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When sleep leaves you tired

2009-06-09T06:40:00.000-07:00

Ask readers of this newspaper if they're getting adequate sleep, and many would probably say "Ha!"

Twenty percent of Americans sleep less than six hours a night, and nearly one-third have lost sleep worrying about financial concerns, according to the National Sleep Foundation, which recommends that adults get seven to nine hours. "Our society thinks sleep is for slackers," says Darrel Drobnich, the organization's chief program officer.

Millions of Americans aren't getting enough sleep, and even those that are may not be getting the most restful sleep possible. Health columnist Melinda Beck tries out the Zeo, a gadget that monitors and tracks brain waves during the different stages of sleep.

But all that lost sleep is taking an insidious toll. Chronic, inadequate sleep raises the risk of cardiovascular disease, depression, diabetes and obesity. It impairs cognitive function, memory and the immune system and causes more than 100,000 motor-vehicle accidents a year. Sleep deprivation also changes the body's metabolism, making people eat more and feel less satisfied.

Studies presented at the American Association of Sleep Medicine's annual meeting in Seattle this week also found that inadequate sleep is associated with lower GPAs among college students and with elevated levels of visfatin, a hormone secreted by belly fat that is associated with insulin resistance.

What many people don't realize is that even if they log respectable time in bed (known as TIB among sleep researchers), they may be getting poor-quality sleep, with not enough of the restorative phases. REM, the Rapid Eye Movement phase in which dreaming occurs, is crucial for consolidating memories, learning, creativity, problem-solving and emotional balance. Deep, or slow-wave sleep, when the body secretes human growth hormone, is critical for development and physical repair. Both REM and deep sleep decline with age and are highly vulnerable to disruptions, from caffeine and alcohol to anxiety and a variety of sleep disorders.

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One tip-off that you haven't gotten enough restorative sleep is trouble waking up and excessive daytime sleepiness (a condition known as EDS). "People say, 'Oh, I don't have a sleep problem. I can fall asleep anywhere, anytime' -- but that means you are excessively sleepy," says Charles Czeisler, a professor of sleep medicine at Harvard Medical School.

Other symptoms of sleep deprivation include mood changes, difficulty focusing or remembering and a chronic need for caffeine, which can then create a vicious circle of dependence and disruption. That would be me.

Finding out what's going on in your sleep generally requires spending the night in a professional sleep lab hooked up to lots of wires and monitors. But I've been testing a new home-sleep monitor called the Zeo Personal Sleep Coach that lets people track their sleep patterns nightly in their own bedrooms.

You sleep wearing a soft headband with sensors that monitor your brain waves and send signals wirelessly to a device that looks like a sleek clock radio. It displays whether you are awake or in light sleep, deep sleep, or REM sleep, in real time, all through the night.

"If you can measure it, you can manage it," says Stephan Fabregas, one of two recent Brown University graduates who invented the Zeo because they were looking for a way to wake up feeling less groggy after late nights.

Of course, not everyone needs a fancy gadget to tell them whether they are sleeping properly. But I was stunned by my results: The Zeo showed that I woke up numerous times and was awake for long stretches of the night, without having any recollection. (Perception of time is often distorted at night -- many people with insomnia actually sleep more than they think they do.) Even though I was in bed for six or seven hours each night, I was averaging only about four hours of real sleep and very little REM or deep sleep. No wonder I feel so tired!

The Zeo stores the information on a memory card you can upload to a Web site, which helps track your sleep patterns and sends daily coaching tips for getting better sleep. The $399 device comes with six months of daily email coaching, which can be extended at a cost of $99 for each additional six months. (Currently, it's available only online at www.myzeo.com.)

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Mikko Stig/Rex/Everett

To help you keep track of your sleep, the Zeo also gives you a "ZQ" score every morning, based on the quantity and quality of your sleep the night before. There's no ideal ZQ -- you're comparing your own score from night to night. But the average for people in their 20s is 86; for those in their 40s, it is 74; and for those in their 50s, it is 67, since sleep quality declines with age.

My ZQs bounced from the 40s to a dismal 15 the first week. Switching to decaf after 3 p.m. and making an effort to get to bed earlier helped me bring my score into the 50s the second week. ("Having caffeine even first thing in the morning can induce changes in brain activity during sleep," says Kenneth Wright, director of the Sleep and Chronobiology Lab at the University of Colorado at Boulder and one of Zeo's scientific advisers.) I also noticed that the nights when I had the longest stretches of wakefulness were those when my column was due -- probably a sign that I was still thinking about it long after turning in.

Everybody's sleep and sleep disruptors are different. Todd Johnson, a 40-year-old border-patrol agent in Caribou, Maine, and one of ZEO's early testers, found that reading before he went to bed helped reduce his wake time and bring his ZQ from the 20s into the 60s. "You can try something that night and see the results in the morning," he says. Another early tester, Tim Guirl, who teaches at a community college in Seattle, found that he had more restorative sleep if he didn't exercise too close to bedtime and eliminated a large late-night snack.

Other recommendations from Zeo include reducing noise, light and disruptive influences like pets in the bedroom; having a "power-down" hour before bedtime with no email, no Internet use, no cellphones and no BlackBerrys; and keeping a consistent sleep schedule. And if you find yourself awake and worrying, Zeo recommends getting out of bed and writing down what you're thinking about in a "worry journal."

Zeo says its brain-wave results are similar to those from professional sleep labs -- but only about 140 people have tested it so far. And the Zeo isn't designed to diagnose actual sleep disorders, which plague an estimated 70 million Americans -- you need to see a doctor for that.

To see if something besides drinking coffee and thinking great thoughts was affecting my sleep, I underwent a sleep study at the Sleep Health Center connected with Brigham and Women's Hospital in Brighton, Mass. A polysomnography, as such tests are called, measures brain waves like the Zeo, but also heart rate, respiratory rate, oxygen saturation, body positions and movements. It took about 45 minutes to have all of the sensors and wires attached -- and then a little longer to get comfortable enough to sleep.

To my surprise, the study found that I had a fairly severe case of Periodic Limb Movements, episodes of involuntary muscle movements in the night. About 10% of adults have PLMs. Many don't even notice; sleep partners are often bothered more than the sleepers themselves. But PLMs can be very disruptive if they are accompanied by arousals from sleep. I was averaging 42 arousals per hour. According to David White, another Harvard sleep physician who prescribed the study for me, PLMs can be due to an iron deficiency or medication side effects, and they are often related to "restless-leg syndrome," which causes an irresistible urge to move the legs, day or night. Medications like Requip can minimize the movements; I'm going to give them a try.

The study also showed I had some obstructive sleep apnea, in which the airway narrows, especially when the muscles relax in sleep. People with OSA stop breathing momentarily until a lack of oxygen alerts the brain, which wakes them up with a gasp. These mini arousals can occur as often as 70 times an hour, leaving the sufferer exhausted and at risk for heart disease, stroke and atherosclerosis. An estimated 4% of men and 2% of women have OSA. One telltale sign is having a shirt-collar size larger than 17 inches. Another sign is loud snoring, although I certainly don't do that. ("Women never snore -- they all deny it," says Dr. White.)

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Zeo

The Zeo sleep monitor lets people track their sleep patterns at home.

The most effective treatment is a Continuous Positive Airway Pressure machine, which blows air through the nose to keep the airway open. My OSA isn't that bad -- yet. Other remedies include a dental appliance that helps prop the airway open and losing weight, which helps reduce the airway blockage.

Dr. White is also chief medical officer for Philips Home Healthcare, which makes a watch-like monitor, called an Actiwatch, that tracks whether the wearer is moving or still, roughly corresponding with sleep. The Actiwatch doesn't show sleep phases; it generally diagnoses problems with jet lag and body clocks. I wore one for a week, and although I'm still a night owl, it showed nothing amiss in that area.

All in all, "there are plenty of ways you can improve your sleep," Jason Donahue, another Zeo founder, tells me cheerily. This week, I'm starting in on Zeo's tips on keeping disturbances in the bedroom to a minimum. The dog may have to find a new place to sleep.

Epidemia de histeria

2009-05-04T05:21:00.000-07:00

Gabriel Guerra

Para Lorenzo y Lorenza Lazo, en recuerdo de Concha…

Dicen que la ignorancia no mata, “nomás ataranta”, pero no estoy tan seguro. La cantidad de tonterías que he escuchado, visto y leído a raíz de la emergencia supera con mucho mi capacidad de digestión.

México y buena parte del mundo parecen estar infectados por otro tipo de virus, que nada tiene que ver ni con las aves ni con los cerdos, pero sí mucho con los humanos. Es un virus que ataca el sistema nervioso central y provoca graves trastornos mentales, afectando la capacidad de raciocinio y el uso de la lógica elemental. Es altamente contagioso y tiene un efecto multiplicador y potenciador sobre sus víctimas, que además aumenta conforme más lejos se encuentran de otros —más reales— focos de infección.

Este nuevo virus tiene una capacidad inusitada para volver irracional al más sensato, hipocondriaco al más saludable y paranoico al más cuerdo. Entre sus primeros síntomas se cuentan la capacidad de creer cualquier teoría descabellada, de repetirla sin pena y sin filtro alguno. Quienes contraen este nuevo virus creen que todo extraño es sospechoso y posible portador de otro, el más famoso pero menos peligroso H1N1, que solamente afecta las vías respiratorias pero que hasta el momento no ha mostrado riesgos para la inteligencia humana. El primero, el virus de la histeria humana, está totalmente fuera de control y no hay antiviral ni vacuna que proteja eficazmente contra su contagio.

Sus alcances no reconocen fronteras ni clases sociales, no distinguen ideologías, nacionalidades ni profesiones. Se enferman lo mismo gobiernos como el cubano y el israelí que periodistas usualmente serios y otros que no lo son tanto; futbolistas que no siempre se caracterizan por su conducta intachable que habitantes de países desmemoriados; adquiere tintes religioso-carnívoros como en Egipto y vuelve locos a agentes migratorios en China, a aldeanos despistados en Guerrero, a políticos y politólogos, a comerciantes y mercaderes…

Conocemos todos las más obvias manifestaciones del mal, como el hostigamiento y discriminación a mexicanos, estén o no infectados por el H1N1, dentro y fuera de nuestro país. Nos escandaliza que los recluyan en China, pero en México la fobia a los habitantes del DF cunde por doquier y se dan casos, hasta ahora aislados, de agresiones físicas y verbales. Naciones o pueblos que en teoría podrían guardarnos agradecimientos históricos cancelan vuelos (Argentina y Cuba) o se mofan abiertamente de los nuestros (Chile) o ignoran toda evidencia científica (Israel).

No es que un boicot turístico cubano vaya a afectarnos gravemente, ni que la suspensión de vuelos desde y hacia Argentina vaya a tener repercusión más allá de las industrias restauranteras y de entretenimiento masculino, pero llama la atención la rapidez y la tontería de los funcionarios que decidieron esas medidas. Los salva un poco el ejemplo de Egipto, cuyo gobierno decidió sacrificar a toda la población porcina de ese país, no sé bien a bien si por preocupaciones sanitarias o para quedar bien con sus radicales islámicos…

Hay personajes públicos que creen que pueden impunemente cuestionar la realidad de una epidemia que podría convertirse en algo peor, y que no se dan cuenta de que su paranoia sólo es superada por su estulticia. Teorías de conspiración dignas de películas de los años 60 aparecen bajo el cobijo de individuos que uno creería más cuerdos, a la vez que otro sector de la población se aferra a las supersticiones para contener el contagio. El cubrebocas se convierte en amuleto mientras que el agua y el jabón son súbitamente redescubiertos por un país que se preciaba de ser limpio pero que —ahora lo vemos— fue dejando de serlo.

Del comercio mejor ni hablar. No sé si son más condenables los revendedores de cubrebocas que los acaparadores silenciosos de Tamiflu, pero me queda claro que las empresas que decidieron lanzar sus campañas publicitarias para aprovecharse de la emergencia merecen algo más que un llamado de atención. Mal hacen los vendedores de desinfectantes o de alimentos que no cuidan el buen gusto, pero resultan criminales los que promueven productos contra la gripa común anunciando que NO requieren receta médica, cuando las autoridades se han cansado de advertir contra la automedicación y cuando hasta el menos informado sabe que lo peor que se puede hacer ante un síntoma es encubrirlo con medicamentos. Quien se anuncia así, en tv abierta durante los partidos de futbol en domingo (y si la Cofepris necesita más datos para ubicarlos estamos en problemas) está poniendo en riesgo a la población.

Malas son la ignorancia y la histeria colectivas, pero peor aún el afán de lucro en circunstancias como la que vivimos. En algunos delitos se puede argumentar la locura como atenuante, pero no la estupidez.

gguerra@gcya.net

www.gabrielguerracastellanos.com

La influenza y nosotros

2009-05-04T05:20:00.001-07:00

José Woldenberg
30 Abr. 09

Junto al brote epidémico de la influenza porcina podemos observar un espectáculo: el de nosotros, los comentaristas. Dado que no existe acontecimiento relevante que no sea acompañado de una estela de apostillas, análisis y comentarios, seguir estos últimos es como observar las sombras que proyectan las figuras o los ruidos de los motores en una carrera de autos. Se trata del acompañamiento que modela y modula el ambiente "cultural e intelectual" del momento, del aura de opinión que rodea a la sociedad, del sentido común impreso. No resulta anodino y deja su impronta en las muy diversas lecturas que las personas hacen de los sucesos. Por mi parte, ofrezco una tipología lírica, subjetiva e inacabada de nosotros, los opinadores, ante la crisis de salud. (No se trata de categorías excluyentes. Una sola persona puede ser ubicada en dos o más casilleros. Y además, cualquiera puede contribuir con nuevos y más decantados tipos).

El experto exprés. De inmediato, luego de dos o tres consultas (telefónicas o bibliográficas), el lego se transforma en una autoridad en el tema. Cuatro o cinco ideas tejidas de manera armónica, más seguridad, más contundencia al enunciarlas, crean un perito en la materia. El nuevo especialista explica, analiza, pontifica. Maneja ese conocimiento (superficial) con soltura y durante los días que corren será un consumado epidemiólogo.

El escéptico. Cada dicho de las autoridades, cada medida tomada, cada cifra sobre la epidemia, le parecen sospechosas. Y a él nadie lo puede engañar. Años en el oficio lo han convertido en un desconfiado contumaz. Sabe o intuye que nada es como parece; que detrás del tono seco del secretario se esconde un secreto que es necesario develar y que los datos deben estar trucados por una estrategia "comunicacional" o por simple inercia. Para él, la suspicacia es sinónimo de inteligencia y si la segunda se encuentra un poco maltrecha, la primera se mantiene incólume.

El sagaz opositor. De inmediato descubrió la lentitud de la respuesta de los gobiernos, la excesiva o la poca información que ofrecen, las contradicciones en sus dichos y decisiones, las pretensiones de utilizar la crisis para fortalecer su imagen. En una palabra, a él no sólo no lo engañan, sino que ya se apresta a desenmascarar -como en la lucha libre- la torpeza, corrupción e incompetencia de los encargados de tutelar nuestra salud. No existe terreno en el que no se deba dar la batalla y ahora el campo es el de la epidemia y la negligencia criminal.

El tira netas. No es un experto ni pretende serlo. Pero, eso sí, sabe todas las medidas que usted debe tomar. Hay que lavarse las manos 26.7 veces al día, no salir a la calle sin tapabocas, no dar la mano y mucho menos un beso, abrir las ventanas del hogar, y a los menores síntomas correr al hospital o la clínica más cercanos. Por el momento es un cruzado de la causa buena, y nada ni nadie lo podrán distraer de su misión. Ha llegado el momento en que cada uno debe contribuir con su granito de arena y él carga un pequeño costalito que trajo de Acapulco.

El acólito de la autoridad. Hay quien los confunde con el anterior, pero éstos son los que no se apartan ni un grado de las indicaciones oficiales. Repiten, subrayan, glosan, insisten. Piensan que su tarea es la de coadyuvar con los gobiernos y se transforma en un eco consistente e insistente de los mismos. En la guerra contra el virus se asumen como soldados a las órdenes de la superioridad. Su disciplina es única e inconmovible y lo demás es lo de menos.

El pescador monotemático. Por supuesto que hay comentaristas especializados, aquellos que "lo saben todo" sobre un tema. Y no pueden ni quieren desaprovechar la ocasión. Ya han aparecido los primeros aportes: "la epidemia y el turismo", "la influenza y el futbol", "la enfermedad y las elecciones", "la salud y la novela". Recuerdan aquel viejo chiste de los fenicios que no estoy de humor para repetir. Se trata de un resorte bien aceitado y que consiste en llevar cualquier tema al terreno conocido. En el no tan remoto pasado inmediato sus temas eran: "el narco y el turismo", "la violencia y el futbol", "la droga y las elecciones", "las bandas delincuenciales y la novela".

El erudito. Los hay en las más diferentes versiones. El que es capaz de recordar todas y cada una de las epidemias que precedieron al actual brote; el que puede citar a los autores que han tratado con la enfermedad y sus derivaciones; el que nos ofrece una historia panorámica del origen, desarrollo y estado actual de las vacunas en todo el orbe. Saben que saben y es el momento para que los demás se den cuenta de ello.

Son voces expresivas, elocuentes, y en conjunto producen una melodía desafinada pero penetrante, estridente e inescapable. Hablan del brote epidémico sin duda, pero también de los comentaristas, de cómo se ven a sí mismos y de cómo quieren ser vistos por los demás. Y ello, a querer o no, tiene su gracia.

Nafta’s Promise, Unfulfilled

2009-03-24T07:40:00.000-07:00

Nafta’s Promise, Unfulfilled

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By ELISABETH MALKIN

Published: March 23, 2009

MEXICO CITY — Mexico’s former president, Carlos Salinas, used to promise that free trade and foreign investment would jump-start this country’s development, empowering a richer and more prosperous Mexico “to export goods, not people.”

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Henry Romero/Reuters

A General Motors assembly line in Silao, Mexico. Mexico’s exports have quintupled under Nafta, to $292 billion last year.

Times Topics: North American Free Trade Agreement

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Henry Romero/Reuters

Nafta, signed by President Carlos Salinas of Mexico, left, and President Bill Clinton, has been in effect for 15 years.

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Alejandro Bringas/Reuters

Workers at a factory in Ciudad Juárez. Economic growth in Mexico under Nafta has not been sufficient to create enough jobs for the million young people who enter the work force each year.

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Fifteen years after the North American Free Trade Agreement took effect, only the first part of that promise has been realized.

Mexico’s exports have exploded underNafta, quintupling to $292 billion last year, but Mexico is still exporting people too, almost half a million each year, seeking opportunities in the United States that they do not have at home.

Secretary of State Hillary Rodham Clinton will arrive in Mexico on Wednesday and President Obama will visit next month. Both are expected to emphasize the successes of American-Mexican economic cooperation, but it will be hard to ignore how much in Mexico has not changed under Nafta.

Economists here say much of the blame lies with Mexican leaders, unable or unwilling to take on oligarchs and unions controlling key sectors of the economy like energy and telecommunications. But they say some blame goes to the unintended consequences of Nafta.

In some cases, Nafta produced results that were exactly the opposite of what was promised.

For instance, domestic industries were dismantled as multinationals imported parts from their own suppliers.

Local farmers were priced out of the market by food imported tariff-free. Many Mexican farmers simply abandoned their land and headed north.

Although one-quarter of Mexicans live in the countryside, they account for 44 percent of the migrants to the United States. The contradictions of Nafta are apparent in Guadalajara and the rich farmland around it.

On the road from the airport to the city, Mexico’s second-largest, a well-worn sign welcomes visitors to Mexico’s Silicon Valley. After Nafta went into effect, the comparison seemed ambitious but not out of reach.

Global giants spent billions of dollars turning Guadalajara into a manufacturing hub for the information technology industry. The industry boomed, spurred by cheap labor and the sense that Nafta guaranteed investor-friendly policies. Today the city is ringed with low-slung factories that churn out everything from BlackBerrys to digital tape storage libraries for Sun Microsystems.

But investors came because the city was already a center of technology. I.B.M, Hewlett-Packard and others had come in the 1960s and 1970s when Mexico’s market was closed.

After Nafta, the new factories imported parts from their global suppliers, wiping out local companies that had sold printed circuit boards or assembled computers under tariff protection, said Kevin P. Gallagher, a Boston University professor who has written about the Guadalajara information technology industry.

Things grew worse when the tech bubble burst, the American economy cooled and the companies moved to China, where they could pay even lower wages. Once China entered the World Trade Organization, Mexico lost much of the edge in exporting to the United States that Nafta had given it. Employment in Guadalajara’s I.T. factories dropped 37 percent in 2001 and continued to slide for two years.

“The agreement could have brought investment with more value here,” including research, testing and design, said Jesús Palomino, the general manager at Intel’s design center in Guadalajara. “But we did not know how to define or negotiate or take advantage of it.”

Mr. Palomino argues that attracting multinational manufacturers was too limited a focus. He oversees about 300 young engineers who test future Intel products and carry out research and development. The sophisticated Intel design center is an exception to the city’s assembly plants. Those factories mostly hire low-wage labor.

“A new phenomenon has grown up under Nafta — high-productivity poverty,” said Harley Shaiken, chairman of the Center for Latin American Studies at the University of California, Berkeley.

Low wages means low purchasing power. “It is not a successful strategy for globalization,” Mr. Shaiken said.

Even Nafta’s greatest success — exports — has become a liability, as Mexico feels the full brunt of declining consumption in the United States. The auto industry, for example, which has flourished under Nafta, has ground to a virtual standstill. Over all, Mexican auto exports fell more than 50 percent in the first two months of this year compared with 2008, and production dropped almost 45 percent.

The central bank forecasts that as many as 340,000 people could lose their jobs this year, and some investment banks predict the economy could contract as much as 5 percent.

That weakness has driven down the peso, which has lost about a quarter of its value in the last six months. Foreign direct investment fell last year to $18.6 billion from $27.2 billion in 2007.

Still, economists here say much of the responsibility for the lack of development in the last decade and a half lies largely with Mexican leaders and their unwillingness or inability to enact real reforms. “We have an economy that has atrophied because of the lack of reform,” said Gerardo Esquivel, an economist at the Colegio de México.

Other developing countries benefited from globalization, particularly in Asia. But in Mexico, economic growth has averaged about 3 percent a year since Nafta took effect, far below what is needed to create jobs for the million young people who enter the work force each year and the millions more who barely scrape by.

As presidential candidates, both President Obama and Mrs. Clinton promised to renegotiate Nafta. But when Mr. Obama arrives next month, he will find Mexico’s leaders reluctant to revisit the agreement. He will also find them seething over his signing of a spending bill that scrapped a pilot program allowing Mexican long-haul trucks to transport cargo throughout the United States. In retaliation, Mexico has imposed punitive tariffs on $2.4 billion worth of American goods.

Nafta guaranteed Mexico, Canada and the United States access to one another’s highways for cargo transport by 2000.

Perhaps the Mexicans least prepared for globalization were Mexico’s small farmers.

“It isn’t possible for a peasant to make a living from the countryside,” said Francisco Vargas, president of an association that groups together 2,500 farmers from Etzatlán, about 90 minutes west of Guadalajara.

The farmers hold other jobs to subsidize their farming. Mr. Vargas is a teacher. Another of the group’s leaders is a retired accountant; a third has a sideline renting out construction equipment. Some farmers continue thanks to money sent by relatives working in the United States.

Farmers in the region have survived Nafta by raising corn yields through converting to modern farming techniques. They also lobby for government aid and band together to fight private oligopolies that sell seed and buy corn.

But their landholdings remain small, sometimes not more than about 10 acres, and they are at the mercy of rising costs and fluctuating prices. Seed is up about 20 percent because of the peso’s devaluation, while corn is off the high of last year as global demand drops.

The farmers say that they have raised their yields to double Mexico’s average of three metric tons per hectare, or more. (The average for the United States is more than nine tons per hectare.) Late last year, their high yields caught the attention of the federal government in Mexico City, which has promised new financing for the Etzatlán farmers and other commercial corn farmers.

“It’s a race against time,” said Antonio Hernández, an agronomist who advises the farmers for a coalition of farming associations in Jalisco state. “We have to demonstrate this before people abandon the land.”

I.T. industry leaders and the local government in Guadalajara are trying to do the same thing: convince Mexicans that there is opportunity at home.

The group representing the industry in Mexico, known by its Spanish initials as Canieti, now promotes Guadalajara’s ability to produce customized products for customers in the United States, specialized corporate software and portions of software for operating systems. Canieti officials also promote the advantage for “pizza products,” like new cellphones that must be delivered on time.

The government and Canieti have put up $4 million to buy equipment and train 150 young people in computer animation, in a bid to attract joint ventures for co-productions and video games.

But Mr. Palomino, the general manager at the Intel design center, argues that the industry should also promote small local companies and encourage them to establish joint ventures in the United States. Those changes would nourish a culture of entrepreneurship that he believes has yet to emerge.

Professor Gallagher at Boston University argues that free trade on its own does not bring development. “Nafta was a great opportunity, but you had to build on it,” he said.

La táctica y estrategia

2009-03-23T11:01:00.000-07:00

Paul Krugman reprueba el paquete para limpiar de activos tóxicos las hojas de balance de los bancos estadounidenses. No obstante, la medida ha causado una buena impresión en los mercados de capital lo que implica confianza que es el activo más importante en una crisis como lo explica este excelente artículo.

When the economy really did fall of a cliff.

When the Economy Really Did ‘Fall Off a Cliff’

2009-03-23T11:00:00.000-07:00

March 23, 2009

OP-ED CONTRIBUTOR

When the Economy Really Did ‘Fall Off a Cliff’

JEAN STROUSE

IN what may come to be the definitive line about our current economic crisis, Warren Buffett said on the CNBC program “Squawk Box” this month that the United States economy has “fallen off a cliff.”

The most trusted investor in history went on the air to talk, with characteristic candor and humor, about the horrendous truth we pretty much know, possibly in an effort to calm things down and point toward some answers we don’t yet know. He proceeded to give his views on what went wrong (“everybody thought house prices could go nothing but up ... so you had $11 trillion of residential mortgage debt built on this theory ”), on people’s paralyzing fear and confusion (“We are in a very, very vicious negative feedback cycle .... I don’t want this to be the last line of the movie”), and on the absolute necessity of fixing the banks and taking clear, decisive action.

A look back at the handling of another financial crisis a full century ago underlines the point about decisive action. You just don’t want to take the wrong decisive action. Markets today are immeasurably more complex, global, fast-moving and regulated (a lot of good that did) than they were a hundred years ago, but the need for strong leadership has not changed.

In early 1906, the banker Jacob Schiff told a group of colleagues that if the United States did not modernize its banking and currency systems, its economy would, in effect, fall off a cliff — that the country would “have such a panic ... as will make all previous panics look like child’s play.”

Yet the country failed to reform its financial institutions, and conditions deteriorated steadily over the next 20 months. There was a worldwide credit shortage. The American stock market crashed twice. The young Dow Jones industrial average lost half of its value.

In October 1907, when a panic started among trust companies in New York and terrified depositors lined up to get their money out, Schiff’s dire prediction seemed about to come true. The United States had no Federal Reserve, the Treasury secretary did not have much political authority, and the president, Theodore Roosevelt, was off shooting game in Louisiana.

J. Pierpont Morgan, a 70-year-old private banker, quietly took charge of the situation.

In the absence of a central bank, Morgan had for decades been acting as the country’s unofficial lender of last resort, gathering reserves and supplying capital to the markets in periods of crisis. For two harrowing weeks in 1907, with the whole world watching, he operated like a general, deploying three young lieutenants to do leg work and supply him with information, and bringing two other leading bankers, James Stillman of National City Bank and George Baker of the First National Bank, into a senior “trio” to make executive decisions. (First National and National City eventually combined to form what is now Citigroup — are the shades of Baker and Stillman writhing over what has become of their descendant institution?)

The Morgan teams ran “stress tests” on the unregulated trust companies, figuring out which were impossibly overleveraged and should be allowed to fail, and which were basically sound but crippled by the panic. Once they had determined that a trust was essentially healthy, the bankers supplied it with cash, matching their loans dollar-for-dollar with the trust’s collateral assets.

When the New York Stock Exchange nearly closed early one day in October 1907 because financial institutions calling in loans were choking off the market’s money supply, Morgan summoned the presidents of New York’s major commercial banks to his office and came up with $24 million to lend to the exchange. Next, New York City ran out of cash to meet its payroll and interest obligations; Morgan and company conjured up a $30 million loan and prevented default.

At the end of Week 1, President Roosevelt sent a letter to the press congratulating the “substantial businessmen who in this crisis have acted with such wisdom and public spirit.” Shipments of gold were on the way from London to New York, and confidence had returned to the French Bourse, “owing,” reported one paper, “to the belief that the strong men in American finance would succeed in their efforts to check the spirit of the panic.” During a panic, confidence is almost as good as gold.

At the end of Week 2, Morgan called 50 presidents of trust companies to his private library on East 36th Street, locked the doors, and did not let them out until they had signed on to a final $25 million loan. The scholar of Renaissance art Bernard Berenson told his patron Isabella Stewart Gardner that “Morgan should be represented as buttressing up the tottering fabric of finance the way Giotto painted St. Francis holding up the falling church with his shoulder.”

Though Morgan had a large sense of public duty, he had not shouldered the falling church out of pure altruism. His self-interest operated on a national scale. His clients — many of them Europeans who had invested for decades in the emerging American economy through the House of Morgan — had billions of dollars committed in the United States. In watching over their long-term interests, trying to control the excesses of the business cycle and maintain the value of the dollar, Morgan had come to serve as guardian of American credit in international markets.

His power in 1907 derived not from the size of his own fortune but from the trust placed in him by investors, other bankers and international statesman. After Morgan died in 1913, the newspapers reported his net worth as about $80 million — roughly $1.7 billion in today’s dollars. John D. Rockefeller, already worth a billion in 1913 dollars, is said to have read the figure, shaken his head, and remarked, “And to think he wasn’t even a rich man.”

Trust in Morgan was by no means universal. In 1907, some of his critics charged that he had started the panic in order to scoop up assets at fire-sale prices and line his own pockets. In fact, the Morgan banks lost $21 million that year.

The difficulty today of assigning dollar values to “toxic” assets makes Morgan’s job look easy. Yet though the amount of money required for the 1907 bailouts is pocket change compared to the current trillions, at the time, the troubles and the numbers seemed enormous.

No single figure, much less a private banker, could wield the kind of power in today’s gargantuan collapsing markets that Morgan had a hundred years ago. And so far, not even the combined official powers of the Fed and Treasury have been able to stop the cascading disasters. Paul Volcker, the former Federal Reserve chairman, said recently that he couldn’t remember a time “maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.”

Perhaps new economic leadership will emerge during this crisis, under our gifted, charismatic president. It seems likely to consist of people who have the kind of experience, judgment and authority Morgan had — possibly a new “trio” made up of the current Fed chairman, Ben Bernanke; Paul Volcker; and Warren Buffett.

Only Mr. Bernanke is formally in a position to exercise that high authority now, which he is doing — he announced last week that the Fed would inject an extra $1 trillion into the financial system. Mr. Volcker, chairman of the White House Economic Recovery Advisory Board, could easily be promoted to a more dominant role. Mr. Buffett has already stepped up in public, praising the steps the Fed took last fall to insure money markets and commercial paper as “vital in keeping the place going” (if the Fed hadn’t acted, Mr. Buffett told his CNBC interviewer, “we’d be meeting at McDonald’s this morning”).

Moreover, Mr. Buffett said he could “guarantee” that in five years or so “our great economic machine” will be running a lot faster than it is now, with the government playing an enormous role in how quickly it recovers. Last fall he declared that we had just been through an “economic Pearl Harbor.” Last week he said that in order to fight this economic war the country has to unite behind President Obama, the government has to deliver “very, very” clear messages and we all have to focus on three jobs:

Job 1: win the economic war.

Job 2: win the economic war.

Job 3: win the economic war.

Just what Morgan would have said.

Jean Strouse is the author of “Morgan: American Financier” and the director of the Cullman Center for Scholars and Writers at The New York Public Library.

The Fed Didn't Cause the Housing Bubble

2009-03-11T08:51:00.000-07:00

By ALAN GREENSPAN

We are in the midst of a global crisis that will unquestionably rank as the most virulent since the 1930s. It will eventually subside and pass into history. But how the interacting and reinforcing causes and effects of this severe contraction are interpreted will shape the reconfiguration of our currently disabled global financial system.

Chad Crowe

There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

This should not come as a surprise. After all, the prices of long-lived assets have always been determined by discounting the flow of income (or imputed services) by interest rates of the same maturities as the life of the asset. No one, to my knowledge, employs overnight interest rates -- such as the fed-funds rate -- to determine the capitalization rate of real estate, whether it be an office building or a single-family residence.

The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier -- in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

U.S. mortgage rates' linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.

As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

That decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble. (The U.S. price bubble was at, or below, the median according to the International Monetary Fund.) By 2006, long-term interest rates and the home mortgage rates driven by them, for all developed and the main developing economies, had declined to single digits -- I believe for the first time ever. I would have thought that the weight of such evidence would lead to wide support for this as a global explanation of the current crisis.

However, starting in mid-2007, history began to be rewritten, in large part by my good friend and former colleague, Stanford University Professor John Taylor, with whom I have rarely disagreed. Yet writing in these pages last month, Mr. Taylor unequivocally claimed that had the Federal Reserve from 2003-2005 kept short-term interest rates at the levels implied by his "Taylor Rule," "it would have prevented this housing boom and bust. "This notion has been cited and repeated so often that it has taken on the aura of conventional wisdom.

Aside from the inappropriate use of short-term rates to explain the value of long-term assets, his statistical indictment of Federal Reserve policy in the period 2003-2005 fails to address the aforementioned extraordinary structural developments in the global economy. His statistical analysis carries empirical relationships of earlier decades into the most recent period where they no longer apply.

Moreover, while I believe the "Taylor Rule" is a useful first approximation to the path of monetary policy, its parameters and predictions derive from model structures that have been consistently unable to anticipate the onset of recessions or financial crises. Counterfactuals from such flawed structures cannot form the sole basis for successful policy analysis or advice, with or without the benefit of hindsight.

Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have "prevented" the housing bubble. All things considered, I personally prefer Milton Friedman's performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind."

How much does it matter whether the bubble was caused by inappropriate monetary policy, over which policy makers have control, or broader global forces over which their control is limited? A great deal.

If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle. If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue.

Global market competition and integration in goods, services and finance have brought unprecedented gains in material well being. But the growth path of highly competitive markets is cyclical. And on rare occasions it can break down, with consequences such as those we are currently experiencing. It is now very clear that the levels of complexity to which market practitioners at the height of their euphoria tried to push risk-management techniques and products were too much for even the most sophisticated market players to handle properly and prudently.

However, the appropriate policy response is not to bridle financial intermediation with heavy regulation. That would stifle important advances in finance that enhance standards of living. Remember, prior to the crisis, the U.S. economy exhibited an impressive degree of productivity advance. To achieve that with a modest level of combined domestic and borrowed foreign savings (our current account deficit) was a measure of our financial system's precrisis success. The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud -- not increased micromanagement by government entities.

Any new regulations should improve the ability of financial institutions to effectively direct a nation's savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis has unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions.

If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows. Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.

Mr. Greenspan, former chairman of the Federal Reserve, is president of Greenspan Associates LLC and author of "The Age of Turbulence: Adventures in a New World" (Penguin, 2007).

Discurso Slim

2009-02-09T19:14:00.000-08:00

El ciudadano Carlos Slim Helú: Gracias, buenas tardes. Me da muchísimo gusto y me honra estar con ustedes en este foro tan importante, no había un antecedente, creo, desde 1931, cuando la Gran Depresión en la que hubo esa unidad entre el bloque revolucionario del Congreso con las Cámaras de Comercio e Industria.

Esa fue una reunión, una alianza importante que se formó y que permitió, con las políticas públicas que en ese momento se adoptaron, crecer 6.2 por ciento de 1932 a 1982. Ese crecimiento sostenido durante tantos años ha sido espectacular, era el famoso milagro mexicano, fue una transformación enorme que el país logró gracias a esos esfuerzos y a esas políticas públicas, en las que se hicieron políticas de Estado que permanecieron por tantos años.

Apena que desde 82, después de la gran crisis de la deuda externa, hayamos crecido cero en términos de per cápita, no es mediocre, es cero, es peor que mediocre, sobre todo si tomamos en cuenta la población que se ha expulsado, es cero por ciento, incluyendo a los mexicanos que han tenido que irse por no encontrar posibilidades de trabajo en este país.

Ese 82, esa gran crisis de deuda externa tuvo varias razones, una fue quizás los Cetes públicos importantes, otro sin duda fue la disponibilidad de petro-dólares, de disponibilidad de financiamiento, de crédito que permitió endeudarse en forma excesiva, pero la puntilla y la causa fue externa, fue la tasa de interés al 21 por ciento. Comprenderán que una economía o en una empresa o en una persona normal a la que le sube cuatro veces el costo financiero, tiene que entrar en problema.

De ahí, de esa deuda externa con varios fines, entre ellos cobrar, vino el plan y el modelo del Consenso de Washington, modelo que tiene varias virtudes, pero cuyos defectos hemos sufrido durante tantos años y que por supuesto los países en desarrollo no lo contemplan, no les hacen caso.

Hemos visto en estos abusos, que ha habido Fondo Monetario, los tecnócratas, los académicos, los dogmáticos, ideólogos brillaron por su ausencia, en ningún momento dado llamaron la atención. Lo más cercano fue la exuberancia irracional de los mercados de diciembre de 96, de Greenspan, cuando el índice era 6 mil 500, luego se fue a 13 mil.

Esa es una situación realmente clara, hay que tener una visión de largo plazo hacia delante, pero hay que saber lo que ha pasado en el pasado. No hay soluciones simplistas al desarrollo sostenido, el país pasó de ser una ciudad agrícola y rural a una sociedad urbana e industrial, ahora hay que pasar a ser una sociedad terciaria, de servicios, tecnológica, de conocimiento, tener contemplado qué es lo que esta sociedad y sus nuevos paradigmas reclaman, para irnos en esa dirección.

Me dio mucho gusto, en la inauguración del foro, no sólo el foro mismo, sino las palabras del presidente del Congreso, el diputado César Duarte, que dice: “Hay que hacer una revisión estructural del modelo y rediseño del sistema financiero”. Es lo que hace falta.

También el presidente del Senado habló de propuestas y compromisos, también habló de cambios estructurales para mejorar productividad y competencia, lo cual es indiscutible que son dos argumentos fundamentales en toda esta situación que estamos viviendo.

Esta crisis que se inicia en los noventa, que trata de frenar Greenspan, con su exuberancia irracional; en el 2000, 2001 hay un susto por la destrucción de riqueza de esa época. Después vienen una serie de políticas excesivas, agresivas, laxas, monetaria y fiscal que hicieron que esa crisis —que se estaba corrigiendo en 2001, que empezó a corregirse en el 2000, 2001, 2002— se saliera de toda proporción y nos llevara a lo que estamos viviendo hoy.

Hoy, el epicentro es la gran crisis de las instituciones financieras, por los excesos, los grandes excesos que tuvieron en sus políticas liberales, neoliberales con falta de todo sentido de cuidado, tanto —yo diría— principalmente el gobierno de Estados Unidos. Y, obviamente, las consecuencias vienen en las decisiones de la falta de regulación y supervisión de las instituciones financieras internacionales, creando nuevos instrumentos y derivados, en que su factor principal es lo que llaman “apalancamiento”, la posibilidad de hacer con 1 peso, 20 o 30 o 50.

Por ejemplo, para comprar commodity había que dar 5 por ciento de garantía. Para comprar derivados no se daba garantía. Entonces se multiplicaba por cientos los riesgos y, bueno, pues esto es lo que estamos sufriendo.

Fue una especulación con el petróleo, la especulación con los alimentos, que afortunadamente se vino abajo, los commodity en general, porque no había que dar nada y se creó una serie de jugadores, apostadores, neófitos, muchachos que llegaban creyendo que todo iba a ser para arriba y para siempre, y apostaban y apostaban. Y bueno, esto es lo que estamos pagando.

Pero lo grave es que, aunque el epicentro es Estados Unidos, las grandes consecuencias o más consecuencias se están teniendo fuera. Por ejemplo, Japón; mientras Estados Unidos cayó 3.8 el producto interno bruto en Japón cayó 8. En Alemania 8, creo que en Japón por ahí o 9, el último trimestre.

Estamos en el momento, yo diría, ya pasó el 29, estamos viviendo el 30; hay que evitar el 31, 32 y 33. Hay que evitar que ese mercado financiero que no se ha logrado estabilizar y no se ve que se esté estabilizando, y que, por supuesto a través del crédito contamina la economía real, no colapse el mundo económico como lo hizo en aquella ocasión y como se ve que lo está haciendo, en muchos sentidos, en este momento.

Está desmedido el crecimiento del desempleo, se habla de dos dígitos, España ya está también en dos dígitos y altos. Japón, Alemania, todo el mundo decreciendo mucho. Nuestros países tienen la fuerza, nuestros países —hablo de Latinoamérica— tienen la fuerza de la mejor en los términos de intercambio en estos últimos años; nosotros el petróleo, otros países el sorgo, otros el trigo, etcétera, y tenemos los minerales.

Tenemos una fortaleza económica, éstos, nuestros países, que tenemos que cuidar y aplicar con mucho cuidado para evitar estos colapsos físicos.

No cabe duda que el producto interno bruto mexicano se va a desplomar, se va a caer, va a ser negativo, ya desde el último trimestre del año pasado, no sabemos cuánto dure, pero va a ser muy fuerte el efecto.

Ahí es donde yo digo: el producto interno bruto va a ser negativo, va a ser sustancialmente negativo por la caída del petróleo y de la exportación, entre otras cosas, y las consecuencias también internas.

Pero hay que cuidar el empleo. No hay que preocuparnos si es menos 2 o menos 1 o 0. Hay que cuidarnos cuál es la masa salarial, cuál es el empleo, y hay que establecer como el acuerdo nacional que encabezó el presidente de la república, buscar medidas que protejan el empleo y el ingreso familiar. Eso es lo fundamental que hay que hacer en este momento.

A mí me da gusto que en ese acuerdo se retomó lo que todos estos modelos y esas ideologías y esos dogmatismos y doctrinas que estuvimos viviendo tantos años, desde 83, pero sobre todo cuando el consenso de Washington empieza a aplicarse con más firmeza en nuestros países, nos ha mantenido con crecimientos cero.

Yo creo que la gran bondad que estamos teniendo, al igual que ocurrió en esa reunión con el bloque revolucionario del Congreso es que nos estamos volcando a la economía interna, ya nos estamos dando cuenta que no todo es pensar afuera.

Pensamos que la inversión extranjera es maravillosa, parece que fuera donativo. La inversión extranjera no es un donativo. La inversión extranjera viene porque estamos ofreciendo buenas utilidades. Las empresas modernas son los viejos ejércitos. Los ejércitos conquistaban territorios y cobraban tributos. Las empresas conquistan mercados y cobran dividendos, regalías, royalty, transferencias de equis y de ye y de zeta.

Hay que volcarse a la economía interna. Obviamente necesitamos inversión extranjera y adoptar tecnología y tal. Pero tenemos que volcarnos en la economía interna, cuidar mucho nuestra economía interna, impulsar las Pymes, la pequeña y mediana, bajar la mortalidad empresarial, impulsar que en México —y no lo digo por nosotros— existan empresas fuertes que compitan internacionalmente.

No hay países fuertes sin empresas fuertes. Si los países no tienen empresas fuertes están volviéndose neocolonias, de alguna forma, necesitan tener la fuerza; no internamente, sino hacia fuera, de poderse proyectar.

Por eso vemos países que han impulsado mucho las empresas fuertes, su transnacionalización, inclusive con impulsos fiscales como es España que les da deducible el 75 al 90 por ciento de la inversión. Brasil que apoya con el Banco de Desarrollo, etcétera.

Y como lo ha hecho Estados Unidos desde la doctrina Monroe, desde Poinsett a la Colonia, ayudando a la independencia para controlar las economías y los mercados nuestros, hasta la fecha.

Creo que es muy importante atender la economía interna. Qué bueno que nos volcamos de nuevo a la banca de desarrollo; la teníamos olvidada. La banca de desarrollo es fundamental para el crecimiento de nuestro país. Tenemos que volver también a hacer infraestructura, a mejorar nuestra capital humano; tenemos un gran presupuesto en él, ahí va la calidad; es baja calidad. Necesitamos modernizarlo, mejorar la calidad y pasar ya a la cultura digital, ya no a alfabetizar, sino alfabetizar digitalmente a la población.

Necesitamos ser competitivos en esta civilización del conocimiento, de la información, etcétera, y necesitamos competencia, estoy de acuerdo con la competencia. Es muy importante, es como si fuéramos un atleta que no compite con nadie, no va a progresar nunca. Necesitamos usar en la competencia referencias internacionales. Qué tiempo hizo éste, cómo salta el otro, cómo juega el beisbolista o el futbolista; qué técnico es el mejor.

Sin duda tenemos que estar abiertos a la competencia y a la globalización. No es una alternativa; es una necesidad. Es un paradigma esta nueva civilización, aunque en este momento se está retrayendo porque el colapso económico, la falta de empleo, la falta de consumo, la caída de la economía americana y de las economías desarrolladas, obviamente, a los países que exportan les van a bajar sus importaciones. Van a bajar los precios de los primarios, como ya bajaron, etcétera; entonces va a haber una caída importante del comercio internacional.

Pero, aparte del concepto el comercio internacional se va a caer el empleo, va a haber mucho desempleo, va a subir el desempleo como no teníamos noticia en nuestra vida personal —sólo historia de los 30—; van a quebrar las empresas, muchas chicas, medianas y grandes; van a cerrar los comercios, va a haber locales cerrados por todos lados, van a haber inmuebles vacíos. Es una situación que va a ser delicada. No quiero ser catastrofista, pero hay que prepararse para prever y no estar viendo las consecuencias después y estar llorando.

Yo creo que como hicimos el 31, hay que retomar nuestras decisiones, hay que ver qué modelo necesitamos tener, cómo debe operar, cómo vamos a salir de esta crisis. Tenemos que salir más fuertes de esta crisis. ¿Cómo? Creando capital humano y físico. Si tenemos un buen capital físico, el capital humano va a ser muy importante.

Se impulsa mucho el empleo a través de las Pymes, todos sabemos eso. Pero también hay que atender nuestro sector agropecuario que puede estar un poco descuidado y, por supuesto, la infraestructura. Y lo más rápido, más efectivo y que genera mayor empleo que la infraestructura y que la construcción misma de la infraestructura —que es fundamental— es el mantenimiento de la infraestructura. Para eso no hay que esperar el plan, el proyecto, la ingeniería, ni el derecho de vía, ni tal ni tal. Ése se hace de un día a otro.

Las escuelas, hay 30 mil escuelas en mal estado. Hay que arreglarlas, hay que modernizarlas, hay que llevar ventanas, baños, techos, pinturas, que están realmente en deplorables condiciones;, igual hacerlo en los hospitales, en los centros de salud, en las oficinas de gobierno, en las zonas arqueológicas, cuidando la biodiversidad, el ambiente, etcétera.

Creo que hay una capacidad brutal en México de dar empleo intensivo, con muy poco dinero, y por supuesto, hay que buscar la combinación del capital público y privado para impulsar aquellos proyectos que lo justifiquen de esa forma. Creo que tenemos que buscar salir, como decía, más fuertes de esto.

A mí me llama la atención que todavía sigan los dogmas, después de 26 años de fracaso, todavía encuentran nuevas fórmulas y nuevos culpables para justificar que no es, aunque los que han sido más importantes lo han reconocido, como Williamson; yo creo que además, en esta situación de estos últimos años, hemos hecho chica a la clase media, la hemos afectado mucho.

Buena parte de lo que señalaba el presidente de la Comisión de Competencia, de que es el 30 o 40 por ciento de los ingresos, porque no tienen ingreso, la gente no tiene ingreso. La tercera parte de los estudiantes de la UNAM viven con un ingreso familiar de cuatro salarios mínimos, que hoy son 400 dólares..., eso no es ingreso. Necesitamos mejorar el empleo y el ingreso de la gente.

Se discute muchas veces entre riqueza e ingreso. No que la riqueza sea privada, colectiva, pública; tiene que manejarse con eficacia para crear más riqueza, y su fruto, que es el ingreso; tiene que tener una mejor distribución del ingreso.

Y vemos cómo se puede, sin duda, una de las formas de mejorar la distribución del ingreso es con educación, es con empleo, y buen empleo. La educación no solamente tiene la ventaja de formar capital humano, sino que es mejor oferta. El que tiene buena educación tiene mayores alternativas de trabajo.

Todavía me faltan varias cosas, pero básicamente insistir en el empleo en México. Creo que ya se me está yendo el tiempo. Yo creo que hay que buscar, sin duda, los capitales nacionales fuertes y competitivos, que al tú a tú con las trasnacionales, crear más riqueza pública y que no se usen.

Cuando falla una iniciativa fiscal en el Congreso, que no se usen los monopolios del Estado para sustituir la recaudación fiscal. Que no se suba la energía como se ha estado haciendo para recaudar fiscalmente. Que no se use la gasolina para recaudación fiscal. Ese acuerdo debe estar aparte. Deben ser empresas que se manejen con autonomía y fuera del presupuesto, para evitar que cuando se autoriza un ingreso no se sube un punto en la red o tal o tal y se le suben los precios y se tiene esa recaudación.

Por último, les quiero decir aquí, como hay varias cosas que han tenido que ver. Lo que dicen los Estados Unidos dicen: vaya a América. Compra en América. El ministro Sebastián, de la industria española dice: “ya hay algo que nuestros senadores pueden hacer por su país, que es apostar por España, por nuestros productos, nuestra industria y nuestros servicios”. Apostar por nosotros mismos. Está empezando a haber un nacionalismo económico para el consumo de Estados Unidos. Ojalá y para nosotros no sea “sell-México”, “vendamos México”.

Le estoy dejando, por favor, al Legislativo, información sobre lo que es la competencia a la que se refería el presidente de la Comisión. Aquí señala que las razones principales más problemáticas, factores de México, es ineficiencia de la burocracia gubernamental, primero, 18 por ciento; corrupción; inadecuada infraestructura, regulaciones restrictivas, regulaciones de impuestos, acceso al financiamiento, tax raise, crime, crimen y robo, inadecuada educación de la fuerza de tarea.

Les dejo esto que es del foro. Nos tiene en lugar 60. No es tampoco la ley de Dios, pues porque en primer lugar está Estados Unidos, ya sabemos que no es el más competitivo del mundo, pues nos están llenando de productos por todos lados.

Les dejo, por favor, la información esta, y les agradezco mucho su atención, el tiempo y la invitación.

Why 'Stimulus' Will Mean Inflation

2009-02-06T05:20:00.000-08:00

Why 'Stimulus' Will Mean Inflation

In a global downturn the Fed will have to print money to meet our obligations.

By GEORGE MELLOAN

As Congress blithely ushers its trillion dollar "stimulus" package toward law and the U.S. Treasury prepares to begin writing checks on this vast new appropriation, it might be wise to ask a simple question: Who's going to finance it?

That might seem like a no-brainer, which perhaps explains why no one has bothered to ask. Treasury securities are selling at high prices and finding buyers even though yields are low, hovering below 3% for 10-year notes. Congress is able to assure itself that it will finance the stimulus with cheap credit. But how long will credit be cheap? Will it still be when the Treasury is scrounging around in the international credit markets six months or a year from now? That seems highly unlikely.

Let's have a look at the credit market. Treasurys have been strong because the stock market collapse and the mortgage-backed securities fiasco sent the whole world running for safety. The best looking port in the storm, as usual, was U.S. Treasury paper. That is what gave the dollar and Treasury securities the lift they now enjoy.

But that surge was a one-time event and doesn't necessarily mean that a big new batch of Treasury securities will find an equally strong market. Most likely it won't as the global economy spirals downward.

For one thing, a very important cycle has been interrupted by the crash. For years, the U.S. has run large trade deficits with China and Japan and those two countries have invested their surpluses mostly in U.S. Treasury securities. Their holdings are enormous: As of Nov. 30 last year, China held $682 billion in Treasurys, a sharp rise from $459 billion a year earlier. Japan had reduced its holdings, to $577 billion from $590 billion a year earlier, but remains a huge creditor. The two account for almost 65% of total Treasury securities held by foreign owners, 19% of the total U.S. national debt, and over 30% of Treasurys held by the public.

In the lush years of the U.S. credit boom, it was rationalized that this circular arrangement was good for all concerned. Exports fueled China's rapid economic growth and created jobs for its huge work force, American workers could raise their living standards by buying cheap Chinese goods. China's dollar surplus gave the U.S. Treasury a captive pool of investment to finance congressional deficits. It was argued, persuasively, that China and Japan had no choice but to buy U.S. bonds if they wanted to keep their exports to the U.S. flowing. They also would hurt their own interests if they tried to unload Treasurys because that would send the value of their remaining holdings down.

But what if they stopped buying bonds not out of choice but because they were out of money? The virtuous circle so much praised would be broken. Something like that seems to be happening now. As the recession deepens, U.S. consumers are spending less, even on cheap Chinese goods and certainly on Japanese cars and electronic products. Japan, already a smaller market for U.S. debt last November, is now suffering what some have described as "free fall" in industrial production. Its two champions, Toyota and Sony, are faltering badly. China's growth also is slowing, and it is plagued by rising unemployment.

American officials seem not to have noticed this abrupt and dangerous change in global patterns of trade and finance. The new Treasury secretary, Timothy Geithner, at his Senate confirmation hearing harped on that old Treasury mantra about China "manipulating" its currency to gain trade advantage. Vice President Joe Biden followed up with a further lecture to the Chinese but said the U.S. will not move "unilaterally" to keep out Chinese exports. One would hope not "unilaterally" or any other way if the U.S. hopes to keep flogging its Treasurys to the Chinese.

The Congressional Budget Office is predicting the federal deficit will reach $1.2 trillion this fiscal year. That's more than double the $455 billion deficit posted for fiscal 2008, and some private estimates put the likely outcome even higher. That will drive up interest costs in the federal budget even if Treasury yields stay low. But if a drop in world market demand for Treasurys sends borrowing costs upward, there could be a ballooning of the interest cost line in the budget that will worsen an already frightening outlook. Credit for the rest of the economy will become more dear as well, worsening the recession. Treasury's Wednesday announcement that it will sell a record $67 billion in notes and bonds next week and $493 billion in this quarter weakened Treasury prices, revealing market sensitivity to heavy financing.

So what is the outlook? The stimulus package is rolling through Congress like an express train packed with goodies, so an enormous deficit seems to be a given. Entitlements will go up instead of being brought under better control, auguring big future deficits. Where will the Treasury find all those trillions in a depressed world economy?

There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more.

And what will be the result? Well, the product of this sort of thing is called inflation. The Fed's outpouring of dollar liquidity after the September crash replaced the liquidity lost by the financial sector and has so far caused no significant uptick in consumer prices. But the worry lies in what will happen next.

Even when the economy and the securities markets are sluggish, the Fed's financing of big federal deficits can be inflationary. We learned that in the late 1970s, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded the Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health.

Inflation is the product of the demand for money as well as of the supply. And if the Fed finances federal deficits in a moribund economy, it can create more money than the economy can use. The result is "stagflation," a term coined to describe the 1970s experience. As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return of stagflation. I wonder why no one in Congress or the Obama administration has thought of that as a potential consequence of their stimulus package.

Mr. Melloan is a former deputy editor of the Journal's editorial page.

The Next Disaster

2008-12-12T07:47:00.000-08:00

On The Cover/Top Stories
The Next Disaster
Jesse Bogan, Kerry A. Dolan, Christopher Helman and Nathan Vardi 12.22.08, 12:00 AM ET

The Nov. 4 crash of a Learjet in an upper-class Mexico City neighborhood caused a disproportionate amount of destruction. All eight passengers were killed--including Interior Minister Juan Camilo Mouriño, President Felipe Calderón's right-hand man, and José Luis Santiago Vasconcelos, a leading prosecutor against the powerful drug cartels; seven people on the ground died, too.

Hours after the disaster, rumors shot across the capital city like the discharge of automatic weapons: The crash was the work of drug traffickers showing who was boss in this nation of 110 million souls. A preliminary report found no evidence of explosives and strongly suggested pilot error in turbulent conditions. Still, says Larry N. Holifield, former head of the Mexico City office of the U.S. Drug Enforcement Administration, "people won't believe it was an accident. They think everything down there is a conspiracy because half the time it really is." One witness to the crash believes the worst. "A plane just doesn't fall out of the sky," says Guadalupe Rodríguez, 42, a law firm assistant. "The narcos are saying, 'Here we are--and nobody's going to get rid of us.'"

You can forgive Rodríguez for thinking so. This year, through mid-November, there have been 4,300-plus drug-related deaths in Mexico, compared with 2,500 in 2007. Edgar Millán Gómez, who oversaw the joint efforts of the army and federal police, was assassinated in May in his home in Mexico City. Roberto Velasco Bravo, a federal chief of criminal investigations, was shot in the head a week earlier. The narcotraficantes have infiltrated the highest levels of law enforcement, including, allegedly, Mexico's principal link to Interpol and its former senior drug czar. Mexico, once again, is battling the ever powerful gangs. "It has been a fierce bloodbath," says Felipe González González, president of the Senate public security commission and former governor of the central state of Aguascalientes. "We have more dead than you have in Iraq."

Is Mexico descending into criminal and economic chaos? "Failed state? That is a very irresponsible remark," bristles Arturo Sarukhan, Mexico's ambassador to the U.S. "The challenge of corruption is being taken on. We are rooting out people who have been infiltrated. Look at the role of the Mexican private sector and civil society. Nowhere can you see signs of anything akin to a failed state."

But there is urgent concern north of the border about a potential strategic threat. "We're fixated on Iraq and Afghanistan, but from a homeland security perspective, right here on our border, isn't this more important?" asks Fred Burton, a former State Department counterterrorism official, now a vice president at Stratfor in Austin, Tex.

Washington, D.C. is fretting, too. "The consequences for both our countries in the near future and the not-so-near future could not be greater," says John Walters, director of the White House Office of National Drug Control Policy, a.k.a. the drug czar. "The consequences if President Calderón fails and the institutions of government, at least in the northern part of his country, become controlled by terrorist mafias--well, we worry about ungoverned spaces far away from the U.S., and this is right next door."

No disagreement from Antonio Oscar (Tony) Garza, U.S. ambassador to Mexico. "The focus of the last couple years has clearly been security," he says. In the so-called Mérida initiative, Uncle Sam has committed $1.4 billion in military hardware to help Mexico battle the cartels. But as of late November no significant transfers had yet occurred.

The explosion of narco terror comes alongside a precipitous drop in oil prices and the crushing effects of a deep U.S. recession. The climate of fear is kicking the life out of the economy. The second wave of the global financial crisis is playing out in the developing world--and right on our doorstep. After expanding by 3.2% in 2007 to $900 billion, Mexico's GDP growth will slow to 1.5% this year and tumble to somewhere between zero and 0.7% in 2009, predicts Raúl Feliz, an economist at CIDE, a Mexico City think tank that specializes in economics and politics. While some of that meager expansion will come from government stimulus spending, its hands are tightly tied because state-owned oil monopoly Pemex (Petróleos Mexicanos) contributes 37%--$80 billion in 2008--of federal revenue. Next year analysts expect a plunge in petrodollars. Unemployment will jump from its current 4.1%. Throw in part-time workers, who account for roughly one-third of GDP, and the jobless figure soars to 10%. Feliz expects that number to reach 12% next year.

Credit-rating agencies are taking notice. In November Fitch put Mexican government foreign and local currency debt on "negative outlook" (though the ratings are still investment grade). It said that Mexico's ability to absorb global shocks was limited.

To say nothing of internal shocks. Eighty percent of Mexican exports--$240 billion this year, up 10% from 2007--go to the U.S., where shoppers aren't spending. You can see the effects in Ciudad Juárez, just across the border from El Paso, Tex. Roughly 223,000 people work at 330 companies in the maquiladora sector, assembling auto parts for the likes of Lear and Delphi, set-top boxes for Cisco's Scientific Atlanta unit and medical devices for Johnson & Johnson, among others. But 22,000 people have lost maquiladora jobs this year, most of them since August, says Sandra Luz Montijo-Dubrule, president of the Maquiladora Association of Ciudad Juárez. "Seventy percent of our industry here is U.S.-owned factories. Now that the recession has hit, we don't have the consumers in the U.S.," she laments. Worse: Every maquiladora job supports four other jobs in the city.

Sidebars:
Industry & Unemployment
Oil
The Drug War
Southern Discomfort

Drug-related violence pervades all segments of life in Mexico. "The cartels have an extraordinary capacity for corrupting and intimidating," says U.S. Ambassador Garza. The drug lords operate through most of the country (see map). In Ciudad Juárez the body count is 1,100 this year--200 or more of those deaths in August.

The cartels are also taking a big toll on business. "U.S. companies are worried about the safety of their workers," says Maria Luisa O'Connell, president of the Border Trade Alliance in Phoenix, Ariz. "Drugs have become such a big problem." As they have for the business community throughout Mexico. As a result of many high-profile kidnappings and murders, one of the most vibrant businesses in the nation is security--bodyguards and armored vehicles. An executive can shell out as much as $500,000 a year to protect himself and his family, reports Stratfor.

Many Mexicans believe the problem originates in the U.S., and that the cartels could be wiped out tomorrow if gringos wrestled seriously with the demand side of drugs. But the Mexican government realizes what it's up against at home. "The state is fighting against an opponent with no limits on arms or financial resources," says Jorge Gonzalez, a professor of international economics at Trinity University in San Antonio, Tex. and a native of Monterrey, Mexico. Throwing 25,000-plus troops at the U.S. border and other hot spots like the northwestern state of Sinaloa, President Calderón has scored a few headline-grabbing wins. He first targeted the powerful Gulf cartel and its infamous enforcement arm, a group of army deserters known as Los Zetas. In late January special forces arrested Alfredo Beltrán Leyva (El Mochomo, or "Red Ant"), a reputed deputy of Joaquín (El Chapo, "Shorty") Guzmán Loera, Mexico's most wanted man. The last of the five brothers who allegedly ran the Tijuana cartel, Eduardo Arellano Félix, was arrested in October. Most Mexicans, however, believe the cartels are winning the war.

Still, Calderón's assault has disrupted the cartels' business in the U.S. It's reflected in the rising price of cocaine, recently $123 a gram on America's streets, up 27% since early 2007, notes Michael Braun, managing director at Spectre Group International in Alexandria, Va. and recently retired chief of operations at the DEA. Cocaine purity is down 16%.

On the economic front Mexicans like to point out how they are in better shape to weather tough times than they were 14 years ago, when the U.S. and others had to intervene to save the peso. Some of that is true. The federal deficit is down to 0.2% of GDP. Short-term interest rates on government debt, while still high, are 8.3%; inflation is at a manageable 5.8%. Solid companies like Wal-Mart de México (68% owned by the Bentonville, Ark. giant) and América Móvil, the wireless services provider, are still forging ahead with precrisis capital expenditures. There's still hiring going on at the factories in Guadalajara, Chihuahua and Reynosa operated by contract manufacturer Jabil Circuit.PepsiCo recently decided to spend up to $3 billion to expand its snack and drink business.

Mexico's other Nafta partner, Canada, has been investing. Two years ago Bombardier Aerospace, lured by tax breaks and a new university to train people in the industry, opened a wire harness factory in the state of Querétaro. Recently it unveiled a $250 million plan for another factory to make wings and fuselages. Canada's Goldcorp is spending $1.5 billion for a gold, silver, lead and zinc mine in Zacatecas State that will employ 1,000 people. That's on top of the three mines it already operates and the $80 million it's spending to drill for gold.

But these investments hardly make a dent in Mexico's economy. There is plenty of grim news to darken the bright spots. The three leading sectors of the economy--services, industrial and agriculture--are slowing; manufacturing is expected to contract next year (see charts).

One silver lining is that the banking system is well capitalized, at least for now, says Deborah Riner, chief economist for the U.S. Chamber of Commerce in Mexico. As a recent imf report points out, there is little exposure to U.S. subprime assets and no hint yet of a credit crunch. That's because the nation hasn't yet developed an addiction to debt. "In times of crisis, cash is king," says Ricardo Salinas Pliego (net worth: $6.3 billion), who controls TV Azteca, mobile phone provider Iusacell and home electronics retailer Grupo Elektra. Salinas recently spent $41 million buying a 28% stake in the bankrupted chain Circuit City.

Salinas' Banco Azteca makes loans to street vendors, cabdrivers, bricklayers and plumbers--at average annual interest rates of 50%. Vice-Chairman Luis Niño de Rivera indignantly defends the usurious rates, which he claims are the market rates. "There used to be no hope for low-income people who barely had access to credit," he says. "We have changed the history of all these people," as well as allowed them to buy goods and services from Salinas enterprises. With 1,530 branches, Banco Azteca has $4 billion in deposits and $2 billion in loans on its books. Borrowers pay weekly--often handing over small sums to one of Azteca's 5,500 collections officers, who show up on motorcycle. That keeps loan losses down to 5.5%.

Sidebars:
Industry & Unemployment
Oil
The Drug War
Southern Discomfort

Default rates will rise in a degrading economy. Already there are bleak signs in the $85-billion-a-year auto industry. While Toyota North America insists it's sticking to its schedule next year, Ford of Mexico says it will "adjust our plans accordingly." Nissan Mexicana recently halted production for six days at its Aguascalientes plant and canceled a planned third shift in Civac. General Motors has cut 660 of its 13,000 workers, discontinued its line of GMC Kodiak medium-duty trucks in Toluca and slowed production of SUVs and pickups in Guanajuato. "Everyone is worried about the future," says a spokesman. Chrysler Mexico laid off 400 of 6,000 people in October and is culling 20% of its 1,200 white-collar employees. Delphi has 55,000 workers at 48 Mexican plants, down from 65,000 at 54 factories two years ago. The auto parts maker is asking some employees to take a voluntary reduced workweek at 50% pay.

On the other side of the border look for a large drop in remittances from Mexicans living in the U.S. For 2008 they will be down roughly 10% to $21.6 billion. In 2009, predicts Roberto Newell, chief executive of the Mexican Institute of Competitiveness, total remittances may be off by as much as 25% from last year. Of the 11 million Mexicans in the U.S., 60% of them send money home. Perhaps as many as 150,000 will be unemployed by June, says Manuel Orozco, an analyst at the Inter-American Dialogue in Washington. Many more have already been forced out of high-paying construction jobs into jobs paying a lot less. After interviewing migrants, Orozco concludes that 3% to 7% of them will go home next year.

All this pinches the lives of people like Sandra Ruiz Martínez, 36. She lives in a two-room cinder block home that somehow stays pegged to the hillside of Ecatepec, Mexico City's largest suburb, with her seven children and her sister and her sister's two babies. Six years ago Ruiz's husband, an undocumented immigrant, went to San Juan Capistrano, Calif. to find work (and ended up starting a second family). As a cook, he used to send $135 every eight days. Since his hours were cut in August, he's been remitting the same amount every three weeks. Ruiz says she needs $8 a day to run her household. While the government helps pay for high school, she can't juggle finances until the money arrives, and none of her kids has gone past the equivalent of eighth grade. The latest squeeze means no new shoes or clothes for anyone. Still, the tiny house is full of laughter. "Why be broke and sad?" she shrugs. "We try to forget."

It may be a lot harder to forget next year, when some government subsidies disappear. Hit by the double whammy of sinking oil prices and lower production, Pemex's contribution to state coffers could drop 20% or more to $65 billion in 2009. This despite only $18-per-barrel production costs, a $22 discount on today's spot price in Mexico.

Pemex is in sorry shape. From a peak of 3.3 million barrels a day in 2004, output is down to 2.8 million barrels. Unless someone figures out how to halt the decline, Mexico may become a net oil importer by 2015, says Allyson Benton, analyst at Eurasia Group, a political-risk consultancy in Manhattan. Pemex vigorously contests the prediction.

The problem isn't a lack of resources. Exploration and production chief Carlos Morales Gil says Pemex has 14 billion barrels of proved reserves, 30 billion barrels of probable and possible oil and another 54 billion barrels yet to be found. The culprit is Mexico's constitution, which stipulates that all oil and gas reserves are the sole property of the people of Mexico. That bars Pemex from selling stakes in oilfields to foreign companies--depriving Mexico of the risk capital and the talent that Western oil companies are instead sending to colder climates and deeper waters.

The Cantarell field was so big that Mexico could afford to be xenophobic about oil production. It's no longer the gusher it was: Production is down from 2 million barrels a day in 2004 to 1 million today. "It made us think we inherited a guaranteed flow of dollars for the rest of our lives," sighs Morales Gil.

A new law passed by the legislature will help to a degree. While the wording of new contracts must still be painstakingly matched to the constitution, the reforms permit Pemex to develop the technology of foreign oil services companies--finally opening Mexico to deepwater exploration of the Gulf--and to pay them incentives based on Pemex's success. Morales Gil can envision a nonequity partnership to produce Mexico's oil via platforms on the U.S. side of the maritime border, where Royal Dutch Shell, bp andChevron are installing an estimated $6.7 billion spar platform that will be linked to fields as far as 10,000 feet below sea level. "Perhaps in these reservoirs it makes sense to get together with the other guys and plan a joint investment," he muses, but "keep the reserves separate."

Pemex says it must spend $20 billion a year for two decades just to keep output stable. That will be very tough to pull off without outside investment--especially for a company sagging under $100 billion in debt. David Shields, an analyst who has long studied Mexican oil, suggests the government take the liability off Pemex's books by converting it to sovereign debt.

Sidebars:
Industry & Unemployment
Oil
The Drug War
Southern Discomfort

But what foreign investor would be eager to buy that debt when the Mexican public markets themselves are pretty spooked these days? "People don't want to put their surnames on a share listing," Mexican stock exchange president, Guillermo Prieto, recently said. "At least six or seven companies have said crime is a reason [for not floating an issue]." The cartels have left particularly grisly marks, including at least 40 decapitations this year. "You have gangs publicizing that they've killed innocent people to enhance their reputation," says Peter Reuter, professor of public policy at the University of Maryland and a Rand Corp. scholar. On Nov. 3 there were 58 drug-related deaths, including four men burned to death in the beach town of Sinaloa de Leyva. On that same day surgeons in a Ciudad Juárez hospital were ordered out of an operating room as hooded men executed a patient who had shown up with a gunshot wound. With so little faith in his own men, Juárez's mayor fired 400 police officers for failing lie detectors and other tests to root out corruption and started to recruit federal troops to the force.

Chronic fear of kidnapping, or worse, is driving more and more Mexicans north to the U.S. Alejandro Junco, proprietor of one of Mexico's largest dailies, El Norte, recently moved his entire family to live in Texas. Pablo Jacobo (Jack) Suneson Bautista, owner of Marti's, a high-end arts and crafts gallery on Guerrero Avenue in Nuevo Laredo, refuses to let his kids come home to work in the business. "No way," he says. "I am just afraid they might be singled out or there might be some kind of kidnapping attempt." No one knows how many Mexicans are fleeing. But Arturo Rolland, a broker at Latin Credit Mortgage & Realty in San Diego, guesses that maybe 100 families a month are moving from Tijuana to the Chula Vista/San Diego area to seek safety. Some because gangsters "are using Facebook and MySpace to track people and their relatives," says a source at the Asociación de Empresarios Mexicanos, an entrepreneurs group in San Antonio.

The narcotraficantes have found opportunity in the U.S., too. If the late Colombian drug lord Pablo Escobar had Miami, then Joaquín Guzmán has Atlanta, which has become the East Coast distribution center of cocaine and other drugs for the Mexican cartels. Atlanta's accessibility to key interstates like I-95 and I-85 make it a perfect hub for moving cocaine and marijuana and taking bulk cash back to Mexico. Atlanta's fast-growing Mexican population, lured largely by the region's building boom, has provided excellent cover and resources for the cartel's U.S. emissaries.

Northwestern Georgia is dotted with drug warehouses and money-counting houses, often set up in empty suburban homes furnished with a few tables and laptops. From there cocaine is moved to New York, Pittsburgh, Washington, D.C., Miami and Chicago. The cash can be counted and inserted within 24 hours in sophisticated hydraulic traps built into tractor trailers for the trip to Texas and the southwestern border. No need for cages or safes--the cash at the money-counting houses is kept in closets, and one Gulf cartel moneyman made it clear that the lives of families in Mexico of anyone messing with the efficiency of his money-moving operation were at stake. "I don't know how much more worried I would have to be," says John C. Killorin, director of the Atlanta High Intensity Drug Trafficking Area.

The Gulf cartel has dug its claws into the Atlanta area, as shown by a federal indictment in September of 34 of its members who authorities say were organized into distribution and transportation cells. The feds say the leader, 20-year-old Edgar Rodríguez-Alejandro, was taking orders from the highest levels of the Gulf cartel in Mexico until he was arrested in May with 12 kilos of cocaine and $7.7 million, a slim fraction of the 16,000 kilos of cocaine and 116 weapons recently seized in the U.S. Two cells of Shorty Guzmán's cartel in Atlanta were tracked and 20 indicted in December 2007.

The cartels are getting hard for Americans to ignore. In July a Rhode Island distributor who owed the Gulf cartel $300,000 was lured to an Atlanta suburb and then jumped by three members of the gang, who held and tortured him. He was rescued by the feds. Says Rodney Benson, the DEA's special agent in charge in Atlanta: "My number one concern is that if we don't impact these organizations there may be increased violence down the road."

What about help from the Mérida plan? "The money is going to the wrong side of the border," contends Congressman Ted Poe (R--Tex.). "With the infiltration of law enforcement and so many corrupt officials in Mexico, we don't want that equipment used against us."

Sidebars:
Industry & Unemployment
Oil
The Drug War
Southern Discomfort

Hidden Travels of the Atomic Bomb

2008-12-10T08:30:00.000-08:00

December 9, 2008

Hidden Travels of the Atomic Bomb

By WILLIAM J. BROAD

In 1945, after the atomic destruction of two Japanese cities, J. Robert Oppenheimer expressed foreboding about the spread of nuclear arms.

“They are not too hard to make,” he told his colleagues on the Manhattan Project at Los Alamos, N.M. “They will be universal if people wish to make them universal.”

That sensibility, born where the atomic bomb itself was born, grew into a theory of technological inevitability. Because the laws of physics are universal, the theory went, it was just a matter of time before other bright minds and determined states joined the club. A corollary was that trying to stop proliferation was quite difficult if not futile.

But nothing, it seems, could be further from the truth. In the six decades since Oppenheimer’s warning, the nuclear club has grown to only nine members. What accounts for the slow spread? Can anything be done to reduce it further? Is there a chance for an atomic future that is brighter than the one Oppenheimer foresaw?

Two new books by three atomic insiders hold out hope. The authors shatter myths, throw light on the hidden dynamics of nuclear proliferation and suggest new ways to reduce the threat.

Neither book endorses Oppenheimer’s view that bombs are relatively easy to make. Both document national paths to acquiring nuclear weapons that have been rocky and dependent on the willingness of spies and politicians to divulge state secrets.

Thomas C. Reed, a veteran of the Livermore weapons laboratory in California and a former secretary of the Air Force, and Danny B. Stillman, former director of intelligence at Los Alamos, have teamed up in “The Nuclear Express: A Political History of the Bomb and its Proliferation” to show the importance of moles, scientists with divided loyalties and — most important — the subtle and not so subtle interests of nuclear states.

“Since the birth of the nuclear age,” they write, “no nation has developed a nuclear weapon on its own, although many claim otherwise.”

Among other things, the book details how secretive aid from France and China helped spawn five more nuclear states.

It also names many conflicted scientists, including luminaries like Isidor I. Rabi. The Nobel laureate worked on the Manhattan Project in World War II and later sat on the board of governors of the Weizmann Institute of Science, a birthplace of Israel’s nuclear arms.

Secret cooperation extended to the secluded sites where nations tested their handiwork in thundering blasts. The book says, for instance, that China opened its sprawling desert test site to Pakistan, letting its client test a first bomb there on May 26, 1990.

That alone rewrites atomic history. It casts new light on the reign of Benazir Bhutto as prime minister of Pakistan and helps explain how the country was able to respond so quickly in May 1998 when India conducted five nuclear tests.

“It took only two weeks and three days for the Pakistanis to field and fire a nuclear device of their own,” the book notes.

In another disclosure, the book says China “secretly extended the hospitality of the Lop Nur nuclear test site to the French.”

The authors build their narrative on deep knowledge of the arms and intelligence worlds, including those abroad. Mr. Stillman has toured heavily guarded nuclear sites in China and Russia, and both men have developed close ties with foreign peers.

In their acknowledgments, they thank American cold warriors like Edward Teller as well as two former C.I.A. directors, saying the intelligence experts “guided our searches.”

Robert S. Norris, an atomic historian and author of “Racing for the Bomb,” an account of the Manhattan Project, praised the book for “remarkable disclosures of how nuclear knowledge was shared overtly and covertly with friends and foes.”

The book is technical in places, as when detailing the exotica of nuclear arms. But it reads like a labor of love built on two lifetimes of scientific adventure. It is due out in January from Zenith Press.

Its wide perspective reveals how states quietly shared complex machinery and secrets with one another.

All paths stem from the United States, directly or indirectly. One began with Russian spies that deeply penetrated the Manhattan Project. Stalin was so enamored of the intelligence haul, Mr. Reed and Mr. Stillman note, that his first atom bomb was an exact replica of the weapon the United States had dropped on Nagasaki.

Moscow freely shared its atomic thefts with Mao Zedong, China’s leader. The book says that Klaus Fuchs, a Soviet spy in the Manhattan Project who was eventually caught and, in 1959, released from jail, did likewise. Upon gaining his freedom, the authors say, Fuchs gave the mastermind of Mao’s weapons program a detailed tutorial on the Nagasaki bomb. A half-decade later, China surprised the world with its first blast.

The book, in a main disclosure, discusses how China in 1982 made a policy decision to flood the developing world with atomic know-how. Its identified clients include Algeria, Pakistan and North Korea.

Alarmingly, the authors say one of China’s bombs was created as an “export design” that nearly “anybody could build.” The blueprint for the simple plan has traveled from Pakistan to Libya and, the authors say, Iran. That path is widely assumed among intelligence officials, but Tehran has repeatedly denied the charge.

The book sees a quiet repercussion of China’s proliferation policy in the Algerian desert. Built in secrecy, the reactor there now makes enough plutonium each year to fuel one atom bomb and is ringed by antiaircraft missiles, the book says.

China’s deck also held a wild card: its aid to Pakistan helped A.Q. Khan, a rogue Pakistani metallurgist who sold nuclear gear on the global black market. The authors compare Dr. Khan to “a used-car dealer” happy to sell his complex machinery to suckers who had no idea how hard it was to make fuel for a bomb.

Why did Beijing spread its atomic knowledge so freely? The authors speculate that it either wanted to strengthen the enemies of China’s enemies (for instance, Pakistan as a counterweight to India) or, more chillingly, to encourage nuclear wars or terror in foreign lands from which Beijing would emerge as the “last man standing.”

A lesser pathway involves France. The book says it drew on Manhattan Project veterans and shared intimate details of its bomb program with Israel, with whom it had substantial commercial ties. By 1959, the book says, dozens of Israeli scientists “were observing and participating in” the French program of weapons design.

The book adds that in early 1960, when France detonated its first bomb, doing so in the Algerian desert, “two nations went nuclear.” And it describes how the United States turned a blind eye to Israel’s own atomic developments. It adds that, in the autumn of 1966, Israel conducted a special, non-nuclear test “2,600 feet under the Negev desert.” The next year it built its first bomb.

Israel, in turn, shared its atomic secrets with South Africa. The book discloses that the two states exchanged some key ingredients for the making of atom bombs: tritium to South Africa, uranium to Israel. And the authors agree with military experts who hold that Israel and South Africa in 1979 jointly detonated a nuclear device in the South Atlantic near Prince Edward Island, more than one thousand miles south of Cape Town. Israel needed the test, it says, to develop a neutron bomb.

The authors charge that South Africa at one point targeted Luanda, the capital of neighboring Angola, “for a nuclear strike if peace talks failed.”

South Africa dismantled six nuclear arms in 1990 but retains much expertise. Today, the authors write, “South African technical mercenaries may be more dangerous than the underemployed scientists of the former Soviet Union” because they have no real home in Africa.

“The Bomb: A New History,” due out in January from Ecco Books, an imprint of HarperCollins, plows similar ground less deeply, but looks more widely at proliferation curbs and diplomacy. It is by Stephen M. Younger, the former head of nuclear arms at Los Alamos and former director of the Defense Threat Reduction Agency at the Pentagon.

Dr. Younger disparages what he calls myths suggesting that “all the secrets of nuclear weapons design are available on the Internet.” He writes that France, despite secretive aid, struggled initially to make crude bombs — a point he saw with his own eyes during a tour of a secretive French atomic museum that is closed to the public. That trouble, he says, “suggests we should doubt assertions that the information required to make a nuclear weapon is freely available.”

The two books draw on atomic history to suggest a mix of old and new ways to defuse the proliferation threat. Both see past restraints as fraying and the task as increasingly urgent.

Mr. Reed and Mr. Stillman see politics — not spies or military ambitions — as the primary force in the development and spread of nuclear arms. States repeatedly stole and leaked secrets because they saw such action as in their geopolitical interest.

Beijing continues to be a major threat, they argue. While urging global responses like better intelligence, better inspections and better safeguarding of nuclear materials, they also see generational change in China as a great hope in plugging the atomic leaks.

“We must continue to support human rights within Chinese society, not just as an American export, but because it is the dream of the Tiananmen Square generation,” they write. “In time those youngsters could well prevail, and the world will be a less contentious place.”

Dr. Younger notes how political restraints and global treaties worked for decades to curb atomic proliferation, as did American assurances to its allies. “It is a tribute to American diplomacy,” he writes, “that so many countries that might otherwise have gone nuclear were convinced to remain under the nuclear umbrella of the United States.”

And he, too, emphasizes the importance of political sticks and carrots to halting and perhaps reversing the spread of nuclear arms. Iran, he says, is not fated to go nuclear.

“Sweden, Switzerland, Argentina and Brazil all flirted with nuclear programs, and all decided to abandon them,” he notes. “Nuclear proliferation is not unidirectional — given the right conditions and incentives, it is possible for a nation to give up its nuclear aspirations.”

The take-home message of both books is quite the reverse of Oppenheimer’s grim forecast. But both caution that the situation has reached a delicate stage — with a second age of nuclear proliferation close at hand — and that missteps now could hurt terribly in the future.

Mr. Reed and Mr. Stillman take their title, “The Nuclear Express,” from a 1940 radio dispatch by Edward R. Murrow , who spoke from London as the clouds of war gathered over Europe. He told of people feeling like the express train of civilization was going out of control.

The authors warn of a similar danger today and suggest that only close attention to the atomic past, as well as determined global action, can avoid “the greatest train wreck” in history.

Conoce tus derechos al ser despedido

2008-12-08T09:58:00.000-08:00

Conoce tus derechos al ser despedido

06:00 08 de diciembre de 2008

CIUDAD DE MÉXICO (CNNExpansión.com) — Los recortes de personal son una posibilidad que debes contemplar dada la actual crisis económica.

Aunque estas medidas están pensadas para ahorrarle dinero a la empresa, si eres despedido por una causa ajena a ti, o por decisión del patrón, existen derechos inalienables que debes hacer valer.

Uno de los principales es que por ley debes recibir una indemnización constitucional de tres meses de sueldo.

“Es importante destacar que el cálculo de estos meses se debe hacer no sobre el salario neto o nominal, sino sobre el salario integrado, que agrupa las prestaciones que por ley se permiten, pero independientes a aquellas que el propio patrón le haya concedido al trabajador” dice en entrevista el abogado laboral y catedrático de la Universidad Panamericana (UP), Uriel Santacruz Martínez.

Además, el patrón está obligado por la Ley Federal del Trabajo (LFT) a indemnizarte con el pago de 20 días por año trabajado, la parte proporcional del aguinaldo y la prima de antigüedad, que se calcula en base a 12 días por cada año de servicio prestado.

“A esto hay que agregar la prima vacacional, la parte del reparto de utilidades, horas extra pendientes, y los beneficios adicionales que se hayan pactado”, dice en entrevista el procurador general de la Procuraduría Federal de la Defensa del Trabajo (Profedet), Joaquín Blanes Casas.

En algunos casos además del salario se dan incentivos, bonos o vales que también deben ser debidamente cubiertos. También tienes derecho a la proporción correspondiente al reparto de utilidades.

No permitas abusos

“El desconocimiento de los derechos laborales y el contrato ocasionan que a veces los empleados sean tomados por sorpresa, por ello es indispensable que sepan bajo qué términos están laborando para su patrón”, asegura la subdirectora Comercial de la Consultora de RH Mercer, Ana Velázquez.

Por ejemplo, los términos de tu liquidación están sujetos a los del contrato individual o colectivo de trabajo que hayas signado al inicio de la relación laboral.

Nadie puede obligarte a firmar: si al ser requerido por el área de RH para darte tu liquidación no estás de acuerdo con el cálculo presentado o tienes alguna duda, la recomendación de los expertos laborales es no firmar ningún documento. Debes saber que nadie puede obligarte a firmar nada, así que no cedas a presiones o intimidaciones de la empresa, ya que esta práctica, además de ser ilegal, “está sancionada y puede procederse legalmente contra el patrón o quien resulte responsable”, dice el abogado Uriel Santacruz.

Retenerte es ilegal: algunas empresas amenazan al empleado con no dejarlo abandonar la institución a menos que firmen la liquidación. Este caso “constituye un delito grave, ya que se incurre en la privación ilegal de la libertad, que se persigue penalmente”, dice la subdirectora de Mercer. La recomendación es comunicarse con algún familiar para informarle la situación, salir en cuanto sea posible y acudir inmediatamente ante la Junta Federal de Conciliación y Arbitraje, la Junta del DF o la Profedet y denunciarlo.

Vigilancia no equivale a acoso: existen compañías en que el despido va acompañado de la vigilancia permanente de algún miembro de seguridad interna para evitar robos a la organización. “Esta práctica se entiende cuando se maneja información confidencial o cuando se tienen antecedentes de que la persona pueda reaccionar de manera violenta, pero no justifica que se acose o intimide a la persona”, asegura Ana Velázquez. “Esta práctica también es ilegal, ya que se están violentando los derechos humanos del trabajador, y también puede procederse contra la empresa”, señala el catedrático de la UP.

Calcula y pide asesoría: una encuesta hecha por la consultora Hewitt Associates destaca que el 39% de las empresas mexicanas está planeando algún recorte de personal debido a la crisis. “Bajo esta premisa lo mejor es tener información del contrato para saber los términos en los que la empresa nos liquidaría. Además hay que hacer un cálculo de la indemnización. Es preferible contar con la asesoría de un abogado o un contador”, dice el director de Consultoría en Talento y Organización de Hewitt Associates, Jorge Ponga. Si el cálculo no corresponde a las cifras presentadas por la empresa, es mejor no firmar.

Si te obligan a firmar… si la presión ejercida por la empresa hace que firmes los documentos, no todo está perdido. “A pesar de esto el trabajador puede presentarse ante las autoridades laborales y decir que fue víctima de presión, por lo que todavía puede reclamar el pago justo de su indemnización y liquidación”, dice Uriel Santacruz. El lapso para presentar una inconformidad va desde los 30 días hasta los 365, dependiendo de los supuestos previstos por la LFT.

Si vas a juicio: un juicio por inconformidad es un proceso largo y tedioso que puede durar mínimo seis meses y hasta más de dos años. “El 70% de los procesos son resueltos en favor del trabajador”, dice el catedrático de la UP. “Aunque la mayoría son ganados por el mismo, si no se tienen los recursos suficientes para sobrevivir este lapso de tiempo, es preferible llegar a un arreglo con la empresa”, dice la directiva de Mercer. En cualquier caso, lo mejor es acudir a un abogado laboral y evitar ser presa de los ‘coyotes’ que sólo buscan aprovecharse de la necesidad del trabajador, recomienda el directivo de Hewitt Associates.

Si no tienes contrato: aunque no haya un contrato firmado, tus derechos laborales no cambian y posees los mismos en cualquier caso. “Siempre es preferible tener un contrato, pero si no es así, el trabajador tiene derecho a que se le pague el salario convenido y se le indemnice”, dice el titular de la Profedet. Las pruebas que pueden presentar el trabajador en este caso son recibos, depósitos en cuentas o testimoniales de otros trabajadores. También tiene derecho al pago de la parte proporcional de vacaciones, aguinaldo, prima de utilidades, etc.

Rescate Comer

2008-10-29T08:05:00.000-07:00

Prefijo

EVENTORE

Clave Cotización

COMERCI

Fecha

29/10/2008

Razón Social

CONTROLADORA COMERCIAL MEXICANA, S.A.B.  DE C.V.

Lugar

MEXICO DF

Asunto

EVENTO RELEVANTE

Eventos Relevantes

CONTROLADORA COMERCIAL MEXICANA INFORMA SOBRE FINANCIAMIENTOS

MÉXICO D.F. A 29 DE OCTUBRE DE 2008, CONTROLADORA COMERCIAL MEXICANA, S.A.B.

DE C.V. (BMV: COMERCI) INFORMA QUE SU SUBSIDIARIA, TIENDAS COMERCIAL MEXICANA,

S.A. DE C.V. (TIENDAS), HA OBTENIDO DOS FINANCIAMIENTOS HASTA POR UN MONTO DE

$3,327 MILLONES, LOS CUALES SUMADOS A SU FLUJO DE EFECTIVO, LE PERMITIRÁN

SEGUIR CUMPLIENDO SUS COMPROMISOS CON PROVEEDORES.

UNO DE LOS CRÉDITOS ES UN PRÉSTAMO DIRECTO POR $327 MILLONES OTORGADO POR UNA

INSTITUCIÓN DE BANCA MÚLTIPLE Y EL OTRO, UNA LÍNEA DE CRÉDITO DE HASTA $3,000

MILLONES OTORGADA POR NACIONAL FINANCIERA, S.N.C. (NAFIN) A UN FIDEICOMISO

PARA EL PAGO A LOS PROVEEDORES DE TIENDAS. AMBOS FINANCIAMIENTOS DEVENGAN

INTERESES A UNA TASA DE TIIE A 28 DÍAS MÁS 5 PUNTOS PORCENTUALES.

AL DÍA DE HOY SE HABRÁ DISPUESTO DE LA TOTALIDAD DEL CRÉDITO DIRECTO Y DE

$1,000 MILLONES DE LA LÍNEA OTORGADA POR NAFIN AL FIDEICOMISO. SE PODRÁN

EJERCER ADICIONALMENTE A TRAVÉS DEL FIDEICOMISO, HASTA $2,000 MILLONES POR

PROVEEDORES DE TIENDAS, PARA DESCUENTOS DE FACTURAS A TRAVÉS DEL PROGRAMA DE

CADENAS PRODUCTIVAS (FACTORAJE).

EL 100% DE LOS RECURSOS OBTENIDOS SERÁ UTILIZADO PARA EL PAGO A PROVEEDORES.

CONFORME SE HAN DISPUESTO LOS RECURSOS DE ESTOS FINANCIAMIENTOS, SE HAN

CONSTITUIDO GARANTÍAS SOBRE ACTIVOS DE LAS EMPRESAS INMOBILIARIAS DEL GRUPO A

FAVOR DE LAS INSTITUCIONES DE CRÉDITO, CON UN AFORO DE 1.5 VECES.

CABE SEÑALAR QUE ESTOS FINANCIAMIENTOS NO FUERON OTORGADOS A CONTROLADORA

COMERCIAL MEXICANA, S.A.B. DE C.V. Y QUE LOS BIENES OTORGADOS EN GARANTÍA NO

SON DE SU PROPIEDAD DIRECTA.

ESTA ACCIÓN LE PERMITIRÁ A TIENDAS MANTENER SU OPERACIÓN DE FORMA ÓPTIMA,

PRESERVANDO ASÍ EL VALOR DEL GRUPO, EN BENEFICIO DE TODOS LOS TENEDORES DE

INTERÉS.

COMO YA SE HA INFORMADO, COMERCI SE MANTIENE EN NEGOCIACIÓN PERMANENTE CON SUS

ACREEDORES FINANCIEROS Y ESPERA PODER PRESENTAR UN PLAN DE REESTRUCTURA EN LAS

PRÓXIMAS SEMANAS.

ASIMISMO, REITERA QUE CONTINUARÁ INFORMANDO OPORTUNAMENTE AL MERCADO SOBRE EL

DESARROLLO DEL PROCESO DE REESTRUCTURACIÓN FINANCIERA.

Greenspan Testimony on Sources of Financial Crisis

2008-10-23T07:25:00.000-07:00

Greenspan Testimony on Sources of Financial Crisis

Posted By topeditor On October 23, 2008 @ 8:27 am In Credit Crisis, Fed | 4 Comments

Former Federal Reserve Chairman Alan Greenspan is set to testify today before the House Committee of Government Oversight and Reform. These are his prepared remarks:

Mr. Chairman, Ranking Member Davis, and Members of the Committee:

Thank you for this opportunity to testify before you this morning.

Greenspan

We are in the midst of a once-in-a century credit tsunami. Central banks and governments are being required to take unprecedented measures. You, importantly, represent those on whose behalf economic policy is made, those who are feeling the brunt of the crisis in their workplaces and homes. I hope to address their concerns today.

This morning, I would like to provide my views on the sources of the crisis, what policies can best address the financial crisis going forward, and how I expect the economy to perform in the near and longer term. I also want discuss how my thinking has evolved and what I have learned in this past year.

In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences. This crisis, however, has turned out to be much broader than anything I could have imagined. It has morphed from one gripped by liquidity restraints to one in which fears of insolvency are now paramount. Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment. Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds, and increased job insecurity. All of this implies a marked retrenchment of consumer spending as households try to divert an increasing part of their incomes to replenish depleted assets, not only in 401Ks, but in the value of their homes as well. Indeed, a necessary condition for this crisis to end is a stabilization of home prices in the U.S. They will stabilize and clarify the level of equity in U.S. homes, the ultimate collateral support for the value of much of the world’s mortgage-backed securities. At a minimum, stabilization of home prices is still many months in the future. But when it arrives, the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards reengagement with risk. Broken market ties among banks, pension, and hedge funds and all types of nonfinancial businesses will become reestablished and our complex global economy will move forward. Between then and now, however, to avoid severe retrenchment, banks and other financial intermediaries will need the support that only the substitution of sovereign credit for private credit can bestow. The $700 billion Troubled Assets Relief Program is adequate to serve that need. Indeed the impact is already being felt. Yield spreads are narrowing.

As I wrote last March: those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined.

What went wrong with global economic policies that had worked so effectively for nearly four decades? The breakdown has been most apparent in the securitization of home mortgages. The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer. But subprime mortgages pooled and sold as securities became subject to explosive demand from investors around the world. These mortgage backed securities being “subprime” were originally offered at what appeared to be exceptionally high risk-adjusted market interest rates. But with U.S. home prices still rising, delinquency and foreclosure rates were deceptively modest. Losses were minimal. To the most sophisticated investors in the world, they were wrongly viewed as a “steal.”

The consequent surge in global demand for U.S. subprime securities by banks, hedge, and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem. Demand became so aggressive that too many securitizers and lenders believed they were able to create and sell mortgage backed securities so quickly that they never put their shareholders’ capital at risk and hence did not have the incentive to evaluate the credit quality of what they were selling. Pressures on lenders to supply more “paper” collapsed subprime underwriting standards from 2005 forward. Uncritical acceptance of credit ratings by purchasers of these toxic assets has led to huge losses.

It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivates markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.

When in August 2007 markets eventually trashed the credit agencies’ rosy ratings, a blanket of uncertainty descended on the investment community. Doubt was indiscriminately cast on the pricing of securities that had any taint of subprime backing. As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue. This will offset in part market deficiencies stemming from the failures of counterparty surveillance.

There are additional regulatory changes that this breakdown of the central pillar of competitive markets requires in order to return to stability, particularly in the areas of fraud, settlement, and securitization. It is important to remember, however, that whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets. Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.

The financial landscape that will greet the end of the crisis will be far different from the one that entered it little more than a year ago. Investors, chastened, will be exceptionally cautious. Structured investment vehicles, Alt-A mortgages, and a myriad of other exotic financial instruments are not now, and are unlikely to ever find willing investors. Regrettably, also on that list are subprime mortgages, the market for which has virtually disappeared. Home and small business ownership are vital commitments to a community. We should seek ways to reestablish a more sustainable subprime mortgage market.

This crisis will pass, and America will reemerge with a far sounder financial system.

Buy American. I Am.

2008-10-19T12:42:00.002-07:00

By WARREN E. BUFFETT

Omaha

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Letter: Andrew Lahde, Lahde Capital Management

2008-10-19T12:42:00.001-07:00

October 17, 2008

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list of those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they lookforward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life – where I had to compete for spaces in universities and graduate schools, jobs and assets under management – with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant – marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other addictive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say goodbye and good luck.

All the best,

Andrew Lahde

Tuesdays with Rupert

2008-09-03T08:02:00.000-07:00

Since buying The Wall Street Journal, Rupert Murdoch has talked freely with the author about his business, his family, and the future. (There was serious gossip, too.) It’s an unparalleled look at the 77-year-old mogul, transformed by his marriage to Wendi Deng, yet utterly, unapologetically himself.

by MICHAEL WOLFFOctober 2008

For nine months, I’ve been interviewing Rupert Murdoch, in an unlikely spirit of openness precipitated by his great satisfaction in having bought The Wall Street Journal, about journalism, his business, politics, his family, and the future for a new biography. I was warned about his charm by many other journalists—warned not to fall victim to it. So the surprise was his lack of it. He’s without introspection and self-analysis and doesn’t like to talk about the past. What’s more, he mumbles terribly (and with a heavy Aussie accent) and seldom finishes a sentence. For the first three months of our interviews, he never addressed a word to or even looked at my research assistant, Leela de Kretser, who was at each of the sessions, and ignored her questions—perhaps because it’s not necessary to acknowledge a girl, or possibly because it was embarrassing for him that she was, at the time, a pregnant girl. (She had the baby. He eventually warmed up.)

But his odd lack of seductiveness or felicitousness—contributing to his aura of villainy—became after a while alluring in itself. There’s no spin, because he really can’t explain himself. Rather, what you see is what you get. He’s transparent. The nature of the beast is entirely evident.

One morning when Leela and I arrived at Murdoch’s office for another interview session, we found the 77-year-old News Corp. chairman and C.E.O. hunched over the phone reporting out a story. He’d been out the night before and gotten a tip. Now he was trying to nail it down. His side of the conversation was straight reporter stuff: Who could he call? How could he get in touch? Will they confirm? Barked, impatient, just the facts. Here was the old man, in white shirt, singlet visible underneath, doing one of the same basic jobs he’d been doing since he was 22, having inherited theAdelaide News in Australia from his father. And he was good at it. He was parsing each answer. Re-asking the question. Clarifying every point. His notepad going. He knew the trade. Of how many media-company C.E.O.’s could that be said? This wasn’t a destroyer of journalism—this was a practitioner.

On the other hand, he was trying to smear somebody. At the dinner party he’d attended—since his marriage to Wendi Deng, he’s become an unlikely fixture at fashionable tables—he heard that a seniormost Hillary Clinton operative was a partner in an online porn company. He didn’t like the operative, didn’t like—no matter how much he had tried—Hillary Clinton. So it didn’t much matter that the story itself seemed far-fetched and tenth-hand. It was juicy and would slime somebody he thought was … a slime. True, it didn’t pan out—and, to his credit, that was the end of it. Well, sort of. Because he kept recycling it. While it did not end up on the Post’s “Page Six,” it became a staple in Murdoch’s repertoire of whispers and confidences and speculations. Rupert Murdoch doesn’t need to print or broadcast the news to make it … news.

He may be among the biggest gossips in New York. In the months of interviewing him, I found that the most reliable way to hold his interest was to bring him a rich nugget. His entire demeanor would change. He’d instantly light up. He’d go from distracted to absolutely focused. Gossip gives him life (and business opportunities). This, I believe, is how the rumor about Michael Bloomberg’s buying The New York Timesgot legs. I offered it to him as a bit of speculation—conflating two of his favorite subjects, Bloomberg, whom he greatly admires, and the Times, which he does not—that a Bloomberg-Times deal could be possible. He paused, considered, opened his mouth, seemed blissed out for a second, processed this information against his own needs and interests … and then said, “It makes sense. I think I’ll ask him.” And suddenly the rumor was everywhere—he was telling everybody, which made it true. The mayor’s people seemed to like the rumor so much that they began to talk it up themselves. Bloomberg himself seemed to fancy it (offering only a tepid denial) and, Murdoch thinks, could act on it.

He’s a troublemaker—maybe the last troublemaker in the holier-than-thou, ethically straitjacketed news business:

Gary Ginsberg, Murdoch’s chief aide and one of News Corp.’s highest executives—and a former Clinton White House staffer—told his boss that he was planning to go to Paris, in August 2007, for the wedding of his friend Doug Band, Bill Clinton’s chief aide. Band was marrying the handbag designer Lily Raf?i, and the wedding was going to be a party-hearty Clinton affair with supermarket magnate Ron Burkle, real-estate-heir-film-producer Steve Bing, and Bill Clinton himself, Ginsberg reported to Murdoch (Ginsberg too knows that Murdoch likes—needs—gossip). So Murdoch, onto not just a good story but also a way to annoy Ginsberg, secretly called the New York Post editor, Col Allan, and, busting the expense budget, had “Page Six” send a reporter to Paris. Headline (to Ginsberg’s consternation): bill & pals do paris (the city, not the bimbo).

The great fear about Rupert Murdoch, among journalists and proper liberals everywhere, beyond even his tabloidism and his right-wing politics, is that he acknowledges no rules. He does it, without mercy, his way. If you watch him up close, this certainly seems true. He sits in his office and plots and schemes and figures out ways to get (to take) what he wants.

Although he’d agreed with the Bancroft family, Dow Jones’s former owners, to accept a strict structure for protecting The Wall Street Journal’s editorial independence, I watched how blithely he paid no attention to it. It barely figured into his plans or consciousness. Except that he seemed briefly tickled to have figured out that if he merely called his chosen editor, Robert Thomson, the publisher, then he’d have his choice. He was only slightly confounded (and a bit bemused) that it took Journal editor Marcus Brauchli four months to get the message that he was out.

Still, up close, such lack of restraint doesn’t necessarily seem so threatening. It seems, in fact … fun. There’s no artifice. There’s no bureaucracy. There’s no pretense. There’s no corporate this and that—Murdoch’s truly the anti-corporate man. It’s all determination and enthusiasm. It’s all about his passions and the effect he can have. (Of course he was going to replace the Journal’s editor. What was everybody thinking?)

It’s his adventure. Part of the reason so many of the people around him are so loyal—such true believers—is that they’re caught up in it. It’s a grand enterprise.

Though not necessarily such a well-organized or even rational one.

There was the moment, in the car heading out to the airport in the weeks before The Wall Street Journalformally became his, when Merrill Lynch was going into the tank. Its C.E.O., Stan O’Neal, had just been fired. Anticipating events—Merrill’s need for cash, its inevitable sale of assets—Murdoch, for an hour or so, decided he ought to be the presumptive buyer of Merrill’s 20 percent stake in Bloomberg (Murdoch cultivates obsessions, and Bloomberg is one). Soon to have The Wall Street Journal, now soon to have his mitts on Bloomberg, Rupert Murdoch, at least in his own mind, would control worldwide financial information. It’s management by fantasy—even though this one, like so many, was shortly to pass.

Buying The Wall Street Journal was surely an exercise of pure fantasy. To think he could take over a company absolutely controlled by a family that had repeatedly said it would never sell was fantasy. To think it was worth what he was paying for it was fantasy. And yet … now it’s his, and if his shareholders are puzzled and grumpy (News Corp. shares are down by more than 30 percent since he bought Dow Jones), so be it (he’ll ignore them as much as he ignores his other critics). He’s in it for the long haul—even at 77.

He is spending time now in consideration of an even more far-fetched fantasy, The New York Times:he’d really like to own it too. Now, everybody around him continues to tell him that buying theTimes is pretty much impossible. There will be regulatory problems. The Sulzberger family would never … And then there’s the opprobrium of public opinion.

But it’s obviously irresistible to him. I’ve watched him go through the numbers, plot out a merger with the Journal’s backroom operations, and fantasize about the staff’s quitting en masse as soon as he entered the sacred temple. It would be sweet revenge—because the Times for so long has made him the bogeyman and vulgarian. And wonderful to own not just one of America’s most important papers but both (he believes in monopolies). And the realization of his destiny: because the Times represents the ultimate in newspaper proprietorship—when he was 19, he and his father, the most successful newspaper executive in Australia, made a pilgrimage to Hillandale, the Sulzberger family home in Connecticut—and he believes he is the ultimate newspaper proprietor.

And because he loves newspapers—he may be the last person to love newspapers. He thinks the Times,with its soft stories and newsless front page and all its talk of being a news brand instead of a newspaper,has forsaken what a newspaper is.

He’s really not interested in all this talk about newspapers as the basis of new information franchises … blah blah. That’s maybe what they say at News Corp. to gull Wall Street. But Rupert Murdoch wants the physical thing. He pokes the paper, slashes at it—move this, reduce that, enlarge this. It may be the ultimate fantasy, his continuing, contrary belief in newspapers.

A newspaper makes you into something. When he bought The Sun in London in 1969, it turned him into Britain’s greatest tabloid publisher and threat to ritual and propriety. The Wall Street Journal is going to turn him into something else again.

Here’s the headline: Rupert Murdoch is becoming a liberal—sort of.

Or, anyway, his purchase of The W.S.J., and his covetousness of the Times, is also about wanting to trade the illiberal—the belligerent, the vulgar, the loud, the menacing, the unsubtle—for the better-heeled, the more magnanimous, the further nuanced. He’s looking for better company.

This most unsocialized of men is becoming socialized—sort of.

This is, in part, the Wendi transformation. The woman from Shandong Province, 38 years his junior, whom he married after breaking up his 32-year marriage to his second wife, Anna, has brought him into the liberal world. The angry outsider, the anti-elitist, the foe of airs and pretension (“Ole Grumpy,” as he’s known by various of his employees), has become part of the achieving, glamorous, clever, socially promiscuous set. Davos, Cannes, Sun Valley, Barry Diller’s yacht—this is now Rupert Murdoch’s world.

Or it’s his wife’s world, which he’s been drawn into.

It would be hard not to be. The girl whose American adventure starts in the kitchen of a Chinese restaurant before she can speak English and takes her to the Yale School of Management and then into the arms of Rupert Murdoch is a compelling heroine. Her adventure may be as great as his. He’s captivated by her ambition (their pillow talk, one might suspect, is business). You can see this as comic: no fool like an old fool—the shapeless conservative suits become Prada (although still worn with the singlets), his gray hair flaming orange (or sometimes aubergine). But I think that misses the true nature of the change. Of the plot twist. Rupert Murdoch is, characteristically, seizing an opportunity. The Zeitgeist is changing and he’s after it.

All right, he’s not quite a liberal. He remains a militant free-marketeer and is still pro-war (grudgingly, he’s retreated a bit). And there was the moment, one afternoon, when over a glass of his favorite coconut water (meant to increase electrolytes) he was propounding the genetic theory that the basic problem of the Muslim people was that they married their cousins.

And yet, he’s come to like the liberals more than the conservatives. Bono and Tony Blair and the Google guys and Nicole Kidman and David Geffen are his and Wendi’s circle. Facebook’s Mark Zuckerberg and real-estate scion and New York Observer owner Jared Kushner and Ivanka Trump are regular invites to the Murdochs’ for dinner. Liking Wendi’s friends so much better than his own (actually, he really had never had any friends), he finds himself with an increasingly divided temperament.

It’s life with Wendi versus life with Fox. (And, too, it’s The Wall Street Journal—and maybe The New York Times—versus Fox.)

Fox has been his alter ego. For a long time he was in love with the Fox chief, Roger Ailes, because he was even more Murdoch than Murdoch. And yet now the embarrassment can’t be missed—he mumbles even more than usual when called on to justify it; he barely pretends to hide the way he feels about Bill O’Reilly. And while it is not possible that he would give Fox up—because the money is the money; success trumps all—in the larger sense of who he is, he seems to want to hedge his bets.

Just before the New York Democratic primary, when I found myself undecided between Clinton and Obama, I said to Murdoch (a little flirtation, like a little gossip, softens him), “Rupert, I don’t know who to vote for—so I’m going to give you my vote. You choose.”

He paused, considered, nodded his head slowly: “Obama—he’ll sell more papers.”

Even though his daughter Elisabeth and her husband, high-flying P.R. man Matthew Freud, have been raising money for Obama in Notting Hill, in London, where they live, and his wife has been attending fund-raisers for Obama in Los Angeles with David Geffen, this is a leap for Murdoch. Murdoch has traditionally liked politicians to come to him. His historic shift in the 1990s to Tony Blair came after Blair made a pilgrimage to Australia.

Obama, on the other hand, was snubbing Murdoch. Every time he reached out (Murdoch executives tried to get the Kennedys to help smooth the way to an introduction), nothing. The Fox stain was on Murdoch.

It wasn’t until early in the summer that Obama relented and a secret courtesy meeting was arranged. The meeting began with Murdoch sitting down, knee to knee with Obama, at the Waldorf-Astoria. The younger man was deferential—and interested in his story. Obama pursued: What was Murdoch’s relationship with his father? How had he gotten from Adelaide to the top of the world?

Murdoch, for his part, had a simple thought to share with Obama. He had known possibly as many heads of state as anyone living today—had met every American president from Harry Truman on—and this is what he understood: nobody got much time to make an impression. Leadership was about what you did in the first six months.

Then, after he said his piece, Murdoch switched places and let his special guest, Roger Ailes, sit knee to knee with Obama.

Obama lit into Ailes. He said that he didn’t want to waste his time talking to Ailes if Fox was just going to continue to abuse him and his wife, that Fox had relentlessly portrayed him as suspicious, foreign, fearsome—just short of a terrorist.

Ailes, unruffled, said it might not have been this way if Obama had more willingly come on the air instead of so often giving Fox the back of his hand.

A tentative truce, which may or may not have vast historical significance, was at that moment agreed upon.

Iconfess to getting a little misty when Murdoch talks about his children, which he does frequently and naturally (he’s often on the phone with them—this coldest of men making protestations of love).

True, he is often talking about them in some otherworldly, even fantastic dynastic sense—perhaps no other business empire has such an air of royalty about it as News Corp. And yet, at the same time, he seems like any old conscientious dad and ordinarily burdened family man.

For one thing, there is his mother, at 99 an indomitable matriarch—something like the Queen Mum of Australia—at the family estate (which has neither heat nor, apparently, a vacuum cleaner), outside of Melbourne, with the world-famous garden she’s been tending for 80 years, still stewing about the breakup of his second marriage, to Anna. “I remember saying to Rupert, ‘Rupert, you’re going to be very, very lonely and the first desiring female who comes along will snap you up.’ He said, ‘Don’t be ridiculous, Mum, I’m far too old for that.’ That’s exactly what happened. Never mind.” One would not like to face that. (When I visited her, she sat for a three-hour interview full of witty chat and then took me for a wild ride, double-clutching an old golf cart, through her gardens.)

Contrary to the expected outcome in dynastic families, the Murdoch kids have turned out well. They’re diligent achievers. Beyond a few tattoos and piercings and a gossip-column affair (Elisabeth left her husband for Freud), they’re not too rebellious either. And they get along—mostly (though his sons, when they were both on the News Corp. board, sometimes bickered endlessly during meetings). And that’s good because his four oldest children will inherit voting control of one of the most influential companies in the world without any mechanism to break a tie.

There’s Prue, the daughter from his first marriage, a 50-year-old Sydney housewife, the mother of his three oldest grandchildren, who has mostly forgiven him for not considering her—because she was a girl—as dynastic material. Prue, whose husband, Alasdair MacLeod, is a ranking player in the Australian operation, is the child who can most take him to task. (“I’ve said to him, ‘Dad, I understand about dyeing the hair and the age thing’—he never wants to die—‘but just go somewhere proper.’ But he insists on doing it over the sink because he doesn’t want anybody to know. Well, hello! Look in the mirror.”) She is, in a sense, more like his wife than his wives. (Actually, he often mistakes her for one of his sisters.)

There’s Elisabeth, 40, his first child with Anna, who, in his gradually transforming view of women (very gradual), was a candidate for running the company until, mad at him for leaving her mother, she upped and quit in 2000, to his great regret. She now lives in London with Freud and her four children and owns one of the largest independent television-production companies in the world (The Office and Ugly Bettyare her company’s shows).

There’s his first son, Lachlan, 38, whom he had pronounced his heir apparent, whom he openly adores—almost pines after—and who left the company after his father failed to stand up for him against other News Corp. executives. Lachlan, although raised as a New Yorker, has reconstituted himself as an Australian. He owns a cricket team in India and, with Jamie Packer, the son of the late Kerry Packer, one of Murdoch’s epochal enemies in the Australian media wars, tried and failed earlier this year to complete a multi-billion-dollar leveraged buyout of an Australian media company. (Murdoch was obviously pained when I returned from seeing Lachlan in Sydney and knew more about his son’s deal than he did. Pained enough for him to try to pretend he knew—that his son hadn’t excluded him.)

There’s James, of whom he is clearly in some awe. James, who is based in London and who runs News Corp.’s business in Europe and Asia, has become exactly the sort of businessman he himself is not, programmatic, marketing-driven—rather, in fact, a highly intelligent automaton—and is now the favorite to become the C.E.O. of News Corp. (answering, however, to his three siblings, or at least to two of them, to get a majority).

And there are Murdoch’s two youngest children: Grace, aged six, and Chloe, aged five, with whom he lives a Manhattan life of nannies, dogs, play dates, and a father picking up after them.

It’s not just the sense of him as an attentive and concerned father that I find makes me misty, but this further sense he implies, even as he dreams of dynastic succession, of his lack of control over the children and their futures.

If he’s proud of his kids’ separate achievements, he’s desperate to have them back in the business and around him. He openly spins scenarios about how they might be tempted back—stuck with the fact that he’s raised them all well enough that they aren’t particularly dependent on him (and, too, they are savvy enough to have figured out the virtue of distance).

In his divorce from Anna he agreed to make inviolable his four older children’s control and interest in the trust. This agreement became hard to reconcile following the birth of his two younger children, and he petitioned his older children to admit their new siblings to the trust. A long negotiation ensued. He agreed to disburse $150 million to each of his children (with all of the family’s wealth in News Corp. stock, the Murdoch kids have long complained to any News Corp. exec who would listen that they never had much real money to call their own), and, in return, his four older children gave up his ex-wife’s so-called watertight agreement and admitted Grace and Chloe to an equal economic interest in the trust—but not a voting interest. (He was too scared or guilty about this decision to tell his wife directly and, instead, let it slip during an interview in 2006 on Charlie Rose—precipitating, when Wendi watched the interview, a marital battle that is still a legend at News Corp.)

His attitude about this is now curious, or alarming, or crafty. Although his older children happily spell out the terms of the trust, as does Murdoch’s longtime lawyer, Arthur Siskind, Murdoch himself baldly denies that what is, is. All his children will participate equally, he says flatly. This is a broken synapse or his way of dealing with his lack of control or it’s what he’s telling his wife or it’s Murdochian principle that everything can be renegotiated.

His takeover of The Wall Street Journal happened because the family that controlled Dow Jones for nearly a hundred years couldn’t control itself. And while Murdoch both took advantage of the Bancroft family’s weakness and was contemptuous of it (and morbidly fascinated by it), the irony hasn’t passed him by that some variation on this fate will be his family’s, too. (When I asked him in our final interview what he can do to prevent what happened to the Bancrofts from happening to his family, he threw his hands up in the air and said, “Oh, simple, I can’t. All I can do is delay it.”)

There is at News Corp. never a discussion of Murdoch’s exit. It is referred to only as “in 30 or 40 years,” when he is gone—which may have started as an amusing locution, but is now a practiced and even official one. His existential predicament is, in other words, his own.

This is an aspect of his special powers. People at News Corp. really do believe he is near immortal—or they are afraid not to believe (because after him the deluge). And he knows that the world (not just his world but the world he has had such an effect on) exists only as long as he does. Indeed, there may not be newspapers unless he owns them. It’s a world that’s on his shoulders.

It continues to all depend on him.

Michael Wolff is a Vanity Fair contributing editor.

Social Intelligence and the Biology of Leadership

2008-08-28T08:45:00.000-07:00

Social Intelligence and the Biology of Leadership
New studies of the brain show that leaders can improve group performance by understanding the biology of empathy.
by Daniel Goleman and Richard Boyatzis
♦ Watch an interview with Daniel Goleman.
In 1998, one of us, Daniel Goleman, published in these pages his first article on emotional intelligence and leadership. The response to “What Makes a Leader?” was enthusiastic. People throughout and beyond the business community started talking about the vital role that empathy and self-knowledge play in effective leadership. The concept of emotional intelligence continues to occupy a prominent space in the leadership literature and in everyday coaching practices. But in the past five years, research in the emerging field of social neuroscience—the study of what happens in the brain while people interact—is beginning to reveal subtle new truths about what makes a good leader.
The salient discovery is that certain things leaders do—specifically, exhibit empathy and become attuned to others’ moods—literally affect both their own brain chemistry and that of their followers. Indeed, researchers have found that the leader-follower dynamic is not a case of two (or more) independent brains reacting consciously or unconsciously to each other. Rather, the individual minds become, in a sense, fused into a single system. We believe that great leaders are those whose behavior powerfully leverages the system of brain interconnectedness. We place them on the opposite end of the neural continuum from people with serious social disorders, such as autism or Asperger’s syndrome, that are characterized by underdevelopment in the areas of the brain associated with social interactions. If we are correct, it follows that a potent way of becoming a better leader is to find authentic contexts in which to learn the kinds of social behavior that reinforce the brain’s social circuitry. Leading effectively is, in other words, less about mastering situations—or even mastering social skill sets—than about developing a genuine interest in and talent for fostering positive feelings in the people whose cooperation and support you need.
The notion that effective leadership is about having powerful social circuits in the brain has prompted us to extend our concept of emotional intelligence, which we had grounded in theories of individual psychology. A more relationship-based construct for assessing leadership is social intelligence, which we define as a set of interpersonal competencies built on specific neural circuits (and related endocrine systems) that inspire others to be effective.
The idea that leaders need social skills is not new, of course. In 1920, Columbia University psychologist Edward Thorndike pointed out that “the best mechanic in a factory may fail as a foreman for lack of social intelligence.” More recently, our colleague Claudio Fernández-Aráoz found in an analysis of new C-level executives that those who had been hired for their self-discipline, drive, and intellect were sometimes later fired for lacking basic social skills. In other words, the people Fernández-Aráoz studied had smarts in spades, but their inability to get along socially on the job was professionally self-defeating.
Do Women Have Stronger Social Circuits? (Located at the end of this article)
What’s new about our definition of social intelligence is its biological underpinning, which we will explore in the following pages. Drawing on the work of neuroscientists, our own research and consulting endeavors, and the findings of researchers affiliated with the Consortium for Research on Emotional Intelligence in Organizations, we will show you how to translate newly acquired knowledge about mirror neurons, spindle cells, and oscillators into practical, socially intelligent behaviors that can reinforce the neural links between you and your followers.
Followers Mirror Their Leaders—Literally
Perhaps the most stunning recent discovery in behavioral neuroscience is the identification of mirror neurons in widely dispersed areas of the brain. Italian neuroscientists found them by accident while monitoring a particular cell in a monkey’s brain that fired only when the monkey raised its arm. One day a lab assistant lifted an ice cream cone to his own mouth and triggered a reaction in the monkey’s cell. It was the first evidence that the brain is peppered with neurons that mimic, or mirror, what another being does. This previously unknown class of brain cells operates as neural Wi-Fi, allowing us to navigate our social world. When we consciously or unconsciously detect someone else’s emotions through their actions, our mirror neurons reproduce those emotions. Collectively, these neurons create an instant sense of shared experience.
Mirror neurons have particular importance in organizations, because leaders’ emotions and actions prompt followers to mirror those feelings and deeds. The effects of activating neural circuitry in followers’ brains can be very powerful. In a recent study, our colleague Marie Dasborough observed two groups: One received negative performance feedback accompanied by positive emotional signals—namely, nods and smiles; the other was given positive feedback that was delivered critically, with frowns and narrowed eyes. In subsequent interviews conducted to compare the emotional states of the two groups, the people who had received positive feedback accompanied by negative emotional signals reported feeling worse about their performance than did the participants who had received good-natured negative feedback. In effect, the delivery was more important than the message itself. And everybody knows that when people feel better, they perform better. So, if leaders hope to get the best out of their people, they should continue to be demanding but in ways that foster a positive mood in their teams. The old carrot-and-stick approach alone doesn’t make neural sense; traditional incentive systems are simply not enough to get the best performance from followers.
Here’s an example of what does work. It turns out that there’s a subset of mirror neurons whose only job is to detect other people’s smiles and laughter, prompting smiles and laughter in return. A boss who is self-controlled and humorless will rarely engage those neurons in his team members, but a boss who laughs and sets an easygoing tone puts those neurons to work, triggering spontaneous laughter and knitting his team together in the process. A bonded group is one that performs well, as our colleague Fabio Sala has shown in his research. He found that top-performing leaders elicited laughter from their subordinates three times as often, on average, as did midperforming leaders. Being in a good mood, other research finds, helps people take in information effectively and respond nimbly and creatively. In other words, laughter is serious business.
It certainly made a difference at one university-based hospital in Boston. Two doctors we’ll call Dr. Burke and Dr. Humboldt were in contention for the post of CEO of the corporation that ran this hospital and others. Both of them headed up departments, were superb physicians, and had published many widely cited research articles in prestigious medical journals. But the two had very different personalities. Burke was intense, task focused, and impersonal. He was a relentless perfectionist with a combative tone that kept his staff continually on edge. Humboldt was no less demanding, but he was very approachable, even playful, in relating to staff, colleagues, and patients. Observers noted that people smiled and teased one another—and even spoke their minds—more in Humboldt’s department than in Burke’s. Prized talent often ended up leaving Burke’s department; in contrast, outstanding folks gravitated to Humboldt’s warmer working climate. Recognizing Humboldt’s socially intelligent leadership style, the hospital corporation’s board picked him as the new CEO.
The “Finely Attuned” Leader
Great executives often talk about leading from the gut. Indeed, having good instincts is widely recognized as an advantage for a leader in any context, whether in reading the mood of one’s organization or in conducting a delicate negotiation with the competition. Leadership scholars characterize this talent as an ability to recognize patterns, usually born of extensive experience. Their advice: Trust your gut, but get lots of input as you make decisions. That’s sound practice, of course, but managers don’t always have the time to consult dozens of people.
Findings in neuroscience suggest that this approach is probably too cautious. Intuition, too, is in the brain, produced in part by a class of neurons called spindle cells because of their shape. They have a body size about four times that of other brain cells, with an extra-long branch to make attaching to other cells easier and transmitting thoughts and feelings to them quicker. This ultrarapid connection of emotions, beliefs, and judgments creates what behavioral scientists call our social guidance system. Spindle cells trigger neural networks that come into play whenever we have to choose the best response among many—even for a task as routine as prioritizing a to-do list. These cells also help us gauge whether someone is trustworthy and right (or wrong) for a job. Within one-twentieth of a second, our spindle cells fire with information about how we feel about that person; such “thin-slice” judgments can be very accurate, as follow-up metrics reveal. Therefore, leaders should not fear to act on those judgments, provided that they are also attuned to others’ moods.
Such attunement is literally physical. Followers of an effective leader experience rapport with her—or what we and our colleague Annie McKee call “resonance.” Much of this feeling arises unconsciously, thanks to mirror neurons and spindle-cell circuitry. But another class of neurons is also involved: Oscillators coordinate people physically by regulating how and when their bodies move together. You can see oscillators in action when you watch people about to kiss; their movements look like a dance, one body responding to the other seamlessly. The same dynamic occurs when two cellists play together. Not only do they hit their notes in unison, but thanks to oscillators, the two musicians’ right brain hemispheres are more closely coordinated than are the left and right sides of their individual brains.
Firing Up Your Social Neurons
The firing of social neurons is evident all around us. We once analyzed a video of Herb Kelleher, a cofounder and former CEO of Southwest Airlines, strolling down the corridors of Love Field in Dallas, the airline’s hub. We could practically see him activate the mirror neurons, oscillators, and other social circuitry in each person he encountered. He offered beaming smiles, shook hands with customers as he told them how much he appreciated their business, hugged employees as he thanked them for their good work. And he got back exactly what he gave. Typical was the flight attendant whose face lit up when she unexpectedly encountered her boss. “Oh, my honey!” she blurted, brimming with warmth, and gave him a big hug. She later explained, “Everyone just feels like family with him.”
Unfortunately, it’s not easy to turn yourself into a Herb Kelleher or a Dr. Humboldt if you’re not one already. We know of no clear-cut methods to strengthen mirror neurons, spindle cells, and oscillators; they activate by the thousands per second during any encounter, and their precise firing patterns remain elusive. What’s more, self-conscious attempts to display social intelligence can often backfire. When you make an intentional effort to coordinate movements with another person, it is not only oscillators that fire. In such situations the brain uses other, less adept circuitry to initiate and guide movements; as a result, the interaction feels forced.
The only way to develop your social circuitry effectively is to undertake the hard work of changing your behavior (see “Primal Leadership: The Hidden Driver of Great Performance,” our December 2001 HBR article with Annie McKee). Companies interested in leadership development need to begin by assessing the willingness of individuals to enter a change program. Eager candidates should first develop a personal vision for change and then undergo a thorough diagnostic assessment, akin to a medical workup, to identify areas of social weakness and strength. Armed with the feedback, the aspiring leader can be trained in specific areas where developing better social skills will have the greatest payoff. The training can range from rehearsing better ways of interacting and trying them out at every opportunity, to being shadowed by a coach and then debriefed about what he observes, to learning directly from a role model. The options are many, but the road to success is always tough.
How to Become Socially Smarter
To see what social intelligence training involves, consider the case of a top executive we’ll call Janice. She had been hired as a marketing manager by a Fortune 500 company because of her business expertise, outstanding track record as a strategic thinker and planner, reputation as a straight talker, and ability to anticipate business issues that were crucial for meeting goals. Within her first six months on the job, however, Janice was floundering; other executives saw her as aggressive and opinionated, lacking in political astuteness, and careless about what she said and to whom, especially higher-ups.
To save this promising leader, Janice’s boss called in Kathleen Cavallo, an organizational psychologist and senior consultant with the Hay Group, who immediately put Janice through a 360-degree evaluation. Her direct reports, peers, and managers gave Janice low ratings on empathy, service orientation, adaptability, and managing conflicts. Cavallo learned more by having confidential conversations with the people who worked most closely with Janice. Their complaints focused on her failure to establish rapport with people or even notice their reactions. The bottom line: Janice was adept neither at reading the social norms of a group nor at recognizing people’s emotional cues when she violated those norms. Even more dangerous, Janice did not realize she was being too blunt in managing upward. When she had a strong difference of opinion with a manager, she did not sense when to back off. Her “let’s get it all on the table and mix it up” approach was threatening her job; top management was getting fed up.
When Cavallo presented this performance feedback as a wake-up call to Janice, she was of course shaken to discover that her job might be in danger. What upset her more, though, was the realization that she was not having her desired impact on other people. Cavallo initiated coaching sessions in which Janice would describe notable successes and failures from her day. The more time Janice spent reviewing these incidents, the better she became at recognizing the difference between expressing an idea with conviction and acting like a pit bull. She began to anticipate how people might react to her in a meeting or during a negative performance review; she rehearsed more-astute ways to present her opinions; and she developed a personal vision for change. Such mental preparation activates the social circuitry of the brain, strengthening the neural connections you need to act effectively; that’s why Olympic athletes put hundreds of hours into mental review of their moves.
At one point, Cavallo asked Janice to name a leader in her organization who had excellent social intelligence skills. Janice identified a veteran senior manager who was masterly both in the art of the critique and at expressing disagreement in meetings without damaging relationships. She asked him to help coach her, and she switched to a job where she could work with him—a post she held for two years. Janice was lucky to find a mentor who believed that part of a leader’s job is to develop human capital. Many bosses would rather manage around a problem employee than help her get better. Janice’s new boss took her on because he recognized her other strengths as invaluable, and his gut told him that Janice could improve with guidance.
Before meetings, Janice’s mentor coached her on how to express her viewpoint about contentious issues and how to talk to higher-ups, and he modeled for her the art of performance feedback. By observing him day in and day out, Janice learned to affirm people even as she challenged their positions or critiqued their performance. Spending time with a living, breathing model of effective behavior provides the perfect stimulation for our mirror neurons, which allow us to directly experience, internalize, and ultimately emulate what we observe.
Janice’s transformation was genuine and comprehensive. In a sense, she went in one person and came out another. If you think about it, that’s an important lesson from neuroscience: Because our behavior creates and develops neural networks, we are not necessarily prisoners of our genes and our early childhood experiences. Leaders can change if, like Janice, they are ready to put in the effort. As she progressed in her training, the social behaviors she was learning became more like second nature to her. In scientific terms, Janice was strengthening her social circuits through practice. And as others responded to her, their brains connected with hers more profoundly and effectively, thereby reinforcing Janice’s circuits in a virtuous circle. The upshot: Janice went from being on the verge of dismissal to getting promoted to a position two levels up.
A few years later, some members of Janice’s staff left the company because they were not happy—so she asked Cavallo to come back. Cavallo discovered that although Janice had mastered the ability to communicate and connect with management and peers, she still sometimes missed cues from her direct reports when they tried to signal their frustration. With more help from Cavallo, Janice was able to turn the situation around by refocusing her attention on her staff’s emotional needs and fine-tuning her communication style. Opinion surveys conducted with Janice’s staff before and after Cavallo’s second round of coaching documented dramatic increases in their emotional commitment and intention to stay in the organization. Janice and the staff also delivered a 6% increase in annual sales, and after another successful year she was made president of a multibillion-dollar unit. Companies can clearly benefit a lot from putting people through the kind of program Janice completed.
Hard Metrics of Social Intelligence
Our research over the past decade has confirmed that there is a large performance gap between socially intelligent and socially unintelligent leaders. At a major national bank, for example, we found that levels of an executive’s social intelligence competencies predicted yearly performance appraisals more powerfully than did the emotional intelligence competencies of self-awareness and self-management. (For a brief explanation of our assessment tool, which focuses on seven dimensions, see the exhibit “Are You a Socially Intelligent Leader?”)
Are You a Socially Intelligent Leader? (Located at the end of this article)
Social intelligence turns out to be especially important in crisis situations. Consider the experience of workers at a large Canadian provincial health care system that had gone through drastic cutbacks and a reorganization. Internal surveys revealed that the frontline workers had become frustrated that they were no longer able to give their patients a high level of care. Notably, workers whose leaders scored low in social intelligence reported unmet patient-care needs at three times the rate—and emotional exhaustion at four times the rate—of their colleagues who had supportive leaders. At the same time, nurses with socially intelligent bosses reported good emotional health and an enhanced ability to care for their patients, even during the stress of layoffs (see the sidebar “The Chemistry of Stress”). These results should be compulsory reading for the boards of companies in crisis. Such boards typically favor expertise over social intelligence when selecting someone to guide the institution through tough times. A crisis manager needs both.
The Chemistry of Stress (Located at the end of this article)
• • •
As we explore the discoveries of neuroscience, we are struck by how closely the best psychological theories of development map to the newly charted hardwiring of the brain. Back in the 1950s, for example, British pediatrician and psychoanalyst D.W. Winnicott was advocating for play as a way to accelerate children’s learning. Similarly, British physician and psychoanalyst John Bowlby emphasized the importance of providing a secure base from which people can strive toward goals, take risks without unwarranted fear, and freely explore new possibilities. Hard-bitten executives may consider it absurdly indulgent and financially untenable to concern themselves with such theories in a world where bottom-line performance is the yardstick of success. But as new ways of scientifically measuring human development start to bear out these theories and link them directly with performance, the so-called soft side of business begins to look not so soft after all.
Do Women Have Stronger Social Circuits?
People often ask whether gender differences factor into the social intelligence skills needed for outstanding leadership. The answer is yes and no. It’s true that women tend, on average, to be better than men at immediately sensing other people’s emotions, whereas men tend to have more social confidence, at least in work settings. However, gender differences in social intelligence that are dramatic in the general population are all but absent among the most successful leaders.
When the University of Toledo’s Margaret Hopkins studied several hundred executives from a major bank, she found gender differences in social intelligence in the overall group but not between the most effective men and the most effective women. Ruth Malloy of the Hay Group uncovered a similar pattern in her study of CEOs of international companies. Gender, clearly, is not neural destiny.
Are You a Socially Intelligent Leader?
To measure an executive’s social intelligence and help him or her develop a plan for improving it, we have a specialist administer our behavioral assessment tool, the Emotional and Social Competency Inventory. It is a 360-degree evaluation instrument by which bosses, peers, direct reports, clients, and sometimes even family members assess a leader according to seven social intelligence qualities.
We came up with these seven by integrating our existing emotional intelligence framework with data assembled by our colleagues at the Hay Group, who used hard metrics to capture the behavior of top-performing leaders at hundreds of corporations over two decades. Listed here are each of the qualities, followed by some of the questions we use to assess them.
Empathy
• Do you understand what motivates other people, even those from different backgrounds?
• Are you sensitive to others’ needs?
Attunement
• Do you listen attentively and think about how others feel?
• Are you attuned to others’ moods?
Organizational Awareness
• Do you appreciate the culture and values of the group or organization?
• Do you understand social networks and know their unspoken norms?
Influence
• Do you persuade others by engaging them in discussion and appealing to their self-interests?
• Do you get support from key people?
Developing Others
• Do you coach and mentor others with compassion and personally invest time and energy in mentoring?
• Do you provide feedback that people find helpful for their professional development?
Inspiration
• Do you articulate a compelling vision, build group pride, and foster a positive emotional tone?
• Do you lead by bringing out the best in people?
Teamwork
• Do you solicit input from everyone on the team?
• Do you support all team members and encourage cooperation?
The Chemistry of Stress
When people are under stress, surges in the stress hormones adrenaline and cortisol strongly affect their reasoning and cognition. At low levels, cortisol facilitates thinking and other mental functions, so well-timed pressure to perform and targeted critiques of subordinates certainly have their place. When a leader’s demands become too great for a subordinate to handle, however, soaring cortisol levels and an added hard kick of adrenaline can paralyze the mind’s critical abilities. Attention fixates on the threat from the boss rather than the work at hand; memory, planning, and creativity go out the window. People fall back on old habits, no matter how unsuitable those are for addressing new challenges.
Poorly delivered criticism and displays of anger by leaders are common triggers of hormonal surges. In fact, when laboratory scientists want to study the highest levels of stress hormones, they simulate a job interview in which an applicant receives intense face-to-face criticism—an analogue of a boss’s tearing apart a subordinate’s performance. Researchers likewise find that when someone who is very important to a person expresses contempt or disgust toward him, his stress circuitry triggers an explosion by stress hormones and a spike in heart rate of 30 to 40 beats per minute. Then, because of the interpersonal dynamic of mirror neurons and oscillators, the tension spreads to other people. Before you know it, the destructive emotions have infected an entire group and inhibited its performance.
Leaders are themselves not immune to the contagion of stress. All the more reason they should take the time to understand the biology of their emotions.
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How Pixar Fosters Collective Creativity

2008-08-28T08:44:00.000-07:00

How Pixar Fosters Collective Creativity
Behind Pixar’s string of hit movies, says the studio’s president, is a peer-driven process for solving problems.
by Ed Catmull
♦ Listen to Ed Catmull discuss managing creativity.
A few years ago, I had lunch with the head of a major motion picture studio, who declared that his central problem was not finding good people—it was finding good ideas. Since then, when giving talks, I’ve asked audiences whether they agree with him. Almost always there’s a 50/50 split, which has astounded me because I couldn’t disagree more with the studio executive. His belief is rooted in a misguided view of creativity that exaggerates the importance of the initial idea in creating an original product. And it reflects a profound misunderstanding of how to manage the large risks inherent in producing breakthroughs.
When it comes to producing breakthroughs, both technological and artistic, Pixar’s track record is unique. In the early 1990s, we were known as the leading technological pioneer in the field of computer animation. Our years of R&D culminated in the release of Toy Story in 1995, the world’s first computer-animated feature film. In the following 13 years, we have released eight other films (A Bug’s Life; Toy Story 2; Monsters, Inc.; Finding Nemo; The Incredibles; Cars; Ratatouille; and WALL·E), which also have been blockbusters. Unlike most other studios, we have never bought scripts or movie ideas from the outside. All of our stories, worlds, and characters were created internally by our community of artists. And in making these films, we have continued to push the technological boundaries of computer animation, securing dozens of patents in the process.
While I’m not foolish enough to predict that we will never have a flop, I don’t think our success is largely luck. Rather, I believe our adherence to a set of principles and practices for managing creative talent and risk is responsible. Pixar is a community in the true sense of the word. We think that lasting relationships matter, and we share some basic beliefs: Talent is rare. Management’s job is not to prevent risk but to build the capability to recover when failures occur. It must be safe to tell the truth. We must constantly challenge all of our assumptions and search for the flaws that could destroy our culture. In the last two years, we’ve had a chance to test whether our principles and practices are transferable. After Pixar’s 2006 merger with the Walt Disney Company, its CEO, Bob Iger, asked me, chief creative officer John Lasseter, and other Pixar senior managers to help him revive Disney Animation Studios. The success of our efforts prompted me to share my thinking on how to build a sustainable creative organization.
What Is Creativity?
People tend to think of creativity as a mysterious solo act, and they typically reduce products to a single idea: This is a movie about toys, or dinosaurs, or love, they’ll say. However, in filmmaking and many other kinds of complex product development, creativity involves a large number of people from different disciplines working effectively together to solve a great many problems. The initial idea for the movie—what people in the movie business call “the high concept”—is merely one step in a long, arduous process that takes four to five years.
A movie contains literally tens of thousands of ideas. They’re in the form of every sentence; in the performance of each line; in the design of characters, sets, and backgrounds; in the locations of the camera; in the colors, the lighting, the pacing. The director and the other creative leaders of a production do not come up with all the ideas on their own; rather, every single member of the 200- to 250-person production group makes suggestions. Creativity must be present at every level of every artistic and technical part of the organization. The leaders sort through a mass of ideas to find the ones that fit into a coherent whole—that support the story—which is a very difficult task. It’s like an archaeological dig where you don’t know what you’re looking for or whether you will even find anything. The process is downright scary.
Taking Risks (Located at the end of this article)
Then again, if we aren’t always at least a little scared, we’re not doing our job. We’re in a business whose customers want to see something new every time they go to the theater. This means we have to put ourselves at great risk. Our most recent film, WALL·E, is a robot love story set in a post-apocalyptic world full of trash. And our previous movie, Ratatouille, is about a French rat who aspires to be a chef. Talk about unexpected ideas! At the outset of making these movies, we simply didn’t know if they would work. However, since we’re supposed to offer something that isn’t obvious, we bought into somebody’s initial vision and took a chance.
To act in this fashion, we as executives have to resist our natural tendency to avoid or minimize risks, which, of course, is much easier said than done. In the movie business and plenty of others, this instinct leads executives to choose to copy successes rather than try to create something brand-new. That’s why you see so many movies that are so much alike. It also explains why a lot of films aren’t very good. If you want to be original, you have to accept the uncertainty, even when it’s uncomfortable, and have the capability to recover when your organization takes a big risk and fails. What’s the key to being able to recover? Talented people! Contrary to what the studio head asserted at lunch that day, such people are not so easy to find.
What’s equally tough, of course, is getting talented people to work effectively with one another. That takes trust and respect, which we as managers can’t mandate; they must be earned over time. What we can do is construct an environment that nurtures trusting and respectful relationships and unleashes everyone’s creativity. If we get that right, the result is a vibrant community where talented people are loyal to one another and their collective work, everyone feels that they are part of something extraordinary, and their passion and accomplishments make the community a magnet for talented people coming out of schools or working at other places. I know what I’m describing is the antithesis of the free-agency practices that prevail in the movie industry, but that’s the point: I believe that community matters.
The Roots of Our Culture
My conviction that smart people are more important than good ideas probably isn’t surprising. I’ve had the good fortune to work alongside amazing people in places that pioneered computer graphics.
At the University of Utah, my fellow graduate students included Jim Clark, who cofounded Silicon Graphics and Netscape; John Warnock, who cofounded Adobe; and Alan Kay, who developed object-oriented programming. We had ample funding (thanks to the U.S. Defense Department’s Advanced Research Projects Agency), the professors gave us free rein, and there was an exhilarating and creative exchange of ideas.
At the New York Institute of Technology, where I headed a new computer-animation laboratory, one of my first hires was Alvy Ray Smith, who made breakthroughs in computer painting. That made me realize that it’s OK to hire people who are smarter than you are.
Then George Lucas, of Star Wars fame, hired me to head a major initiative at Lucasfilm to bring computer graphics and other digital technology into films and, later, games. It was thrilling to do research within a film company that was pushing the boundaries. George didn’t try to lock up the technology for himself and allowed us to continue to publish and maintain strong academic contacts. This made it possible to attract some of the best people in the industry, including John Lasseter, then an animator from Disney, who was excited by the new possibilities of computer animation.
Last but not least, there’s Pixar, which began its life as an independent company in 1986, when Steve Jobs bought the computer division from Lucasfilm, allowing us to pursue our dream of producing computer-animated movies. Steve gave backbone to our desire for excellence and helped us form a remarkable management team. I’d like to think that Pixar captures what’s best about all the places I’ve worked. A number of us have stuck together for decades, pursuing the dream of making computer-animated films, and we still have the pleasure of working together today.
It was only when Pixar experienced a crisis during the production of Toy Story 2 that my views on how to structure and operate a creative organization began to crystallize. In 1996, while we were working on A Bug’s Life, our second movie, we started to make a sequel to Toy Story. We had enough technical leaders to start a second production, but all of our proven creative leaders—the people who had made Toy Story, including John, who was its director; writer Andrew Stanton; editor Lee Unkrich; and the late Joe Ranft, the movie’s head of story—were working on A Bug’s Life. So we had to form a new creative team of people who had never headed a movie production. We felt this was OK. After all, John, Andrew, Lee, and Joe had never led a full-length animated film production before Toy Story.
Disney, which at that time was distributing and cofinancing our films, initially encouraged us to make Toy Story 2 as a “direct to video”—a movie that would be sold only as home videos and not shown first in theaters. This was Disney’s model for keeping alive the characters of successful films, and the expectation was that both the cost and quality would be lower. We realized early on, however, that having two different standards of quality in the same studio was bad for our souls, and Disney readily agreed that the sequel should be a theatrical release. The creative leadership, though, remained the same, which turned out to be a problem.
In the early stage of making a movie, we draw storyboards (a comic-book version of the story) and then edit them together with dialogue and temporary music. These are called story reels. The first versions are very rough, but they give a sense of what the problems are, which in the beginning of all productions are many. We then iterate, and each version typically gets better and better. In the case of Toy Story 2, we had a good initial idea for a story, but the reels were not where they ought to have been by the time we started animation, and they were not improving. Making matters worse, the directors and producers were not pulling together to rise to the challenge.
Finally A Bug’s Life was finished, freeing up John, Andrew, Lee, and Joe to take over the creative leadership of Toy Story 2. Given where the production was at that point, 18 months would have been an aggressive schedule, but by then we had only eight left to deliver the film. Knowing that the company’s future depended on them, crew members worked at an incredible rate. In the end, with the new leadership, they pulled it off.
How did John and his team save the movie? The problem was not the original core concept, which they retained. The main character, a cowboy doll named Woody, is kidnapped by a toy collector who intends to ship him to a toy museum in Japan. At a critical point in the story, Woody has to decide whether to go to Japan or try to escape and go back to Andy, the boy who owned him. Well, since the movie is coming from Pixar and Disney, you know he’s going to end up back with Andy. And if you can easily predict what’s going to happen, you don’t have any drama. So the challenge was to get the audience to believe that Woody might make a different choice. The first team couldn’t figure out how to do it.
John, Andrew, Lee, and Joe solved that problem by adding several elements to show the fears toys might have that people could relate to. One is a scene they created called “Jessie’s story.” Jessie is a cowgirl doll who is going to be shipped to Japan with Woody. She wants to go, and she explains why to Woody. The audience hears her story in the emotional song “When She Loved Me”: She had been the darling of a little girl, but the girl grew up and discarded her. The reality is kids do grow up, life does change, and sometimes you have to move on. Since the audience members know the truth of this, they can see that Woody has a real choice, and this is what grabs them. It took our “A” team to add the elements that made the story work.
Toy Story 2 was great and became a critical and commercial success—and it was the defining moment for Pixar. It taught us an important lesson about the primacy of people over ideas: If you give a good idea to a mediocre team, they will screw it up; if you give a mediocre idea to a great team, they will either fix it or throw it away and come up with something that works.
Toy Story 2 also taught us another important lesson: There has to be one quality bar for every film we produce. Everyone working at the studio at the time made tremendous personal sacrifices to fix Toy Story 2. We shut down all the other productions. We asked our crew to work inhumane hours, and lots of people suffered repetitive stress injuries. But by rejecting mediocrity at great pain and personal sacrifice, we made a loud statement as a community that it was unacceptable to produce some good films and some mediocre films. As a result of Toy Story 2, it became deeply ingrained in our culture that everything we touch needs to be excellent. This goes beyond movies to the DVD production and extras, and to the toys and other consumer products associated with our characters.
Of course, most executives would at least pay lip service to the notion that they need to get good people and should set their standards high. But how many understand the importance of creating an environment that supports great people and encourages them to support one another so the whole is far greater than the sum of the parts? That’s what we are striving to do. Let me share what we’ve learned so far about what works.
Power to the Creatives
Creative power in a film has to reside with the film’s creative leadership. As obvious as this might seem, it’s not true of many companies in the movie industry and, I suspect, a lot of others. We believe the creative vision propelling each movie comes from one or two people and not from either corporate executives or a development department. Our philosophy is: You get great creative people, you bet big on them, you give them enormous leeway and support, and you provide them with an environment in which they can get honest feedback from everyone.
After Toy Story 2 we changed the mission of our development department. Instead of coming up with new ideas for movies (its role at most studios), the department’s job is to assemble small incubation teams to help directors refine their own ideas to a point where they can convince John and our other senior filmmakers that those ideas have the potential to be great films. Each team typically consists of a director, a writer, some artists, and some storyboard people. The development department’s goal is to find individuals who will work effectively together. During this incubation stage, you can’t judge teams by the material they’re producing because it’s so rough—there are many problems and open questions. But you can assess whether the teams’ social dynamics are healthy and whether the teams are solving problems and making progress. Both the senior management and the development department are responsible for seeing to it that the teams function well.
To emphasize that the creative vision is what matters most, we say we are “filmmaker led.” There are really two leaders: the director and the producer. They form a strong partnership. They not only strive to make a great movie but also operate within time, budget, and people constraints. (Good artists understand the value of limits.) During production, we leave the operating decisions to the film’s leaders, and we don’t second-guess or micromanage them.
Indeed, even when a production runs into a problem, we do everything possible to provide support without undermining their authority. One way we do this is by making it possible for a director to solicit help from our “creative brain trust” of filmmakers. (This group is a pillar of our distinctive peer-based process for making movies—an important topic I’ll return to in a moment.) If this advice doesn’t suffice, we’ll sometimes add reinforcements to the production—such as a writer or codirector—to provide specific skills or improve the creative dynamics of the film’s creative leadership.
What does it take for a director to be a successful leader in this environment? Of course, our directors have to be masters at knowing how to tell a story that will translate into the medium of film. This means that they must have a unifying vision—one that will give coherence to the thousands of ideas that go into a movie—and they must be able to turn that vision into clear directives that the staff can implement. They must set people up for success by giving them all the information they need to do the job right without telling them how to do it. Each person on a film should be given creative ownership of even the smallest task.
Good directors not only possess strong analytical skills themselves but also can harness the analytical power and life experiences of their staff members. They are superb listeners and strive to understand the thinking behind every suggestion. They appreciate all contributions, regardless of where or from whom they originate, and use the best ones.
A Peer Culture
Of great importance—and something that sets us apart from other studios—is the way people at all levels support one another. Everyone is fully invested in helping everyone else turn out the best work. They really do feel that it’s all for one and one for all. Nothing exemplifies this more than our creative brain trust and our daily review process.
The brain trust.
This group consists of John and our eight directors (Andrew Stanton, Brad Bird, Pete Docter, Bob Peterson, Brenda Chapman, Lee Unkrich, Gary Rydstrom, and Brad Lewis). When a director and producer feel in need of assistance, they convene the group (and anyone else they think would be valuable) and show the current version of the work in progress. This is followed by a lively two-hour give-and-take discussion, which is all about making the movie better. There’s no ego. Nobody pulls any punches to be polite. This works because all the participants have come to trust and respect one another. They know it’s far better to learn about problems from colleagues when there’s still time to fix them than from the audience after it’s too late. The problem-solving powers of this group are immense and inspirational to watch.
Getting Real Help (Located at the end of this article)
After a session, it’s up to the director of the movie and his or her team to decide what to do with the advice; there are no mandatory notes, and the brain trust has no authority. This dynamic is crucial. It liberates the trust members, so they can give their unvarnished expert opinions, and it liberates the director to seek help and fully consider the advice. It took us a while to learn this. When we tried to export the brain trust model to our technical area, we found at first that it didn’t work. Eventually, I realized why: We had given these other review groups some authority. As soon as we said, “This is purely peers giving feedback to each other,” the dynamic changed, and the effectiveness of the review sessions dramatically improved.
The origin of the creative brain trust was Toy Story. During a crisis that occurred while making that film, a special relationship developed among John, Andrew, Lee, and Joe, who had remarkable and complementary skills. Since they trusted one another, they could have very intense and heated discussions; they always knew that the passion was about the story and wasn’t personal. Over time, as other people from inside and outside joined our directors’ ranks, the brain trust expanded to what it is today: a community of master filmmakers who come together when needed to help each other.
The dailies.
This practice of working together as peers is core to our culture, and it’s not limited to our directors and producers. One example is our daily reviews, or “dailies,” a process for giving and getting constant feedback in a positive way that’s based on practices John observed at Disney and Industrial Light & Magic (ILM), Lucasfilm’s special-effects company.
At Disney, only a small senior group would look at daily animation work. Dennis Muren, ILM’s legendary visual-effects supervisor, broadened the participation to include his whole special-effects crew. (John, who joined my computer group at Lucasfilm after leaving Disney, participated in these sessions while we were creating computer-animated effects for Young Sherlock Holmes.)
As we built up an animation crew for Toy Story in the early 1990s, John used what he had learned from Disney and ILM to develop our daily review process. People show work in an incomplete state to the whole animation crew, and although the director makes decisions, everyone is encouraged to comment.
Overcoming Inhibitions (Located at the end of this article)
There are several benefits. First, once people get over the embarrassment of showing work still in progress, they become more creative. Second, the director or creative leads guiding the review process can communicate important points to the entire crew at the same time. Third, people learn from and inspire each other; a highly creative piece of animation will spark others to raise their game. Finally, there are no surprises at the end: When you’re done, you’re done. People’s overwhelming desire to make sure their work is “good” before they show it to others increases the possibility that their finished version won’t be what the director wants. The dailies process avoids such wasted efforts.
Technology + Art = Magic
Getting people in different disciplines to treat one another as peers is just as important as getting people within disciplines to do so. But it’s much harder. Barriers include the natural class structures that arise in organizations: There always seems to be one function that considers itself and is perceived by others to be the one the organization values the most. Then there’s the different languages spoken by different disciplines and even the physical distance between offices. In a creative business like ours, these barriers are impediments to producing great work, and therefore we must do everything we can to tear them down.
Pixar’s Operating Principles (Located at the end of this article)
Walt Disney understood this. He believed that when continual change, or reinvention, is the norm in an organization and technology and art are together, magical things happen. A lot of people look back at Disney’s early days and say, “Look at the artists!” They don’t pay attention to his technological innovations. But he did the first sound in animation, the first color, the first compositing of animation with live action, and the first applications of xerography in animation production. He was always excited by science and technology.
At Pixar, we believe in this swirling interplay between art and technology and constantly try to use better technology at every stage of production. John coined a saying that captures this dynamic: “Technology inspires art, and art challenges the technology.” To us, those aren’t just words; they are a way of life that had to be established and still has to be constantly reinforced. Although we are a director- and producer-led meritocracy, which recognizes that talent is not spread equally among all people, we adhere to the following principles:
Everyone must have the freedom to communicate with anyone.
This means recognizing that the decision-making hierarchy and communication structure in organizations are two different things. Members of any department should be able to approach anyone in another department to solve problems without having to go through “proper” channels. It also means that managers need to learn that they don’t always have to be the first to know about something going on in their realm, and it’s OK to walk into a meeting and be surprised. The impulse to tightly control the process is understandable given the complex nature of moviemaking, but problems are almost by definition unforeseen. The most efficient way to deal with numerous problems is to trust people to work out the difficulties directly with each other without having to check for permission.
It must be safe for everyone to offer ideas.
We’re constantly showing works in progress internally. We try to stagger who goes to which viewing to ensure that there are always fresh eyes, and everyone in the company, regardless of discipline or position, gets to go at some point. We make a concerted effort to make it safe to criticize by inviting everyone attending these showings to e-mail notes to the creative leaders that detail what they liked and didn’t like and explain why.
We must stay close to innovations happening in the academic community.
We strongly encourage our technical artists to publish their research and participate in industry conferences. Publishing may give away ideas, but it keeps us connected with the academic community. This connection is worth far more than any ideas we may have revealed: It helps us attract exceptional talent and reinforces the belief throughout the company that people are more important than ideas.
We try to break down the walls between disciplines in other ways, as well. One is a collection of in-house courses we offer, which we call Pixar University. It is responsible for training and cross-training people as they develop in their careers. But it also offers an array of optional classes—many of which I’ve taken—that give people from different disciplines the opportunity to mix and appreciate what everyone does. Some (screenplay writing, drawing, and sculpting) are directly related to our business; some (Pilates and yoga) are not. In a sculpting class will be rank novices as well as world-class sculptors who want to refine their skills. Pixar University helps reinforce the mind-set that we’re all learning and it’s fun to learn together.
Our building, which is Steve Jobs’s brainchild, is another way we try to get people from different departments to interact. Most buildings are designed for some functional purpose, but ours is structured to maximize inadvertent encounters. At its center is a large atrium, which contains the cafeteria, meeting rooms, bathrooms, and mailboxes. As a result, everyone has strong reasons to go there repeatedly during the course of the workday. It’s hard to describe just how valuable the resulting chance encounters are.
Staying on the Rails
Observing the rise and fall of computer companies during my career has affected me deeply. Many companies put together a phenomenal group of people who produced great products. They had the best engineers, exposure to the needs of customers, access to changing technology, and experienced management. Yet many made decisions at the height of their powers that were stunningly wrongheaded, and they faded into irrelevance. How could really smart people completely miss something so crucial to their survival? I remember asking myself more than once: “If we are ever successful, will we be equally blind?”
Many of the people I knew in those companies that failed were not very introspective. When Pixar became an independent company, I vowed we would be different. I realized that it’s extremely difficult for an organization to analyze itself. It is uncomfortable and hard to be objective. Systematically fighting complacency and uncovering problems when your company is successful have got to be two of the toughest management challenges there are. Clear values, constant communication, routine postmortems, and the regular injection of outsiders who will challenge the status quo aren’t enough. Strong leadership is also essential—to make sure people don’t pay lip service to the values, tune out the communications, game the processes, and automatically discount newcomers’ observations and suggestions. Here’s a sampling of what we do:
Postmortems.
The first we performed—at the end of A Bug’s Life—was successful. But the success of those that followed varied enormously. This caused me to reflect on how to get more out of them. One thing I observed was that although people learn from the postmortems, they don’t like to do them. Leaders naturally want to use the occasion to give kudos to their team members. People in general would rather talk about what went right than what went wrong. And after spending years on a film, everybody just wants to move on. Left to their own devices, people will game the system to avoid confronting the unpleasant.
There are some simple techniques for overcoming these problems. One is to try to vary the way you do the postmortems. By definition, they’re supposed to be about lessons learned, so if you repeat the same format, you tend to find the same lessons, which isn’t productive. Another is to ask each group to list the top five things they would do again and the top five things they wouldn’t do. The balance between the positive and the negative helps make it a safer environment. In any event, employ lots of data in the review. Because we’re a creative organization, people tend to assume that much of what we do can’t be measured or analyzed. That’s wrong. Most of our processes involve activities and deliverables that can be quantified. We keep track of the rates at which things happen, how often something has to be reworked, whether a piece of work was completely finished or not when it was sent to another department, and so on. Data can show things in a neutral way, which can stimulate discussion and challenge assumptions arising from personal impressions.
Fresh blood.
Successful organizations face two challenges when bringing in new people with fresh perspectives. One is well-known—the not-invented-here syndrome. The other—the awe-of-the-institution syndrome (an issue with young new hires)—is often overlooked.
The former has not been a problem for us, thank goodness, because we have an open culture: Continually embracing change the way we do makes newcomers less threatening. Several prominent outsiders who have had a big impact on us (in terms of the exciting ideas they introduced and the strong people they attracted) were readily accepted. They include Brad Bird, who directed The Incredibles and Ratatouille; Jim Morris, who headed Industrial Light & Magic for years before joining Pixar as the producer of WALL·E and executive vice president of production; and Richard Hollander, a former executive of the special-effects studio Rhythm & Hues, who is leading an effort to improve our production processes.
The bigger issue for us has been getting young new hires to have the confidence to speak up. To try to remedy this, I make it a practice to speak at the orientation sessions for new hires, where I talk about the mistakes we’ve made and the lessons we’ve learned. My intent is to persuade them that we haven’t gotten it all figured out and that we want everyone to question why we’re doing something that doesn’t seem to make sense to them. We do not want people to assume that because we are successful, everything we do is right.
• • •
For 20 years, I pursued a dream of making the first computer-animated film. To be honest, after that goal was realized—when we finished Toy Story—I was a bit lost. But then I realized the most exciting thing I had ever done was to help create the unique environment that allowed that film to be made. My new goal became, with John, to build a studio that had the depth, robustness, and will to keep searching for the hard truths that preserve the confluence of forces necessary to create magic. In the two years since Pixar’s merger with Disney, we’ve had the good fortune to expand that goal to include the revival of Disney Animation Studios. It has been extremely gratifying to see the principles and approaches we developed at Pixar transform this studio. But the ultimate test of whether John and I have achieved our goals is if Pixar and Disney are still producing animated films that touch world culture in a positive way long after we two, and our friends who founded and built Pixar with us, are gone.

Pixar’s Operating Principles
1. Everyone must have the freedom to communicate with anyone.
2. It must be safe for everyone to offer ideas.
3. We must stay close to innovations happening in the academic community.

Russia Never Wanted a War

2008-08-20T09:21:00.000-07:00

August 20, 2008
Op-Ed Contributor
Russia Never Wanted a War
By MIKHAIL GORBACHEV
Moscow
THE acute phase of the crisis provoked by the Georgian forces’ assault on Tskhinvali, the capital of South Ossetia, is now behind us. But how can one erase from memory the horrifying scenes of the nighttime rocket attack on a peaceful town, the razing of entire city blocks, the deaths of people taking cover in basements, the destruction of ancient monuments and ancestral graves?
Russia did not want this crisis. The Russian leadership is in a strong enough position domestically; it did not need a little victorious war. Russia was dragged into the fray by the recklessness of the Georgian president, Mikheil Saakashvili. He would not have dared to attack without outside support. Once he did, Russia could not afford inaction.
The decision by the Russian president, Dmitri Medvedev, to now cease hostilities was the right move by a responsible leader. The Russian president acted calmly, confidently and firmly. Anyone who expected confusion in Moscow was disappointed.
The planners of this campaign clearly wanted to make sure that, whatever the outcome, Russia would be blamed for worsening the situation. The West then mounted a propaganda attack against Russia, with the American news media leading the way.
The news coverage has been far from fair and balanced, especially during the first days of the crisis. Tskhinvali was in smoking ruins and thousands of people were fleeing — before any Russian troops arrived. Yet Russia was already being accused of aggression; news reports were often an embarrassing recitation of the Georgian leader’s deceptive statements.
It is still not quite clear whether the West was aware of Mr. Saakashvili’s plans to invade South Ossetia, and this is a serious matter. What is clear is that Western assistance in training Georgian troops and shipping large supplies of arms had been pushing the region toward war rather than peace.
If this military misadventure was a surprise for the Georgian leader’s foreign patrons, so much the worse. It looks like a classic wag-the-dog story.
Mr. Saakashvili had been lavished with praise for being a staunch American ally and a real democrat — and for helping out in Iraq. Now America’s friend has wrought disorder, and all of us — the Europeans and, most important, the region’s innocent civilians — must pick up the pieces.
Those who rush to judgment on what’s happening in the Caucasus, or those who seek influence there, should first have at least some idea of this region’s complexities. The Ossetians live both in Georgia and in Russia. The region is a patchwork of ethnic groups living in close proximity. Therefore, all talk of “this is our land,” “we are liberating our land,” is meaningless. We must think about the people who live on the land.
The problems of the Caucasus region cannot be solved by force. That has been tried more than once in the past two decades, and it has always boomeranged.
What is needed is a legally binding agreement not to use force. Mr. Saakashvili has repeatedly refused to sign such an agreement, for reasons that have now become abundantly clear.
The West would be wise to help achieve such an agreement now. If, instead, it chooses to blame Russia and re-arm Georgia, as American officials are suggesting, a new crisis will be inevitable. In that case, expect the worst.
In recent days, Secretary of State Condoleezza Rice and President Bush have been promising to isolate Russia. Some American politicians have threatened to expel it from the Group of 8 industrialized nations, to abolish the NATO-Russia Council and to keep Russia out of the World Trade Organization.
These are empty threats. For some time now, Russians have been wondering: If our opinion counts for nothing in those institutions, do we really need them? Just to sit at the nicely set dinner table and listen to lectures?
Indeed, Russia has long been told to simply accept the facts. Here’s the independence of Kosovo for you. Here’s the abrogation of the Antiballistic Missile Treaty, and the American decision to place missile defenses in neighboring countries. Here’s the unending expansion of NATO. All of these moves have been set against the backdrop of sweet talk about partnership. Why would anyone put up with such a charade?
There is much talk now in the United States about rethinking relations with Russia. One thing that should definitely be rethought: the habit of talking to Russia in a condescending way, without regard for its positions and interests.
Our two countries could develop a serious agenda for genuine, rather than token, cooperation. Many Americans, as well as Russians, understand the need for this. But is the same true of the political leaders?
A bipartisan commission led by Senator Chuck Hagel and former Senator Gary Hart has recently been established at Harvard to report on American-Russian relations to Congress and the next president. It includes serious people, and, judging by the commission’s early statements, its members understand the importance of Russia and the importance of constructive bilateral relations.
But the members of this commission should be careful. Their mandate is to present “policy recommendations for a new administration to advance America’s national interests in relations with Russia.” If that alone is the goal, then I doubt that much good will come out of it. If, however, the commission is ready to also consider the interests of the other side and of common security, it may actually help rebuild trust between Russia and the United States and allow them to start doing useful work together.
Mikhail Gorbachev is the former president of the Soviet Union. This article was translated by Pavel Palazhchenko from the Russian.

Dr. Doom

2008-08-19T17:31:00.001-07:00

August 17, 2008
Dr. Doom
By STEPHEN MIHM
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.
But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”
Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed. Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” stuck to his script of “nightmare” events: waves of corporate bankrupticies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would trigger a panic by depositors. Not all of these developments have come to pass (and perhaps never will), but the demise last month of the California bank IndyMac — one of the largest such failures in U.S. history — drew only more attention to Roubini’s seeming prescience.
As a result, Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. He has been summoned to speak before Congress, the Council on Foreign Relations and the World Economic Forum at Davos. He is now a sought-after adviser, spending much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Though he continues to issue colorful doomsday prophecies of a decidedly nonmainstream sort — especially on his popular and polemical blog, where he offers visions of “equity market slaughter” and the “Coming Systemic Bust of the U.S. Banking System” — the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things. “I have in the last few months become more pessimistic than the consensus,” the former Treasury secretary Lawrence Summers told me earlier this year. “Certainly, Nouriel’s writings have been a contributor to that.”
On a cold and dreary day last winter, I met Roubini over lunch in the TriBeCa neighborhood of New York City. “I’m not a pessimist by nature,” he insisted. “I’m not someone who sees things in a bleak way.” Just looking at him, I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace.
When I pressed him on his claim that he wasn’t pessimistic, he paused for a moment and then relented a little. “I have more concerns about potential risks and vulnerabilities than most people,” he said, with glum understatement. But these concerns, he argued, make him more of a realist than a pessimist and put him in the role of the cleareyed outsider — unsettling complacency and puncturing pieties.
Roubini, who is 50, has been an outsider his entire life. He was born in Istanbul, the child of Iranian Jews, and his family moved to Tehran when he was 2, then to Tel Aviv and finally to Italy, where he grew up and attended college. He moved to the United States to pursue his doctorate in international economics at Harvard. Along the way he became fluent in Farsi, Hebrew, Italian and English. His accent, an inimitable polyglot growl, radiates a weariness that comes with being what he calls a “global nomad.”
As a graduate student at Harvard, Roubini was an unusual talent, according to his adviser, the Columbia economist Jeffrey Sachs. He was as comfortable in the world of arcane mathematics as he was studying political and economic institutions. “It’s a mix of skills that rarely comes packaged in one person,” Sachs told me. After completing his Ph.D. in 1988, Roubini joined the economics department at Yale, where he first met and began sharing ideas with Robert Shiller, the economist now known for his prescient warnings about the 1990s tech bubble.
The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.
Roubini’s work was distinguished not only by his conclusions but also by his approach. By making extensive use of transnational comparisons and historical analogies, he was employing a subjective, nontechnical framework, the sort embraced by popular economists like the Times Op-Ed columnist Paul Krugman and Joseph Stiglitz in order to reach a nonacademic audience. Roubini takes pains to note that he remains a rigorous scholarly economist — “When I weigh evidence,” he told me, “I’m drawing on 20 years of accumulated experience using models” — but his approach is not the contemporary scholarly ideal in which an economist builds a model in order to constrain his subjective impressions and abide by a discrete set of data. As Shiller told me, “Nouriel has a different way of seeing things than most economists: he gets into everything.”
Roubini likens his style to that of a policy maker like Alan Greenspan, the former Fed chairman who was said (perhaps apocryphally) to pore over vast quantities of technical economic data while sitting in the bathtub, looking to sniff out where the economy was headed. Roubini also cites, as a more ideologically congenial example, the sweeping, cosmopolitan approach of the legendary economist John Maynard Keynes, whom Roubini, with only slight exaggeration, calls “the most brilliant economist who never wrote down an equation.” The book that Roubini ultimately wrote (with the economist Brad Setser) on the emerging market crises, “Bailouts or Bail-Ins?” contains not a single equation in its 400-plus pages.
After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.” Of course, the United States wasn’t an emerging market; it was (and still is) the largest economy in the world. But Roubini was unnerved by what he saw in the U.S. economy, in particular its 2004 current-account deficit of $600 billion. He began writing extensively about the dangers of that deficit and then branched out, researching the various effects of the credit boom — including the biggest housing bubble in the nation’s history — that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop.
By late 2004 he had started to write about a “nightmare hard landing scenario for the United States.” He predicted that foreign investors would stop financing the fiscal and current-account deficit and abandon the dollar, wreaking havoc on the economy. He said that these problems, which he called the “twin financial train wrecks,” might manifest themselves in 2005 or, at the latest, 2006. “You have been warned here first,” he wrote ominously on his blog. But by the end of 2006, the train wrecks hadn’t occurred.
Recessions are signal events in any modern economy. And yet remarkably, the profession of economics is quite bad at predicting them. A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.
The dismal science, it seems, is an optimistic profession. Many economists, Roubini among them, argue that some of the optimism is built into the very machinery, the mathematics, of modern economic theory. Econometric models typically rely on the assumption that the near future is likely to be similar to the recent past, and thus it is rare that the models anticipate breaks in the economy. And if the models can’t foresee a relatively minor break like a recession, they have even more trouble modeling and predicting a major rupture like a full-blown financial crisis. Only a handful of 20th-century economists have even bothered to study financial panics. (The most notable example is probably the late economist Hyman Minksy, of whom Roubini is an avid reader.) “These are things most economists barely understand,” Roubini told me. “We’re in uncharted territory where standard economic theory isn’t helpful.”
True though this may be, Roubini’s critics do not agree that his approach is any more accurate. Anirvan Banerji, the economist who challenged Roubini’s first I.M.F. talk, points out that Roubini has been peddling pessimism for years; Banerji contends that Roubini’s apparent foresight is nothing more than an unhappy coincidence of events. “Even a stopped clock is right twice a day,” he told me. “The justification for his bearish call has evolved over the years,” Banerji went on, ticking off the different reasons that Roubini has used to justify his predictions of recessions and crises: rising trade deficits, exploding current-account deficits, Hurricane Katrina, soaring oil prices. All of Roubini’s predictions, Banerji observed, have been based on analogies with past experience. “This forecasting by analogy is a tempting thing to do,” he said. “But you have to pick the right analogy. The danger of this more subjective approach is that instead of letting the objective facts shape your views, you will choose the facts that confirm your existing views.”
Kenneth Rogoff, an economist at Harvard who has known Roubini for decades, told me that he sees great value in Roubini’s willingness to entertain possible situations that are far outside the consensus view of most economists. “If you’re sitting around at the European Central Bank,” he said, “and you’re asking what’s the worst thing that could happen, the first thing people will say is, ‘Let’s see what Nouriel says.’ ” But Rogoff cautioned against equating that skill with forecasting. Roubini, in other words, might be the kind of economist you want to consult about the possibility of the collapse of the municipal-bond market, but he is not necessarily the kind you ask to predict, say, the rise in global demand for paper clips.
His defenders contend that Roubini is not unduly pessimistic. Jeffrey Sachs, his former adviser, told me that “if the underlying conditions call for optimism, Nouriel would be optimistic.” And to be sure, Roubini is capable of being optimistic — or at least of steering clear of absolute worst-case prognostications. He agrees, for example, with the conventional economic wisdom that oil will drop below $100 a barrel in the coming months as global demand weakens. “I’m not comfortable saying that we’re going to end up in the Great Depression,” he told me. “I’m a reasonable person.”
What economic developments does Roubini see on the horizon? And what does he think we should do about them? The first step, he told me in a recent conversation, is to acknowledge the extent of the problem. “We are in a recession, and denying it is nonsense,” he said. When Jim Nussle, the White House budget director, announced last month that the nation had “avoided a recession,” Roubini was incredulous. For months, he has been predicting that the United States will suffer through an 18-month recession that will eventually rank as the “worst since the Great Depression.” Though he is confident that the economy will enter a technical recovery toward the end of next year, he says that job losses, corporate bankruptcies and other drags on growth will continue to take a toll for years.
Roubini has counseled various policy makers, including Federal Reserve governors and senior Treasury Department officials, to mount an aggressive response to the crisis. He applauded when the Federal Reserve cut interest rates to 2 percent from 5.25 percent beginning last summer. He also supported the Fed’s willingness to engineer a takeover of Bear Stearns. Roubini argues that the Fed’s actions averted catastrophe, though he says he believes that future bailouts should focus on mortgage owners, not investors. Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars’ worth of high-risk mortgages (in exchange for the lenders’ agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages — or the complex securities derived from them — go under. “You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”
For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”
Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”
The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”
Stephen Mihm, an assistant professor of economic history at the University of Georgia, is the author of “A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States.” His last feature article for the magazine was about North Korean counterfeiting.

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