Fisher Investments Editorial Staff

Capitalism, the Capitol and Capitals

By, 10/17/2012

Out of Batteries

Crony capitalism strikes again! Lithium ion battery maker A123 filed for bankruptcy Tuesday—adding itself to the growing list of failed firms who received Department of Energy green energy subsidies.

Even a $249 million (tax-payer funded) grant couldn’t save this firm in its noble quest to power electric cars. What evil forces are afoot here? No doubt, politicians will blame subsidized competition from China. (They never seem to tire of calling the kettle black.) But the real culprit was weak sales of electric cars. For that, you can mostly blame basic economics. Even with government largesse, electric cars aren’t yet economic. As much as politicians who want to shape and direct our economy wish it weren’t so, petroleum products remain cheap and plentiful—as do the cars they fuel. After the (tax-payer funded) tax credit you get for buying an electric car, the premium above a good ole American gas guzzler is still about $10,000. That may be fine for folks who make $10 million a movie, but the rest of us may choose to deploy that capital more efficiently.

This isn’t to say one day the road won’t be littered with electric cars. Maybe it will! Or, maybe, littered with cars powered by (now, very cheap and extraordinarily plentiful and really rather environmentally clean) natural gas. Or cars powered by coal or Skittles or wishful thinking. We can’t predict what sources of energy may become (or remain) economic 10, 20 and 50 years from now—but nor can any politician. By picking winners and losers (well, mostly losers, lately) the government is reallocating capital from the private sector which, motivated by profit, must develop goods and services that are economic—else they go away. And politicians are allocating capital to companies that needn’t think much about profitability at all, at least for awhile.

The end result typically isn’t wildly profitable, innovative firms. It’s very often bankrupt shells that are only good for harvesting (tax-payer funded) tax losses. (Ahem, Solyndra.) Which isn’t particularly a great return on a (tax-payer funded) investment.

Capital Quandries

Tonight, as the two foremost US presidential candidates square off in their second debate, it seems another debate is poised to rage inside the beltway.

At issue in the capitol is, redundantly, capital. The Basel III international banking accord that is. Some senators—one source counted 53 in all—are urging US regulators (we’d be more specific here, but the list would take a page) to relax or delay the implementation of rules for some or all banks. Many seem to feel the rules’ complexity and scope doesn’t account for the vast array of different banks operating in the US. Few defend the biggest of the big (in fact, it seems some in Washington are going after them with a rather revisionist complaint). But smaller, community banks seem to garner much more support.

Which highlights a somewhat ironic point: While Basel’s (and other regulators’) rules pay reference to limiting what they see as “too-big-to-fail” banks (or Globally Systemically Important Financial Institutions, G-SIFIs), the reality is the implementation of steep new capital requirements that are industry-wide and other complications could actually benefit big banks relative to small.

Now, it remains to be seen what comes from the current debate regarding US implementation of the rules. It is an important story to stay apprised of, to be sure. (While many think higher capital means safer financial system—which it can—it can also mean forced deleveraging and reduced lending to businesses and individuals.) In addressing the issue, Senator Richard Shelby said today that he wanted regulators to demonstrate that “the rules will make the banking system safer.” We’d suggest that if these words are taken at face value, the capital debate in the capitol is far from finished.

Another Critical Summit for the EuroTM

Well folks, it’s that time again: The next supposedly critical summit for the euro (trademark pending) kicks off Thursday.

Topping the agenda is Greece, which is negotiating budget cuts to unlock its €31.5 billion aid tranche. Recall, Greece initially had until June 30 to trim €11.5 billion from the 2013-2014 budget, or else it would supposedly forfeit aid and run out of cash before a key August debt redemption. But June 30 came and went, as did the bond redemption—and Greece is still afloat and eligible for funding. Now Greece is requesting an extra two years to make these cuts. With the IMF is warming to the idea and German Chancellor Angela Merkel applauding Greece’s efforts, Greece likely gets its money—but expect plenty of politicking beforehand.

Next up is Spain, which is still weighing whether to request a line of credit from the ESM. With backstops already in place for its troubled banks and regional governments, Spain likely doesn’t need a full rescue à la Greece. But with borrowing costs creeping up a bit, Spanish officials likely find the prospect of ECB debt purchases rather attractive—and signing a memorandum of understanding with the ESM is the only way to unlock this. Opening a provisional line of credit would satisfy this condition, likely allowing Spain to benefit from the ECB’s debt purchases while continuing to issue debt on primary markets. But Spanish officials say they probably won’t decide this week, so the summit may see more EU squabbling over what Spain should do.

Finally, no EU summit would be complete without debate over tighter integration. Negotiations on a banking union will continue, though with officials divided over its scope and Germany and Sweden pushing for a slow approach, significant progress seems unlikely. Meanwhile, German Finance Minister Wolfgang Schäuble has proposed giving the European Commissioner for economic and currency affairs full autonomy over member state budgets—if the commissioner decided a nation’s deficit was too high, under Schäuble’s proposal, they could veto the budget without securing the full commission’s agreement. It seems some eurozone finance ministers support the plan, but enacting it would require treaty changes—which require consent of all 27 EU member states. With the UK very wary of any changes that would disrupt the “integrity of the single market,” and some nations tiring of ceding sovereignty to Brussels, this summit likely sees plenty of wrangling over Schäuble’s proposal.

Like all EU summits, this week’s likely won’t be make or break for the euro—just a spectacle of political theater, and perhaps a backdrop for a compromise or two.


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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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