Milwaukee Biz Blog

The Justice Department is correct to be concerned about the potential anti-competitive effects of a merger between ATT and T-Mobile. Such a merger would threaten the viability of Sprint-arguably the more aggressive of the top three wireless carriers in introducing new technology-and solidify the grip of two legacy Bell companies.
 
Together, T-Mobile and Sprint have been more nimble and aggressive in building out technology, while the legacy Bell companies have been more interested in monopolization of the industry. The latter simply does not service wider business competitive and consumer interests.
 
AT&T and Verizon have not been quick to fully build out new technology, and an oligopoly on internet service dominated by those two companies and cable monopolies would almost guarantee rates would not fall and consumers would have too few choices.
 
A strong flexible and rapidly advancing internet backbone is essential to U.S. international competitiveness. Leaving it in the hands of AT&T and Verizon makes little sense from the perspective of broader business needs.
 
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and the author of “Antitrust in the Global Trading System.” He is a former chief economist at the U.S. International Trade Commission.

At times of peril, when all around are panicking, the person who stays calm can see the facts, act prudently, and not merely survive, but prosper. No doubt, readers have heard that before, but this is a good time to remember it.

The markets are behaving like it is 2008 again, but it is simply is not.

The current situation does bare some considerable resemblance in two important ways. A recession is threatened by anemic growth-the man riding a bicycle too slowly-and a fundamental imbalance in demand between Asia and the West-caused by aggressive exchange rate misalignments a U.S. President and European leaders understand but lack the courage to confront.

And, a huge debt overhang-this time sovereign debt in Europe, not private mortgages-threatens the viability of critical financial institutions. European banks hold huge amounts of Italian, Spanish, Portuguese, Greek, and other European government bonds.

With the bond market pressuring Italy and restive about France, it is easy, but wrong, to polemic that Greece is Bear Stearns, Italy is Lehman Brothers and France potentially the next AIG. It is simply not the same.

In 2008, the problem was a massive overhang of poorly understood, faulty mortgage backed securities created and insured by U.S. financial institutions with virtually no reliable collateral. This time the principle debtors are sovereigns with the capacity to tax and restructure debt-if necessary by fiat. Those governments' problems are straightforward and understood, and enjoy the implicit guarantee of the European Central Bank.
Already, the ECB is purchasing the sovereign debt of the Mediterranean states and Portugal, and it will purchase more debt as necessary to supplement fiscal reform to ensure solvency. The ECB may not like it, but like the Fed, it is only as independent as its creators-the sovereigns-will permit.

As an economist, I am fully aware of the consequences for moral hazard and long term growth of socializing bank losses. Too much harm has already been done on this side of the pond by the bailout of GM, Chrysler and the Wall Street banks, and what the ECB will likely be compelled to do-buy bonds that it may never fully pay off-only compounds those harms.

In the near term, 2011 differs from 2008 in that that Rome, Lisbon and other profligate governments have access to the ECB printing press in a way that the abovementioned private firms did not to the Fed's money making machine, at least not until it was too late.

Inflation is less of a concern-bonds function as near money-and the ECB is merely swapping one form of liquidity for another on the books of the bank. Also, the iron rule that money causes inflation most applies when economies are at least near full employment-none of that is around at the moment. Austerity in the United States and Europe ensures underemployment of resources will persist.

In the West, democracy has gone too far-the majority consistently votes for politicians that promise more than societies are producing and borrow against the future in irresponsibly ways. The most irresponsible among us, under the banner of disadvantage and social justices, threaten civil collapse when disappointed-the riots in England are not a new phenomenon. Remember Watts, and just try to raise tuition in France.

Social Democrats on both sides of the pond have turned social responsibility through government into absolute fiscal irresponsibility.

Now as we unwind it all-bad private mortgages and bonds governments can't honor-the West is headed for another long period of slow growth. No longer will debt permit the West to churn paper and live high on Asia's productivity.

The West will have to accept a diminished place in the world for not limiting the powers of its banks and politicians to do too many foolish things, at the consent (demands) of the governed.

This said, markets are behaving irrationally-global financial markets are not headed for a second meltdown. But growth is going to be slow until western leaders correct the imbalance in demand between Asia and the West, and work off all the debt. Still, 2011 is simply not 2008.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.

President Obama's intervention in the dispute between Wisconsin Republican Governor Scott Walker and public employee unions violates his constitutional obligations to ensure representative democracy in each of the several states and abuses special privileges he enjoys as President.
 
Across the country governors and state legislatures are grappling with tough budget deficits made worse by union contracts that guarantee workers more generous retirement and health care benefits than enjoyed by their private sector counterparts.
 
Governor Walker faces a $3.6 billion dollar shortfall over the biennium beginning July 1. He is seeking legislation requiring state workers, who currently contribute little or nothing to pensions, to kick in 5.8 percent of wages, and to pay 12.6 percent of the cost of health insurance. In return, he promises no layoffs-compared to private sector workers, those are great terms.
 
The rub-he wants to curtail, but not eliminate, collective bargaining by state workers, and require their unions to submit to annual recertification elections. Notably, many states limit or deny state workers collective bargaining rights.
 
Democratic state senators in the minority have fled the state to deny the upper chamber a quorum and shut down the legislative branch of government.
 
President Obama, through his private political organization and the Democratic National Committee, has helped mobilize a massive influx of outside demonstrators in Madison, supporting the shut down and frustrating the outcome of the November election, which brought Governor Walker and Republican majorities to power.
 
Article IV, Section 4 of the Constitution, states "The United States shall guarantee to every State in this Union a Republican Form of Government..." By supporting and facilitating outside agitators in Wisconsin to extend the shutdown of the legislature, the President is failing in his constitutional obligation to ensure that voters can effect laws through the ballot box.
 
It is important to recognize the President is not intervening via federal authority to enforce a U.S. law or civil rights, but rather using the prestige of the presidency and personal resources to disrupt in the deliberations and lawmaking functions of a state legislature-acting within its state and federal constitutional authority-and indeed encouraging the shutdown of constitutional government in that state.
 
In the private sector, unions represent less than 8 percent of workers, because an increasingly well educated and professional labor force does not find them relevant, as did less educated industrial workers who dominated the non-agricultural labor force in the decades after World War Two.
 
Public sector unions enjoy a superior relevance to their members. If a private union negotiates wages and benefits that make its employer uncompetitive, the business fails and workers lose their benefits. Government workers and their employers face no similar competitive restraints, and often organize politically to ensure their bosses-governors and legislators-are pro-union.
 
Now in Wisconsin and several other states, voters have chosen governments that would rebalance the relationship between public employers and organized labor. The reforms proffered by Governor Walker are not as radical as laws denying collective bargaining, for example, in Virginia and several other states.
 
Under U.S. law, the scope of public sector workers' right to collective bargaining is the legitimate province of state legislatures, and the intercession of the President of the United States into the lawmaking functions of a state legislature is an illegitimate use of federal executive power.
 
Presidents enjoy a peculiar status in U.S. law. Federal courts are disinclined to adjudicate the acts of sitting presidents, fusing their private and official personality under the law.
 
President Clinton only faced the genuine litigation-both criminal and civil-from Special Prosecutor Ken Starr and other plaintiffs after his term in office was concluded. Mr. Starr likely concluded that short of high crimes and misdemeanors, which are the exclusive province of the House and Senate, Presidents, as heads of state, can't be indicted.
 
President Obama by acting through his private political machine is abusing his special status. He is providing resources to aid and abet the shutdown of constitutional government in Wisconsin.
 
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

Wisconsin is ground zero in the struggle to restore fiscal sanity to government.

Budgets are spinning out of control, thanks to union contracts providing overly generous retirement and healthcare benefits and skyrocketing Medicaid costs. President Obama, instead of focusing on systemic problems, seeks political advantage and multiplies the difficulties confronting state governments.

Wisconsin Governor Scott Walker faces a $3.6 billion dollar shortfall over the biennium beginning July 1. He is asking state workers, who currently contribute little or nothing to pensions, to kick in 5.8 percent of wages, and to pay 12.6 percent of the cost of health insurance. In return, he promises no layoffs-compared to private sector workers, those are great terms.

The rub - he wants to curtail, but not eliminate, collective bargaining rights. President Obama, mindful of who provides foot soldiers for Democratic campaigns, oversimplifies the issue by calling Walker's budget an attack on unions.

Worse, the President is interfering with the outcome of an election. By using his political machine to flood Madison with demonstrators, he encourages Democratic Senators in the minority to flee the capital to deny the upper chamber a quorum and shut down the legislative branch of government.

Apparently, President Obama believes elections have consequences only when his side wins. The people of Wisconsin elected Scott Walker and a Republican Senate to reform state finances and curb union power; the President doesn't like their methods, so it's OK for Democrats to shut a branch of government.

Similarly, Americans elected a Republican House to curb spending in Washington, which jumped from $2.7 to $3.8 trillion in four years with Nancy Pelosi as Speaker. The President threatens to veto a 2011 spending bill that imposes $60 billion in cuts, and then portray Republicans as shutting down the government and denying the elderly their social security checks.

In the private sector, unions represent less than 8 percent of workers, because an increasingly educated and professional labor force finds them irrelevant, and simply won't vote yes for unions in representation elections. Hence, the President backs "Card Check," a proposal by the AFL-CIO to deny workers of union elections and permit organizers to strong arm workers in restrooms and parking lots to sign cards.

Public sector unions enjoy a superior relevance to their members. If a private union negotiates wages and benefits that make its employer uncompetitive, the business fails and workers lose their benefits. Government workers and their employers face no similar competitive constraints, and they can organize politically to ensure their bosses-governors and key legislators-share Barack Obama's peculiar pro-union bent, however out of step with popular sentiment.

Now that political strategy has backfired. In Wisconsin and several other states, voters have chosen governments that would rebalance the relationship between public employers and organized labor. The reforms proffered by Governor Walker are not as radical as the law limiting collective bargaining in Virginia.

On health care, the President rammed through an unpopular health care reform law that subsidizes a broken system too much and reforms too little.

Germany, with private insurance and health care systems similar to ours and comparable or better standards of care, spends 12 percent of GDP on health care, while the United States spends 18 percent. Simply, Germans pay less for drugs, hospital stays, administrative costs, and malpractice than do Americans. The President's health reforms do little to address these issues and instead are driving up costs-witness the numbers of small businesses dropping health benefits for employees, and states and unions seeking waivers from the more onerous requirements of the new legislation.

Bond markets are beginning to treat U.S. federal, state and municipal governments like bonds issued by Athens and Dublin. Rating agencies are downgrading state and municipal governments and considering the same for the federal debt. Investors are demanding higher risk premiums on long-term U.S. Treasuries

Protecting unions and spending too much on a broken health care system may prove shrewd politics for the media savvy and rhetorically gifted President Obama seeking reelection, but it is lousy economics. It goes a long way toward explaining why the federal deficit has jumped from $161 billion to $1.6 trillion in four years, state governments are teetering on fiscal ruin, and investors around the world are increasingly nervous about Washington's ability to pay its bills.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

Americans are justifiably ticked off with both political parties but Election 2010 offers little hope. Democrats, Republicans, and yes the Tea Party offers little that is encouraging.

President Obama's droning complaints about the failures of George Bush, notwithstanding, the current economic quagmire is a bi-partisan creation.

The Great Recession was caused by reckless Wall Street pay and fraud, a breakdown in sound lending standards by Fannie Mae, Freddie Mac and mortgage mills like Countrywide, and a huge trade deficit with China and on oil. The latter left Beijing and Middle East royals with trillions of U.S. dollars that they invested foolishly in the U.S. bond market and which financed the housing and commercial real estate bubbles.

Scrape away the finger pointing. All was set in motion by bank deregulation engineered by Clinton Administration Treasury Secretaries Robert Rubin and Lawrence Summers, and Bill Clinton's deal to admit China into the World Trade Organization. The latter permitted China free access to U.S. markets while maintaining an undervalued currency and huge tariffs and other barriers to U.S. exports. 

Democrats in Congress and the White House, when they occupied it, took every opportunity to block domestic oil and gas development and, led by the ever thoughtful and high minded Michigan congressional delegation, froze auto mileage standards.

If I like anything President Obama did, it was to finally impose higher mileage requirements. And initially, he pushed for more offshore drilling. Unfortunately, some tropisms can't be overcome, and when BP disaster hit, the President punished the entire petroleum industry.

If President Bush is culpable for anything, it was to not see the gathering storm on Wall Street. But Treasury Secretary Snow was a railroad man and understood finance little, and Treasury Secretary Paulson, a shinning star from Goldman Sachs, honestly believed banks could borrow at 3 percent and lend at 5 and pay MBAs three years out of school $5 million bonuses to create mortgage backed securities. 

The best way to understand the Bush Treasury is to view the Eric von Stroheim 1924 masterpiece, "Greed."

Whichever bunch of second rate incompetents you favor-the Clinton or Bush White Houses-one thing is clear, Obama ratcheting up government spending and taxes won't fix what's broke, and neither will the GOP prescription of tax cuts and deregulation.

President Obama's two signature initiatives-health care reform and financial services reregulation-simply don't work. The former fails to address the root problem-Americans pay 50 percent more for doctors, hospitals and drugs-than subscribers to national health plans in Germany, France and other decadent socialist European countries, and the banks are back to their old tricks. 

Wall Street is hustling municipal governments into the kind of quick-fix budget schemes-like selling parking meters and airports fees-that made Greece the most historically elegant insolvent entity since bankruptcies were invented in the courts of ancient Athens. Now bankers are shoring up 2011 bonuses by hustling shoddy corporate bonds that lack adequate collateral and may never be repaid.

Republicans like Mitt Romney and John Boehner offer little encouraging. Cutting taxes and mindless deregulation are not the answer. Washington can't forsake any revenue until the GOP trims $1 trillion from federal spending, and few believe deregulation will fix health care or Wall Street.

Republicans don't believe in effective government solutions to health care, Wall Street, fixing trade with China, and dependence on foreign oil.

Enter the Tea Party. It really only offers a purer form of failed Republicanism. Tax and spend less, and turn the country over to the robber barons.

Americans needs a prophet-another Harry Truman or Ronald Reagan-who will level with them. 

Americans must accept fewer government-paid benefits-for the rich, the poor and those in between-and must acknowledge the market works best most of the time, but it is not working in health care, banking, China, and oil. 

That means new approaches to regulating, yes regulating, what the medical industry charges, bankers pay themselves, what Americans tolerate and buy in the Middle Kingdom, and guiding big oil and car companies to sustainable solutions. 

Sounds radical but running the world has never been a choice between statism and anarchy. And running it effectively accepts that the private sector is not the enemy and government is not evil, but neither can serve the other, and us, if value is not seen in each.

Peter Morici is a professor at the Smith School of Business at the University of Maryland and former chief economist at the U.S. International Trade Commission. He is a frequent economic analyst on cable television news networks and grants permission to BizTimes Milwaukee to reprint his commentary.

Sunday evening, J.P. Morgan announced its purchase of Bear Stearns at $2 per share after it had closed at $30 on Friday, and the Federal Reserve announced yet another emergency credit facility.

The shareholders at Bear Stearns were lucky to get anything for the firm, and J.P. Morgan CEO James Dimon, eager to get his hands on Bear Stearns' brokerage business, may ultimately have built the scaffolding for his own hanging.

The hidden liabilities and potential for law suits at Bear Stearns are huge. Look at the unanticipated trouble Bank of America is having with Countrywide. Sometimes CEOs simply do reckless things. Dimon is gambling not investing. When the other shoe falls, shareholders will know who to blame.

Bear Stearns is not the only big financial house in trouble. The potential for contagion is real and menacing. The real questions are: Which of the big banks will be next to fail? How many more banks will fail? Will the whole system turn to panic if Citigroup unwinds?

The quality of leadership provided by Citigroup CEO Vikram Pandit, and Robert Rubin, the man who chose him, is a major concern now that Citigroup has been forced to pour $1 billion into the hedge fund Pandit sold his employer. The Board at Citigroup seems hypnotized to be putting up with that maneuver.

We don't want to return to Glass-Stegall but some of the large bank groups may have to be broken up. Citigroup tops the list. These firms are just not managed well and are too large and diverse to be managed effectively. The economy has been put at grave peril by the unwillingness of Pandit and other leaders of the Wall Street banks to reform what are clearly broken banking practices and a failing business model.

The Federal Reserve, to bolster liquidity, cut the primary credit rate charged primary dealers who borrow against securities at the Fed from 3.5 percent to 3.25 percent. Also, it increased maximum maturity for loans from 30 to 90 days. This should increase liquidity in the securities market a bit but will not address the primary systemic problems that make bank credit so difficult to obtain.

The Federal Reserve continues to bail out major financial institutions without imposing meaningful conditions to improve their conduct and performance. It is failing to require the reforms that have closed the bond market to banks, make the securitization of bank loans virtually impossible, and have greatly curtailed responsible lending to businesses by banks. In turn, the banks continue to impose onerous conditions on their customers. Many are sound businesses not responsible for the crisis the banks have created yet bear the primary burden.

Hence, the Federal Reserve continues to give aid to the irresponsible, while letting these same banks punish their customers.

Through Sunday's move, the Fed is trying to reassure financial markets that it stands ready to back up the banks but this is not likely to work. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have reacted to events and consistently been behind the curve. Their leadership has been wholly lacking.

Sunday's moves by the Federal Reserve are the desperate acts of failing men.

The threat of contagion and wholesale breakdown is on a scale of 1929 is real.

Yet, President George W. Bush adopts the posture of Herbert Hoover, telling us everything will work out soon. He looks more like a man whistling through the graveyard. Bernanke and Paulson look worse than that.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

Earlier this week, Ceberus shoved aside Thomas LaSorda to name Robert Nardelli CEO of Chrysler. One wonders why.

As things currently stand, the North American automobile industry is losing money. Toyota earns about $1,200 a car and the Detroit Three lose more than that. Overall, the Big Six - GM, Ford, Chrysler, Toyota, Nissan, and Honda - have trouble turning a profit.

The Detroit Three are not incompetent. They lose money owing to burdensome legacy and everyday labor costs, and antiquated work rules. Without a transformational contract, the domestics will continue to lose money, and by the utterances of Ron Gettlefinger, don't look for the UAW to do what needs to be done to preserve their numbers long term.

As for Chrysler, Robert Nardelli is the wrong man for the job.

Chrysler has three problems. First, it has the immediate problem of putting more desirable products on the road. Nardelli is not a car guy. He can't quick fix what Chrysler hasn't got. He lacks the background.

Second, Chrysler has endemic problems in its supply chain. Chrysler produces the poorest quality, most unreliable products among the big six (GM, Ford, Chrysler, Toyota, Nissan and Honda). Poor quality stems from poor engineering and inept components suppliers. A deep understanding of automotive systems, engineering and supplier relationships are needed to fix Chrysler's quality problems. Nardelli lacks the necessary background.

Third, in five to seven years, newer prototypes - hybrids, fuel cell, hydrogen, etc. - will be more much important than today. Chrysler is behind in developing new protype vehicles, and it must joint venture effectively with others to compensate. Nardelli is hardly a poster boy for corporate diplomacy. His tour of duty at Home Depot demostrated that.

The North American industry has too much capacity and one too many original equipment manufacturers. Right now, either Ford or Chrysler is headed for Chapter 11.

Nardelli's appointment makes it more likely that Chrysler will be the company that fails.

Peter Morici is a professor at the Robert H. Smith School of Business, University of Maryland, and former Chief Economist at the United States International Trade Commission. Morici's economic analysis is widely respected. He has granted Small Business Times permission to share his viewpoints with our readers. Chrysler operates a plant in Kenosha.