Posted by
Michael Avari on Monday, October 05, 2009 1:27:59 PM
It was not a good week for fans of central planning.
On the eve of the 20th anniversary of the fall of the Berlin wall this November, Angela Merkel, who grew up in East Germany, led her center-right coalition to reelection this week. Free of the gravitational pull of the defeated left with which her government had to collaborate hitherto, Merkel wasted no time in announcing business tax cuts after her victory. Not to be outdone in Europe, French President Nicolas Sarkozy announced a $15 billion business tax cut two days later [1]. Are you listening, Washington?
This week, too, China celebrated the 60th anniversary of Communist rule and the irony could not have been more piercing. Hanging on to the vestiges of Communist tradition, the Chinese saw fit to parade arms proudly, some newly displayed to the West, which they acquired with the yield of their recent conversion to capitalism. Coexistence never had a more profound meaning.
Back in the USA, General Motors, 80% owned by government, reported its sales dropped 45% in September [2]. The bad news did not stop for GM as it also announced plans to shutter Saturn after talks to sell the division failed. Chrysler, which was owned by a private equity firm and which was forced into bankruptcy by President Obama mainly to protect UAW jobs [3], saw sales fall 42%. Ford, the only American company free of government interference saw only a 5% decline. It is tempting to infer a negative correlation between government management and business results.
Another calamity of government machinations, Bank of America, which was strong-armed into absorbing Merrill Lynch by President Bush’s Secretary of Treasury, Henry Paulson, and Fed Chairman Ben Bernanke, announced that its Chief Executive would step down [4]. Kenneth Lewis’ job was threatened by Paulson and Bernanke when he expressed doubt about the merger one year ago. They should have listened to him. The Wall Street Journal reported that Bernanke, Treasury Secretary Timothy Geithner, and even Rep. Barney Frank may have a say in Lewis’ successor. It is clear now that the peril of government-industry “partnership” is a dilution of the interests of shareholders.
Meanwhile, one year after the Bush administration put Freddie Mac and Fannie Mae into conservatorship on behalf of the taxpayer, delinquency rates reached a record 3% to 4% of their portfolios [5]. It wasn’t suppose to work that way, we were told. More disturbing, the Federal Housing Authority’s capital cushion is down to only 2% of its loan portfolio—smaller than many banks registered when the financial crisis erupted last year [6]. The FHA, a government agency, insures mortgages owned by the other two government agencies. Perhaps government thinks it can manage risk better than the private sector.
Finally, as unemployment reached its peak near 10%, Robert Zoellick, President of the World Bank, warned that the dollar may lose its place as a reserve currency, unless the US managed its debt [7]. These seemingly disassociated events reveal another negative correlation with which we should be concerned, between the size of government, especially when financed by a debt that is approaching 100% of GDP, and business activity that supports a strong dollar.
With all this bad news, one would think lawmakers would be rushing to expunge the economy of failed centralized husbandry. Not so. Impenitent liberals are calling for—what else?—another stimulus.
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[1] “Sarkozy hands business €10bn tax cut”, 29 Sep. 2009, Financial Times, http://www.ft.com/cms/s/0/4c0da02a-ad0d-11de-9caf-00144feabdc0.html
[2] “Cruel September for Car Makers” 2 October 2009, The Wall Street Journal, http://online.wsj.com/article/SB125440186148556087.html
[3] McCullagh, Declan. “Chrysler Bankruptcy Exposes Dirty Politics”, 7 May 2009, CBS News, http://www.cbsnews.com/stories/2009/05/07/politics/otherpeoplesmoney/main4997900.shtml
[4]”Bank of America Chief Resigns Under Fire”, 2 Oct. 2009, The Wall Street Journal, http://online.wsj.com/article/SB125434715693053835.html
[5] UPI, http://www.upi.com/Real-Estate/2009/09/25/Freddie-Macs-Delinquent-Loans-Rise-for-28th-Month/4731253892039/
[6] “Subprime Uncle Sam”, 29 Sep. 2009, The Wall Street Journal, http://online.wsj.com/article/SB10001424052970204488304574428970233151130.html
[7] “World Bank Head Sees Dollar’s Role Diminishing”, 28 Sep. 2009, The New York Times, http://www.nytimes.com/2009/09/29/business/economy/29dollar.html