Thursday, March 11, 2010

ECONOMIC WARFARE & PALLET TIM

Prepare the armada, it looks like the first salvos are being shot ...


After closing Europe's bond markets to Wall Street, top European Union officials are hitting back at criticism from U.S. Treasury Secretary Tim Geithner, "who has accused Brussels of pushing ahead with rules to regulate managers of hedge funds and other alternative investment funds that could be protectionist."

Hmmm ... first Europe shuts out Wall Street's corrupted bond traders. Then they tell us that we don't know how to discipline our spoiled Wall Street mandarins. Sounds like fightin' words to me.


Seriously, the real problem here is that Tim Geithner and the Obama administration don't seem to understand that Europe blames U.S. financial insitutions for the Global Financial Crisis (as they should). Ergo, it only makes sense that Europe doesn't want to encourage the same unregulated stupidity that Wall Street embraced in the lead up to the 2008 market meltdown.

But what's worse is that Secretary Geithner doesn't seem to understand that Europe is no longer a post-war American satellite, that can be shaped and managed from Washington. Perhaps he should read up on what's been happening in Europe over the past decade ...

Months before the start of the Second Gulf War in 2003, Secretary of Defense Donald Rumsfeld chided Germany and France for not following the U.S. lead on Iraq – derogatorily referring to their leaders as holdovers from “old Europe.” The claim was both misinformed and full of hubris. Since 1945 Europe had embraced democratic and free market principles, was a solid ally during the Cold War, and pursued economic integration as a way to foment cooperation and allay past tensions in the region.

Rumsfeld’s comments demonstrated a willful ignorance of how “new Europe” fulfilled, if not exceeded, the aspirations of America’s post-war architects. Old Europe – if we are to get our history right – would not have waited for the U.S. to sweep into the Middle East. In the end, Rumsfeld would have done well to have spoken with General Electric’s former Chief Executive Officer, Jack Welch. He understands “new Europe.”

During his tenure as CEO Welch merged more than 900 firms with GE. When Honeywell became available in October 2000 Welch went into action. While Honeywell produced many of the same products as GE – plastics, chemicals, electrical machinery, and aircraft engines –Welch wasn’t concerned about anti-trust legislation because he believed Honeywell’s products were “complimentary” rather than competitive. And besides, why should he worry? He was Jack Welch.

After getting the green light from the U.S. Justice Department Welch met with Eurocrat, Mario Monti, the European Union’s Director-General for Competition (its “antitrust” division). In Brussels Welch would find “new Europe.” In The United States of Europe T.R. Reid described the introduction: “Welch flashed his friendly, casual smile, stuck out a hand, and said, ‘Mario – call me Jack’ … ‘Mr. Welch,’ [Monti] replied in his accented but precise English, ‘we have a regulatory proceeding under way. I feel the proper approach would be to keep things on a more formal basis. You can call me Sgr. Monti.’”

Monti’s team had done their homework. They secured information from both GE’s industry competitors and United Technologies (the firm GE outbid for Honeywell). At one point, when asked about aircraft electronic parts manufactured by Honeywell, GE’s team offered only blank stares. And on it went.

When Monti finally called Welch to tell him the “deal is over” he would end the conversation by saying, “Now I can say to you, ‘Good-bye, Jack.’” Fifty-five years after the end of WWII Mr. Welch learned the hard way that the system U.S. post-war architects wanted to build for the world had found a home in Europe. Welch learned something else: By creating the conditions for a prosperous and independent Europe to emerge America’s grand liberal strategy had – and apparently without Donald Rumsfeld’s knowledge – erased “old Europe.”

This snippet (from my book) makes one thing clear. While Secretary Geithner may want to cry "protectionism" the Europeans have both the clout and institutions to fight Wall Street, and their Washington errand boys (yes, Tim Geithner is doing Wall Street's bidding). Whether Europe chooses to continue this posture over the long term is another matter.

Still, given market developments in 2008 - which Geithner seems to want to ignore - it might behoove Pallet Tim to stop catering to Wall Street.

I'm actually glad that Europe is starting to stare down Pallet Tim (so named for sending $12 billion in cash to Iraq on pallets ... most of which was lost). Neither he, nor anyone else in Washington, seems interested in reining in Wall Street. Unless we begin to make it look like we've learned something from the 2008 meltdown we should expect more of this from Europe.

The first salvos of economic warfare never seem like much. Worse, when things escape human control, policy makers are the first to say, "I didn't think it would get this bad ..." (or some variant thereof).

Stay tuned.

- Mark

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