Financial Post - Diane Francis

Californication. The Terminator

Diane Francis — Mon, 06 Jul 2009 11:36:00 GMT

Governor Arnold as "The Terminator": life imitates art in Sacramento

The newest Terminator role casts the Governor in the role of paying off the state's debts with IOUs to creditors, big and small, rich and poor. This is because the spendthrift California taxpayer wants no services cut, except civil service salaries, and no tax hikes to pay for growing costs.

The state, bigger economically than Canada, Brazil or Spain, is good for the chits but people need cash flow asap. So the factors will have a field day. But here are some other questions posed by Post reader Mark Smyth for Californians to answer:

What is California's discount rate on its paper these days?

Which mutual fund, private equity outfit or Wall Streeter is going to be the first to set up a trading desk for California IOUs?

At what discount?

Can I buy them off anotheer vendor who is owed money by California?

If I set up a trading desk for California IOUs, can I get stimulus money from Washington to hire traders and pay them success/retention bonuses?

Is MIchael Jackson's Neverland been repoed and is it collateral?

Will the Chinese buy "Californias" instead of U.S. T-bills?

If the Chinese or others decide to buy the Cali IOUs instead of T-bills, will the feds have a Chapter 11 moment?

Immigration cutbacks essential

Diane Francis — Fri, 03 Jul 2009 12:39:00 GMT

It’s the issue that dares not speak its name, but the time has come to consider curbing immigration during this emergency period, except to fill skilled trades vacancies.
Canada hosts more immigrants and refugees per capita than any other developed country, but as unemployment will continue to climb and as many workers need retraining, it’s time to cut back on the number of newcomers Canada admits.
Immigration is politically incorrect to question, much less criticize. This is because of many myths and also because the immigration lobby is embedded in all parties and provinces. The lobby includes the politicians, lawyers, consultants and special interest groups that make hay off the flow of people into the country.
But setting aside politics, just ask yourself: would a company keep hiring workers and increasing overheads if it had to lay off people?
Similarly, nations are like corporations and immigration departments (not humanitarian refugee policy) should function like company personnel sections. This means that for the sake of all involved, hiring should be based on filling otherwise unfillable positions.
By the way, this would mark a return to Canada’s pre-1986 immigration policy. In 1986, the government of Brian Mulroney broke with several decades of successful strategy when it unilaterally decided that a permanent quota of 250,000 immigrants per year was the way to go (and permitted family reunification in the broadest sense as a way to meet the quota).

Forward to yesterday
A return to the previous policy is needed. Entries were based on economic and specific labor market conditions in Canada. This helped the economy run better and insured immigrants jobs in their fields.
The Department of Manpower and Immigration would allow 60,000 immigrants in during tough times and more than 120,000 during good times. (Refugees are a different policy.)
I arrived in the late 1960s under this regime and was offered plenty of work as others were too who immigrated. I believe a nation which invites people to leave home and migrate has a responsibility to insure that there are jobs for all. I also believe that a nation which invites people should make sure these newcomers are not a burden to existing Canadians because they cannot find work.
Currently, there are 1.55 million Canadians out of work, immigrants and native-borns. The national average is 8.4% unemployment, Ontario is 9.4% and climbing (where 60% of all immigrants go) and more than 13% in some parts of Atlantic Canada.
It is foolish, if not reckless, to continue to let 250,000 people into this economy in its current state.
There are tens, if not hundreds, of thousands of Canadian students hitting terrible job markets these days and for the foreseeable future. There are tens, if not hundreds, of thousands of Canadians who need bootstrapping economically. There are tens, if not hundreds, of thousands of Canadian workers who are unemployed, soon-to-be-unemployed or under-employed who need to be retrained in order to fill New Economy or growing jobs markets.
The new reality is that the world has taken a couple of giant steps backward and Canada, while in relatively good shape, has a lot of pain to suffer for the next few years.
I have long argued for a return to the pre-1986 point system, based on filling jobs with people who can do them. This served Canada exceedingly well, but the current blind quota system does not and will simply add to the country’s financial woes. Now’s the time to revamp immigration policy.

Madoff deserves 150 years

Diane Francis — Mon, 29 Jun 2009 18:33:00 GMT

You gotta love the Americans. Their Puritanical streak shows when it comes to locking up rich bad guys like Bernard Madoff who just landed a 150-year sentence for his gigantic swindle.
It may seem to be overkill for a guy like Madoff who’s already 71 years old, but U.S. District Judge Denny Chin disagreed.
"Here the message must be sent that Mr. Madoff's crimes were extraordinarily evil and that this kind of manipulation of the system is not just a bloodless crime that takes place on paper, but one instead that takes a staggering toll," Chin said.
So Bernie, the man who MadeOff with Billions, will never get out of jail, which is as it should be.
What the Puritans south of the border understand is that white collar crimes are as violent and egregious as murder. In this case, as in others, individual victims commit suicide, lose their health, have their lives destroyed, become unable to support dependents, suffer family breakdown or are put under unjust strain. Victims, which are charities or foundations, are bankrupted or damaged.

Bernie the baddie
But Madoff is more than just a sociopath. Too much of this story doesn’t hang together and he was too functional in other aspects of his existence.
That’s why I think this may be more about money laundering and tax evasion than about fraud. Most don’t realize that he pleaded guilty to money laundering too.
If so, then some Madoff “victims” may be perpetrators.
Here’s my thinking:
It is bothersome that investigators have been unable to find records of any trading for years. If there had been trading, and massive losses, then it would be arguable that he started off legit then got into trouble and was forced to begin his Ponzi.
But the fictitious nature of this long-term scam may mean it was money laundering combined with a Ponzi.

Here’s how money laundering would have worked:
Unsavory people, from drug cartels to gangsters or greedy tax evaders, are forced to keep their ill-gotten gains hidden from police or tax authorities in dirty money havens. In order to get out their money, so they can spend it, they hire people like Mr. Madoff to “clean” their cash.
On paper, they “invest” huge sums in capital in Madoff funds in return for 10% a year in dividends. But only the 10%, plus fees for Madoff, are transferred to Madoff so he can pay the crooks in a taxable jurisdiction.
In other words, the crooks pretend to give him millions to invest. He pretends to invest it. And he collects big fees for transferred to them 10% every year of their hidden capital.
Laundering money is not for the faint of heart by the way. These people are often very dangerous and may explain why some of Madoff’s biggest feeder-intermediaries are known to police and another one actually disappeared from Vienna immediately after the gig was up.
This speculation is not to say that there aren’t thousands of legitimate victims such as Holocaust survivor Elie Wiesel and many worthwhile charities.

So here’s my theory.
Word of Mr. Madoff’s 10-per-cent returns spread like wildfire, and everyone wanted to be an investor. A few years back an acquaintance of mine in New York City, plus others she knows, approached him but were refused by Madoff himself.
“Trust me, you don’t want to be part of this,” he reportedly said.
Unfortunately, this is now an open and shut-tight case. The truth shall never come out because my bet is that Mr. Madoff will take it to the grave. Or has been told, by some investors, he has to.

Economic recovery: 2011 maybe

Diane Francis — Fri, 26 Jun 2009 17:21:00 GMT

John Kenneth Galbraith once famously wrote that the purpose of economic forecasting is to make astrology look legitimate.
It’s worse than ever as the range of guesses hits the headlines in the past couple of weeks from multilateral organizations to bank economists.
Crystal-ballgazing has never been more perilous because the world has so many moving parts operating at the speed of light.
For most, the only reliable barometers are what customers are saying and doing as well as what employers. This is because customers and employers are not always right, but they are never wrong. Their opinions, spread by word and deed, become self-fulfilling to a certain extent and should be heeded.
And the consensus seems to be that the bottom has not been reached overall and the world is only at the end of the beginning. That is why unemployment and bankruptcies are tracking upwards and will continue to do so for many months.

Slow to get it
The entire world held its breath for months after the catastrophe hit in September 2008. Suppliers went unpaid by customers but did not complain. When orders dried up, they hunkered down hoping for an uptick in a few months. They burned through their retained earnings to keep afloat, slow to lay off or otherwise downsize. Retailers were tardy in trimming inventories. Manufacturers and distributors waited until some signs of recovery before deciding what products or services to abandon or slash. Consumers cancelled trips if they could and postponed trading up houses, condos, appliances or cars.
Then spring sprung and tough decisions have led to more job losses and bankruptcies than before. And this may increase for some time, six months if one is optimistic and longer if not.
Businesses holding the bag cannot do so any longer. Some cannot face the prospect of a few more years of hardship so they go under and/or push their customers into bankruptcy.

Government giveth and taketh away
Another reason why green shoots have not led to much of a pulse in economic activity is that, despite trillions in bailouts and government initiatives, many government stimulus packages are mislabeled, have long lead times, been bogged down in red tape or their effectiveness been negated by premature tax hikes.
There is government tax-creep, and tax clouds looming, across North America, thus dampening some gains made by over-spending.
In Canada, Toronto’s garbage workers are striking for more money at a time when everyone else struggles. Ontario is harmonizing its retail tax with Ottawa’s which will mean more tax revenue down the road. Florida and dozens more states have dramatically hiked taxes on cigarettes, gasoline, liquor.
At the same time, there are surprises. Canada’s real estate market hasn’t taken a massive tumble which means that the net worth of most Canadians (if they own homes) has not taken a major hit. This may also be due to the fact that the banking system is okay and the commodity price boom, which lasted from 2003 to 2008, left billions in the wallets and bank accounts of Canadians.

More trouble looms
That aside, things will worse somewhat in Canada is probably as good a guess as any. Here are the statistics:
    The Americans have been in a recession since December 2007 and twice as many Americans, or 14.5 million, are unemployed, bringing the national average to 9.4%.
    The recession for Canadians began in October 2008 and the jobless numbers have jumped by 23% to 1.55 million or a national rate of 8.4% unemployment.
    The single biggest problem is Ontario’s auto sector, upon which 400,000 jobs depend. Ontario’s unemployment is now 9.4% or the same as the U.S. rate.

Iran: The Pink Revolution

Diane Francis — Tue, 23 Jun 2009 12:07:00 GMT

Neda, female shot by a sniper during riots, dies on Tehran street (AFP Getty Images)

This photograph, of a young Iranian woman alleged named Neda, has become both a rallying cry and the symbol of oppression by Ayatollahs and what's wrong with Islamic or other ultra-religious countries like Iran. She was gunned down walking on the street after leaving her car which was overheated in stalled traffic due to the protests.
The facts are that countries are only as successful as the rights they grant to their females. Equal education levels for females always result in lower birth rates, two-family incomes, savings, middle-class growth and greater economic prosperity for a society. This is only common sense: Any society which represses and disenfranchises its females operates with only half its economic IQ and cannot compete or prosper against countries, like China or developed nations, which offer opportunities to both sexes.
What's interesting is that this may go down in history as the first full-scale Pink Revolution. True, there are many young men involved in protests who have also become victims, but the women are standing shoulder to shoulder in a way never before seen in a society that mistreats them so severely.
This is why the genie has left the bottle and Iran will never be the same irrespective of what the current regime decides to do. That's because you cannot repress half a population, you cannot keep them in the dark, you cannot fool the rest of the world.

Bloodshed is likely
Unfortunately, this current rebellion may end in huge tragedy. It has one of two ways to go: like Ukraine's Orange Revolution or like China's Tiananmen Square rebellion. The Ukrainians successfully turned to the streets, then the courts and international community, to overturn a rigged election. The Chinese took on the communist elite in the hopes of bringing about human rights and democracy but thousands were slaughtered. Even so, reforms followed and the rest is, as they say, history as China manages an unprecedented openness, growing democratic practices and free enterprise.
So how will Iran go?
Ukrainians triumphed because their military and police sided with the cause. I was in Kiev for three weeks during the tensest days of the Orange Revolution as the streets were filled, riot police were everywhere and its Supreme Court deliberated. Every night the country's most decorated general stood on the podium backing the Revolution.
China's attempt failed despite three weeks of standoff between the students in the Square and its sympathetic, conscript army. Eventually, the regime brought in battle-hardened troops from Manchuria to slaughter thousands.

What do the generals want to do?
Iran's outcome will depend on its military. History shows that conscripted armies never murder their own. This means that no matter how much the Ayatollahs threaten they must deliver the muscle to stop the revolution from bringing the country to its knees.
Whatever the outcome, Iran will never be the same. This is a revolution that has been waiting to happen not just in the country but across most of the Islamic world where women are treated as second-class citizens and disenfranchised educationally and economically.
Iran may be the first Islamic country to implode because the country is very schizoid: A relatively secular society controlled by religious fanatics and headed by a country bumpkin President whose holocaust-denials have made him an international scourge. Despite the medieval mentality of the religious elite, Iran educates most of its young women even though it under-utilizes them in the workplace. Young Iranians are free to travel and the diaspora's influence cannot be underestimated.
All of these conditions have led to this enormous clash. Adding fuel to this fire was President Barack Obama's eloquent message to the Islamic world in Egypt recently about female economic, educational and legal disenfranchisement and how that represents a mass human rights abuse and impediment to progress.

Females must back this cause
This is why the blogosphere, twitter network and world public opinion is rallying around the cause of democracy and justice in Iran. This is why Neda is such a compelling symbol for all of us. This is why the women of the world must unite in this cause, and others. We have only our male and religious oppressors to lose.

(Photos: Iranian women fill jails for misdemeanors and Iran's army goose-steps in a show of force)

New world order: first trash U.S. banking

Diane Francis — Mon, 22 Jun 2009 13:00:00 GMT

American opponents to President Obama’s announced re-regulation of the financial sector are billing the issue as capitalism versus socialism or even communism.
It is not the case. This is not the economic version of the Cold War and the search for a new architecture does not mark the death of capitalism.
In fact, free enterprise was nearly murdered by Wall Street, AIG and other reckless financial institutions. They did not meet their defined responsibilities. They bent the law to bypass rules governing their behavior. Many of them abandoned traditional banking and got into the gaming business. And they brought the world to the brink in the fall.
The role of government is appropriate in the financial sector because of its importance to sustaining a healthy capitalist system. Banks, brokers, insurers and others are licensed by the government to benefit society by being astute gatekeepers to success: They deploy their own capital and savings from the public honestly by investing in worthy individuals and entities which will create wealth then repay their loans.

Need a referee to protect capitalism from manipulators
Government’s role is necessary because these institutions, in turn, exist as a result of deposits from the public and shareholders’ money. They have a fiduciary obligation to responsibly use other peoples’ money for the benefit of all. The rules dictate who, what and how they lend or insure as well as how they leverage.
But what Wall Street and the others did was lend, or insure, obscene amounts of money to inappropriate entities for inappropriate reasons without any market discipline. There were no clearing houses for the trillions in derivatives they created, no markets for them, no pricing mechanisms, no leverage restrictions, no capital allocation and no transparency or proper accounting.
They were not players in a free enterprise system but were gamblers rigging the system for their own benefit.
America’s financial punters sank the legitimate and regulated credit system. They collected upfront fees and played fast and loose with credit instruments, witness estimates that the notional value of credit default swaps, and other risky “derivatives”, could total up to US$600 trillion, or 10 times’ the world’s GDP..

Disaster required governments
Last fall, Washington was told by AIG and Lehman Brothers the world was bust. Thanks to trillions in bank bailouts, and shotgun marriages, total collapse was averted.
Months later, there are positive signs. Consumer confidence has a pulse, at long last, but this has yet to translate into spending. Some 53 million people have lost their jobs worldwide and governments are in hock to the tune of trillions. Innocent victims also include the world’s poorest nations and their citizens, including those who ran their fiscal and monetary houses in a responsible way.
Wall Street’s recklessness, and in some instances criminality, has destroyed credit which continues to afflict third party, real-economy businesses from Detroit (which already had problems) to retailers and most others.
The fix will take years, and require international cooperation, and wasn’t the fault of government or the rest of us. So the next time some Wall Streeter or financial sector apologist is blabbing about how re-regulation will kill capitalism, just remember it was so-called capitalist “champions” in pinstripes who destroyed free enterprise by driving it into the wall.

New world order: part II

Diane Francis — Thu, 18 Jun 2009 18:28:00 GMT

The BRIC Group's (Brazil, Russia, China, India) maiden summit in Moscow this week

The bankruptcy south of the border, thanks to America's monetary and fiscal and financial institution malpractice, has erased the unipolar reality and left a power vacuum into which new players are leaping.
The latest entry to help participate actively in the New World Order is a concocted coterie calling itself BRIC, the Davos-derived acronym for the biggest up-and-comers economically: Brazil, Russia, India and China.
The BRIC group has absolutely nothing in common except that they want to have a say in the Multipolar world that's evolved now that the Yankee Hegemon is flat on its economic back. They join the throng which now includes disparate partnerships-for-power such as the original G7 (where Canada is a member even though its economy is smaller than Spain's or Brazil's), the G8 (Russia added to the Big Seven even though it's smaller than Illinois economically), the newly-minted G20 (to deal with the crisis), the G2 (US and China who will eventually run everything), the Cairns, OPEC and have-nots which could variously be labelled as the G50, G100 and G172.

Global government is born
The significance of all this summitry is that the world is rapidly restructuring itself into a system of globalized governance as a result of the meltdown.
The G8 and G20 are functioning like the world's cabinet.
BRIC, OPEC, Cairns and others are functioning like political parties or coalitions formed to further common interests or as countervails to other coalitions.
"This development is equivalent to the industrial revolution and reformation in history," declared Commonwealth Secretary-General Ramleh Sharma at the recent Conference of Montreal. "We are talking about the end of geography. The death of time and distance. A compacting world. Non polarity. This means a demand for social justice, redistribution of rights, opportunities and resources not only in national terms, but international terms."
He said the G172 is as important as the G20 and that the "mainstream will have to take care of the marginalized" just as occurs in developed, enlightened nation-states. He also pointed out that two more clusters of countries -- the Commonwealth and Francophonie -- are organized and represent 50% of the world's population, including some of its poorest residents.
"This means the universal wisdom -- `do unto others as you would have them do unto you' -- is now the ethic for global government," he said.

A new global vocabulary
What this compaction or globalization will eventually mean is:
Poorer nations cannot be ignored but will be regarded, like our national "ghettos" or slums, as places where bootstrapping by wealthier citizens is needed.
Dangerous or failed states cannot be ignored but will be regarded, like our dangerous neighborhoods, as places where police must patrol vigorously and investments/spending to help local residents must be undertaken.
Rich countries will be regarded as the world's "good neighborhoods" where people can contribute taxes or charitable donations to less fortunate countries in order to keep the world safe as well as to help improve global living standards.
This level of collaboration may seem naively optimistic but international cooperation took a giant leap forward after the last catastrophe, the Second World War, when rich and poor allies forged a new world order that rebuilt devastated nations in Europe and elsewhere and vastly improved living standards for 60 years.
Now the unprecedented destruction of wealth is starting to coalesce the world's leaders and global initiatives designed to extend human justice and economic opportunity to hundreds of millions more people for another 60 years.

Obama and new world order: Part I

Diane Francis — Wed, 17 Jun 2009 15:44:00 GMT

The world's fire-fighting has succeeded in preventing the flames from spreading following the meltdown of Wall Street then the world's economy. But the next "attack" could be worse unless there is rigorous fireproofing going forward among all nations and their banks.
President Obama announced sweeping regulatory changes today but international reform is necessary.
To mix metaphors, a new financial architecture -- involving regulation -- must be created to fill the oversight vacuum in financial services that contributed mightily to the crisis.
International Monetary Fund Managing Director Dominique Strauss-Kahn noted last week at the Conference of Montreal how "striking is the level of international cooperation” but suggested that forging lasting reforms will be needed but difficult.
The interdependency worldwide is now apparent.
"It all started in housing in the U.S. then we learned there was linkage between the financial and real economy," he said. "Now we must worry about country failure and need an early warning system."

What next?
George Soros today spelled out his three fixes: central banks should be deputized to prevent bubbles from getting out of control through money supply and interest rate policies; runaway credit should be curbed by regulating more onerous margin (leveraging) and minimum capital requirements (down payments) and banks should not be allowed to invest in speculative securities or derivatives.
Strauss-Kahn said banks must be forced to disclose all their losses and haven't yet. There have been 122 banking crises worldwide since 1944 and the one constant is that recovery was not possible until the banks were cleansed of losses and bad practices. "And there are still undisclosed losses in the banking system today," he added.

Draconian steps needed to avert another fire bombing
Soros' ideas are valid, but an early warning system is needed too, along with agreement by nations and entities that they must accede to those conditions that create and perpetuate healthy markets. These are competition and/or anti-trust rules to prevent excessive concentration of ownership in the financial sector; development of countervailing influences (press, buy-side investors, activists); transparency and full, fair and timely disclosure along with independent audits.
In other words, I believe that national governments, along with sizeable financial sector entities worldwide, must be treated like publicly-listed companies. In fact, I would urge that their managements (elected or potentate) should be forced to provide the world with audited statements, announce any facts that are material to the value of their GDPs or currencies as well as be forced to hold annual and quarterly meetings so they can be scrutinized by the world.
Similarly, countries and other giant entities (like pension or sovereign funds) should face delisting from the global economy if they are unwilling to accede to disclosure rules.

Reform is not an option
It sounds draconian, but the facts are that the world is so inter-dependent that standardization of regulations and responsibilities should be imposed on all in the interest of fairness and justice.
Some G20 participants are talking about "early warning" systems but the biggest impediment is that while everybody wants to know what others are up to, or not up to, they will be disinclined to disclose their own problems. As World Bank President Robert Zoellick put it last week: “Everybody wants an early warning system unless the bad news is about their country.”
Of course, the same argument against disclosure has been made by corporations that are publicly listed and yet they adhere to the rules in order to enjoy the privilege of tapping into global stock and bond markets. The same should apply to nations and the world's biggest financial entities some of which are larger than nations. For instance, the Wall Street Five (now One, Goldman Sachs) paid bonuses to their New York staff in 2007 which was equivalent to the GDP of Manitoba and bonuses worldwide the size of Vietnam's GDP.
Exxon is bigger in terms of revenues than two-thirds of the world's governments.

Carrot and stick
Countries and companies could receive early help too if forced to disclose problems before they careen out of control. On the other hand, those who refuse to comply can be "delisted" or denied credit and market access by the rest of the world. By the way, the world's basketcases who have not passed market muster and borrow from the IMF or World Bank are forced to comply with rigorous regulators and severe rules until they pay off debts.

Great Recession: at the end of the beginning

Diane Francis — Mon, 15 Jun 2009 18:58:00 GMT

Robert Zoellick, President of the World Bank, says no easy fix awaits.

High-level Montreal confab sheds light
Those who have gone on a game park safari in Africa are familiar with the phrase the “Big Six”, or a promise by hosts to get up close and personal with lions, leopards, giraffes, elephants, water buffaloes and rhinos.
Last week, the Conference of Montreal bagged the “Big Six” of the global economy and then some. The leader of every important multilateral economic institution came and spoke to a large turnout crowd. Speakers ranged from the chief of the International Monetary Fund to the men running the World Bank, European Central Bank, Organization of American States, Commonwealth, Francophonie, OECD, Asian Development Bank and European Reconstruction Bank, plus others from labor, business and politics.
This mini-Davos is the result of an inspired partnership between Gil Remillard and Paul Desmarais Jr. whose charming family enjoys sizeable political influence and clout in Canada, the EU and increasingly in China. (The Desmarais have employed just about every Canadian prime minister since WW2 and sundry notables.)
The gathering, punctuated by an exquisite dinner in the imperial-style Desmarais headquarters for Power Corp. in Montreal, was exceedingly informative.

Here are some conference highlights:
-- IMF’s Dominique Strauss-Kahn commented that catastrophe was averted because “never have so many countries” cooperated by adopting the same economic policies. But there remains a systemic and contagious risk in Central Europe such as the failure of troubled Hungary, Latvia, Belorusse or Ukraine. “Nobody in Europe wants to talk about this,” he added.
-- Undisclosed banking losses remain the biggest downside risk to recovery, added the IMF chief. (Another speaker estimated this to be another US$3 trillion on top of the US$1 trillion disclosed and written down.
-- World Bank President Robert Zoellick, lender of last resort to poor nations, said the world has gone from a “financial crisis to an economic crisis to a human crisis”. Systemic change, not just stimulus, is needed to fix problems. He added that “we face the challenge of rolling over debt in the developing world” this year of between US$350 billion and US$600 billion.
-- Energy and food prices are likely to go up with recovery, creating political risks around the world, he said.
-- Zoellick cautioned that the liberation of Central and Eastern Europe could be put at risk as a result of this economic devastation unless policies addressed their unique problems.
-- He added that bailing out emerging nations is in the developed world’s self interest because they are suppliers and buyers of goods from around the world. Economic devastation in countries also lead to spill-over effects such as wars and revolutions.
-- Commonwealth Secretary-General Kamalesh Sharma suggested the need for a 21st Century social contract in a contracting, inter-dependent world. This would involve adherence to social development as well as economic development for the world’s marginalized.
-- The global economy must be restructured and was like an “orchestra without a conductor”, said entrepreneur and former Pakistan Prime Minister Shaukat Aziz. “The crisis was a result of greed, arrogance and a breakdown in management, boards, policies, regulations and politics,” he said. “There are another US$3 trillion in losses to banks to be provided for so before we talk about green shoots, these losses have to be dealt with.”

Conclusion
Guesses as to when the world’s economy will feel a pulse again ranged from the end of this year to an indefinite number of years of recession unless certain dramatic changes in structure are made.
Conclusion? We are not at the beginning of the end, but are more likely ending the beginning.

Economy's good. Gone fishin'

Diane Francis — Thu, 28 May 2009 12:57:00 GMT

China's container madness on the ebb as the People's Export Model fades

I'm hanging up my "pen" and taking off for a week's vacation. See you again Saturday June 6.

Here are the week's "hot" stories though and my take on what to watch for:

1. Reports are that the China Business Model is over. There's some truth to this as the world reaches another inflection point. This financial meltdown and recession has led to a rebalancing with China spending like mad to buy assets, companies and stimulate its economy while consumers in spendthrift U.S.A. save instead of buying Chinese and other import stuff, concentrating on paying down or avoiding debt. China Inc., as constituted until last fall, worked really well as a means of raising living standards, creating a middle class, fostering enterprise, creating a global business network and socking away trillions in the nation's treasury. Now it's time to spend internally and take huge positions in the resources that will be needed to grow and develop its economy.

2. Chrysler's collapsed car sales despite its bailout. I think taxpayer prop-ups are well and good but at the end of the day the Consumer is King and the King has spoken. Stay tuned for a merger between Chrysler and Ford or, more likely, Chrysler and GM. Both will downsize.

3. Magna front-runner in sweepstakes for Germany's Opel. Don't believe it. Germany Chancellor Angela Merkel has made it clear the government must bless any takeout and there's much angst, and should be, about Magna's Russian partner/partners/puppeteers directed by Vlad Putin. This deal may not fly. The Social Democratic Party support for Magna is due to the fact that former Chancellor, Gerhard Schroder, is soft on Moscow and been on its payroll as a lobbyist, consultant since leaving power. Stay tuned.

4. Alberta's observer status at OPEC. This will drive the American Republicans and other Cold Warriors crazy. It will also drive Ottawa's External Affairs crazy. Joining OPEC is a threat to supplies across the border from Alberta and it also undermines the federal government. Never mind, though. Quebec has done that for years by joining a bunch of international organizations as though it was a sovereign nation.

5. Italy's Silvio Berlusconi, a wild guy who has offered to take the Gitmo prisoners off President Obama's hands. He was recently dissed by his missus over a relationship (he claims platonic) with an 18-year-old. The guy is outrageous and no more so than his offer to take all these undesirables off America's hands. What's in return? Perhaps whatever he wants, within reason.

6. Canadian markets, and economic prospects, are considerably better than America's. The biggest drag on U.S. consumption is overindebtedness followed by fear (see my previous blogs on the U.S. healthcare mess) over medical costs among uninsured, under-insured and unemployed. The U.S. healthcare system is the developed world's worst, most expensive and least effective. It is that country's biggest competitive disadvantage going forward. When I return I will have some prescriptions that Americans aren't going to like as to how to cure what ails.

7. Consensus may be correct that the bottom was reached around March 9. Jobless claims have continued to climb but layoffs have slowed since then. Housing slack is being taken up south of the border and in Canada, housing has dropped by a mere 2.5% in a year. Buying is pretty brisk in Toronto.

(Photos: Putin hunting for assets in Germany and Berlusconi with his wife who is not amused

Iraq and Memorial Day in California

Diane Francis — Tue, 26 May 2009 14:43:00 GMT

Santa Monica Pier on Memorial Day 2009. Arlington West is a project dedicated to peace where the crosses of all the fallen in Iraq and Afghanistan are on display. There are volunteers selling "peace sequoia" sprouts and handing out pacifist pamphlets.

The beach cemetery is a permanent fixture and a sad reminder, to hundreds of thousands of tourists and Californians, of these wars which are mostly relegated to the back pages of newspapers these days despite the continuing carnage.

Another interesting aspect to this living demonstration of empathy is that there is a complete list of the more than million Iraqis who have died there since the American invasion. This is unlike the dreadful Vietnam war where the 2.5 million Vietnamese casualties have been ignored.

The display certainly touched me and everyone else who saw it along the boardwalk to the shoreline.

Schwarzenegger and Cali-confiscation

Diane Francis — Mon, 25 May 2009 12:39:00 GMT

Here comes the "Guv", California's Arnold Schwarzenegger in "Terminator"

La La Land, California, has never been goofier, what with its voters rejecting any attempt at fiscal responsibility. Again.
The state has courted disaster before thanks to its weird referendum rules, instituted nearly one century ago, before the gigantic state became the world’s 8th biggest economy.
Even its Governor, Arnold Schwarzenegger, and state legislators are at sea in terms of knowing what to do apart from savaging their budget to avert going bust.
The vote last week was called in February to give voters a chance to approve or disapprove a mix of higher taxes, spending reforms and other tweaks to control the state’s soaring deficits.
The only proposition that voters approved, not surprisingly, was to limit pay raises for public officials and politicians until the deficit was erased.
So now the fun begins as lawmakers must cut services, thus courting their own personal political disasters at the ballot box next.
Of course live by voter revolt, die by it. Governor Schwarzenegger came into office four years ago as a result of a by-election when the existing governor was turfed out unceremoniously by an angry electorate.
Schwarzenegger is himself as weird as his jurisdiction. He’s an advocate of fuel efficiency who drove motorcycles and a Hummer gas-guzzler for years (now electrified). He’s a Hollywood denizen. He’s a Republican in name only and is kind of a Democrat but not really either. Actually, he's a Kennedy because he married one.

I will be writing this week about this zany place so stay tuned.
There is much fear and loathing here about the situation but the state's debts/deficits don't seem as bad as Spain's or Italy's or Greece's. Americans hate taxes is the problem, not really anything else. They also hate big governments, especially those Republicans who live in the sunshine state. Some anxious commentators have even suggested that the state’s only hope is to be divided into four new states because it is ungovernable. If that's so, then so is Canada.

I respectfully disagree, pending future research and/or revelations. California is just way out there and, politically, it has democratized its weirdness and dysfunction with referendums all the time. These days nothing has changed and Cali-confiscation is another example of the state's excess, and success. Frankly, the fix will be simpler than people conjecture.
Potholes will be unfilled, goodies will disappear, a few politicians will be turfed out and life will go on in La La Land where the stuff of dreams is fabricated in Hollywood and the technologies that have transformed human existence are fabricated in Silicon Valley.
May it never change.

Mulroney shenanigans

Diane Francis — Fri, 22 May 2009 15:24:00 GMT

“I will tell the truth, the whole truth and nothing but the truth”

This is the oath that witnesses swear or attest to in affidavits. “The whole truth” covers off the fact that in our legal system any omission of information can be as serious an offense as any commission, or falsehood.
Former Canadian Prime Minister Brian Mulroney knows this. He’s a lawyer and, by many accounts, a very good one.
But in 1996, he appears to have forgotten the oath. That's when he was deposed as a result of his libel case against the Royal Canadian Mounted Police (which accused him of owning a Swiss numbered bank account involving Airbus "commissions").
He eventually agreed to a settlement with the Canadian federal government of C$2.1 million, and when questioned about his relationship with accused tax evader, Karl-Heinz Schreiber, omitted quite a lot of information. When asked about their relationship, Mulroney at the time said the two had only met for “a cup of coffee…once or twice.”
Now after his testimony this week in Ottawa at the Oliphant Inquiry into all of this, Mulroney said Schreiber and he had at least three hotel room trysts where the former Prime Minister was handed envelopes stuffed with thousand-dollar bills. Mulroney also said that he was hired by Schreiber (and his European clients) and paid $225,000.
That's not a coupla coffees.
Schreiber, fighting extradition to face serious jail time in Germany, said he handed over $300,000 in cash payments to Mulroney for some lobbying.

The problem
I like Brian Mulroney personally. I think he was a good prime minister. He understood business and economics. He fixed our relationship with the neighbors and forged a freer trade deal which, on balance, was demonstrably better than having no deal at all.
But his “omission” has not only cast a permanent shadow over his reputation but has embarrassed Canada and cost taxpayers at least $25 million. This total is comprised of:
    $2.1 million in a legal settlement with the feds (taxpayers) involving his libel case against the RCMP and Department of Justice for linking him to Airbus bribes
    $2 million in legal fees to defend himself in all the parliamentary hearings and the current Oliphant inquiry
    $21 million for the Oliphant inquiry underway now to get to the bottom of the Mulroney-Schreiber connection and other matters.

So what is to be accomplished by all of this except to dismantle the image of Brian Mulroney and Canada as the squeaky clean country that it has represented itself to be?
But now that we're stuck with it, here’s what I hope this inquiry should resolve:
    Mulroney said he took $225,000 from Schreiber and declared it as income for tax purposes six years later. Did he pay sufficient penalties and interest? He said he only paid taxes on half that amount. Is this justified and should this be re-opened by tax authorities?
    Should Mulroney pay back the $2.1 million libel case settlement?
 Mulroney said he did not invoice Schreiber for these services so nobody knows what sales taxes, such as GST and Quebec Provincial sales taxes, he charged for his services. If he did he not charge taxes and remit them then have authorities looked into this and has he settled with GST and PST authorities? (Rules are that in Quebec both sales taxes are added to legal or lobbying/consultant fees if services are performed in Canada. If performed elsewhere, there’s no charge but Mulroney has to prove that is the case. Has he?)
    Did Mr. Mulroney lobby and, if so, did he register as one? Did he break rules?
    How did Mr. Mulroney spend his $225,000 in cash. Was it to tradesmen for home renovations or others for services or goods on which GST and PST was not paid?
    Did Mr. Mulroney get a tax write-off in return for the $2.1-million libel settlement that he gifted to charities? Should this be returned to taxpayers?

(photos: Mulroney's nemesis Schreiber and Mulroney in happier days)

Conrad Black's excellent moment

Diane Francis — Thu, 21 May 2009 15:40:00 GMT

Conrad Black’s success in getting an appeal before the U.S. Supreme Court will help define an important point of law as to how business can and should be conducted south of the border.
The Court rejects thousands more requests for appeals than it accepts and the issue is one that the justices feel should be clarified. Black is serving a 6.5-year sentence for fraud and obstruction of justice. The majority of his prison time concerned the obstruction charges and the issue the court is mostly going to concentrate on is the fraud charges.
He and three other Hollinger International Inc. executives were convicted in 2007 involving illegal bonuses totaling US$6.1 million. They also face many civil lawsuits waged by government authorities and shareholders. These skirmishes have ruined the company. So far, Lord Black and the others have spent $100 million in legal fees paid for by Hollinger which is now called Sun-Times Media Group Inc.
They have won this Supreme Court appeal but now must fight in a Chicago court to get more legal fees from the Sun-Times which filed in March for Chapter 11 protection. Black has argued that he is the victim of an American legal system drive-by “shooting” and is innocent of any wrongdoing.

Another shot
Black’s ordeal has been a lively water-cooler topic in Canada, and enough said. But this appeal extends the importance of his case because it may set a precedent which revises the way anyone does business in the future south of the border. At issue is the “honest services” provision of U.S. fraud laws.
The top court will consider the case after October and is somewhat surprising because the convictions were upheld last year by a well-respected panel of appeal court judges.
The appeal deals with arguments, by Lord Black and two of his co-defendants John Boultbee and Mark Kipnis, that the jury in their trial was given flawed instructions that allowed a guilty verdict even if jury members concluded that Hollinger suffered no monetary loss because of the payments that the men received. Instead, the jury was instructed it could find the men guilty if the executives merely failed to render "honest services" to shareholders.
"The jury was permitted to return guilty verdicts on the fraud counts even if it rejected the government's main theory -- that petitioners stole money from Hollinger," the appeal argued. The government said the jury instructions in the case allowed conviction only if the arrangement "threatened foreseeable economic harm to Hollinger."
This issue – that no harm would have been done to shareholders – is what the Court will concern itself with. The “honest services” provisions were created to prevent government officials from using their positions for unfair personal gain, but have been utilized to punish corporate officials who do the same. Some critics allege that the “honest service” statutes are unfairly vague and overly used by prosecutors who want to appear tough on corporate crime.

What a mess
The court will clarify these provisions -- years and millions of dollars later -- plus clear up the fact that circuit courts have been divided on their intent and usage. The appeal, if successful, may also benefit Jeffrey Skilling, former Enron Corp. CEO. Black may ask for bail pending the outcome of this appeal which will take at least one year.
It all seems like hair-splitting to me and is another example of the litigation and legal mess in the United States. Hollinger's shareholders, at the end of the day, have been ruined by it all and there is no compensation for this.

Obama's fuel home run

Diane Francis — Wed, 20 May 2009 12:50:00 GMT

America's principal drug dealers: the Saudis

America finally has a smart leader, not a good old boy from Texas and his sidekick who were in the hip pockets of the Saudis and oil interests at home and abroad. Yesterday’s announcement of dramatically enhanced fuel efficiency standards on vehicles recognizes that environmental, economic, trade and foreign policies converge and can be addressed all at once.
To wit, curb America’s oil addiction, and you balance the books, trade, save the environment and, possibly, Detroit from itself.
Here’s what President Obama announced yesterday and below that is what I wrote last summer which includes important background to this issue.
“In the next five years, we're seeking to raise fuel-economy standards to an industry average of 35.5 miles per gallon in 2016, an increase of more than eight miles per gallon per vehicle. That's an unprecedented change, exceeding the demands of Congress and meeting the most stringent requirements sought by many of the environmental advocates represented here today,” he said.
“As a result, we will save 1.8 billion barrels of oil over the lifetime of the vehicles sold in the next five years. Just to give you a sense of magnitude, that's more oil than we imported last year from Saudi Arabia, Venezuela, Libya, and Nigeria combined,” he added.
The usual suspects from the right dubbed this a US$1,300 car tax, the estimated increase in costs for a small efficient car – totally ignoring the US$2,800 in fuel costs saved based on current gasoline prices.

Here’s my 2008 blog/column on the issue:
“America’s oil addicts need rehab now.
“The United States is the world’s third biggest oil producing nation behind Saudi Arabia and Russia, but you wouldn’t know it given its huge oil import tab. This year, at $130 a barrel, oil imports could total $578 billion, equivalent to 81.5% of 2007’s trade deficit of $708.5 billion for imports of every kind.
“The Saudis produce 10.72 million barrels daily, Russia, 9.67 and the U.S. 8.37 million. But consumption is 20.59 million barrels a day, making net imports 12.2 million a day. This is more than Germany, Japan, France and Italy import.
“We [I’m Canadian and American] Americans are spoiled and greedy oil users and spill or waste more than any 20 undeveloped countries. Despite the whining about $4-a-gallon (at peak oil prices), Americans pay dramatically less for gasoline than do Canadians at $6 a gallon or Europeans at up to $11 a gallon.
“Instead of seeing our wasteful ways as the problem, the public and politicians are externalizing blame and looking for scapegoats.
“But the Bush regime’s intelligence has been about as smart when it comes to comprehending the global supply-demand issue for oil and all commodities as it was unearthing weapons of mass destruction in Iraq.
“So America needs an energy intervention right now which will have added benefits such as helping to clean up the environment, slash trade deficits, reduce dependency on nasty foreign regimes and finance research into new technologies.

“Here is a simple, sensible 21st Century energy policy:
1.    Mandate increased fuel efficiencies of at least 10 miles per gallon for every vehicle and within two years require all new cars sold in the U.S. to be hybrids. Measures should be considered, such as subsidies, to help retire the nation’s gas guzzlers more quickly. Why? If all vehicles in the U.S. were 10-miles-per-gallon more efficient, the country would cut oil consumption by four million barrels daily, eliminating $189.8 billion, or 27%, from the total trade deficit.
2.    But another measure is essential in tandem with fuel efficiencies: an increase in gasoline taxes. This is because studies show that fuel efficiencies don’t necessarily decrease consumption but increase it because the same money can buy more tankfuls. So the combination of fuel efficient cars, and more expensive gasoline, would result in lower consumption.
3.    Higher gasoline taxes, call it a n energy research levy, could be earmarked for research into alternatives.
In other words, all Americans have to do is live like Europeans who use smaller, lighter and more efficient vehicles less often.
These prices are not temporary nor are they a conspiracy or a bubble. Supplies from Alaska, the North Sea, Mexico and China have been declining dramatically as demand around the world soars.
John McCain’s remedy is to chop gasoline taxes which will make matters worse. Plentiful and relatively cheap gasoline has led the United States into this predicament in the first place by allowing Detroit to hook the nation on SUVs, pick-up trucks and heavy luxury vehicles.
Obama has a grasp of what’s needed. He’s rejected the tax cut gimmick, recognizes the need for revenue to do research and connects cheap oil with pollution and the dangerous dependency on hostile and rogue regimes around the world.”

Add to that zoning that dramatically enhances urban densities and stops sprawl; better public transportation and a program to subsidize people to trade in their guzzlers for fuel efficient vehicles, underway in many European countries. These and other measures may help cure what ails America and, indirectly, Canada too.

(Photos: American traffic jam in NYC and Tata's US$2,500 mini car)