Did Political Contributions Drive Federal Bailout?

Did Political Contributions Drive Federal Bailout?

According to OpenSecrets.Org:

Banking / Financial Firms

  • AIG donated $586,000 to the Democrats while donating $268,000 to the Republicans, with 69% of total donations going to the Democratic Party. Since 1990, AIG has donated more than $9.3 Million to political candidates.
  • Goldman Sachs has donated nearly $20 Million to the Democratic Party since 1990.
  • In the 2008 election, Citigroup donated 61% of their nearly $4.4 Million to the Democratic Party.
  • In the 2008 election, Bank of America donated $2.3 Million, with 56% of donations going to the Democratic Party.
  • Merrill Lynch donated 62% of their $14.2 Million in contributions to the Republican Party since 1990.
  • Lehman Brothers level of political contributions did not make it to the Top 100 Political Contributors.

In examining this list, one can conclude that the two firms allowed to collapse or fold were not heavy contributors to the Democratic Party while those getting bailouts were heavy contributors.

Automotives Related

  • The Teamsters Union has donated nearly $25 Million to the Democratic Party since 1990.
  • The AFL-CIO has donated nearly $17 Million to the Democratic Party since 1990.
  • Sheet Metal Workers Union has donated $16 Million to the Democratic Party since 1990.
  • United Auto Workers has donated over $25 Million to the Democratic Party since 1990.

Is it any wonder that, while President Bush was in office, his administration offered no aide to the automotives industry, but President-Elect Obama pushed for financial assistance even before he took office?

Further Evidence of Political Favoritism to Heavy Democratic Contributors

In the meantime, both Senate Banking committee Chairman Christopher Dodd (Dem.) and Treasury Secretary Timothy Geithner have been implicated in designed the bonus plans for both AIG executives and Merrill Lynch. Add to the conspiracy that Freddie Mac and Fannie May, the two key federally controlled mortgage giants, are planning millions in retention bonuses to top executives. Will we find that Democratic Rep. Barney Frank, who failed in properly overseeing the two federal organizations, had something to do with these outrageously planned bonuses?

Poor President Obama!

Is President Obama the only Democrat in Washington D.C. who is straightforward and willing to take responsibility? Will he be the next Teddy Roosevelt (Rep. Pres.) in cleaning out corruption in Washington D.C. or will he fall victim to the corruption all around him? Obama survived the fallout in corrupt Democratic politicians in Illinois, but eventually his luck will run out unless he directly confronts the clear and evident pattern of political corruption all around him and his political party.

These are dire days for the U.S. economy, and a cloud of doom is building from the continuous ongoing exposure of political corruption in the party that controls Washington D.C.


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Filed under Corruption, Economy, Finance, Government

What Does Stress Testing of Banking Mean?

What Does Stress Testing of Banking Mean?

In recent financial news, Ben S. Bernanke, the chairman of the Federal Reserve, was quoted as stating that a stress test of the top 20 banks would occur. What this entails has been briefly outlined in the recent NY Times (online) article Stress Test for Banks Exposes Rift on Wall St. – NYTimes.com.

Note: Any emphasis shown in italics has been added by John Doughtry.

“Until the financial system deteriorated last fall, investors focused on what is known as Tier 1 capital, which [sic] consists of common stock, preferred stock and hybrid debt-equity instruments.

Now, however, they are focusing on what is called tangible equity capital, which [sic] includes only common stock, saying it is a better way to measure the risk in bank shares.

The difference might sound like something only an accountant would worry about, but it lies at the heart of two questions confounding both Washington and Wall Street: Are the nation’s banks sound? And are bank shares a good barometer for the health of the financial system? […]

Details of the bank stress test are scant, but federal regulators are expected to examine the ability of banks to cope with a situation in which unemployment rose to 10 to 12 percent and home prices declined by an additional 20 percent, according to Treasury Department and Federal Reserve officials. While officials say they don’t expect such a severe downturn, some economists aren’t ruling one out.

In recent weeks, federal regulators were planning to continue to demand that banks maintain Tier 1 capital equivalent of at least 6 percent of total assets adjusted for risk. Regulators also want at least half of it in common stock, but have given banks some leeway. […]

But stock investors are homing in on tangible common equity. Whereas Tier 1 capital gives regulators comfort because it captures a bank’s ability to weather a financial storm, stock investors, who suffer the first losses, are worried about their own exposure. Tangible common equity, or T.C.E., they argue, is the best measure for them.

Until last fall, there was little difference between the two measures. But when the government made big investments of preferred stock to shore up banks, common shareholders became more vulnerable.”

The Difference between Tier 1 Capital and Tangible Common Equity (TCE)

According to economist Dr. James Kwak:

“One commonly used measure of capital is called Tier 1 Capital, which includes common shares, preferred shares, and deferred tax assets. A less commonly used measure is Tangible Common Equity (TCE), which includes only common shares. Obviously, TCE will yield a lower percentage than Tier 1.

[…] The initial government investments in Citigroup, back in October and November, were in the form of preferred shares. Between the two bailouts, the government put in $45 billion in cash and got $52 billion in preferred stock (the $7 billion difference was the fee for the guarantee on $300 billion of Citi assets). That preferred stock was designed to be much closer to debt than to equity: it pays a dividend (5% or 8%), it cannot be converted into common stock (so it cannot dilute the existing shareholders), it has no voting rights, and it carries a penalty if it isn’t bought back within five years. In fact, it is hard to distinguish from debt, except perhaps for the fact that, if Citi defaults on it (cannot buy the shares back) we don’t need to worry about systemic instability, because the government can absorb the loss. As preferred stock, these bailouts boosted Citi’s Tier 1 capital, but not its TCE.”

The last sentence in italics is the key to understanding why TCE is a better measure of a bank’s health for share holders. It removes significant risks in measuring the capital worth of a bank, thus investors prefer to view TCE rather than Tier 1 measurements.

The bad news for the general public (whose tax dollars were used to buy the preferred stock) is that there is higher risk involved. Note, however, that unlike common stock, preferred stock does not provide as much control over banks, although the federal government, due to its massive presence, could attempt to bully bank executives. Considering the amount of corruption uncovered and the level of executive greed in the face of financial crisis, perhaps a full-time government watchdog is not a bad idea.

For those that have fears that these preferred stock purchases equate to a nationalization of our banking system, this should alleviate at least some of their fears.

Blog author: John Doughtry

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Filed under Economy, Finance, Government

Requirements for Economic Recovery

Requirements for Economic Recovery

To get a handle on where the economy currently stands, take a look at the graph below. It is one of the nicest comparison graphs I’ve run across that compares our current economic (European AEX) picture with the 1929 DJIA economy and the Japanese Nikkei meltdown of the 1990s.

See http://www.vanenschot.com/finance/stockmarketcrash.html. The image is linked below:

Comparison of three stock markets

Comparison of three stock markets

Compare the chart above with the DJIA chart below. Line up the two charts at 2003, and one can see that the AEX and the DJIA are very close in performance.

DJIA Since 2003

DJIA chart courtesy of MSN at http://moneycentral.msn.com/investor/charts/chartdl.aspx?D5=0&D4=1&ViewType=0&ShowChtBt=Refresh+Chart&DateRangeForm=1&ComparisonsForm=1&D3=0&CE=0&Symbol=%24INDU&C9=2&DisplayForm=1&CP=0&PT=10

What Does This Mean?

The translation is this: Expect the stock market’s bottom to hit within the next 45 days (by April 30, 2009), followed by a protracted 5-7 year recovery.

Comments on Presidential Economic Stimulus Package

While I appreciate President Obama’s focus on improving the education system and access to the Internet, those incentives do not create new jobs. One must have a Return on Investment (ROI) that will remain after the money is spent. Education, unfortunately, is an ongoing expense. The ROI time line of education is typically a decade or longer, and this country cannot afford to wait ten years for an economic turn-around.

Obama indicated heavy investment in science and technology, but there needs to be clearly defined areas of investment. Exact areas were not outlined, and in business, identifying exact areas is the first step towards improvement.

For this country’s economy to recover between 2009 and 2015, it will require the federal government to invest in rebuilding the transportation infrastructure that serves as the primary conduit in a healthy, thriving economy.

Simultaneously, the country’s dependence on foreign oil holds this country hostage to foreign governments. Many of those countries would rather squeeze the American economy out of every cent they can. Do we really want to wait until petroleum is selling at $150 per barrel to say the words, “I told you so”?

Recommendations for Economic Recovery

Here are the recommendations I have for economic recovery. Compare what I believe is needed to what President Obama stated is in the stimulus package. See http://www.whitehouse.gov/agenda/economy/ for stimulus details.

1. Fund Alternative green energy for electrical power generation (Wind, Solar, WTE)

Yes. Obama wants “doubling the production of alternative energy in the next three years.” I have no idea how he he plans to replace all the electrical power that will be lost as nuclear plants close, but at least he wants to do it cleanly, right? Hmm, then why did he mention “clean” coal power plants? Does he really think coal is renewable energy?

2.Enact minimum of 40 mpg for passenger vehicles. Stop rewarding automakers for producing gas guzzlers like the Hummer that get single digit mileage. Penalize automakers for anything less than 40 mpg. Make it a federal mandate for all cars sold in the USA. There is no excuse with today’s technology not to get a minimum of 40 mpg for automobiles. Trucks are a different class.

No. Obama has not established anything for setting car mileage requirements or in generating incentives to car companies like Tesla Motors who produce cars with zero emissions and over 200 miles per battery charge.

3. Build twenty new Nuclear power plants to replace aging ones.

No. Obama is against nuclear power. As many as a dozen of the aging nuclear plants will go out of production in the next ten years, with several currently operating beyond the intended life expectancy. The average nuclear power plant generates 1 to 2 gigawatts of electrical power per year. How are we going to replace the power produced by these plants? Through Wind and Solar? No, both of those technologies are too inefficient. A large wind generator can produce 1.5 megawatts. We would need 1000 wind generators to equal the output of a single nuclear power plant! WTE (waste-to-energy) power plant? We would need 4 to 5 WTE plants to equal a single nuclear plant.

4. Enact infrastructure replacement for highway bridges.

No. Obama has not indicated a federal program for this. Yet tens of thousands of highway bridges are in need of serious repair or total replacement. Waiting until the economy starts to recovery is not the time to slow down the highway traffic to perform repairs. Do the repairs and replacements now. Be proactive, damn it!

5. Fund and build a federally subsidized High Speed Rail between all major cities ASAP.

No. Obama has not indicated a federal program for this. Why are high-speed rails not being built along the same corridors as Interstate highways?

Why are we wasting so much time and energy getting on airplanes to take trips of less than 300 miles? While are we spending hundreds of dollars on gasoline for a round trip of 600 miles (10 hours) if we could spend half that amount and spend only 6 hours travelling?

The average traveler spends 2 hours coming and going to the airport, another 2 hours to meet security requirements, and another 2 hours to fly 300 miles by the time we deal with airplane take offs and landings. A total of 6 hours to travel 300 miles.

Compare that with a high-speed rail service capable of 200 mph, and even with the 2 hours to travel to and from the rail terminal, we reduce the travel time from the 6 hours down to 4 hours. No cancellation of travel due to snow. No cancellation of travel due to thunderstorms at other airports.

Every economic recovery of the past one hundred years required investment in mass transportation, whether in providing it or in increasing the speed or improving efficiency. Why is the federal government ignoring this fact this time?


Filed under Economy, Government

The Frightening Rise of Federal Power and the Loss of American Liberty

Federal Powers at the Local Level

Lew Rockwell is a political commentator. At Lew Rockwell’s web site, he outlines how, since 1995, the Federal government has been pushing the militarization of local law enforcement through the Pentagon’s Law Enforcement Support Office (LESO), which is a part of the Defense Logistics Agency (DLA). The problem with this Federal assistance, Rockwell states, is that “Any police agency that receives so much as a particle of federal aid is no longer a local police force. It is, in principle, a federal army of occupation.” Rockwell states that this “principle [was] recognized in the Supreme Court’s 1942 Wickard v. Filburn decision.

With local law enforcement receiving additional Federal assistance after the 9/11 attacks, all local law enforcement became de facto members of a Pentagon-led army. Year after year since 1995, the White House has been expanding Federal powers, eliminating independent local law enforcement, and charging private citizens with the newly create laws – laws which violate civil rights and violates the Bill of Rights. To see the progression, a nice timetable has been listed at TinWiki.org.

In the past year, local law enforcement agencies were given a Federal order to report any suspected terrorists. An outline of how a “suspect” is determined, prior to any crime, was not given. Thus, your city police can now act as part of the Pentagon Gestapo. Under the Patriot Act, you have no rights to an attorney, and should you be whisked away in the dead of night, no one in your family has to be informed of your situation. The Patriot Act cancels Habeas Corpus which guarantees your right to an attorney. Ironically, the Supreme Court restored Habeas Corpus to Guantanamo detainees in June 2008, however the Supreme Court has yet to restore Habeas Corpus to American citizens cornered by the unpatriotic Patriot Act.

Is Hope of Change for Better Ethics Already Lost?

For those who hoped for political change in Barrack Obama might be interested to know how closely he worked with the Neocons (click here for details on the Neocon movement).

Coincidentally, Obama was endorsed by Jay Rockefeller, who is part of the Rockefeller family legacy. It is no secret that the Rockefeller family believes in manipulation of politics, economics, and even the law itself to obtain the true objective, that of centralized wealth and power.

David Rockefeller, the only surviving grandchild of the famous John D. Rockefeller, stated in his memoir:

“Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure – one world, if you will. If that is the charge, I stand guilty, and I am proud of it.”

What has become of America? Where are the leaders with conscience and ethics? Is this country doomed? Have we been hoodwinked into believing Obama represents a change in political agenda?

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Change of Government? Really?

Originally posted on another web site: November 05, 2008 2:14AM
(Small expansions/clarifications made in this posting)

Foreword: I am an Independent, neither Democrat nor Republican. I did not vote for either of those parties in this recent presidential election.

The Fear Factor
I know many Republicans who fear that our country will lean towards Socialism or Marxism because of a radical left wing of the Democratic party. Many fear that Obama’s “redistribution of wealth” is a disguise for Socialism. Many believe that Capitalism is the only way that works.

A response to cover all angles of fears is beyond my available time to devote. But I do wish to provide observations of what I perceive as erroneous by various groups who are fearful of the recent change in government.

Distribution of Wealth
First, some background:
No president has been able to pull back Federal spending. It is the nature of government to spend as much as they can. Alexander Hamilton and his group of supporters during the establishment of the US Constitution made sure that the Federal government has the ability to raise taxes as high as they wish.

Adam Smith, a supporter of the capitalist economic model, had serious concerns about the dehumanization of people. The long history of business in this country proved that unless laws were created to protect the workers, business owners would not provide the essential necessities to their employees. This negative aspect of apathy and corporate greed has been the bane of capitalism, and eventually led to laws governing work safety, minimum wage, and more.

Business owners screamed bloody murder, claiming that they were being robbed of their profits. In essence, they were right. It was a redistribution of wealth because of their lack of concern for their workers. Workers today have matching 401K programs and insurance because of this “redistribution of wealth”. Business Owners, for the most part, only provide these types of benefits because of competition, and not because of their generosity.

Note: The ability to compete against corporations that do not provide similar benefits has forced US manufacturers to either tighten up their efficiencies or to move operations overseas to countries where employers are faced with lower employee benefit costs. This means countries such as China, Thailand, Philippines, South Africa, and India may seem more lucrative in profit than US based operations with US workers. Much more can be said about this issue, but it is sufficient to state that many 2nd and 3rd tier companies that moved operations to China regretted the move once energy prices tripled shipping costs. There is always a price to pay when taking an apparent easy way out rather than working on improving US-based operational efficiencies.

Taxation exists in many forms. There are taxes on gasoline, non-food items, toll roads, and various sales tax at the federal, state, and local levels. Then there are all of the taxes on income, including Medicare and social security. These taxes are not limited to the government providing security and common well fare. It also provides for “redistribution of wealth“. How? If the wealthy are taxed more severely, then the majority of the cost of new highways and new infrastructure to support communities are paid by the wealthy. Therefore, everyone that uses those infrastructures should thank the wealthy for covering the lion’s share of the cost.

However, many who are non-wealthy erroneously believe that the wealthy do not pay income tax. Rest assured that the Alternative Minimum Tax insures that everyone who makes above a certain income will pay taxes. Unfortunately, this system never considered inflation, therefore the AMT is now striking more and more middle class incomes. Every year a temporary fix has had to be passed through Congress. See http://www.cbpp.org/2-14-07tax.htm

Note: The sad truth is that all of the tax loop holes that existed at the time the AMT was initially created no longer exist. Therefore, the purpose of the AMT no longer exists. The obvious question is why is AMT still around if its purpose for existence is no longer there? The answer is that the US Government does not wish to stop collecting the additional $600 Billion in AMT taxes gathered each year. What I fear is that Obama has indicated that he will remove all tax breaks instilled by Bush. This would mean that the impact of the AMT will hit more Americans because there will no longer be any manual adjustments made.

  • Thus, we see from a brief examination of history that the harsher side of capitalism created the need to force adjustments, which, in essence, created a form of wealth redistribution.
  • The AMT also attempted to do the same, attempting to insure that the wealthy did not walk away without playing taxes.
  • The future shows that tax increases will hit households making over $150K per year, and if the manual temporary fixes to AMT are eliminated, the increase will hit households with incomes below $100K per year.
  • Obama stated in his first debate with McCain that he would bring tax relief to those making under $250K per year. However, later in his campaign, he changed that limit to $200K per year.

The point is this: Unless Obama eliminates the AMT and restructures existing IRS guidelines, taxes will significantly rise for any household with an income of $100K or higher. This would mean an increase in taxes for a majority of middle class workers, not a tax break.

What Does This Mean For The Future Obama Redistribution of Wealth?
If he is telling us the truth, he is wanting to balance the tax burden more fairly. However, the term “fairly” means different things to each income level.

The primary problem, however, has been out-of-control governmental taxation while simultaneously ignoring the severe impact on individuals making less income who are still required to pay taxes at a greater impact to their income that those who earn higher wages.

To provide an analogy: the price of gasoline has more than doubled in the past few years. For a person earning $30K per year and whose prior gasoline expenses were $1000 per year was, only recently before prices collapsed, suddenly facing $4000 per year in gas expenses. At the lower expense, fuel was 3.3% of yearly income. Suddenly, at the higher price, the fuel cost was 13.3% of yearly income — a jump of 10% in expenses. However, for someone earning $200K per year, the percentage would have moved from 0.5% to a mere 2.0% — a change of only 1.5% in expenses.

The same level of impact applies to fixed taxes (such as those hidden in gasoline and cigarettes). The smaller wage earner may pay a significantly smaller percentage, however, due to the many hidden taxes within our economy (gasoline, telephone, toll roads, purchases at stores, etc) the net impact of hidden, fixed taxes takes a higher percentage of the earner’s income. This is what Obama is suggesting will be changed by modifying tax scales, providing relief for lower and middle income workers while increasing the tax burden on the wealthy. We shall see if he truly understands the complexity of the tax system.

This action goes against the core of libertarian minds who do not view that government should manipulate taxation for any reason, and it does not suit hardcore capitalists who demand “a decent profit” for their hard work and risk taking. While I partially agree with the libertarian view and with the capitalist view, I belief there must be a balance as John Rawls indicated. However, it is imperative that a true balance exists. Rawls warned of over-burdening the higher earners to the point of punishing the wealthy for earning money. It would take far too much space to explain the details of Rawls’ philosophy, but it is a balance between capitalistic and socialistic economies.

If Obama does increase taxes, promising for redistribution, but turns around and spends heavily on federal programs creating more federal bureaucracy, then he will not have kept his promise of reducing government interference and creating redistribution of wealth. He will have merely increased the tax burden on the wealthy, potentially creating a situation of which Rawls warned.

Socialist Economics vs. Socialist Government
Socialist Economics has been in our system for almost a hundred years. It has helped to create a large middle class. Prior to the socialist economic mechanisms put into place gradually during the past 100 years, capitalism was creating the classic Marxist model of “class struggle”, just as Marx predicted. The wealthy controlled the poor, and there were very few middle class earners. Capitalists like John D. Rockefeller and Andrew Carnegie truly believed that their wealth was given to them by “God” and that they had no responsibility to share any profit to the workers. Since workers had no representation within corporations and the government traditionally sided with big business, the “class struggle” emerged, giving rise to unionization and the consequences.

Constitutional Objectives: It Includes General Well-Fare of the People
A part of our Constitution states that the government is responsible for the defense of this country against foreign powers. It also states that the government is responsible for the general well fare of its people. Government cannot ignore the economic blight of its people created by its economic model (capitalism) which does not possess a conscience.

Milton Friedman warned us that corporations do not possess ethics. It is the people who must possess them. He also warned us of the growing trend of companies selecting executives focused solely on the market without any consideration of social or societal responsibilities. When the leaders of businesses are without ethics, we see the aftermath, such as Enron, AIG, and more. The workers are the ones that suffer the most from unethical practices that are performed within capitalism.

Thus, no economic system is without problems, not even capitalism. An uncontrolled socialist economic model can lead to total government control. I fear that the recent bail-out to the financial industry is a step toward nationalization of the business sector — a heavy-handed symptom of socialist economics. Unless watched and controlled, this can lead us down the road to a Socialist Government and not merely a socialist economy.

John Doughtry

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US Economic Forecast Through July 2009

Housing slide has not bottomed out in all regions. The NE, SE, most of California (SW) and scattered portions everywhere else have NOT bottomed out on the declining market value of homes. Charts indicate that in those regions, the housing prices are still 200% higher than actual worth. Expect the Feds and the State of California to get really creative real soon. Also expect to see public backlash as many who do not “deserve” rescuing get it, and those “deserving” rescue do not get it. (Use whatever definition you wish for the two terms).

Other than for Chicago, the Midwest region is now stable, and has been relatively so for the past 60 days. The past two months of casualties has primarily been due to overloaded budget due to increased energy costs and food price increases. Those that had been squeezing by with less than 20% cushion in their finances were overloaded by the estimated 60% increase in budget needed for energy and food.

We should start seeing a MAJOR collapse in California and Florida beginning in mid-November. Not a good time for the two states responsible for 50% of our economic power.

There is both a critical tipping point caused by “too high a price” and another tipping point caused by “too low a price”. Back in 2004, I had calculated that a per gallon price of greater than $3.50 would create a significant economic slowdown. Once prices this year got over $4.00/gal., I had no doubt of what was coming down the tunnel.

The lower price end is $70 per barrel. We’re seeing current pricing at less than $65, and this will create another crisis as well. Without enough profit from oil, there is no incentive for:
a. Alternative Energy efforts. These efforts costs run in the Billions. Without an incentive of high energy costs, expect to see a lot of these Green projects lose funding or stock market support.
b. New Drilling efforts. Again, to establish a new well can cost in the hundreds of millions. Without adequate profit, there is no incentive to drill new holes. And if there are no new wells, when the NEXT energy crunch comes, we’ll be right back where we were this summer.

If pricing remains below $70, we’re going to be setting ourselves up for a VERY nasty economic recovery.

First a disclaimer: I am NOT a financial adviser. Take any action at YOUR OWN RISK. The following is based on my personal research and my own strategy for surviving the economic storm.

If you’re like millions of mutual fund owners, you’ve seen your portfolio lose value anywhere from 10%-50% percentage in the past six months. For those of you who didn’t move fast enough, it’s time to consider shifting your investments to the following:
a. BioMed Industry. It is still a hot market, and will weather the storm better than other areas. The reason is due to equity and forecast. The value of biomed does not easily change when other areas of the economy bounce. In addition, the forecast is that people will continue to need medical care — there is no decline in illness during bad times.
b. Treasury Bonds. DO IT QUICK! You’ll want to do this BEFORE the Federal Reserve lowers interest rates in order to obtain maximum gains from Treasury Bonds. Hang on to them unless interest rates show signs of rising. Remember the general rule: Treasury Bond yields go UP as interests rates go DOWN.
c. Find the best rates on six-month and 2-year CDs and shift investments into those as well. Again, do it before the Feds take action on lowering interest rates.
d. If you REALLY want to play stocks, it may already be too late to jump into the best bets. Generally, tight economic times means people change where they spend for entertainment. Businesses like NetFlix will see an increase as folk begin staying in and watching more rental movies. If you have a Timeshare in a Condo in Florida, you might not do well for the next 9-18 months, as an example. Places like Walmart and Target will increase business as shoppers move away from higher priced stores.

If you’re in realty, the automotive manufacturing sector, or housing sector, then times will be tough. If you’re in industries where there is a heavy reliance on discretionary spending, such as vacation resorts, then expect to see a significant squeeze in business unless your particular zone is family-oriented and on the conservative end of cost.

Expect to see an additional 30,000 jobs lost in the automotive industry, with an additional 250,000 unemployed in other sectors by Spring 2009. We’ve already crossed the magic tipping point of losing over 400,000 jobs this year. (That was the magic number I had estimated would be the clear evidence of economic peril).

As I predicted to my friends and family back in the Spring of this year, expect to see either GM or Chrysler go down the tubes. Don’t be surprised if the Japanese buy one of them. They will do so because of the rising difference between the Japanese yen and the US dollar. Japanese manufacturers NEED an immediately home base in the US. What better way than to take over an existing infrastructure that is poorly run? If the Japanese merely buy the ASSETS without the employees, then hiring will restart WITHOUT unions. Think about that.

Expect unemployment to hit 9% to 12% (depending on the US Region) by Spring 2009.

I’m pushing the envelope of my little crystal ball. I see a clear point of delineation at this time frame. If the cost of oil is stable and above $70 per barrel, and the pricing decline of housing has completed its worst in the remaining regions, then the economy will be ready for a gradual recovery.

On the other hand, we could see pricing continue to collapse in ALL sectors, creating what economists dread the most: DEFLATION. Also known as instant DEPRESSION. Here’s the bad news: a depression doesn’t merely reduce the costs of everything, it also reduces everyone’s income. It’s an ugly one-two punch that the Feds and the Treasury are trying to avoid. It’s very possible they will avoid the big D word, but it will require:
a. Stabilization in the housing sector.
b. Japanese buyout of either GM or Chrysler.
c. Chinese economy to maintain GDP growth above 6% or so (they are now at 9% which is the lowest in a number of years, indicating a rapid slow down of the economy).
d. A steady low level interest rate while avoiding inflation. This will be a neat trick to pull off, since any extended period of time where interest rates are lower than inflation will create an over-abundance of money. The Feds and the Treasury will need to continually rebalance their dealings with the banks and other institutions with great dexterity and flexibility.

The good news is that this is hitting the entire world, so it’s not merely an American phenomenon. The bad news is that this is hitting the entire world, because the US GDP is equal to the EU + Asia, combined. Thus, the collapse of the US economy has triggered a domino effect.

Watch for the signs as outlined above. We’ll all know by next summer which way things are going.

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Management 2.0 Criticism

In the September 2008 issue of CIO Magazine Australia, writer Sue Bussell referenced criticism that I provided about the pitfalls of “Management 2.0”. My quotation is in red.

From: http://www.cio.com.au/index.php/id;257351638;pp;9;fp;4;fpid;51237

Management 2.0? That’ll Be the Day

Many organizations and management strategists are grappling with, is the concept of Management 2.0, a new style of management supposedly better suited to the Web 2.0 age
Sue Bushell 01 September, 2008 14:42:00

In his book, The Future of Management, Gary Hamel suggests that organizations today face a new set of business challenges that the existing management model does not match. The drone worker of yesterday is giving way to the engaged and vocal employee of today who expects a company culture that replicates the collaborative nature of Web 2.0 — in other words Management 2.0

A CIO becomes aware that a member of staff has “gone around him” to get the information he needs from someone in another department the staffer located after some creative e-networking. As it happened, the source didn’t have the full story but the information sounded reasonable enough to the IT staffer, who happily acted on it with unfortunate results. The CIO’s reaction: “It was not only dumb but disloyal. If [the staffer] had only gone through his manager none of this would have happened.”

Another CIO tells the story of how 160 or so business analysts around the company took it upon themselves to create an online forum where they could find and get to know one another, share ideas and source help with problems from peers. No one asked permission. They just did it. The CIO’s reaction, “I was a little surprised to learn about it. But I think it’s interesting. We’re letting it continue and we’ll see what happens.”

There’s a lot of this sort of thing around as managers battle to continue managing in a Web 2.0 world, says New York-based Cognetics Corporation president Anne Pauker Kreitzberg. Managers have a general sense of what Web 2.0 tools are — especially when it comes to applications they’re familiar with like YouTube, Facebook, or Linkedin. But they still struggle to understand these technologies, discover their real business value, address the risks and figure out how to best use them.

“Only those companies that have been very early adopters — many of them in the tech business — have come to the realization that a critical success factor is having a culture that supports Web 2.0,” says Kreitzberg, who is in the process of building a community Web site for “folks interested in this topic”.

“To my mind, that’s the conclusion Gary Hamel, Andrew McAfee — in his Enterprise 2.0 work — and others are talking about.”

What they’re talking about, and many organizations and management strategists are grappling with, is the concept of Management 2.0, a new style of management supposedly better suited to the Web 2.0 age. With the growing maturity of the Internet and the arrival of Web 2.0 posing unprecedented challenges, Harvard Business Review says management — rather than technological — innovation has become the key driver of economic value worldwide.

And Hamel, visiting professor of strategic and international management at the London Business School who The Economist calls “the world’s reigning strategy guru”, is convinced traditional management has reached the end of the road. In his view the old management principles, with their focus on “incrementalism” (improving the same product or service with more efforts), are irrelevant. What matters today is strategic innovation. “The last decade was all about deal making and reducing costs. General Electric was a good example of this era. This approach doesn’t work any more,” Hamel has said.

“The efficiency-focused management model has run its course,” Hamel argues in his book The Future of Management. “To see the future of management, look to the Internet, open source, free markets and democratic institutions.”

Unprecedented competition and massive changes in business environment make it high time to usher in an entirely new set of management principles based on high-order innovation that breaks industry mores and achieves true engagement with human talent in the company. Hamel says the planning, organizing and controlling models, which have served us well for a century, won’t help companies solve 21st century problems. Instead, in an era marked by global competition and commoditization, adaptability, speed and creativity are essential for survival. Web 2.0, he says, empowers individuals with information; aggregates collective wisdom; links buyers and sellers and enables creative expression.

In Hamel’s view, the “future of management” is a world where:

  • Decisions are peer-based
  • Resources are free to follow opportunities
  • Commitment is voluntary
  • Power is generated from below
  • Communities are self-defining
  • Everyone has a voice
  • The tools of creativity are distributed widely
  • It’s easy and cheap to experiment
  • Capability counts more than titles
  • Just about everything is decentralized

Over the last decade, the Internet has dramatically transformed the world of business, Hamel says, and in future it is almost certain to change the work of management just as thoroughly as it’s changed every other facet of commercial life.

The first job of any manager is to amplify human capabilities, and the second is to aggregate individual efforts in ways that allow human beings to do together what they couldn’t do on their own. “Management innovation” entails getting better at both amplifying and aggregating human capability, Hamel argues in a recent blog post, and the Internet will facilitate both.

“In the years to come, progressive companies will use the Web to overcome the shortcomings of their antiquated, bureaucracy-based management models — flaws that today severely inhibit the capacity of these organizations to adapt, innovate and inspire . . .

“One hundred years ago, the railroad, the telephone and reliable electrical power paved the way for the emergence of the modern industrial company. Today, a new suite of “social technologies”, centered around the Web, is giving us the chance to reinvent management as we know it — an opportunity that is only open, though, to the companies and managers that can slough off a hundred years of management dogma. The potential pay-off for inventing Management 2.0? Organizations that are as adaptable, innovative and engaging as the people who work for them.”

Stuck in a 1.0 Mentality

While the next wave has been postulated for many years, very few managers or companies have made a success of it, says Telecom New Zealand program director Dave Stringer. That’s because the difference between managers, captains and leaders is not something that a 1.x manager wants to understand — they are still looking for Management 2.0, as opposed to “Organization Philosophy 2.0 (OP 2.0).”

“The concept of teams has been around for many years,” Stringer says. “The issue is not the basic concept, but the stuff underneath it. In the 1.0 world, the philosophy evolved from a simple base premise, which was that a ratio of one leader to 10 followers allowed for rapid and effective communication — the Caesar approach to managing armies. Teams, though, are a different kettle of fish. There are directed teams: think of a gridiron team, where the coach sends every play to the quarterback with a player exchange. There are managed teams: think of a basketball team, where the plays are worked out off-court and the centre decides which one to use. There are led or captained teams: think of a rugby team, where the captain takes all the key decisions on the field. There are self-managing teams: think of an equestrian team that has to work out and agree together their strategy and tactics for an event. There are self-directing teams, who are given no goals, but are sent out to add value as they see fit.

“There are so many types of team that can be employed in business, but they almost all share the characteristic that, if there is a manager it is that person’s job is to ensure the logistics and the sourcing are fit for purpose. That is the challenge, and that is the reason it’s taking time to make the transition. When the Hay System, and all those other approaches to managing income relativities, is based on the skills brought to the talent pool, and take no cognizance of the number of people ‘reporting to’ someone, then we will know we are on our way to 2.0 — not just in organization structure, but also in enterprise.”

“In my view, Management 2.0 will be less about ‘managing’ than ‘facilitating’,” says Gautam Ghosh, senior consultant at India-based Tvarita Consulting. Managers must adapt to an interconnected world where every employee has access to tools, and the screen between the organization and the outside world is a porous system.

“The days of command and control are done and dusted,” Ghosh says. “Management 2.0 would call for a new mind-set and culture of inspiring people and helping them find their calling. CIOs can help by also moving to this model, by challenging the top down IT models and moving to open communication systems that break down silos between organizational boundaries.”

Management Wars

Noel Posus, global director of Incredible Awareness, is willing to bet that Management 2.0 is going to look a lot like Web 2.0.

Most of us grew up in a “post-industrial” society, Posus says. We are now on the verge of a post-managerial society, perhaps even a post-organizational society. This is not to imply a future without managers, he says. Just as the coming of the knowledge economy didn’t wipe out heavy industry, so the dawning of a post-managerial society won’t produce a world free of executives and administrators. Yet it does herald a future in which the work of managing will be performed less and less by “managers”.

“To be sure, activities will still need to be coordinated, individual efforts aligned, objectives decided upon, knowledge disseminated, and resources allocated, but increasingly this work will be distributed out to the periphery,” Posus says.

“While Management 2.0 won’t completely supplant Management 1.0, the two versions aren’t entirely compatible. There are going to be conflicts. Indeed, I think the most bruising contests in the new millennium won’t be fought along the lines that separate one competitor or business ecosystem from another, but will be fought along the lines that separate those who wish to preserve the privileges and power of the bureaucratic class from those who hope to build less structured and less tightly managed organizations. Richard Florida sees the same battle shaping up. In The Rise of the Creative Class, he puts it bluntly: ‘The biggest issue at stake in this emerging age is the ongoing tension between creativity and organization.’ This is, perhaps, the most critical and intractable management trade-off of all, and therefore, the one most worthy of inspired innovation.

“It will take more than advances in technology to usher in the post-managerial age. As I noted earlier, management and organizational innovation often lags far behind technological innovation. Right now, your company has 21st-century Internet-enabled business processes, mid-20th-century management processes, all built atop 19th-century management principles.”

But while Posus says Management 2.0 will be the model for the future, implementing it will bring multiple challenges, including the realities of the multi-generational workforce.

Baby Boomers who don’t really want to retire are coming back into the workforce as free agents, often in consulting and mentoring roles. They may find the Management 2.0 style more than a bit foreign to them and possibly not cope well. Gen X is likely to really embrace this model but may also find it difficult to “sell” to others.

Gen Y may find it conceptually interesting, but is likely to side with Baby Boomers in wanting more structure. On one hand, they may really like the freedom this model provides, while on the other hand may not cope well with the individual responsibility such a model requires to work. “Gen Y’s may want more ‘telling’ in their environments and may find it difficult to adapt.” Posus says.

Still, there will be numerous benefits to all generations, including making it easier for them to all work together. To reap these benefits, Posus says, organizations must institute strategic learning and development inputs to develop the culture to work within this model. Some of the cultural set-up components from self-managed and/or self-directed teams may be helpful here.

Posus says formal and informal mentoring at every level of the organization will be required to make the model succeed and prove easy to grow organically. Those coaches and mentors must be fully versed in the model and become “trainers” and “consultants” to assist the organization, and the people within, with the necessary cultural development. And the coaches and mentors will most likely need to understand the multi-generational workforce dynamics and be both flexible and adaptable in their coaching/mentoring styles, he says.

Spell It Out

IT executives need to clearly articulate in business terms how technologies like Web 2.0 can be exploited to improve capital growth, organic growth, and cut operating costs, which in turn flow on to improvements in total shareholder return for investors, says Peter Hassall, IT executive management consultant at Peter Hassall & Associates.

“Putting ourselves into the shoes of our business partners, we need to ask ourselves: What will Web 2.0 technologies do for our businesses?,” Hassall says. CIOs need to determine how Web 2.0 applications will either directly or indirectly:

  • Improve organic growth through product and service innovations
  • Help reduce cost of operating the business
  • Enable new product distribution channels thereby increasing market share
  • Prove an enabler for opening up more merger and acquisition (M&A) opportunities, and therefore increase capital growth

“Additionally, we need to clearly demonstrate how we can protect sensitive corporate data and comply with listing requirements in the open and collaborative environments encouraged by Web 2.0 environments. At the same time we encourage the free flow of ideas and innovative thought through the use of these technologies,” he says.

“Our challenge is not to promote a “techo” concept of Management 2.0 but to ensure that management understands how Web 2.0 can add value to their business unit — either directly or indirectly — and more specifically provide some idea on how investment in the technologies will improve the bottom line, dividends and share value over time.

“In this and every case of considering technology investments for business benefit, Management 2.0 looks no different to what Management 1.0 should look like now,” Hassall says.

Unaware of Potential

Some companies will face serious barriers to moving towards a new Web 2.0-enabled paradigm of management.

Corporate behaviour specialist Colin Chodos, managing director at Sydney-based CCS, says he recently informally surveyed some 1200 CEOs of Australian SMEs about their experience using Web 2.0 products and services. He found less than 10 per cent had any real experience with the tools or techniques. Most were unaware of the potential these new technologies might bring to their businesses. “The current business barriers to Management 2.0 could therefore lie in the generational issue of leaders who are unfamiliar with trends and solutions championed by their CIOs,” Chodos says.

“Significant education strategies need to be explored that will enable business leaders to understand the changing skills required to take advantage of Management 2.0. For example: ‘How do I as a new-age manager find time to sift through massive loads of content and opinion to extract trends that will help key business decision making?’ In the past this skill has been the domain of the professional researcher. Today a possible barrier, but in the future this ability to process information at a corporate level will be a competitive advantage,” Chodos says.

Managers also must have the desire to move towards a new style of management — by no means a given says US business coach Alan Hill, president of Minneapolis-based DMZ Properties.

“Currently belief in the pyramid system tells managers that to give up control is to give up power, something any sane manager would be loath to do after having worked and ‘schemed’ so hard to get where they are. Their view would be: ‘I played by the rules, why shouldn’t everyone else have to?’,” Hall says.

Then again, Management 2.0 is all about breaking those rules.

Not Too Sure About 2.0

For many seasoned IT professionals, the whole idea of a new era of management ushered in by the Internet generates only cynicism

US-based IT business strategist John Doughtry thinks that Gary Hamel’s bullet list (see main story) sounds a lot like the ideals of a democracy, but doubts how long any such democratic environment is likely to last before some power play occurs.

“We may cry for a radical change as did the 18th century French, but it won’t take long before a Napoleon will come along and gather all the power he or she can muster,” Doughtry says. “This is the problem, isn’t it? Democratic structures can only survive when there are ethical authorities who do not abuse their power.”

Doughtry says he’s been running IT/IS departments in a very “peer-to-peer” manner — what used to be known as “team-oriented management” — for decades. Done correctly, he says, it empowers everyone on the team, increases motivation, improves morale, improves productivity, and builds a more trusting relationship between everyone.

The dark side, though, is that it only takes one “Judas” to undo the entire structure unless the higher authorities understand and advocate this form of organization. Very few do, in his experience: most CEOs prefer a more authoritarian approach.

“I even had one CEO call me into his office and tell me: ‘I do not believe in this so-called team-oriented concept, so don’t talk about it, and don’t utilize it.’ He was practically red in the face in his anger at the entire style,” Doughtry says. “Another CEO I knew continually wanted to ‘see heads roll’ anytime there was a human error of some type.

“In both these examples, a strong authoritarian, nearly totalitarian rule was preferred. How does one roll in any new style of management when the former style of management still maintains the power? The answer is simple: you can’t. Such change and advocacy of change has to occur from the top-down.”

On the Precipice?

While we’re still trying to reconcile Management 1.0 and 2.0, one observer says it’s three times lucky

Forget Management 2.0, says Terrence Seamon, portfolio manager at American Management Association. We are actually on the precipice of Management 3.0.

According to Seamon, Management 1.0 was Taylorism Management, which focused on efficiency. Management 2.0 was Participative Management which accompanied the quality movement and focused on customer and process. Now, he says, we are entering a new era of management that recognizes the individuality of each employee, their strengths and their aspirations.

“Management 3.0 is about engaging and unleashing people and trusting that they will do what the organization needs to have,” Seamon says. He believes we are witnessing a paradigm shift in organizations worldwide:

  • from focus on weaknesses to focus on strengths
  • from appraisal to appreciation
  • from “our way or the highway” to flexibility
  • from “one size fits all” to customization
  • from “command and control” to engage and energize

“Call it the positive workplace movement, or the employee engagement movement, or the strengths-based movement, or the appreciative Inquiry movement, or whatever. It is happening,” Seamon says. “It is a very good thing, destined to awaken joy, meaning and commitment in the workplace.”

“Somebody once said that it’s a curse to live in interesting times. I disagree. To me, it’s a gift . . . and an opportunity,” Seamon say.

— end of article —

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