

Canadian network CTV suggests in their report that his "neo-conservatism" was an issue. (I'll use the quotation marks because I'm not convinced that CTV, or anyone else, really knows what that word means.) But at the end of the day, the Europeans either saw the light and realized that Wolfowitz would be great for the job, or they realized that fighting would be futile and surrendered. Take your pick.

The Cranky Economist, for his part, is relieved to see that the nomination will be approved. Wolfowitz strikes me as just what the World Bank needs.

"GM" is for "good morning"

And what better way for a true-blue FOCE to start his or her day than by reading a post about your favorite struggling Detroit automaker and mine.

The latest news to be had from Reuters via Yahoo! is that GM is mulling the sale of the commercial mortgage business in its GMAC lending subsidiary.

I admit it -- the Cranky Economist's first instict was to think, "Hey now. It's profitable. So why are you selling it?" At first blush this deal struck me as a bad idea. But now I'm coming around. After all, what business does an auto manufacturer have sticking its thumb in the mortgage-lending pie to begin with? Better to try to scrounge up a little capital (and that $1 billion, while not insignificant, is only "a little capital" when you compare it to the rest of GM's balance sheet) by selling off a successful but distracting asset.

So the Cranky Economist is officially agnostic on the question. Que Sierra, Sierra, they say as they drive their GMC SUVs. But I figured it was worth mentioning anyway, since I've been following GM's travails somewhat over the past week.

It's hard to be an oligarch in Russia

That, at least, must be what Mikhail Khodorkovsky is thinking these days, as his trial for tax fraud and other nasty crimes winds down. Just check out this AP report (via BusinessWeek): During closing arguments, the prosecutor asked for the maximum 10-year sentence.

As the Cranky Economist has said before, it's not a matter of whether Khodorkovsky is completely innocent. Chances are he's not. But by the same token, surely the Russian justice system is in trouble when the only criminals who happen to get prosecuted are the ones who happen to be contributing to Vladimir Putin's electoral opponents.

Who's suffering? As the AP article suggests, the Russian people. This transparently political case has scared off many investors and roiled the Russian oil sector just at a time when record crude prices should be boosting the economy. "Justice" evidently doesn't come cheap.

It was good while it lasted

It's been an exciting week for Blockbuster. First came news that it was dropping its bid for Hollywood Video. Now, as Reuters reports, it's been spanked by six state attorneys-general over its bizarre "no late fee" program.

Since the Cranky Economist isn't a Cranky Lawyer, I'll leave it to others to debate the relative merits of the legal case against Blockbuster. Instead, I'll just point out that it was a really bizarre tack from a business standpoint. Blockbuster has been under pressure from the simple, low-cost options now available to consumers in the form of Netflix and its ilk. To which Blockbuster responded by what -- simplifying its rental program? Oh no. It merely tried to put some very complicated (and, it would seem, deceptive) lipstick on its old-fashioned-business-model pig. The result being a mass of confused, angry and overcharged consumers who are probably even more willing now to try another rental chain or Netflix than they were before.

The main point being that just because we Cranky Economists like big corporations doesn't necessarily mean that we think they're very smart all the time.

Sony's knavery

The headlines look really bad. But don't be fooled. As Reuters reports, Sony may have been ordered to stop selling its spectacularly popular PlayStation2 as a penalty for patent infringement, but thanks to injunctions and eventual royalty payments the likelihood that the consoles will ever disappear from the shelves is practically nil. Hence, practically no effect from the ruling on Sony stock.

The main thing that strikes me about this case is how foolish it was to not just work out a royalty deal in the first place. It wasn't like Immersion was a competitor in the video-game-console trade. What was Sony thinking?

What's a court to do?

Alright, I admit it: The Cranky Economist is flummoxed by this one, from PC World. Now that hunting season for that rare beast emergingus consensae is over, the Supreme Court will turn its creative eyes to telecom regulation. The FCC, with support from the Bush administration, has ruled that cable internet services are not subject to telephone-line regulations that require the owners of phone lines to share the lines with their competitors. That means that if Comcast, in its great wisdom, should wire up my Cranky Neighborhood for Cranky Cable Broadband, Comcast would maintain the right to a monopoly on that line.

The problem is that there are compelling arguments on each side. There's an obvious case for striking down the original FCC decision, thus allowing multiple ISPs to compete on the lines. It would drive down prices for the service by creating a competitive marketplace. And my instincts run strongly against the idea of government sponsoring a monopoly in anything.

And yet. The administration might be on to something when it argues that the lines will never be run if the cable companies can't be sure they'll reap some rewards from their efforts. America is behind the curve when it comes to running broadband to businesses and households, and that process will only get slower if there's an uncertain return on the investment.

Do I have an opinion? Of course. Just not a very forceful one. For now, I'm going with my gut and saying that we should allow competition over these lines. But I'm open to suggestions. Comments, anyone?

BK's bravery

Remember that post yesterday about Burger King's Enormous Omelet Sandwich? In case you don't, the gist was that the Cranky Economist praised BK for introducing a disgustingly fatty and caloric new product even as the trial lawyers are aiming their cannons at the fast-food restaurants in soon-to-come obesity lawsuits.

Further proofs of just how brave BK is comes in the form of this cereal lawsuit, reported by AP via ABC "Fake GOP Talking Points" News.

Hope for Netflix?

The Cranky Economist particularly enjoyed the upper-level course in financial economics he took during his senior year at a certain Cranky College. One of the many virtues of this course was that it first introduced me to Netflix, the increasingly popular DVD-rental-by-mail service. Although I didn't subscribe to Netflix until more than a year after taking the final for the class, the past two and a half months have been the happiest in my movie-renting life.

Its trove of indie and foreign titles, however, was not why Netflix was a topic of discussion in a class about financial markets. Its stock price was. When it first went public, Netflix's price had skyrocketed for a while. This was a source of puzzlement to my professor, who predicted -- correctly -- that Netflix would come under increasing competitive pressure from new entrants to the mail-rental biz like Blockbuster, and from new entrants to the broader movies-at-home biz, like on-demand movies from satellite and digital cable. Meanwhile, it seemed like an odd business model: It can't afford for its customers to use it too much; in fact, its ideal consumer would be one who subscribes and then hardly ever returns movies, thus saving the shipping costs.

Still, increased competition or no, Netflix seems to be doing alright for itself, having just passed the three million subscriber mark, according to MarketWatch.

Who will win the Netflix Wars? Darned if I know. But it sure ain't dead yet.

When is an ad not an ad?

When it's on PBS, apparently, at least according to the NYT. Underwriters (PBS-speak for "advertisers") are no longer content with those little slides that used to flash before and after programs, giving the name of the supporter and nothing else. So now, as PBSophiles everywhere will have noticed in the past couple years, these corporate sponsors are allowed to create advertisements. Which seems to be sparking an existential crisis of sorts for the network's executives and devotees.

Of course, there are some rules that PBS advertisers, oh sorry, "underwriters" must follow as they craft their spots. Consider the Chipotle faux pledge drive spot described in the article. Take this example, buried deep in the article:

The Chipotle spots had to toe some very fine lines. For example, the guidelines allow people in the spots to consume a product as long as they do not appear to enjoy it overtly. So the producer instructed the actors in its pledge drive spoof not to look too thrilled.

This invites one observation in particular: It appears that PBS programming really can support advertising. You'll recall that the main justification for getting government in the TV business is that there is a variety of educational program that is worth having but that would not draw a large enough audience to attract advertisers. And yet, this "underwriting" charade has always been a form of advertising. PBS may not be drawing a very large audience, but it is drawing an audience large enough that advertisers, oh sorry, "underwriters" like Chipotle want to produce real ads for it. I chalk it up to the proliferation of niche cable channels, which have demonstrated to advertisers that they can get a big return on their ad money even from buying spots on a network with a narrowly defined audience.

So tell me again, why exactly are we funding PBS?

Putin pushes privatization...

...perhaps. At least he's making the right noises, according to this AP article (via BusinessWeek). It seems he is now willing to call it a day on the paroxysm of corporate prosecutions that have been convulsing the Russian business world for the past couple years.

If he's serious, this would be a positive development. As the Cranky Economist has noted before, there were plenty of problems with the way Soviet-era industries were privatized in the early and mid 1990s, and there was more than enough criminality to go around. At the same time, I'm not sure I see what's to be gained by going back and trying to prosecute now crimes the government was happy to abet then. Of all of the things that can and should be done to reform Russia's, er, problematic business climate, I'm not convinced this Spitzer-esque indicting spree was the best option. Could it be Putin has finally realized this?

As an optimist, I'd like to think so. But before you direct me to the bridge link, I'll allow for another motive. By now, Putin has been able to indict every oligarch who would be willing and able to threaten his political power -- Mikhail Khodorkovsky of Yukos is the most prominent example. With no other political scalps to hunt down, Putin can certainly afford now to hang up the knife. And win the plaudits of naive young business and economics bloggers while he's at it.

Chinese banking; or, Who says stenography doesn't pay?

Bad news if you're a corrupt Chinese banking executive: The International Herald Tribune (part of the NYT empire) reports that reforms aimed at improving management at China's state-run banks are on the way.

Corruption is certainly a serious problem. If you read any of the numerous articles out this morning about this reform proposal, you will quickly notice that every paper seems to have its own embezzlement story. (The most intriguing may be MarketWatch's fleeting reference to a typist who allegedly pocketed $6 million; the Cranky Economist is obviously in the wrong line of work.)

But this is only the tip of the iceberg when it comes to problems in China's banking sector. Even if all of the country's bankers were as honest as can be, there would still be trouble. They would still be carrying an unsustainable burden of non-performing loans.

The problem is that for decades now, the state-owned banks have been a vehicle for subsidizing state-owned enterprises. It's a convenient way for the Communist system to pretend that there is some degree of economic accountability for the enterprises. Would that it were so. Instead, the banks are expected to continue pouring ungodly amounts of money into inefficient enterprises, subsidies that go on the books as loans, loans that have virtually no chance of being repaid.

Which in itself would be bad but not dangerous, except for accounting. Loans go on banks' balance sheets as assets, in China as elsewhere. So if the banks write off these bad loans, suddenly their balance sheets would deteriorate significantly. (Western banks have to use cash from current revenues to restore the balance when they write off their bad loans, but the scale of the problem is an order of magnitude larger in China, and will require a lot of money from the government.) So China's banks are already perched precariously on the edge of the precipice. The entry of foreign competition in 2007 (as mandated by the WTO) could well push them over the edge, as they have to compete with efficient and well capitalized external banks.

There's a political element as well. Chinese families have abnormally high savings rates. And most of that savings goes into deposits at the local bank, a bank that is either state-owned itself or intimately linked to a bank that is. If these bad loans force any of the big state-owned banks into insolvency, expect runs (it has already happened several times in recent years, in rural provinces) by Chinese people desperate to reclaim their life savings and angry at the government that has jeopardized the money. Will this be the equivalent of Polish solidarity? It'll be an interesting couple years.

A Whopper of a good idea?

After the Cranky Economist's successful lamb roast yesterday, this post may involve a shift from the sublime to the ridiculous. But word on the street, via USA Today, is that Burger King is rolling out a new breakfast sandwich. And it's going to be even less healthy than the Whopper.

I have to admit -- I'm not a big fan of Burger King. Or McDonald's. Or most fast food. (Although I do admit to eating at Wendy's once every couple months or so.) It's not that I'm an anti-fast-food fascist. I used to love fast food. It's just that I've grown tired of the heavy feeling you get from that ball of fried food that just sits in your stomach all afternoon. So I choose to grab a tuna sandwich for lunch at a nearby deli.

Let me repeat the key phrase in there: I choose. If other people want to eat fast food, more power to 'em. There are certainly plenty of options out there.

Unfortunately, this is a somewhat uncouth opinion to hold these days. Members of the tort bar are circling the fast-food industry like sharks around an Australian surfer, smelling juicy lawsuits on behalf of overweight, sickly people who chose poorly. So this new BK breakfast sandwich is noteworthy not because it will be tasty but because it will be fattening. If they are willing to roll out such an obviously unhealthy product in the current legal climate, perhaps this suggests that they'll be willing to fight the lawyers in court.

Good news, that. America's business landscape is littered with the skeletons of industries that surrendered, settling in the face of ridiculous lawsuits instead of taking their cases into the public forum that a trial would provide. So I say, bring on the Enormous Omelet Sandwich. It's high time.

Happy Easter

The Cranky Economist is taking a break from serious posting today in observance of the holiday. I'm roasting a lamb instead. Delicious times. But never fear -- I'll be back tomorrow with your regular menu of economics and business commentary.

In the meantime, a Happy Easter to all you FOCEs!

This Week's SAL

Welcome to the second Saturday for the Cranky Economist blog. Without further ado, your Saturday Assets and Liabilities (which both happen to come from the New York Times?!):

Assets

President Bush. But for something that probably hasn't registered on your radar screens: Amtrak reform. Although you'd never guess it from the tone of this article, the news here is actually good; Bush might be putting the fear of God in Amtrak's board.

National passenger rail in this country just isn't working. The trains rarely seem to run on time, the automatic ticket machines can be friendlier than the staff, and there's that smell that sticks in your clothes until you launder them. Amtrak claims it could fix all these problems -- and problems we passengers don't see, such as crumbling infrastructure in the heavily traveled Northeast Corridor -- if only the Feds would pony up even more cash than the billions they have poured into Amtrak already. If you believe that, well, here's the bridge link I posted a few days ago.

In reality, the only way to fix Amtrak is to destroy it. There is a need for passenger rail in America, but only in part of it -- the Washington-to-Boston corridor that is already the only profitable line in the system. Unfortunately, rather than funding capital investments to improve service where people actually use the trains, a significant chunk of any additional appropriations will find their way to subsidizing lines that carry no one through the middle of nowhere. Do we really think that a Congressman from Kansas or Texas or Nebraska is going to agree to spend his constituents' tax money to subsidize rail travel for Manhattanites?

So let today's Amtrak go bankrupt, as the President is (at least saying he's) willing to do. When it's sold off for parts, the profitable Northeast Corridor will go to someone who can actually run it efficiently. What would happen to the other parts of the network is an open question. But it's not like there are any riders there to complain.

Liabilities

George Soros. Now, it's impossible to know who's right and who's wrong in the insider-trading case for which Soros' conviction was just upheld. After all, all the players are either French or George Soros. But the case surely does have a certain, how shall we say, odeur about it, so it's not unreasonable to suppose that the court has pegged the Hungarian-turned-Kerrynista just about right. Further proof that politics makes strange bedfellows: I wouldn't have thought the populist MoveOn.org-ers would give the time of day to a corporate criminal. But I guess they're happy to take his ill-gotten gains.

Time to cover your Fannie

All the cool kids are doing it. Suing Fannie Mae, that is. This latest class-action, quoth MarketWatch, comes from options traders who claim they were misled about the true state of Fannie's balance sheets. Gee, I wonder what could have given them that impression...

The Cranky Economist's mischievious side is tempted to joke that the fraud at least provided some downside risk for what were otherwise shamefully secure "investments." But that isn't really fair. At the end of the day, the rules is the rules, and you gotta play by 'em. Fannie's execs apparently didn't. See you in court.

Calling Putin's bluff

Remember Mikhail Khodorkovsky? I thought not. He used to be the insanely rich head of Yukos, one of Russia's largest oil companies. Then he started making insanely threatening forays into politics; at least, they looked that way if you happened to be Vladimir Putin. As a result, Khodorkovsky has been insanely imprisoned for tax evasion and other trumped-up charges since October 2003. And just by coincidence, his former company got chopped up and sold off in parts, one of the more profitable of which just happens to have been acquired at an insanely low fire-sale price by a government-owned former competitor. Who would have thought?

Now, however, the AFP reports that Khodorkovsky, with a little help from his friends, is calling Putin's bluff. With the tax bill potentially paid off, what will happen to the government's case? In Russia, anything is possible, so we'll just have to see. But the result will certainly be enlightening as to what kind of game Putin's really playing here.

Incidentally, one should not necessarily be under the impression that Khodorkovsky is an all-around great guy, an innocent Putin victim. He's a member of a class of oligarchs who built personal empires, not to mention tremendous fortunes, by purchasing Soviet government assets during privatization in the 1990s. Were all of these transactions legit? Of course not. Were any of them on the up-and-up? As Katherine Hepburn's Queen Eleanor opines in The Lion in Winter, "in a world in which carpenters get resurrected, anything is possible." So has Khodorkovsky been involved in his fair share of shady dealings in the past decade? Probably. But that's not really the issue. If Putin were truly going after these robber barons, Moscow's prisons would be overflowing with white-collar criminals right now. All signs point to Khodorkovsky's erstwhile political ambitions as his real crime.

Blockbusted

The merger that wasn't: Yahoo! News carries an AP report that Blockbuster decides Hollywood Video isn't worth the effort.

I'm agnostic on whether, in a perfect world, this would have been a good idea. Perhaps Hollywood really is better off in the hands of Movie Gallery.

The only comment to make here is that the Cranky Economist doesn't quite see why a Blockbuster deal should have elicited reaction from Federal trust-busters. On its face, it's not hard to see why it would have. Blockbuster is the No. 1 in the industry, and Hollywood is No. 2. Together they would have made one enormous rental chain with enormous price-setting power in the bricks-and-mortar rental trade.

Yet, arguably the commodity here isn't DVDs-rented-in-a-bricks-and-mortar-store. The commodity is movies. Actually, the commodity is entertainment. And right now that marketplace is fiercer than it has ever been. First, Blockbuster-Hollywood would have had to compete with new-release movies, sports, books, television programs, the Internet, exotic adventure vacation packages -- you name it -- for entertainment dollars. And even once they had sold us on the idea of watching non-new-release movies, they'd have to convince us to get in our cars to go to their stores to get those movies, instead of watching them on one of the zillions of premium movie channels and on-demand video products now available on cable and satellite, or getting them through the mail via Netflix. The sheer inconvenience factor of the bricks-and-mortar concept should have been enough to control their rapacious gouging.

So I don't quite understand how being the top dog in one particular sector of this vast entertainment marketplace would have helped them very much. Looks to me like another case of possibly overactive anti-trust regulators. (To be clear, there was never a ruling; the two parties pulled the plug before seeking approval, but after getting strong signals that approval would be denied.)

Again, I have no idea what the relative merits of this deal would have been without the threat of regulatory interference. And it's a shame that investors won't get the chance to consider all the options that might have (should have?) been on the table.

Another bubble?

Good morning, FOCEs ("Friends of the Cranky Economist"). My apologies for the second delayed start in a row. DSL still not working at home. Is a cable broadband connection on the way? We'll see what happens after consultations with the Cranky Roommates.

But although ISPs may come and go, real estate's for ever. Right? The New York Times is apparently thinking maybe that's not the case after all.

So is real estate the new tech stock? Are we in the middle of a bubble?

For starters, let's think about what "bubble" actually means. It doesn't mean just any big run-up in the price of an asset or assets. It means a big, irrational run-up in the price. That is, you only have a bubble when the prices keep going up even though there's no economic rationale for the move. As a theoretical matter, there is some debate among economists about whether "bubbles" even exist. To identify a bubble you have to know what the value should be -- by definition, the bubble price exceeds that rational value. But the dirty secret is that economists have no idea how to determine the "rational value" of just about any asset. Any honest financial economist will tell you, for example, that standard models for calculating the intrinsic value of stocks leave a lot to be desired. So we can't rule out the possibility that what looks like a bubble only appears irrational because our models aren't accounting for all of the reasonable factors that influence asset prices.

So much for the theory. What does this have to do with real estate? Well, there are so many rational reasons that real estate prices should be going up right now that I find it hard to believe we're in a bubble. Herewith just a few I can posit off the top of my head:

• Low interest rates: Mortgage rates have been at phenomenal lows in recent years. But everyone realizes that these lows can't last. Is it so surprising, then, that there would be a big rush to buy while the rates are in the bargain basement? This is a classic price-increasing shift in the demand curve.


• Rising affluence: Lost tech fortunes aside, the fact is that for decades now there has been a continuous upward trend in income and wealth. It is now more possible for more people to contemplate buying a home than ever before. Given that homeownership is something that American culture prizes, of course we're going to start seeing more buyers in the marketplace. And that's not even mentioning the second-home purchases that this affluence allows.


• Migration: As our economy grows less and less agricultural, our society is growing more and more urban. Over time, we've seen a growing exodus off the farm and into the townhouse. One anecdotal piece of evidence comes from my own family, where the value of the Cranky Parents' Cranky Homestead in a medium-sized town (pop. 19,000) situated in a rural area in New England has certainly not benefited from the boom market to the degree that it would were it situated in New York City or Washington. Land may be many things, but portable it isn't. And it's important to note that although in general house prices seem to be rising most places, the rate of increase has been very uneven and seems to depend on the geographic market.


• Those tech-stock scars: Even if a debate still rages about whether the tech boom was or wasn't irrational, it was certainly traumatic to investors who lost their shirts buying pieces of paper that were worth millions one day and nada the next. Couple that with an investing environment where corporate scandals and a sluggish economy (at least until recently) make the stock markets seem less enticing and where low interest rates are holding bond yields down, real estate begins to look like a good place to stick your extra cash.

And these are just the factors that popped into my mind without doing any research on the matter.

Does this mean that prices will continue to rise at the rate they've been going? Not at all. Saying that this is a rational market -- and not a bubble -- does not preclude a fall in the price level. Prices fluctuate in rational marketplaces all the time. But it does mean that we shouldn't assume that just because a market is doing something we only partially understand, it must be acting irrationally.

Yes, but will it work?

It's official: K-Mart's acquisition of Sears, first announced last November, is now a done deal.

But will it really save either struggling retailer?

The theory seems to be that by creating a single WalMart-sized company, the merger will create WalMart-sized economies of scale. And the architect of the deal -- financier Eddie Lampert, who bought K-Mart out of bankruptcy in 2002 -- is viewed as a sort of retailing wunderkind to boot. After all, K-Mart actually posted a profit last year.

Except that, as readers of the above-linked article will discover, there's more to that profit than meets the eye. Most of it comes from selling off some of K-Marts impressive real-estate assets. When it comes to real sales figures -- which you would think would be a good indicator of the health of a retailer -- K-Mart is still very much in trouble.

Meanwhile, the Cranky Economist is left wondering: The economies of scale that have made WalMart and Target so successful are based on the fact that both buy enormous quantities of the same types of goods -- discount merchandise. It isn't just that they're big boys. They're big boys on a particular block. Will the "bigger K" be able to do the same?

The new K-Mart/Sears duo won't have the same kind of clout. Sure, it'll be tremendous in terms of market cap and store locations. But it will be divided between the discount retailer and the slightly more up-market component. This might be trumpeting my ignorance of retail, but I'm not sure where the combination adds much to either side of the equation. At the same time, I also don't see where any synergy between the two will come from. Perhaps there's a market for Martha Stewart linens and JoeBoxer underwear in Sears. But Craftsman tools and Kenmore appliances in K-Mart? Doubtful. (For the record, Cranky Dad suggested a few months ago that they develop a Martha Stewart-Craftsman Jailbar Hacksaw line. I'm sure that would be a real winner.)

Arguably this merger would be defensible if both companies were coming to the table from positions of relative strength. But I've got to wonder whether it's really a wise idea for them to attempt it right now.

It was still on the air?

Sad news for all you financially minded PBSophiles out there: "Wall Street Week" will no longer be there for you, with or without Louis Rukeyser and/or Fortune.

The Cranky Economist remembers it well: That classily upbeat opening music, reminiscent of tickertape machines and old newsreels about Wall Street; Louis Rukeyser's comforting stately wise-old-man appearance; the deathly dullness. Well, that last item is just a result of my youth at the time. And more recently, when perhaps I might have been more interested in the program, I could watch CNBC all day every day, peruse a couple newspapers online, and then check out updated quotes and market news on a host of websites, all without having to sacrifice my Friday evenings. (Perhaps its Friday-night slot is an explanation for its failure to attract a younger audience as time went on.)

In its heyday before the dawn of niche cable channels and the internet, WSW was a major media player. No longer.

Just like PBS.

Not another GM post...

Sorry I'm late this morning, folks -- internet was down at home. But I'm in the office now. So on with the show:

Yeah, the Cranky Economist knows. You're all tired of reading about it. But I'm not quite tired of writing about it yet. So we'll start this, the second week of TCE, with General Motors (and no, I don't have a short position in it; for the record, as a struggling journalist, I'm too poor to hold any position in anything right now).

Its stock price sank yet again yesterday, falling 2.98 percent. Why, you ask? Here's a clue. The health-care-expense cutting is a great idea. But the third paragraph of this AP article is potentially even more disconcerting in the long run than any short-term worries about labor relations:

[GM Vice Chairman Bob] Lutz said he hoped GM wouldn't have to phase out one of its weaker brands, such as Buick and Pontiac, at a time when competitors like Toyota Motor Co. are adding brands. But he said he and GM Chairman and CEO Rick Wagoner are determined to spend resources wisely.

Sure, Pontiac and Buick could use some major brand re-tooling; the former is struggling to compete with svelter sports cars, and, well, my grandpa drove the latter for years before he gave up the car keys. But for better or worse it has already shed Oldsmobile. Does GM really want to jettison yet another recognizable brand name? Are they really so sure that either of these two would be beyond rehabilitation?

Especially since, later on in the article, we discover that the real growth stock at GM these days is in Cadillac, GMC and Hummer. So that's (old-man) niche luxury cars, SUVs (in this era of rising gas prices) and niche luxury SUVs, respectively. That doesn't exactly spell lasting market share to me, although if I knew anything about anything I wouldn't be writing this blog.

Today's Second Social Security Post

Another element of the report linked in the post immediately below strikes me as something worth writing about, since it will surely attract the attention of liberal bloggers, politicians and even economists:

For the trust funds to remain solvent throughout the 75-year projection period, the combined payroll tax rate could be increased during the period in a manner equivalent to an immediate and permanent increase of 1.92 percentage points, benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 12.8 percent, general revenue transfers equivalent to $4.0 trillion (in present value) could be made during the period, or some combination of approaches could be adopted.

Translation: "A payroll-tax increase is the most pedestrian possible solution to this problem, so we'll go ahead and suggest it so as not appear as if we have no ideas." And who can blame them for taking this approach?

Just so long as no one is tempted to take it too seriously. As much as both sides like to pretend that this is a cold, calculated, economic issue, it's not. At heart, how you tackle the obvious crisis in Social Security (yes, Mr. Krugman, there is one) is going to be colored by your answer to the question I allude to below: Whom do you trust more? Markets? Or Congress?

Congress has been a terrible steward of the "trust fund" so far. Our elected representatives are terrible stewards of just about everything. It's simply a fact of political life, and it's even partly our fault -- we expect them to give us the moon while wanting to pay only the price of a sea star in taxes. So as we consider the Social Security Trustees' recommendations, we need to think long and hard about whether depositing another 1.92 percentage points of our incomes in the laps of our politicians is really a feasible way of bolstering the system. Especially when, as the report goes on to say immediately after the passage quoted above, "[s]ignificantly larger changes would be required to maintain solvency beyond 75 years" anyway.

Insolvency cometh, and that right soon(er)

Not that it matters, but the Social Security trustees report today that the system will be broke in 2041, a year ahead of schedule. The relevant passage goes thusly:

Annual cost will exceed tax income starting in 2017 at which time the annual gap will be covered with cash from redeeming special obligations of the Treasury, until these assets are exhausted in 2041.

To translate: For years now, payroll taxes have provided more income into the system than Social Security has disbursed to beneficiaries. In theory, this cash is supposed to have been held in the oft-discussed "trust fund." That trust fund is worth just about as much as the trust we have in Congress to not spend "free" money. Which is to say, not much. Instead, for decades we have been "borrowing" from the trust fund, taking the cash out and putting special Treasury bonds in. Starting in 2017, it will no longer be the case that payroll revenue exceeds benefits, so we will have to start cashing in those bonds. What I'm still trying to figure out is where the cash will come from, but that could just be me.

But whatever the details, the implications of this longstanding shell game are clear: Our retirement benefits are never really safe as long as they're in the hands of the government. Eventually -- in 2041, to be exact -- we're going to pick up that last shell and discover that there's no pea underneath. Liberal opponents of personal accounts argue that the government is more responsible than are the markets. If anyone has any actual proof of this, I'm all ears.

What a difference an ocean makes

The Cranky Economist held off on getting a cell phone for several years, while all around me my peers were starting to chat away on the then-not-quite-as-ubiquitous-as-today devices. That all changed when I got to London a couple years ago. Not only were "mobiles" (as the Europeans snootily call them) even more common than in the States, but my landline wasn't working for my first three weeks in my new home. Enough was enough, and off I trotted to obtain a little blue Siemens phone and an Orange pay-as-you-go service plan.

What struck me at the time was the "inconvenience" of the plans on offer. Although I had not yet joined in the Stateside cellular revolution, I had seen a year's worth of TV ads from competing American service providers offering enormous new-service bonuses, free evenings and weekends, and extra minutes up one shining sea and down the other. Not so in England. If you sign up for a regular monthly plan, you get however many minutes you pay for and not a minute more, even if you're phoning home on a Sunday. There are extra fees for calling people who are not members of the same network you are. And these plans are uniformly more expensive than the American equivalents that offer the Yankee bells and whistles. Not to mention that, at least two years ago, they were all completely the same, at a time when American providers were bending over backwards to offer features (like Cingular's famous "roll-over") that would differentiate them from the competition.

In short, for a variety of reasons that the Cranky Economist only incompletely comprehends, British wireless operators have had enormous latitude to create their dream marketplace -- competitive, yes, but also very definitely price-setting. Now, however, they might be starting to wonder whether that's all about to change as no-frills competitors join the playing field (free site registration required).

Being a Cranky Economist and not a Cranky Telecoms Analyst, I have no idea how the entry of no-frills providers will or won't shake up the British mobile market. But that won't stop me from looking with some puzzlement at an odd marketplace -- where the customer base is saturated and prices are high, and yet no one is willing to embark on some American-style price-cutting.

Socked by S-Ox

The Cranky Economist's small but growing fan club may recall that in Saturday's A&L, I pointed out that the pre-Sarbanes-Oxley laws had been perfectly sufficient to send Bernie Ebbers, a raft of former Enron execs and Martha Stewart up the river.

However, these pre-Sarbanes-Oxley regulations were not at all up to the task of creating mountains of expensive and wasteful red tape for companies across the economy. Never fear -- Congress, in its infinite wisdom, has solved this problem for us.

You'll recall that S-Ox was passed and signed into law even before the last little shreds of Enron-related paper had wafted to the floor of Arthur Andersen's offices. The theory was that the execs at Enron and WorldCom (and their accountants) -- who had already lied shamelessly and repeatedly about seemingly every aspect of their businesses to anyone who asked -- would have told the truth if only they had been required to sign off personally on their corporate financial reports and to certify corporate compliance procedures. While we're at it, anyone interested in buying a bridge?

So what we are left with is a bunch of avaricious former corporate officers who would have been going to jail anyway, while the rest of us dig out from under reams of new regulatory paper and the attendant billions of dollars in compliance costs -- costs that will haunt the economy from here to eternity, since this increased regulatory burden isn't intended to phase out. Economists will eventually perform studies that will quantify in dollar terms exactly how expensive this law has proven to be. What will that number mean for you and me in terms of lost economic growth? Impossible to say.

But at least we were all so impressed with Congress' corporate crime fighting that we re-elected them. So Sarbanes-Oxley appears to be working just as intended.

Those crazy investors

Who says investors don't have a sense of humor? (hat tip to an anonymous friend of the Cranky Economist) Note the snide comment about the Cornell scholarship. Some bizarre nepotism awaits those who persevere to the end, too.

At least, this letter looks funny to those of us who didn't lose as much money in Star Gas Partners LP as did Mr. Loeb. So fellow Cranky Economists will temper their afternoon Schadenfreude with a consideration of the millions of dollars between these lines.

There's no point to this post, other than to point out that there really are human beings inside those swank buildings in Manhattan.

Fed raises interest rates...

...by a quarter point. No surprise there -- the move was widely expected, and markets had essentially adjusted for it in trading yesterday. But an econ blog would be remiss in failing to mention it.

UPDATE (3/23/05 3:00 pm): Cranky Economist Ignorance Alert -- This turns out to have been a surprising move after all. Those in the know when it comes to the fine art of deciphering Fed-speak (which means just about every commentary except for yours truly) picked up on the fact that this statement contained an unusually strong warning on inflation, born out this morning by a surprising increase in the Consumer Price Index (CPI) and reflected in a significant dip in stock prices.

In my defense I will merely say that I only have the chance to be young and stupid once, and I intend to take full advantage of the opportunity.

Big Three Watch

Yesterday, I briefly noted some emerging problems on the investor side at General Motors. But it's worth pointing out that the problem isn't confined to GM. The other two Detroit titans are in trouble, too. The common ailment of all three American auto manufacturers is their cost-structure, and especially the historically generous packages they have offered to their unionized work force.

However, an article in this morning's New York Times suggests that Chrysler is making progress on getting small health-insurance concessions from the United Auto Workers union (UAW). Certainly no small feat, and, if it sticks, a potential road to future cost savings (although, as the article notes, the introduction of relatively small deductibles for some employees is hardly going to make a dent in overall health costs any time soon).

Yet there is an even bigger problem lurking: pensions. The pension landscape in the pre-401(k) industrial-economy days was marked by large manufacturing giants who would offer their workers generous defined-benefit pensions. And the Big Three are no exception. Even if they were to magically switch their entire current labor force over to defined-contribution plans (like those 401(k)'s) today, they would still have enormous defined-benefit liabilities from the current cohort of retirees the pension plans are supporting.

Which is why trouble in Detroit is a major economic story, and not just a business-page oddity: The taxpayers have to pick up the pieces of these pensions if any of the companies go under. As far as I know, these liabilities are covered under the Pension Benefit Guarantee Corporation, a quasi-public insurer that guarantees retirees a certain pension payment if their erstwhile employer folds. Under normal circumstances the PBGC should be able to support itself the way any normal insurance company would, charging premiums over an actuarial pool that includes all the companies that offer defined-benefit pensions. But lately it's been looking a little undercapitalized (since most healthy companies have shifted to defined-contribution plans, and thus avoid paying premiums into what is essentially a corporate pension-insurance program). So if one or two major bankruptcies should push the PBGC over the edge, taxpayers will be on the hook to meet those obligations, a result of the PBGC's quasi-governmental status.

That all brings us back to the Big Three via the following path: Cranky Economist predicts that, as the automakers step up negotiations with the unions to bring down short-term labor costs, we'll see them increasing the promises they make under their defined-benefit pensions. It's a great ploy for the companies, which is why it's been such a popular tactic in the airline industry: Get your workers to take a pay cut today by promising them better pensions tomorrow. If your business improves, it's more convenient for you to pay them in the future. And if you fold anyway, the PBGC is there to take care of the retirees. Well, us taxpayers ought to care about this, since we can't rule out the possibility that we'll have to pick up the slack down the road.

Bottom line: What happens at the Big Three is everyone's business. We'd better hope that their managements don't make promises they can't keep.

Executive compensation is in the news...again

File under "Who Would Have Thought?" -- "Executives Cash In, Regardless of Performance" (from the Washington Post). The crux of the matter:

At many other corporations untouched by scandal, pay continues to climb whether performance is great, lousy or middling.

Now executive compensation is a thorny issue. Conservatives (and many economists) argue that those high compensation packages are set in a competitive marketplace so we should assume from the get-go that they are efficient, and that without the high salaries, the stock options, the extravagant pensions and the golden parachutes companies would find it impossible to attract economic-value-increasing quality execs. And the people who make this argument have a point. Particularly in the face of opposition from liberals and populists, who don't have much of an economic argument, no matter how compelling their moral case may or may not be.

Into the fray step Lucian Bebchuk and Jesse Fried with their recent book Pay Without Performance. (Bebchuk has been hammering away at this issue for a while, and is even quoted in the above-linked WaPost article.) This is an interesting book because it so convincingly explains why the traditional economic models of executive compensation are deeply flawed. In short, the old ways of modeling compensation negotiations have downplayed the significance of personal ties between boards and executives, and have not accounted for non-economic motivations that might drive the participants in the negotiations.

Still, no matter how correct Bebchuk and Fried may be about the models, the glaring real-world question is, What are we going to do about it? And perhaps this is a problem without a solution. Unfortunately, corporate boards are the units best suited to making compensation decisions. Even if they do it terribly, they do it better than anyone else would. Meanwhile, we have no way of even guessing what compensation packages would look like in some mythical more-perfect corporate universe.

So let me propose the Cranky Economist's Might As Well Be Principle: Executive compensation, like so many other facts of economic life, is not efficient. But it might as well be -- no one will be able to do it more efficiently, so we will never have any way of measuring (by comparison) precisely how inefficient the current system is. Pro-business conservatives should win this argument, but they shouldn't be happy about it. At the end of the day we're still stuck with a system that will continue to reward execs who drive their companies into the ground.

The next big collapse?

More bad news for General Motors. Bonds from America's third-largest issuer of corporate debt are barely rated above junk status right now. And bowing to investor pressure, GM is trying to shrink its white-collar work force by offering a buyout plan.

I'm the first to admit that I haven't been following GM closely (or at all) recently. But -- we're in the middle of an economic recovery that has been marked by, among other things, big-ticket consumer spending hastened by ridiculously low interest rates that make the terms of, say, car loans look especially attractive. So...am I wrong in wondering what's been going on in that executive office suite?

There they go again

For about the past year and a half, the Euro has been running stronger than the dollar -- sometimes a little stronger, sometimes much stronger. And for the most part everyone's been coping passably, although the shift has been noticeably more painful for some European exporters than for others.

But does this signal that the Euro is the new "master currency," that the Euro-zone is now poised to rival America's economic hegemony? Some Americans seem worried about this. They needn't be.

European deficit spending is why. Years after the Euro-zone big boys started violating the currency's Stability and Growth Pact restrictions on deficit spending, the member nations have agreed to move the goal posts. I'm already on record discussing the relative merits of deficits American- and Euro-style. Here it suffices simply to point out that in America, the Congress' latest budgetary adventurism suggests that the lunatics are running the asylum. Europe, however, now seems to have a much more serious problem: No one is running the asylum.

Sunday NYT Front Page Story that's not Front Page News

Here it is, the much-promised Sunday New York Times feature of my blog. I was originally going to hunt for the most offensive article in the A section each week. But in any given week I would either be overwhelmed by contestants for that title, or (like today) underwhelmed by the sheer inanity of the section.

So instead I present a re-designed Sunday feature: The New York Times Front Page Story That's Not Front Page News. Herewith the inaugural FPSTNFPN:

An article about the large number of grandparents that a growing number of young children have as a result of two or three generations of easily obtainable divorce. Interesting as a sociological matter, or just as a lifestyle column. But is it front page news? This, this, and even this, although all flawed in the normal NYT way, might have been stronger contenders in terms of newsworthyness. Instead they are buried on A8, A17 and A25 respectively.

With that, have a pleasant weekend. I'll be back on track tomorrow, with more interesting business and economics news.

Saturday Assets and Liabilities

Taking a break from the fevered two-post-a-day schedule I've been on for the past two days, I introduce a new Saturday feature: My cheers and jeers for the week. But since I'm an economist, I feel compelled to call it "Assets and Liabilities" (If I'm feeling ambitious tomorrow, I might roll out a feature on the New York Times -- I might as well get my money's worth as a Sunday subscriber... Otherwise, see y'all Monday.)

Anyway, here you go.

Assets

The Bernie Ebbers jury. Their deliberations were, well, deliberate (40 hours over eight days), and in the end they weren't fooled by his claim that he just hadn't had a clue that his most senior managers were driving WorldCom into the ground. His hubris and rapacity were bad for WorldCom's employees, for its investors, for its customers and now for Ebbers himself.

Which invites two comments. The first is that, as the Wall Street Journal noted in an editorial earlier this week, the legal system is capable of cleaning up wrongdoing even without Sarbanes-Oxley. Ebbers wasn't charged under the new law -- and the old laws appear quite sufficient to send him to jail. The second is that an ordinary jury can in fact sort through a complicated corporate case. Following last year's shenanigans around the trial of former Tyco chief Dennis Kozlowsky, some lawyers had been nattering that we needed to create a special legal track for corporate cases, on the theory that the cases' complexity demands expert adjudicators. Perhaps that's not so, after all.

Liabilities

Airbus, and its European sugardaddies. U.S.-Europe negotions broke down yesterday over ending government subsidies for the European aircraft manufacturer. The U.S. argues that these subsidies are illegal, and cares about ending them because America has a particularly big horse -- Boeing -- in this race, too. Given that the two companies are locked in a cosmic death struggle for the hearts and minds of airlines everywhere, Boeing is understandably concerned that government support for the other side is skewing the market.

The European defense is that all the kids are doing it; Boeing is subsidized, too. Which is (only sort of) true. On account of its defense contracting business Boeing has a symbiotic relationship with the U.S. government. But there are a couple interesting distinctions. The bulk of Boeing's "subsidy" comes in the form of government contracts, so in theory it's a true business relationship (even though the vagaries of the Congressional budgeting process lend themselves to overexpenditures that can look an awful lot like a subsidy). And it's at least more subtle than what the Europeans are doing. Compare that to Airbus, which over the years has received outright grants and low-interest loans to the tune of hundreds of millions of dollars.

It's nothing against Airbus -- as a passenger, I think they actually offer some products that are superior to their Boeing competitors. But isn't it time for the European hatchling to fly out of the nest?

Let the good times roll...

More on the World Bank, goshdarnit. There is, it would appear, trouble in paradise:

Although many bank insiders and observers predict that the odds strongly favor Wolfowitz eventually getting the job, the furor yesterday indicated that at the very least a fight will rage for several weeks before the board approves him.

Of course, in such a situation, it always helps to consider the source. And if we believe the Washington Post (a reasonable thing to do, since it's not the New York Times), one of the more prominent COWs (critics of Wolfowitz) is a British MP named Clare Short, former Minister for International Development. Two things are worth noting about her. First, she's the former minister because she resigned her government post on the eve of the Iraq war in 2003. Second, well, she's an idiot. (I Googled "Clare Short" and that link was exactly the sixth result to appear.)

With enemies like these, you must be on the right track.

Toys 'R Whom?

Toys 'R Us will be bought out later this spring for up to $6.6 billion. The lucky winners of the recent bidding war for the troubled toy-seller include a leveraged-buyout firm, the private-equity company that also owns Dominos and Staples, and a real-estate specialist.

A deal of this sort wouldn't ordinarily raise many eyebrows, and for the most part it's not raising mine. But I'll just comment on this phrase from a larger WSJ article (which I won't link since it's subscription-only):

Toys "R" Us Inc. achieved its goal of boosting shareholder value by agreeing to be acquired...

This is certainly one strategy for "boosting shareholder value." And the deal certainly will do that: The announced value of the deal--$26.75 per share--represents a not-insignificant premium on the recent stock price. Still, we probably shouldn't assume that this value boost is going to save the company.

Although everyone is saying that the purchasers intend to rebuild the Toys 'R Us "brand" to compete with the toy departments at WalMart and Target, there's no escaping the fact that one of the Toys 'R Us-buying troika is a real estate investment company. Even if this deal keeps the toy store complete (over the past few months we'd seen speculation that it would be split up and sold off in parts), executives seem to be protesting just a bit too much that we're not about to see a big real-estate sell-off.

What's the moral of this story? There isn't one, really. Should we mourn the fact that erstwhile titan Toys 'R Us is falling victim to discounters like WalMart and Target? No. The pair are winning the toy wars because they're delivering what parents want at prices they can afford. So if it turns out to be true that the parts of Toys 'R Us--its real estate holdings--are worth more than the sum, this deal will be a great way for investors to cash out and for those locations to be converted to better uses. The march of progress...

Wolfowitz to the rescue!

Having already written about Bush's new pick to head the World Bank once in the past 24 hours, I don't intend to do so again.

Instead, I will merely capitalize on the attention the controversial nod has focused on the Bank by recommending two fairly recent books on economic development that offer interesting insights into the Bretton Woods institutions.

In Why Globalization Works, FT columnist Martin Wolf most notably points out that the IMF isn't all that bad. An unusual argument indeed, when most kind-hearted economics professors and professionals these days bemoan the Fund's one-size-fits-all policy prescriptions. Even though that one prescription is precisely what's needed by each recipient of the Fund's tender loving care, since they all get themselves into crises in exactly the same way.

Meanwhile, whether he intended it to be this way or not, Sebastian Mallaby's The World's Banker presents outgoing Bank head James Wolfensohn as an object lesson in how not to run an international institution. One quickly reaches the conclusion that Wolfensohn was a terrible pick for the job: His boundless energy paled in comparison to his amazing lack of focus, and his scattershot management style didn't help any. Could Wolfowitz be any worse? Certainly not.

Fannie May Not...

...file its 2004 financial report to the SEC on time. In fact, it definitely won't. Surprise, surprise.

However, there's more to that 4.3 percent price drop than meets the eye. Also in today's news, we read that John Snow and Alan Greenspan will be testifying about Fannie Mae (FNM) before the Senate Banking Committee in just a couple weeks.

This raises an interesting question: Is the market reacting to the bad news about the fundamentals (that bad news being that no one will know for a long time precisely what those fundamentals are), or is it responding to political risk? I raised this question once before, in my pre-blog days, and I like to think that subsequent events have proven me right. In fact, on the very day that TAE column appeared, Fannie's stock price dove once more, driven (arguably) by news that Congress was taking a renewed interest in the housing enterprise.

The most likely explanation for FNM's precipitous decline is a combination of both factors. The fact of the matter is that there are two distinct problems with Fannie. The first is accounting that was probably criminal (I'd bet on indictments before Christmas). But the second, deeper problem is structural. Even if its books were pure as snow, Fannie's and Freddie's unusual and outdated relationship with the government would still expose them, their investors and, ultimately, everyone else to all sorts of risks.

So the real question is: Will Congress be able to see through the scandalous accounting to what lies beneath? Sadly, the indictments are a much stronger bet by far.

Welcome

Welcome to The Cranky Economist, yet another Washington blog. I, Joe, am your fearless leader, with able help from any friends I can con into posting here. Check this space every once in a while for an engrossing selection of my finest musings (or ramblings...) on economic and business news, and even some politics.

With that, let the games begin!