Surprise, surprise

I know I'm off to a late start today, but I'll try to make it up to all you FOCEs with somewhat more vigorous posting than you've seen over the past few days.

I'll start with the news that General Motors posted a $1.1 billion net loss for the first quarter, and announced that it won't release an earnings forecast for 2005.

As Reuters reports it, the company blames this loss mainly on several one-time charges, although a mounting crisis traceable to union compensation (especially health care costs) and thinning sales in the face of neglected product development form the backdrop for this announcement.

All well and good, although I really don't buy the explanation that attributing the result to one-time charges makes things any better. Just look at the one-time charges described in the article -- reorganizing European operations (because the company has been failing there) and idling a plant in Michigan. They may be one-time expenses, but they point to a longer-term decline if something doesn't happen to turn the company around soon.

What a relief

Also in your newspapers this morning, a report of the G-7 meetings held over the weekend in Washington. The main story seems to be that they are still not supporting debt relief for third-world countries. Which is actually good news.

It's not that the Cranky Economist supports trapping poor nations in obscene piles of foreign debt. Quite the contrary -- I'm deeply suspicious of the World Bank/IMF method of "development financing." Why, you ask? Well for starters, after fifty years of doing it that way, where's the development? These loans have a nasty habit of propping up despots who then embezzle the money for their own purposes (worth remembering lest anyone think Oil-for-Food was an isolated event). And under the loan regime, officers at the Bank and IMF have perverse incentives to make loans without any consideration for whether the country will be able to repay. Just read Tropical Gangsters, the account of a World Bank officer in Equatorial Guinea. It climaxes with a long meeting at the end when Bank officials gather and start fudging numbers to be able to give the counry a loan. No wonder there's a debt problem.

But the debt wouldn't necessarily be a problem if the countries were growing fast enough to pay it off. They aren't doing so because the developed world finds plenty of other ways to keep them barefoot, pregnant and in the kitchen, as it were. Such as blocking agricultural trade with them.

I'm uneasy about the idea of debt forgiveness because a.) it's a dodge that keeps the first world from tackling the root causes of third world poverty, and b.) because it will only help the bad political leaders who benefited from the loans in the first place.

Don't get me wrong -- the debt is a big problem. But erasing it might not be the best solution.

Monday morning M&A

Good morning, faithful FOCEs. I know you've been distraught by my sparse posting the past few days, and there's bad news -- the problem will get worse before it gets better. The Cranky Family is in town today, so I'll be doing some Cranky Sightseeing. But before I leave, a couple stories that merit comment:

First, Adobe is buying Macromedia. This strikes me as a noteworthy event for several reasons. Principally, it's a big deal. As excited as we have all been about the MCI story, it is only one of many mergers and acquisitions that have been launched in the past few months. And that's good news. The uptick in M&A activity is a sign of business optimism.

This particular merger is also worth noting from an excited-tech-geek perspective because it holds out the promise of all sorts of innovations to come from the new company. As suspcious as I usually am about the rationale for mergers and acquisitions, this one seems to make sense. It could just be opening the door to a variety of new Internet document technologies we can't even imagine today.

Saturday Assets & Liabilities

Although I feel somewhat like a liabiliity myself for not having posted as much over the past couple days, I present this week's assets and liabilities as a way of getting myself back on track:

Assets

The U.S. House of Representatives, who this week voted to repeal the estate tax. The theory is that this tax redistributes wealth from the rich to everyone else. If that's true, I'm still waiting for a check for my share of the Rockefeller fortune. In reality, at "best" it double-taxes assets in the estate, and at worst it provides ample incentive for the outrageously wealthy to shunt their money into a variety of tax shelters so as to cleverly avoid any tax. Three cheers to Congress for trying (again) to remedy this situation.

Liabilities

The Europea Union (of course), this time for blocking imports of American genetically modified (GM) animal feed. I've posted already on the GMO issue below, so for here is merely suffices to say that this is a load of Belgian-cow manure. There is no actual scientific evidence that these genetically modified organisms are dangerous. The furur in Europe over this issue has been stirred up by a coalition of eco-weenies and cynical pols. At least the U.S. economy can absorb the hit from this ban. Third-world countries dependent on agricultural trade with the EU can't. So three jeers to the EU for perpetuating a costly myth.

On a fast train to nowhere

My apologies, dear FOCEs, for not blogging today. It was a busy and eventful 24 hours, and for better or worse I was too busy to blog. But no fear -- I'm back. I leave this post for all you poor sods with nothing better to do on a Friday night, with perhaps more after I get back from dinner because I have nothing better to do on a Friday.

In honor of my Cranky Travels to the Big Apple yesterday, I bring you this Bloomberg report about the latest trials and tribulations of Amtrak's high-speed Acela Express service (which I did not use, to ease the Cranky Budget). The brakes, it appears, are cracking.

So is the veneer on the idea that this high-speed rail idea was a good one. Sure, the Northeast Corridor between Washington, New York and Boston is the only profitable part of the rail network. And I'm willing to believe that high-speed trains are the best way to compete effectively with the airline shuttles. And I'm sure with proper marketing, careful schedule and reliable service, the train could do just that.

But how you get from those suppositions to the notion that it would be wise to design the trains from scratch (instead of borrowing bullet-train designs already used for years in Europe and Japan) is beyond me. Should we now be surprised that the trains were rolled out late and have been plagued by one technical problem after another? Of course not. Did anyone think that this process would not end in eternal litigation as Amtrak and the manufacturers sue each other to the Chattanooga Station and back? If you though we'd avoid that scenario, here's the bridge link. Should we be appalled at the waste of our taxpayer money? I sure am.

I ride Amtrak periodically, but have not enjoyed the Acela Express experience yet. My main experience with the service is seeing it flagged as "delayed" on the boards in stations every time I ride a regular train. Amtrak is presumably embarassed about this latest episode. Well, they should be. Surely we ought to be able to make the trains run on time.

While we're on the subject of taxes...

This particularly obnoxious column from the BBC decries, among other things, tax avoidance -- the practice of exploiting legal loopholes in the tax code.

Again, let's consider this for a minute. "Exploiting legal loopholes." The loopholes are perfectly legal! Why are we lambasting big corporations and rich individuals for plying their lawyers' knowledge of the tax code to reduce the tab on April 15? I'm not angry, I'm jealous!

The tax loophole is a creation of (largely liberal, although sometimes conservative) efforts to manipulate the tax code for social engineering. Not very often are these things explicitly written into the code. They are frequently unintended consequences of other incentives and penalties that are written into the tax code.

So if we're unhappy that folks are using these perfectly legal means to reduce their tax bills, and those perfectly legal means arise from efforts to perfectly fine-tune the tax code, what again makes us think that more "fine tuning" will close the loopholes?

Maybe we'll let Granny see 2011 after all

Good morning, FOCEs. The Cranky Economist is in Cranky New York today, so I will not be posting during the day. Instead I give you a veritable feast of items that I prepared last night. Or two. Let it not be said that I'm a stingy opinionist.

We turn first to the estate tax, which the House voted yesterday to repeal permanently. A hot-button political issue in recent years, the estate tax was repealed temporarily in 2001, with the intent that it would re-appear in 2011. Which created a perverse incentive for greedy heirs across the land to off their ancestors before ringing in 2011 (hence the brilliant title on this post).

So let's have us a little discussion of why Congress is finally doing the right thing here, shall we:

First, dispense with the notion that a temporary tax cut can accomplish anything. Time was when I would have said that it was a foolish idea because people would just adjust their behavior to account for their expectation of higher taxes in the future. However, there is now mixed evidence on this. As a friend of mine in high school used to say, "Never underestimate the stupidity of the masses." Mine isn't an empirical objection but a theoretical one. To accept the "stimulus when it's needed" argument requires a couple of assumptions. First, you have to believe that the government can move deftly enough to engineer the economy. Horse hockey.

But the second is the funniest. Democrats who trumpet this line are implicitly accepting the claim that tax cuts are stimulative. Let's follow this line to its logical conclusion. You therefore have to accept that a tax increase will slow the economy, even if you try to argue that the benefits of the government spending are an offset. But how can you argue for the offset if you have already conceded in another circumstance that the tax cut would be more effective than the spending?

But that's just academic. How about the reality of the estate tax? It's just a money grab. Remember, almost all of the assets previously subject to estate taxes had already been taxed amply before. Congress has had one bite at the apple; our elected representatives don't deserve more.

At least one Vioxx suit looks set to bite the dust

Bad news for a plaintiff in Alabama: Merck purports to be able to prove that the suing widow's husband can't possibly have taken Vioxx before he died of a heart attack a couple years ago.

This New York Times (yeah, I know) article is correct to point out that if this suit is dismissed it will be more a moral victory than anything else. After all, the facts of this particular case are just so bizarre. Although I will venture to add that, from my safe and uninformed distance low these many hundreds of miles away, this case appears to have all the ingredients of the litigation mess to come -- grieving widow, grasping lawyers and groundless charges.

As I have said before, Merck's "crime" was not that it marketed a drug that could have serious cardiac side effects. It was that the company marketed the drug to the wrong people. As sympathetic as we must be towards those who have lost loved ones to heart attacks while taking Vioxx, surely part of the blame lies with doctors who were too quick to prescribe the drug instead of over-the-counter alternatives that are safer for all but the small subset of arthritis patients for whom Vioxx-esque Cox-2 inhibitors really were a Godsend. And I suspect that in many cases we will never be able to sort out how much of a heart attack was caused by Vioxx and how much by deep-fried chicken and Burger King's Enormous Omelet Sandwiches.

All in all, good news from Alabama. But unfortunately, the rest of these lawsuits don't look set to go nearly so quietly into that good night.

Is it you?

A milestone in Cranky Economistdom is fast approaching: my 100th hit since installing the counter last week. Will it be you? Check the counter at the bottom right-hand column. If it says 100 when you load the blog, let me know who you are so I can congratulate you.

A GM post

The Cranky Economist is normally reluctant to link to Wall Street Journal content because only Cranky Subscribers can access it. But this week's Business World column from Holman Jenkins is just too good to pass up.

In a nutshell, his argument is that GM is in especially serious trouble because the compounded weight of decades of excessively generous labor contracts is sapping money from R&D. GM has now reached a point where it is cancelling promising new programs because it has to pour so much cash into pensions and health care expenses.

A good point, that, and worth reading in full. If you don't subscribe to the Journal, you should.

An MG post

Remember MG Rover? Well, if you own a Rover don't count on your warranty -- there may not be enough cash to cover repair bills as promised.

But that's not the kicker in this article (and here you should prepare yourself for some more Airbus bashing): The punchline is that the European Commission is raising a stink about the prospect that the British government will pour money into MG to keep the doors open. Quoth AP (via Forbes.com):

Trade Secretary Patricia Hewitt said the government will review a 6.5 million pound (US$11.7 million, euro3.2 million) loan it granted Rover's administrators earlier this week after production was shut down at the company's Longbridge factory. The loan enabled PwC to pay workers for a week, but the administrator has warned that without further assistance mass layoffs are likely.
...
However, strict European Union rules regarding government subsidies to private companies could prevent any extension of the loan. The European Commission said Wednesday that regulators needed more information from the government about its plans for Rover.

So let's get this straight. The Commission is perfectly content to allow subsidies for a bloated but competitive company (remember, Airbus actually surpassed rival Boeing in orders filled last year). But when it comes to assistance for a bloated but failing company, something has to be done to stop the market distortion.

The issue here isn't even the subsidy -- it's probably a bad idea in both cases. While we all need to be sympathetic for the plight of MG Rover's workers (and as a soon-to-be-displaced worker myself, I certainly am), the fact is that it's probably better to help them by working out direct income transfers via an unemployment compensation program than it is to prop up a company that will go bankrupt either sooner or later.

The real issue is the weird decisions emanating from Brussels. Really, did I accidentally wake up in some Bizarro World this morning? How can they go to the mat for Airbus subsidies but deny the same assistance to Rover? Some things I will just never understand.

More Snow

Treasury Secretary John Snow has repeated his assertion that Fannie and Freddie should reduce their portfolios.

Today's news is in most respects a House-side reprise of testimony the secretary offered to a Senate committee last week. It's notable principally because it demonstrates that the White House seems to be committed to GSE reform. Always a good thing.

What we need is robots

Or at least computers to execute our trades on the floor of the New York Stock Exchange. Although at this point I'm sure a lot of people would settle for "specialists" who don't engage in shifty trading of the sort charged against 15 floor traders yesterday.

The real significance of this story is not that there are allegedly criminals gaming the markets. That's old news. This story is interesting because it comes at a very awkward time for the NYSE. Under assault from electronic markets such as the NASDAQ, the NYSE has been fighting to preserve its antiquated but highly profitable specialist system, in which living, breathing (and now, apparently, cheating) human beings manage continuous auctions for shares in listed companies. Antiquated because in the face of the NASDAQ system and others like it, the NYSE is slow and inefficient. Highly profitable because the specialists take a cut of every transaction in fees, so those positions are very lucrative and brokerages are willing to pay the exchange a lot for the privilege of holding them.

The argument, a growing body of evidence to the contrary, is that human specialists are somehow better at matching up buyers and sellers quickly. But this sounds ever more dubious in the face of NASDAQ's ever more sophisticated technology. Meanwhile, the NYSE's trade-through rule, only recently extended to other markets, deprives traders of the level of choice about execution that NASDAQ offers.

Faced with these shifts in the market, any company listed on the NYSE would have to adapt or die. Which makes the exchange's resistance to change somewhat ironic. And as good a place to start on this Wednesday morning as any.

Count on the French...

...to make things worse. After all, only a Frenchman would think it was a good idea to raise the temperature in already strained U.S.-EU negotiations by talking favorably about the prospects of even more subsidy aid for Airbus.

Ample posts on this topic below.

Don't tax this blog!

Although the blurb at the top of this page says I'm "Washington-based," that's not completely true. I'm "Washington-area-based." I live in lovely northern Virginia a few minutes south of the District and commute in to my day job each morning. One advantage of which is that I enjoy congressional representation, including the able advocacy of Sen. George Allen, who has come out in support of a bill that would prohibit the Feds from taxing Internet communication. Ain't he a great guy?

The Internet poses an interesting problem for those of a more pro-tax bent. Not only is much Internet activity currently untaxed, but the Internet is quickly providing the means to circumvent more traditional activities that are. One example is voice-over-Internet, or VoIP, telephony, currently subject to federal excise taxes under a provision in the tax code that will sunset eventually if it's not renewed. That provision was passed in 2004 partly to keep VoIP from cutting into tax revenues from standard landlines. And, although this article focuses exclusively on a current discussion about communications taxation, the issue is even larger. Ever notice how you don't always pay state sales tax on online purchases?

So perhaps the best way to put this article into context is to realize that the Internet is now going to provide the same tax competition inside the U.S. market that we already experience in foreign trade (just check out the Airbus-Boeing post below). It's wild-west untaxedness will put pressure on many of the consumption-based taxes we have today.

Longer and more tortuous than a Russian novel part deux

Not the MCI proxy saga. This time the title refers to Martha Stewart's sentence, upheld today on appeal. That doyenne of domestic divas will dither in her datcha until her 10-month sentence is up.

Judge Cederbaum's argument -- that this is the sentence that anyone convicted of this crime would serve -- would be more compelling if Martha really had committed a crime. But instead she's just guilty of having an unethical stockbroker and a grating off-screen personality.

So again I say, Free Martha!

Longer and more tortuous than a Russian novel

That seems as good a way as any of describing the saga surrounding MCI's sale. Just when you think it's gotten as exciting as it can -- lawyers, proxy fights, angry investors -- it gets even weirder.

The latest news: Verizon (whose bid makes a lot of sense for the company but not for the shareholders) has announced a deal to buy 13 percent of MCI's stock from a Mexican billionaire. You can't make this stuff up.

The theory is that Verizon can maneuver more successfully through the MCI proxy fight if Verizon has a significant block of voting shares to its name. Elegant from a purely Machiavellian perspective, although notably lacking in charm. Especially because Verizon is offering the Mexican billionaire significantly more per share than the value of their current offer, which has had the unfortunate, albeit presumably unintended, effect of angering a significant block of the owners of the other 87 percent of MCI.

Where this will all end up is beyond my feeble powers of prognostication. But increasingly I have this sinking sense that Qwest will win out. Just so long as I don't have to be in the room when they write the check to Verizon to cash out that 13 percent stake, a nice little bit of Baby Bell icing on the cake after Verizon has already forced Qwest into an outrageously high bid.

Hold the 'Bus part deux

Now that they have officially avoided today's deadline for an agreement on the U.S.-EU dispute over subsidies for aircraft manufacturers, the Europeans are going on the offensive. As in, their demands this time around are offensively ridiculous. Sure, the EU says, Boeing may not receive the kind of "launch aid" Airbus soaks up from its governmental sponsors. But Boeing pays lower taxes! And, says Europe's trade representative, this has got to stop before the EU will negotiate.

Sadly, this is not as creative an argument as it may at first appear. Tax-happy western European countries have a tradition of whining about the economic success of their lower-taxing neighbors. Ireland's famously low corporate tax rates (and its concomitant famous growth rates) are a perennial sore spot, which explains the nagging calls for "harmonization of economic policies" within the EU. And the entrance of eastern European countries that also have more favorable economic policies has only made the problem worse.

So once and for all: Yes, Europe, there is a difference between stimulative tax breaks and subsidies. If you have your knickers all in a twist about low taxes in Washington State, try cutting your own taxes. Even if doing so makes it harder for you to afford your subsidies to Airbus. Trust us -- low taxes have done wonders in America and Ireland.

Let the deliberations begin

Mikhail Khodorkovsky's trial nears its conslusion as the court's deliberations begin, following a rousing closing argument by the erstwhile oil tycoon himself. I've posted on this case, and the damage it's doing to Russia's economy, below. For now, I will only remark on how impressive it is that 10 months in a courtroom cage do not seem to have diminished the defendant's vim and vigor nearly as much as it has diminished foreign investors' perceptions of Russia.

Hold the 'Bus

Airbus, that is. Even though today marks the deadline for a U.S.-EU agreement on subsidies to aircraft manufacturers, no deal has been struck yet. Nonetheless, neither party expects to take the case to the World Trade Organization quite yet. At issue: government support for Airbus and Boeing. Both companies receive various forms of government support. But only Boeing can claim with a straight face that the U.S. government gets something for the money -- most of the "subsidies" come in the form of defense contracts. What to make of the decision not to go running to the WTO right away? Presumably the U.S. is holding back because we want to rebuild a more amicable relationship with Europe. The EU is almost certainly holding back because they know they would lose.

In a weekend that saw Charles and Camilla pledge everlasting marital fidelity to each other, you might think that we were all irony-ed out. Never fear. Just check out these three consecutive paragraphs from the Reuters article linked above:

"We hope it will be possible to continue negotiation. It is of course open for both the EU and the U.S. ... to refer the matter to the WTO. But in our opinion this is better avoided," said Simon Fraser, head of European Trade Commissioner Peter Mandelson's cabinet.

"It is not the EU's intention to move first on WTO action," he told reporters in Brussels.

However, an aide to Mandelson noted that an agreed standstill on fresh aid to the aviation titans would lapse with the deadline on Monday, and EU member states could not negotiate indefinitely because Airbus is expected to seek "launch aid" loans for its new model, the A350.

Some people just never learn.

This week's Sunday NYT feature

...will not be appearing in this space. My Sunday New York Times has not arrived, and the outlook isn't good for delivery any time today. When I called to enquire, I discovered that there is not actually a human being working anywhere in the subscription department (so apparently it's not just the newsroom...).

Which raises an interesting question about whether this is any way to run a business. The NYT is already in the running for next Saturday's Liability, so it should hope some really juicy scandal displaces it.

Your weekly dose of SAL

Saturday Assets & Liabilities

Assets

Armando Falcon, Jr. Armando who, you say? For the past five years, he's been director of the Office of Federal Housing Enterprise Oversight (Ofheo), the agency that polices Fannie and Freddie. He also announced Tuesday that he will be stepping down next month, at the end of his current five-year term. Falcon might not have always been the perfect regulator -- certainly many of Fannie and Freddie's worst abuses reached their apex on his watch. But he at least deserves credit for a "death bed conversion" of sorts. Now that those abuses have been revealed, he has been as aggressive as anyone in his shoes probably could be in cleaning them up. Not "perfect world" aggressive, mind you. But he's done his best. Which is better than we've come to expect from the GSEs' protectors on the Hill.

Liabilities

Kirk Kerkorian His lawsuit against DaimlerChrysler was dismissed yesterday. I haven't been following this case very closely at all. I don't profess to be an expert on it. For all of my postings on General Motors, I don't even claim to have much to say about the auto industry in general. So I will just say that this suit always struck me as a bit, well, odd. Kerkorian claimed that management had lied when it called Daimler-Benz's takeover of Chrysler a "merger." Perhaps they did. But who really believed them? Cranky Dad is not an investor, and the business page is not the first section to which he turns when he sits down to read his morning paper. Yet I remember even him joking about how silly it was that anyone would think this was a merger. "Silly" seems like a good word to describe this lawsuit. Those silly disgruntled billionaire investors.

It's not April 1...

...so I can only assume this is true. The Cookie Monster is going healthy. Two serious comments, and then, well, the joke this one really deserves.

First, just yesterday I noted efforts at General Motors to encourage employees to shape up, on the theory that this would reduce the company's health insurance expenditures. That program caught my eye because it raised the possibility that the private sector would have better incentives, and thus design more productive programs, to combat the health woes that are plaguing America. This Sesame Street program strikes me as what we would end up with otherwise. (Because let's face it -- PBS is a government program, pledge drives and "underwriters" notwithstanding.) Meanwhile, as experts bemoan America's sedentary lifestyle, and especially the degree to which our youngsters now just sit around watching TV, one can't help but note a certain irony here. And will it even reach a meaningful number of kids? Worth asking because...

Second, Sesame Street's new healthy living message will be falling on a declining audience. Under pressure from a terrifying proliferation of cable children's programming (some of which, incidentally, may be pedagogically sounder than Sesame Street), the PBS program's audience has been drifting away for years. So, best efforts to the contrary, you have to wonder what difference it will make.

And now, although the song has probably already been written, I present my Cranky Lyrics to "A Cookie Is A Sometimes Food" (which I've elected to sing to the tune of the Gilligan's Island theme song):

A cookie is a sometimes food,
'Cause it will make you fat;
So if you want to look real good,
You should remember that, you should remember that.

The calories will do you in
The carbs will stretch your waist;
So if you want to be real thin,
You'd better stick to paste, you'd better stick to paste.

With exercise you might get fit
It's a method that is tried;
Still, lest our ratings take a hit,
Watch PBS inside, watch PBS inside.

Well, how did you think...

...she was paying for all those spices she was smuggling in the Federal pen? Martha Stewart, domestic dab hand, K-Mart conquistadora and wrongly convicted "stock swindler," banked $1.2 million from her company last year, and -- shock! horror! -- spent some of it in prison.

To which I can only comment that she, unlike the MG Rover execs described a couple posts below this, probably deserves it. After all, she managed to charm her way back into the hearts of homemakers, thus helping to insure the survival (and thus employee jobs and shareholder value) of her eponymous media empire.

Yeah, she's home now. But once more, for old time's sake: Free Martha!

The Qwest for popularity

Reuters now reports that Qwest thinks MCI's shareholders are ready to accept Qwest's buy-out over Verizon's offer. Ample posts on this topic below.

Rover in the doghouse

Actually, it's worse than that: The MG Rover doghouse will be shutting down. Hope is fading fast on a salvific takeover by a Chinese automaker, and government assistance doesn't appear to be forthcoming for Britain's sole remaining car manufacturer. (This does not, however, necessarily mean that you will never be able to buy a "Rover" again; BMW retains the right to market autos under that brand name thanks to its one-time ownership of the company, which ended in 2000 in a deal the merits of which the Cranky Economist still doesn't completely understand.)

MG Rover's failure has several implications. First, it comes at a terrible time for Tony Blair's Labour government. Earlier this week Blair called an election for May 5, and this is a deeply felt industrial loss for the country. Will it tip the balance in the Tories' favor? Probably not. But it doesn't help confidence in Blair.

Second, look for the closure to re-spark Britain's perennial debate about "fat cat" executives. In an earlier article (to which I intended to link before Blogger crashed on me last night...), the Financial Times noted that MG Rover's current executives look set to walk away from this deal with their big pensions intact. Now, the Cranky Economist isn't generally bothered by large executive compensation packages. If asked, I will opine that the money is worth spending if it buys a company good management. Well, in this case perhaps it didn't. Food for thought for MG Rover's displaced workers and disgruntled shareholders.

Finally, a nostalgic note. From his youthhood, the Cranky Economist has heard Cranky Dad recount fondly stories of his time spent tooling around Belgium in Cranky Grandpa's MG back in the Cranky Day. It was arguably the manliest car Cranky Dad has ever driven; certainly it was far superior to the Datsun and -- gasp -- Dodge Colt that haunted my younger days like hatch-backed apparitions of real cars. And, unlike the "sporty" (?!) 300M currently in Cranky Dad's garage, that MG really was a sports car.

MG Rover, this speeding ticket's for you!

John Paul, Professor of Economics

I generally operate on the assumption (read: delude myself into thinking) that you loyal FOCEs tune in for my opinions on business and economics. To that end, I generally only link to "hard news" articles, and save the editorializing for myself.

I'll make an exception in this post, however, to call your attention to one of the better analyses of what Pope John Paul II really thought about economics, an article on National Review Online. It's not a terrific explication, but Sirico comes much, much closer than any other commentator I've seen opining on the subject.

The pain's not going away, but the drugs are

That's the word as the Cranky Economist finally catches up to yet another pharmaceutical story that has been brewing for the past few days. The FDA is forcing Pfizer to take Bextra (an arthritis drug that resembles Vioxx) off the market, citing some of the same cardiac risks that led to Merck's decision to pull Vioxx last fall.

Merck yanked Vioxx, you may recall, after a study found that the drug was responsible for a somewhat increased risk of heart problems among its users. A perfectly reasonable decision in this litigious world in which we live in (to paraphrase McCartney), although in a "perfect world" sort of way it was dubious. Merck's sin was arguably in over-marketing the drug. Sure, it (and other Cox-2 inhibitors like it) probably do increase heart risk. But that risk was worth it to the small subset of arthritis patients for whom traditional medicines like naproxen (Aleve) and ibuprofen (Advil) were causing stomach ulcers. The real problem with Vioxx wasn't that Merck was selling a dangerous drug; the problem was that too many of the wrong people were buying it.

As the Forbes article linked above suggests, there may have been an added wrinkle with Bextra -- its connection to a rare skin reaction -- that might have influenced the FDA's decision as much as the worry over heart woes. But at the end of the day, one has to wonder whether hyper-sensitivity to risk fueld by a hyperactive trial bar might not be influencing some of the thinking here. Within a week of Merck's announcement last fall, I remember seeing ads on TV by some scurrilous trial lawyer trawling for Vioxx clients. I have to wonder, are we whittling away our ability to make sensible trade-offs when it comes to medical care?

Which is not to be too down on the FDA -- the agency has generally been very effective at protecting American consumers. If memory serves, for example, Thalidomide was never approved for use in the U.S. But if the panel appointed to study the issue was split almost down the middle, and the panelists most likely to encounter patients who could benefit from these drugs determined that the trade-offs were worthwhile, one starts to ask what's going on here.

Snow comes down...

...in favor of smaller portfolios and receivership for Fannie and Freddie (Treasury Secretary John Snow, that is).

Several comments on his testimony:

First, for an extended discussion of the importance of receivership powers, see yesterday's post on Alan Greenspan's testimony to the same Senate committee.

Ditto for a discussion of the issue of the housing GSEs' portfolios. (For an interesting piece about a more technical aspect of this trading take a look at this subscription-only article from this morning's Wall Street Journal, which notes that Fannie developed a habit of keeping the best mortgage-backed securities (MBS) for itself when building its portfolio, and only selling less desirable MBSs into the private market.)

Note disbelievingly, however, Snow's claim that the Treasury would only consider bailing out Fannie or Freddie in the context of an orderly receivership process were one of them to fail.

This issue gets to the heart of the much-discussed "implicit subsidy." Legally, Fannie and Freddie each have up to a $2.5 billion credit line at Treasury -- the Treasury Secretary can issue government bonds up to that amount to shore up either of the enterprises if they run into troubles. Now, this amount is a pittance compared to the GSEs' size. But it's important because it could constitute vital "seed money" around which to organize a massive bail-out. It's symbolically important of the government's commitment to the GSEs. Numerically it's not insignificant. And perhaps every Fannie and Freddie creditor is telling himself or herself that, well, certainly I would get a cut of that money.

So on its face, Snow's claim that he would only extend this credit (which lies within the Treasury secretary's discretion) subject to conditions such as receivership sounds like a positive step. Except that politically it's hard to see how it could be true.

Fannie and Freddie are important issues because their debt is so widely held throughout the financial market. After all, it's viewed to be just as secure as real government bonds. Odds are great that your local bank is holding at least some of its assets in the form of GSE debt. So if one of them were to go under, and that debt were to become worthless, it would cause enormous strain throughout the economy, strain that ordinary people would probably start noticing fairly quickly. So there would be tremendous political pressure for the government to do something to fix it. In the face of impending crisis, and with political pressure mounting, what are the odds that any treasury secretary of either party would have the intestinal fortitude to say "Stop!" until Fannie and Freddie started to behave themselves? Here's the bridge link, in case you were wondering.

All in all, Snow is saying the right things. But we should just make sure that we're applauding him for the "right things" that he's actually likely to follow through on.

Shaping up (the balance sheet)

The Cranky Economist recently had a Cranky Birthday, which led to an influx of Cranky Monetary Birthday Gifts from some quarters of the Cranky Family. A portion of which, I am happy to report, will have to go towards the purchase of new Cranky Pants, since a new fitness regimen (well, actually, just forcing myself to go to the gym more often) has led to a reduction in the Cranky Waistline over the past two months. And being in shape is doing wonders for my tennis game, as evidenced by last night's victory over one of the Cranky Roommates.

For me, the decision to turn off the TV and head to the gym was fueled by several factors. I found I was too tired and too stressed too much of the time. There are only so many Law & order reruns that any man can watch on TNT, so I was running out of things to do with my evenings. And going to the gym seemed like a more amenable Lenten discipline than fasting.

Which isn't to say that I'm any better in the health and fitness department than anyone else -- far from it. I think my story is just an example of how many factors can drive people to take an interest in shaping up. Which suggests that there may be many possible solutions to America's pressing obesity problem, and the concomitant health concerns -- and expenditures -- that go with it.

All of which comes to mind after reading this article about GM's efforts to reduce healthcare expenditures by encouraging healthier lifestyles (a WSJ article, so unfortunately it's subscription-only). The company believes that treatments for obesity-related ailments such as high cholesterol and diabetes are costing it hundreds of millions of dollars a year, so it is slowly trying to find ways to encourage workers to live in healthier ways.

How is it doing so? Through highly localized tactics. Sure, it has been building gyms in its plants, and has rolled out a series of healthy living courses across the company. But the article describes how, in one plant where deer hunting is especially popular among the workers, the company rolled out a series of fitness classes geared towards teaching people how to shape up for hunting season, and distributed healthy venison recipes.

Which is worth considering at a time when health experts are clamoring for the government to "do something" about America's bad health. Although it's early days yet for GM's efforts, and it's still possible they won't be entirely successful, I suspect that these programs have a better shot at changing behavior than any government program would. It's because private-sector companies like GM are best positioned to respond nimbly to localized needs. Meanwhile, the American system of private health insurance provision gives those companies strong incentives to encourage better health habits. Which is why GM, in its time of financial near-crisis, is turning its attention to healthy living.

Food for thought.

Is the jig up?

Well, when I went to bed last night, it looked like we were in for a hugely entertaining (for us) and hugely expensive (for Qwest) proxy fight over the fate of MCI. Now, however, Qwest's quest may be over. (Hey now, you have to have expected that lame pun eventually.)

Turns out that MCI has a poison-pill provision that would make any hostile bid hugely expensive.

Another interesting element from this TheStreet.com article is the following passage, which lends support to my suspicion that some of MCI's investors are more interested in cashing out than they are in building a viable long-term company:

Observers say the next step is likely to be a proxy battle in which MCI shareholders are asked to take sides. The vote is expected to be influenced by a number of large investors who may be looking primarily for a rich exit from MCI's stock, which declined sharply last year before being resuscitated by MCI's efforts to find a suitor.

Let the games begin

I know it's late. And the Cranky Economist is a bit tired after his first Cranky Victory of the season on the Cranky Local Public Tennis Courts. But this is just too good a story to not comment on tonight:

The natives are restless. MCI shareholders are expressing their dissatisfaction with the board's decision to go to Verizon. Qwest is sticking to its guns. Everyone (this being America) has hired lawyers. Let the proxy fight begin!

NB: When you read this article, keep in mind that 11% of the stock is a lot in the proxy world. And that 11% represents an enormous amount of money in its own right.

A dubious rule, through and through

The SEC, says the AP, is set to approve an extension of the "trade-through rule" to electronic markets such as the NASDAQ. Which is a shame.

The rule, long a mainstay on the floor of the New York Stock Exchange (NYSE) requires brokers to execute trades at the lowest current price. Which sounds great in theory, but doesn't always work that well in practice. For one thing, it can make large trades complicated and uncertain. Hidden behind that price you see in the back pages of your Wall Street Journal every day is a constantly fluctuating auction of shares in a particular company. It arises from the interaction of many sellers and many buyers, each trading different-sized lots (clusters of shares) and coming to the table with different bids and asks (prices at which one is willing to buy and sell a share, respectively). The trade-through rule requires that your trade be executed at the best price, which it defines as the lowest price if you're buying and the highest price if you're selling.

What could be wrong with that? Potentially a lot, if you're a big investor (and those are the ones who count in this argument, since small investors aren't the ones who make the type of trade where this matters, and have no business trying to do so). If you are trying to buy a large block of shares quickly (say, 10,000) but the best price is only available on a 100-share lot, your broker will first have to buy that 100 shares, and then the 5,000-share lot that might offer the next-best price, then the 2,500-share lot with the next-best price after that, and so forth until he has cobbled together your 10,000 shares. This can be a time-consuming process, during which the price may continue to fluctuate. Meaning that you will have an angst-inducing period of up to a few minutes during which you will know that your broker is executing a big, expensive deal, but you won't know just how expensive the deal will be. Which will probably send shares of Pepto-Bismol's manufacturer skyrocketing.

But there's an even bigger philosophical question at stake. Why is the SEC so hell-bent on inflicting an NYSE rule on other stock markets? Currently, NASDAQ and a host of other electronic marketplaces operate without the trade-through rule, and there hasn't been any clamor there to introduce it. In fact, a lot of people who actually execute trades on a daily basis seem to like the flexibility that the NASDAQ system offers to execute a trade precisely how one wants to. (Although many brokerages have publicly supported the SEC's recent move, arguably for political reasons.) If anything, the trade-through rule is one of several unpopular features of the NYSE (another being its human "specialist" system, almost unique in the western world now, in which real people actually conduct the auctions described above on a trading floor).

This unpopularity is part of the reason why the NYSE has been antsy lately about the growing draw NASDAQ seems to be exercising in the equity market. But instead of changing their own rules to conform to what traders seem to want, the NYSE has found it easier to goad a compliant SEC into making the unpopular rule the law of the land.

Despite the polemical tone of the description above, the Cranky Economist is actually agnostic about the merits of the trade-through rule per se. Perhaps brokers really do find it useful. In which case, we would expect to see them taking their business to the NYSE trading floor. But that's just the point -- we should let the market decide this one.

A shorter trade post

The Cranky Economist feels especially prolific today, having churned out the inordinately lengthy posts below. So before I head to lunch, I will just leave you with a brief comment on a trade story that caught my eye today.

India is upset with European non-tariff trade barriers. Good for them. This is an important issue, and highlights a trading sin the Europeans have been getting away with for too long.

Tariffs and other obviously craven barriers to the international flow of goods are increasingly passe in this WTO world. What's a protectionist to do? Construct an elaborate network of regulations under the guise of "consumer protection" in order to keep foreign goods out.

One obvious example of how the Europeans love doing this is the persistent angst over genetically modified (GM) food. Genetic modifications to enhance disease- and pest resistance and increase agricultural production are the best hope for many third-world farmers to start lifting themselves out of poverty. Just remember the miracles that hardier strains of rice worked on the Indian economy decades ago. GM food is safe -- try as they might, opponents have been able to produce not a shred of evidence that GM food is a health risk, and we have been consuming it for years in America. But in Europe, an alliance of eco-apocalypticists, farmers and cynical politicians has succeeded in blocking the import of GM food. Publicly they argue that they are "protecting consumers." But since there is no evidence that there's anything for the consumers to be protected from, it seems much more likely that they are actually protecting domestic European producers.

So kudos to India's commerce and industry minister for calling Germany's economics and labor minister on the issue. It's about time Europe stopped using sham safety concerns to impoverish the developing world.

No option but to comply

That's the situation in which IBM and other tech companies now find themselves as they begin to expense stock-option compensation plans.

Yeah, the Cranky Economist knows we've all been down this road before, and have spent many sleepless nights pondering whether we should or shouldn't expense these options. But I wasn't blogging then. So I'll take this opportunity to throw in my two cents on why this expensing rule is a bad idea.

There are two reasons. First, it's not clear that these options are really an expense. Second, it's crystal clear that it is impossible to assign a meaningful value to them.

Why are they not an "expense"? Take a step back and consider what an option is. For those of you not in the know, it is a contract that gives the holder the right to trade a stock at a particular price (called the "strike price") at a particular time. (The options under discussion are "calls" that let the bearer buy the stock; a "put" lets you sell it.) Call options can be a veritable gold mine if the strike price is less than the market price (the "spot price") on the day the option is exercised. You buy the stock at the cheap strike price, and turn around a sell it for the higher spot price.

But how is this an "expense"? It's not a cash outlay on the part of the company in the way that a salary or benefits are. The contracts are most often fulfilled by creating equity on demand as employees opt to cash out their options (most options can be exercised at any time before expiration) -- that is, it just prints up more stocks that it then sells at the strike price instead of the spot price. So the "cost" to the company is that it is selling a portion of this equity at below-market price. But is that truly an "expense"? The company still gets some cash for its equity, even if it gets less cash than it would on the market.

Certainly nothing in life is free -- these options are an "expense" for someone. That someone is existing shareholders, who find their equity stake (and thus their earnings per share) diluted by the creation of extra equity to fulfill these contracts. Which is why information about options-based compensation has always been included in financial reports, even if it has not been included in profit and loss calculations.

One reason it isn't included in those calculations is the second objection I noted above: It is difficult, if not impossible, to value options in any meaningful way. The value to the employee is obviously the difference between the strike price and the stock price on the day the option is exercised. But how do you guess today what that value will be at some indeterminate point in the future? In markets for traded options, traders can guess (but only guess) at the value of options contracts, and the market will generate an average guess that is as good as any. But how can you begin to guess at the value of an option that isn't traded? Any result you come up with will inevitably be arbitrary. Thanks to the new accounting rules corporate guesses will be arbitrary in a uniform way. But a uniform rule requiring every accountant to aver that the earth is flat doesn't lead to any meaningful revelation about the nature of the cosmos.

So, thanks to the public's combination of confusion over, and revulsion at, how options were used at Enron, we are now left with a regulation that, curiously, will bring less transparency and comprehensibility, not more, to corporate balance sheets. Well done.

How big should Fannie and Freddie be?

Not as big as they are, says Alan Greenspan. In testimony to the Senate Banking Committee today, the Fed chairman argued that increased regulation isn't enough -- Fannie and Freddie are dangerous not just because they're sloppy or corrupt, but because they're enormous. The only solution is to force them to reduce the size of the investment portfolios they hold.

Now, Greenspan didn't utter the "p" word, so you can't discern any particular attitude towards privatization from his remarks. And some might argue that his emphasis on better regulation implies that he thinks Fannie and Freddie should continue operating under their congressional charters.

But clearly he is deeply skeptical about their current business models, and in particular about their argument that holding any sort of portfolio in their own mortgage-backed securities is beneficial for mortgage markets:

A recent study by Federal Reserve Board staff found no link between the size of the GSE portfolios and mortgages rates. The past year provides yet more evidence, with GSE portfolios not growing and mortgage spreads, as well as the spread between yields on GSE debentures and Treasury securities, declining further. Indeed, while GSE stock prices have fallen substantially and turmoil has continued at the GSEs, mortgage markets have functioned well.

As far as we can tell, GSE mortgage securitization, in contrast to the GSE's portfolio holdings, is the key ingredient to maintaining and enhancing the benefits of the GSEs to homebuyers and secondary mortgage markets.

Translation: If Fannie and Freddie had just stuck to doing what they were originally intended to do, we wouldn't be here today.

The other notable aspect of this testimony is Greenspan's emphasis on the importance of giving the GSEs' regulator receivership powers. Even though investors and creditors assume it would never happen, there is some legal provision for GSE insolvency. However, those rules are weak and vague. The crux is that currently the Office of Federal Housing Enterprise Oversight (OFHEO) would only exercise conservatorship powers. A conservator can only step in to freeze everything in an insolvent company until things settle down a bit. But for a while now, OFHEO has been asking for receivership powers, which would give it the ability to actually liquidate a GSE if it ran into trouble.

Granting receivership power to OFHEO is viewed as an important move in many circles, although its precise effects are still hotly debated. The most compelling arguments in favor (all of which the Cranky Economist buys, to one degree or another) say that the move would telegraph to the markets that Congress really is willing to contemplate allowing one of the GSEs to go under in an orderly fashion. This message would countervail the "implicit subsidy" markets think is there right now, and might lead to more market discpline of the two enterprises, thus reducing the risk that OFHEO would ever need to use its receivership powers. Particular if the move came as part of a larger legislative effort to clarify exactly how one of the enterprises would be allowed to fail if they ran into trouble, it could introduce more certainty into the marketplace, and we could all sleep better at night.

The main argument against is that, by tinkering with the "implicit subsidy," granting receivership would only make the markets more skittish precisely because it would be evidence that the Congress was contemplating the failure of either or both of the GSEs. This doesn't make a lot of sense to me. The markets ought to be skittish already -- recent accounting woes have provided ample proof that the GSEs may be on shakier ground than anyone appreciates. And that "implicit subsidy" is just that: implied. Although investors assume the government would do something to bail them out of their irresponsible investments, no one knows precisely what. Creating receivership powers would create more certainty, always a good thing in financial markets.

So those are the big Greenspan stories. He favors forcing Fannie and Freddie to reduce their internal investment portfolios. And, just as significantly, he favors granting OFHEO receivership. Not bad for a morning's work.

Gird yourselves...

...for a proxy fight. MCI has yet again jilted Qwest in favor of a match with Verizon.

The Cranky Economist is on the record saying I think this is probably a wise move on the part of MCI's board, if you happen to care about the long-term prospects for creating a stable, competitive company. But will the results of a proxy fight (in which Qwest tries to bypass the MCI board by taking its case directly to the shareholders) reflect that judgment? Hard to say. When Qwest is offering you a lot more cash for your MCI shares, it's not hard to imagine how you might start taking more interest in the short term than in the distant future.

Regardless, it's sure to be the entertaining business story of the spring.

Greenspan on gas

Alan Greenspan gave a speech today on the current energy market. And while the media reports I've seen so far have played up the more negative aspect of his remarks, overall he seems fairly upbeat (at least, as upbeat as an economist can be).

The money quote comes right at the end:

We are unable to judge with certainty how technological possibilities will play out in the future, but we can say with some assurance that developments in energy markets will remain central in determining the longer-run health of our nation's economy. The experience of the past fifty years--and indeed much longer than that--affirms that market forces play the key role in conserving scarce energy resources, directing those resources to their most highly valued uses. Adequate productive capacity, of course, is driven also by nonmarket and policy considerations.

To be sure, energy issues present policymakers and citizens with difficult decisions and tradeoffs to make outside the market process. But those concerns, one hopes, will be addressed in a manner that, to the greatest extent possible, does not distort or stifle the meaningful functioning of our markets. We must remember that the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion. Moreover, they stimulate the research and development that will unlock new approaches to energy production and use that we can now only scarcely envision.

Which means that, as painful as high oil prices may be in the short term, we should not believe that the age of $50 oil is a harbinger of economic armageddon.

I smell a statistical rat

From the AP (via Yahoo! News), word that "community activists" are suing Citibank and Bank of America for discriminatory lending practices. The banks allegedly charge higher mortgage rates to blacks and Hispanics than they do to whites.

The banks' defense is that the plaintiffs' statistics aren't telling the whole truth. And this is quite probably true. I have actually spent about a half hour hunting around for the original data set on which these charges are based. And as far as I can tell, it doesn't include relevant non-race information that might be useful in determining whether racial discrimination was really at work here. Among its omissions are the FICO credit scores and data on debt-to-income rations that the Citi spokesman cites in the AP article.

The plaintiffs certainly don't seem bothered by this shortcoming. On its website, the Inner City Press describes in broad strokes its method for conducting its analysis. Not a single mention of potential "mitigating factors."

Which is truly unfortunate. It is certainly worth considering the causes of any racial disparities in home ownership (assuming such disparities exist). After all, for most families a home is the single largest asset, and home ownership is still, as it always has been, a vital step up the socio-economic ladder. So if minorities aren't enjoying equal access in the housing market, it's a potentially large problem.

But if it turns out that the disparities in mortgage rates suggested here are a result not of bankerly racism but of widespread credit-rating problems, what good is suing the banks going to do? Wouldn't it be more effective to focus on better financial education in the schools, to teach people how to manage credit wisely enough to earn a credit score that will qualify for low mortgage rates?

As I say, I have no idea whether there truly is a problem, and, if so, what is causing it. But my suspicion is that this lawsuit is barking up the wrong tree, no matter how many headlines it grabs.

Talk is cheap...

...but airplanes aren't. Which is how the U.S. and EU come to be locked in a trade dispute over subsidies to aircraft makers Boeing and Airbus. Although the two sides had cut off negotiations over the dispute a few weeks ago, Reuters reports that the two parties now appear willing to come back to the table.

The Cranky Economist will just take this opportunity to point out that even though both companies do indeed receive various forms of government support, Airbus is far and away the bigger culprit here. Boeing's "subsidy" comes mainly in the form of government contracts that pay (at least in theory) for services rendered and equipment provided. Airbus, on the other hand, enjoys favorable borrowing rights and other forms of direct aid to its commercial aircraft business, money that buys nothing more than continental pride.

Good morning, Fannie Mae!

Is it just me, or did I just blog about Fannie Mae late yesterday? I did. But the Cranky Bad News just keeps rolling in. At least, it's bad news if you're a coddled GSE executive who's used to ruling your roost with nary a contrary word from anyone else.

MarketWatch reports that later today the chairman of the House subcommittee with jurisdiction over Fannie and Freddie will introduce legislation tightening regulation on the two GSEs. (I'll be keeping my Cranky Eyes open for the actual text of the legislation once it becomes available.) This move comes as the subcommittee prepares for yet another GSE hearing set for tomorrow.

Of course, in a perfect world they would be talking about privatizing the mortgage companies instead of regulating them more heavily. Then again, if bears were bees and bees were bears, we wouldn't have to climb up all these stairs (quoth Milne). Since privatization isn't likely to happen any time soon, we should take what we can get. And that happens to come in the form of tighter regulation.

Tough call at MCI

Be glad you're not an MCI board member.

First, Qwest ups its ante, and shows that it has the cash to back up its bid.

Then, Verizon warns that it won't up its bid again if MCI accepts Qwest's latest offer.

Should MCI go with Verizon? Probably. Will they? Your Cranky Guess is as good as mine.

No rest for the weary...

...Fannie Mae investigator. Just when you thought it couldn't get any worse for the government-sponsored housing enterprise, we discover that regulators have stumbled across even more potential accounting irregularities.

Some of the emerging details on this story suggest that it could get really rocky (and the Street is taking the hint; Fannie's price is down around 5 percent just today). It appears that Fannie created several of a certain type of "subsidiary" business entity to issue and sell the mortgage-backed securities that form the core of the GSE's business model. It could then use a particular section of the accounting rules to define these "subsidiaries" in such a way that their assets and liabilities would be kept off Fannie's books. This raises the specter of a potentially enormous problem:

Fannie's core business is (supposed to be) buying mortgages from banks and then bundling those mortgages into securities (mortgage-backed securities, or MBSs) that can be traded on the market. This is a risky sort of asset, however -- it disappears as soon as the underlying mortgage is paid off. And a unique feature of the American mortgage market is that homeowners can pre-pay the principal with no penalty. (This is most likely to be a big problem in periods when interest rates are low, leading many homeowners to refinance.) So Fannie, or the Fannie "subsidiary" issuing the MBS, also sells a form of "insurance policy" to the MBS purchasers, guaranteeing a certain minimum return on the investment.

What that means is that Fannie, through the operation of these trusts, was prone to significant interest-rate risk. How much risk? We'll have to see how that was accounted for (or even if it was accounted for in one place). There are ways to create sophisticated portfolios of derivatives to hedge against these risks (in fact, the structure of other hedge portfolios led to an earlier round of embarrassing accounting revelations for Fannie).

Which leads to this list of some things to look for in the news reports in coming days:

First, how effectively were these units hedged? Strikes me as a reasonable question, since, if Fannie was so eager to keep these trusts off the books, one wonders how aggressive they were about going through the trouble to hedge.

Second, how were those hedge positions accounted for? A very interesting question, given Fannie's apparent predilection for sloppy hedge accounting.

All of which matters because it is precisely this interest rate risk that would tip Fannie (or Freddie, for that matter) over the edge into collapse.

My Cranky Prediction: We haven't seen nearly the end of this story yet.

"GM" is for "good management"?

Since I've been keeping a quarter of an eye on General Motors lately, I would be crankily remiss if I neglected to mention today's management shake-up at the struggling automaker (from Reuters).

However, I'm no expert on the world of making and marketing horseless carriages, so I will leave it to others to speculate on whether this move will succeed in bringing GM back from the brink of junk bond-dom, or whether it is merely re-arranging deck chairs on the Titanic.

Perhaps this post will generate the third-ever comment on this blog from someone I don't know?

What European economy?

Yes, there is a European economy. And according to this AP article (via BusinessWeek), it's not doing so well at the moment. The latest forecast is for continuing abysmal growth rates.

The interesting thing about this report is all the excuse-making. From afar, it's pretty obvious that labor-market rigidities, high taxes and only sporadic commitment to internal market liberalization (for example, there is still not a single EU market for banking services) are all to blame for the EU's stagnating growth. And, in their more honest moments, the Europeans themselves might admit this is true. Just witness the latest commotion in Germany about labor market reform there.

However, the most popular scapegoat at the moment is the Euro-dollar exchange rate. Now, they're getting hammered. One of the Cranky Relatives is involved in a European venture that exports to the U.S., and it's important not to underestimate the amount of damage that the weak dollar is doing to these businesses (a weak dollar discourages Americans from importing by making foreign goods seem relatively more expensive).

At the same time, the American economy has always weathered a strong dollar remarkably well. In fact, the American economy seems to be able to thrive regardless of the relative value of the currency (or at least, has been doing just fine lately; what would happen if the greenback continues to slide is another matter). That experience suggests that the European pain in the face of a strengthening currency is symptomatic of other problems.

The big one that presents itself is weak domestic (meaning, inside the euro-zone) demand. The U.S. has been enjoying improved competitiveness of its exports on the world market thanks to the weaker dollar, but back in the halcyon days of dollar strength, we could rely on enormous domestic demand to power the economy. It was the compound effect of years of economic flexibility and growth that created an economy large enough and strong enough to fuel its own growth.

But Europe is almost completely dependent on foreign demand? Even with all its hundreds of millions of inhabitants it can't sustain itself through a period of euro strength?

The point of which is that there's more to this story than meets the eye.

Sex

No, silly. This is a family blog. Although that cheap old headlining trick has gotten your attention.

Of course, even if this is a family blog, you have access to plenty of smut on your television, at least if you believe Alaska senator and nominal Republican Ted Stevens, chairman of the Commerce Committee. Be not afraid (of filth on TV), however. The senator might be willing to do something about it.

The real question is, what is it that's offending us? Setting aside for the moment aberrations like Janet's "wardrobe malfunction" (what a terrific phrase!) or the flap over that "Desperate Housewives" NFL ad, my Cranky Sense is that TV, even on cable, is already pretty clean. Sure, there's plenty of late-night filth on HBO and Cinemax, but that comes at a time when the children of parents responsible enough to use blocking technologies will be in bed already anyway.

So what, precisely, are we trying to clean up? If Congress succeeds in raising the limits on indecency fines, we'll discover that Janet Jackson will start conducting more careful interviews for prospective costume designers. Can we ask for anything more?

And how much will any new solution cost? Because we'll pay for it in higher cable and satellite bills.

First SAL of April

Good morning, all. After a hectic day yesterday, I only posted once. But fear not, I'm back today with your weekly dose of Saturday Assets and Liabilities, and will resume a normal blogging schedule on Monday.

Assets

The Pope. As his health fades rapidly this weekend, thoughts are already turning to the legacy of his pontificate. Just look at this representative article from the Washington Post. The most important paragraph runs thusly:

The Polish-born John Paul came to the papacy at the height of the Cold War in 1978 and presided during the West's triumphant defeat of communism. At the same time he emerged as a tough critic of global capitalism and defender of the poor, reaching out to the Third World far beyond any previous prelate. He drew large and often emotional crowds during his many tours in Latin America, Asia and Africa. He also opened dialogues with other religions.

He understood that the tyranny of Communism was not the way to help the poor. And he understood that tyranny was inherent in Communism itself, that it wasn't just a Soviet aberration (an understanding that led him to quash pro-Marxist "liberation theology" in Latin America). But at the same time, he recognized that, even if capitalist free markets were the best hope, they could only work if the participants were mindful of a higher authority. As I interpret them, his pronouncements "against" capitalism were not against the system itself. Rather, he preached against idolatry, against transforming free markets themselves into a god and then clinging to belief in them as an excuse for ignoring the poor.

A good point, that, and an important reminder for all of us who can sometimes let our respect for, and fascination with, markets lead us to forget that there are people behind the numbers.

Liabilities

Goldman Sachs. A GS analyst on Thursday sent oil prices skyrocketing after issuing a report in which the analyst speculated that oil prices could hit $105 in the not-so-distant future. This even as prices had been falling somewhat in the few days leading up to the announcement. Several things seem odd about this story. First, that $105 is so much larger than any other estimates currently floating around. Meanwhile, as one competing analyst opines in both these MarketWatch articles, GS's large oil derivatives positions might have, er, influenced what sorts of assumptions they might have used to reach certain conclusions. It's impossible to say whether there's any odor about this, but it certainly does seem strange.

News from that other housing GSE

The Cranky Economist has been fascinated by management woes at Fannie Mae for months now. Not only is it a captivating business story, but it's a classic Washington scandal-in-the-making, too. It's all there -- dodgy accounting, fat-cat executives, political connections. Who could ask for more?

But there is another housing GSE (government-sponsored enterprise) that has had a scandal of its own. In 2002, Freddie Mac announced that, thanks to antiquated accounting procedures, it wasn't sure exactly what its earnings were. This was a much more boring scandal, since it seemed to stem more from incompetence than from crass criminality tinged with venality. And in this town, incompetence isn't exactly a rare commodity.

All of which serves as a prelude to the news (from AP via Yahoo! News) that Freddie's 2004 profits took a major hit. A look at exactly why 2004 results were so dismal suggests that the loss could augur well for the future.

Why is that, you ask? Because a lot of the drop in profits arises from two factors: Increasing capital reserves to acceptable levels, and, less significantly, putting the finishing touches on a brand-spanking-new accounting system that will soon allow Freddie to file statements on time for the first time in three years. This, in the GSE world, is what passes for progress.

The long and the short of it is that Freddie appears to be cleaning up its act, and will probably return to some semblance of normalcy towards the end of calendar 2005. Which I suppose is good news. In a perfect world, Fannie and Freddie would both be privatized. But in the meantime, it's not unreasonable to hope that they would behave themselves like real, responsible companies. Freddie, at least, seems to be trying.