Europe's Solyndra and the Beauty of Bankruptcy
(Corrects name of European Central Bank president in fourth paragraph.)
I spent the early part of this week presenting at several conferences in Belgium, in and around Brussels. I was the not-so-randomly selected person to give the American take on the state of the global economy and capital markets. Or, at least, an American take. I never want to misrepresent my own biased and conflicted views as the consensus. Regular readers should have some idea of what I think of most of the conventional wisdom.
Whenever I travel, I always find things to be puzzled over, e.g., Why don’t we have dual flush toilets here? (Not all flushes are created equal, and dual water capacity makes sense from an efficiency perspective).
The perspective of America from across the Atlantic is invariably one those things I find perplexing. The Europeans are genuinely puzzled by our political stalemates (makes sense if you come from a parliamentary system); they do not really understand the rise of Tea Party; and they cannot figure out what happened to the Occupy movement. They still like President Barack Obama, but the blush is very much off that rose; they still do not care very much for President George W. Bush.
I very much got the impression that Europeans marvel at the strength of America’s economy. Its diversity, adaptability and innovation are signs of a tremendous resilience that seems to be consistently underestimated. In the present cycle, the U.S. seems to far ahead of the EU zone in recovering from the Great Recession. Perhaps that explains why European Central Bank chief Mario Draghi took a page from the Federal Reserve with his surprise rate cut last month.
Lots of other things surprised me. Even though Belgians have a system of bank insurance -- they guarantee deposits up to 100,000 euros -- they do not have much faith in it. During a panel debate, questions were also asked of the full audience. About 90 percent of those in the room did not believe their deposits were safe. I found this astounding. Then again, the Europeans have a longer history of bank failures, including central bank collapses, than we do in America. And I cannot say I fully understand their deposit insurance structure, as it does not seem to be an independent entity such as the Federal Deposit Insurance Corp. Regardless, the folks in this room on this particular night had little faith that their deposits are secure.
I would be remiss if I failed to mention a few words about the infrastructure in Brussels and surrounding areas. While the locals complain that the roads need work and other items are in disrepair, to this New Yorker’s eyes, things looked, well, wonderful. The roads are autobahn smooth, a delight to drive fast on (I was a passenger). The airports are architectural marvels, large and functional and very efficient. They seems intelligently engineered and quite easy to navigate. Public transit -- both buses and trains -- are well thought of by the public (I did not take any mass transit).
Given the high price of gasoline, the availability of compact fuel-efficient manual transmission cars was no surprise. What was a surprise were the large number of big, superefficient diesel cars. A long ride back to the hotel in a BMW 5 series diesel wagon at 130 km hour (~80 mph) revealed a car that was smooth, powerful and, at over 40 MPG combined fuel economy, surprisingly efficient. This is no tiny Yaro, but rather a full-size estate wagon. Why don’t we have more of these here?
Belgium also has a current scandal relevant to the giant wind turbines that dot the landscape. It is their Solyndra, only they are unwilling to let it go bankrupt. Apparently, the farms have been a huge money-loser, and instead of allowing for a reorg, the Belgians keep pouring more money into the projects. My advice? Allow it to go bankrupt, so they can be bought for pennies on the dollar and run more productively by a new group of investors/managers.
It’s a cliché that the second mouse gets the cheese, but it is often true. Bankruptcy allows, for the lack of a better phrase, second mouses to take over. Indeed, part of my presentation is on why bankruptcy is such a wonderful mechanism following any type of mal-investment. It allows capital to be reallocated to more productive uses, and replaces the early speculative investors with the next generation, which may have a better business model and will definitely have a lower cost structure.
The one thing that seems to be ubiquitous today everywhere is political discord. The northern and southern portions of the country -- Flemish and French -- are at odds over corruption, taxes, government projects, the welfare state, indeed almost everything. There is even a burgeoning separatist movement.
Its good to see that wherever I travel, some things remain constant.