President Sarkozy

French Bankers Accept Restrictions on Bonuses

In a ploy to strengthen his political capital, President Nicolas Sarkosy this past week convinced leaders of his country's major banks to cut proposed bonuses by 50% and to tie the payout of those bonuses to long-term performance. Sarkosy knows that the French proletariat have become angered at what they have deemed excessive compensation paid for on the backs of the working class. If this narrative sounds familiar, it should. Recall last year's bonus payouts and lavish outings made by Merrill Lynch (now owned by Bank of America), AIG and others which received billions of dollars in TARP funding. Now Mr. Sarkosy hopes to make hay on the world stage at the G-20 Summit scheduled next month in Pittsburgh.

At the heart of this debate are the issues that separate capitalism from socialism. Capitalists believe that private ownership and free enterprise provide the most efficient economic structure; socialism advocates ownership belongs to the community as a whole. With so many suffering at the demise of the financial system, it has become easy to lay blame on banks and bankers who have notoriously been the most highly compensated. Virtually no blame has been placed on the government whose policies set guidelines for reserve requirements or encouraged relaxed standards in lending. In this have versus have not scenario, world leaders with socialist tendencies have an audience of tens of millions eagerly waiting to hear their message.

The likelihood is that Sarkosy will be warmly received by the Obama administration during his visit in September and that the two will tag-team on ways to influence the amounts and methods to which banks compensate their employees. As changes in compensation policies begin to take effect bankers directly impacted will look for opportunities to regain their “lost” income resulting in a flight of talent from the US and France to countries where the laws are less imposing. The US, which has been a magnet for the world's most gifted and talented, will weaken over time if policy changes are allowed to reverse this polarity. To maintain its status as the world's financial epicenter, the US must ensure the virtues of capitalism go unimpeded. Instead of directing banker compensation, the government should concentrate on revising banking policy that reinforces a strong and sustainable banking structure.

Pete Canalichio
August 29, 2009

Fed extends consumer lending program through March

The Fed sent a strong signal on August 17th when they extended the Term-Asset-Backed-Loan-Facility (TALF) that the financial markets continue to be hampered by investors unwillingness to buy loans backed by student loans, auto loans and credit cards. Traditionally these type of loans were some of the safest and most liquid. With the fallout in the economy last September and the corresponding jump in defaults on credit cards and other asset backed loans, investors have shied away from these types of loans labeling them just too risky. Without a liquid market for asset back loans, consumers and small businesses cannot borrow the money they need. To offset the risk and spur investment, the Fed instituted TALF last December. The program which was intended to go from March through December 2009 has grown to over $36 billion and is now been extended through March 2010.

Until investors feel confident that market dynamics have been righted to the point that they can begin to accurately price debt instruments including asset backed loans, the financial crisis will persist. In the meantime, programs like TARP and TALF are artificially propping up the financial markets, but at what price? The Fed now holds $2 trillion dollars of debt in its efforts to drive the economy out of recession. This balance has more than doubled since last year causing some to question the Obama administration's economic policies and whether the United States might lose its AAA rating. A drop in rating would severely weaken the dollar and put a strain on the US government's ability to borrow money, especially if foreign governments lose their faith in America.

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For me personally, I am glad the US government has instituted TARP and TALF. For without these programs, hundreds of banks which are borrowing billions from the government every day would have failed bringing the financial markets to their knees. Instead of talking about “green shoots” we would be talking about the Great Depression of 2009. While we are far from out of the woods, we must begin to consider the consequence of the debt the government has accumulated and the inflation that will come when the economy finally rebounds. I hope Bernanke and his team stand ready again to take action.

Pete Canalichio
August 24, 2009

Retail sales fall 5.1% in July

More than a temporary setback

Andrea Chang's article in the LA Times last week entitled “Retail sales fall 5.1% in July despite back-to-school lures” exemplifies the mindset of today's US consumer. There is a “batten down the hatches” approach to this economic storm that has left most purchasing decisions being made on a case by case basis. Consumers are continuing to ask themselves “Do I really need this?” and then choosing not to buy. Most consumers have experienced a paradigm shift in the way they see the world. Precepts such as “my home will continue to increase in value” are no longer valid leaving the consumer wondering if any economic principles will stand the test of time. As a result, consumers are learning to live with less; some, in fact, have chosen to permanently simplify their lives as they prefer the reduced stress that comes with it.
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It's going to take a lot more than seasonal markdowns to entice today's consumer to start shopping again on a regular basis. Despite a 40% drop in the price of gasoline from its $4 per gallon peak in July 2008, consumers continue to purchase hybrid and other high mileage cards, if they choose to buy at all. There is an unspoken but pervasive fear amongst consumers that things may not improve for a while. “I may have a job today, but will I tomorrow?” or, “Will the housing market ever recover?” With unemployment approaching 10% and millions of homes going into foreclosure, retail sales will continue to languish. Consumers who make up two-thirds of the economy are not going to put their families' savings at risk unless they believe there is a fundamental change in our economic structure.

To get consumers shopping again, Americans are going to have to be convinced that the US economy has a long-term positive outlook. To get there, America needs to get through the financial and real estate crises that are paralyzing the nation. This will begin to eliminate the fear of deflation and entice consumers to hold onto their homes instead of leaving them in droves as they did this past year. Furthermore, unemployment rates need to stabilize and begin to decline. When America gets back to work it will also get back to buying more than the bare essentials. Finally, the US must embark on a well articulated energy policy that makes America less dependent on foreign energy and more independent from using its own plentiful energy resources. When these things are in place, not only will consumers feel better about shopping, they will have the resources to do so.

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Pete Canalichio

August 17, 2009