Akio Toyoda’s contribution is to restore the great corporate culture of his grandfather’s day.

Dear Puritans:

The best comment I have seen on the recall of Toyota’s cars came from John Rosevear, who writes in the ‘Motley Fool’ website.  He argues – rightly – that the proper course for any company, when faced with defects in its products, is to admit  to them without obfuscation or delay. For some decades, Toyota has avoided doing so, pretending that its cars were beyond reproach. Now under a new chief executive, Akio Toyoda, it has reversed itself; only last week, he told the world that he did not ‘see Toyota as an infallible company that never makes mistakes’.

Akio is the great-grandson of Sakichi Toyoda, a Japanese peasant farmer who set up in business in 1866 to make textile machinery. As we record on page 111 of THE PURITAN GIFT, Sakichi had been heavily influenced by a translation of one of the sacred texts of Puritanism, Smiles’ ‘Self Help’.  Under the direction of the founder’s son, Kiichiro, the family diversified into making motor cars in 1937, adopting the more euphonious name ‘Toyota’ for that part of its business. A decade later, during the US Occupation of Japan, that same Kiichiro would adapt contemporary American manufacturing methodology to create the Toyota Production System. Since then, company’s rise has been inexorable; in 2009, it overtook the bankrupt General Motors as the largest manufacturer of motor cars in the world.

However, a minor sickness entered the company’s soul in the 1990s in the form of the ‘Re-engineering’ craze. According to this fad, senior corporate executives did not need expertise in engineering or manufacturing — that was for the lower orders. Top people needed financial expertise!  ‘The Cult of the (So-called) Expert’, aka as ’financial engineering,’ was born in a major Japanese company, leading to an attitude of denial on a senior level concerning defects. Akio’s contribution will be to restore in all its integrity the great corporate culture of his grandfather’s day.

Yours aye,

WILL HOPPER,

joint author of  THE PURITAN GIFT
w.hopper@puritangift.com
k.hopper@puritangift.com
www.puritangift.com

Follow me on: www.twitter.com/puritangift

GIVE US EACH DAY OUR DAILY BLOG: http://thepuritangift.wordpress.com/  

The Japanese paid ‘peanuts’; the Americans got ‘monkeys’ – for example, the directors of Citigroup, AIG and Lehman Brothers.

Dear Puritans:

Marks & Spencer is a leading British retail chain.  A generation ago, it was one of the country’s leading ‘blue chip’ companies, renowned for the quality of its goods and the reasonable prices which it charged. On page 137 of  THE PURITAN GIFT, we even held up one of its founders, Simon Marks, as a role model for businessmen everywhere; one of his famous, if vulgar, sayings was : ‘good goods will sell arse upwards’ – that is, irrespective of what you call them. In distrusting brand-worship, Simon helped create one of the nation’s greatest corporate brands.

Some decades ago, however, M&S lost its way in the marketplace, becoming known for overpricing and poor presentation. In a belated response to this challenge, its Board has just appointed a new CEO, attracting him away from a highly successful retail chain called Morrisons with a ‘golden hello’ equivalent to over $20 million. When the price of this hire was questioned by critics, the Chairman’s reply, as reported in yesterday’s London Evening Standard, was : ‘if you pay peanuts, you get monkeys.’ 

On which we have two comments to make. The first is: where were the internal candidates for the job?  M&S has over 70,000 employees throughout the land. One of the principal functions of any Board is what is called ‘management succession’. One would expect there to have been a short list of half a dozen man and women constantly under review for appointment  to the most senior posts.  Getting on to that list should also have been part of their essential motivation. In other words, there has been a serious failure at the Board level.

Secondly, and contrary to what M&S’ chairman has told us, there is no close and necessary connection between ‘peanuts’ and ‘monkeys’. As my brother and I explain on page 108 of our book, in 2006 the Chief Executives of the 100 leading US companies were paid 475 times the average national wage; the equivalent figure in Japan was eleven. The Japanese paid ‘peanuts’; the Americans got ‘monkeys’ – for example, the directors of Citigroup, AIG and Lehman Brothers. Sad to say, from this point of view, Britain is an American colony.

Yours aye,

WILL HOPPER, joint author of  THE PURITAN GIFT
w.hopper@puritangift.com
k.hopper@puritangift.com
www.puritangift.com

Follow me on: www.twitter.com/puritangift

GIVE US EACH DAY OUR DAILY BLOG: http://thepuritangift.wordpress.com/

According to President Yushchenko, Ukraine needs a General MacArthur

Dear Puritans:

This morning’s newspapers are full of events in Kiev, where votes are being counted in the run-off presidential election. It looks as if the decidedly glamorous Julia Tymoshenko has been defeated by the decidedly unglamourous Viktor Yanukovich, whom today’s Financial Times describes as a man of ‘limited intellect and weak ideology’.  No one can be sure of the outcome until the count is complete; it is just possible that glamour will prevail.

It all brings back warm memories of a cold night on December 28, 2004 when I stood in the Maidan (aka Independence Square) in the capital of Ukraine. The presidential elections of November 21 had been rigged in favour of the pro-Russian Viktor Yanukovych and against his pro-European opponent Viktor Yushchenko. The courts then ordered a re-run and the results had been announced that morning. In the event, Yushchenko scored 51.99 versus Yanukovych’s 44.20%, representing a switch of over 5%.

At midnight I headed for the Maidan to celebrate with my colleague, John Cook, and our Ukrainian-American client, Michael Bleyzer. By some reports there were a million people there; the Orange Revolution was underway. I wore an orange woolly hat and scarf emblazoned with appropriate political slogans and joined with everyone else in raising my arms and shouting YUSH-CHEN-KO! YUSH-CHEN-KO!  YUSH-CHEN-KO! A pattern had been set for future similar events throughout the world. In spite of many intervening difficulties, democracy has survived in  Ukraine.

My brother and I had a special, personal reason to favour the victor (no pun intended). Back in 1995, we had arranged a seminar in the Embassy of Japan in London to celebrate the work undertaken by the Civil Communications Section of General MacArthur’s Command in Tokyo under the US Occupation. (It was this Section which taught then contemporary US managerial practices to the Japanese – see Chapter Ten of THE PURITAN GIFT.) Among those attending was a certain Viktor Yushchenko, then Governor of the Ukrainian Central Bank, who happened to be passing through London on that day. Afterwards, he came up to us and said: Ukraine needs a General MacArthur.

Yours aye,

WILL HOPPER, joint author of  THE PURITAN GIFT
w.hopper@puritangift.com
k.hopper@puritangift.com
www.puritangift.com

Follow me on: www.twitter.com/puritangift

GIVE US EACH DAY OUR DAILY BLOG: http://thepuritangift.wordpress.com/

For most practical purposes, George W Bush is still the President of the United States.

Dear Puritans:

My brother and I had never heard of a senator called Barack Obama when we published the original, hardback edition of The Puritan Gift in March 2007. However, we thought we knew a  lot about him when our paperback was under preparation in December 2008: the senator from Chicago was already President-elect. I greatly admired the skill with which he had secured his election and I hoped he would break with the personalities and policies of his disastrous predecessor. In anticipation, we introduced the new edition on page iv with an excerpt from one of his speeches:

This is our time – to put our people back to work and open doors of opportunity for our kids; to restore prosperity and promote the cause of peace; to reclaim the American Dream and reaffirm that fundamental truth – that out of many, we are one.

Has he done any of these things? The answer has to be, regretfully, no – and he has not even begun to do so. Instead, Obama has retained in power the very same key figures — Gates, Geithner, Bernanke –  who ran the Bush administration, and they pursue policies that are distressingly similar to what went before. A sad, succinct article headed ‘Clueless in Washington’ on page 13 of today’s Economist tells it all: ‘Mr Obama’s budget reveals a road-map to fiscal catastrophe.’ For most practical purposes, George W. Bush is still the President of the United States.

Yours aye,

WILL HOPPER, co-author of THE PURITAN GIFT
w.hopper@puritangift.com
k.hopper@puritangift.com
www.puritangift.com

Follow me on: www.twitter.com/puritangift

GIVE US EACH DAY OUR DAILY BLOG: http://thepuritangift.wordpress.com/  

My guess is that most of the Toyotas now being retro-fitted with pedals and mats had nothing wrong with them.

Dear Puritans:

Today the newspapers are all leading on the news that the Toyota Motor Corporation has recalled thousands of its best-selling cars because of defective accelerators and brake pedals, not to speak of ‘out-of-position floor mats’ that interfered with the operation of these controls.

Toyota figures very large in THE PURITAN GIFT. My brother and I even compare it with Shakespeare’s Julius Caesar, saying that it ‘doth bestride the narrow world like a colossus.’ We believe that its Production System provides a  model of good governance not just for companies but for organisations of all kind. There is also a great deal to be said for its approach to finance: it does not like debt, regarding borrowed money as an enemy.

However, we also point out that ‘even the great Toyota’ has recently failed to meet its own high manufacturing standards. In our view, this ‘fall from corporate grace’ resulted from the import by the company from the West of the so-called ‘re-engineering fad’. For example, in the 1980s, Toyota attempted to remove its entire layer of middle managers, the object being inter alia to save money. Unsurprisingly, this attempt failed. As we say on page 239, the middle manager or kacho is the heart and soul of the Japanese management; remove him, and everything falls to pieces. Whence pedals that are defective and floor mats of inappropriate size and shape.

Toyota appears to have learned its lesson. Let us therefore not be too concerned about the current recall of Priuses and other marques. My guess is that most of the cars now being retro-fitted had nothing wrong with them; it fact, they were superb examples of the manufacturer’s art.

Yours aye,

WILL HOPPER, joint author of  THE PURITAN GIFT
w.hopper@puritangift.com
k.hopper@puritangift.com
www.puritangift.com

Follow me on: www.twitter.com/puritangift

GIVE US EACH DAY OUR DAILY BLOG: http://thepuritangift.wordpress.com/

 

The American Great Housing Bubble began in 1995.

Dear Puritans:

Everyone knows that America suffered from a huge housing Bubble that burst in September 2008. What is not so clear is when this Bubble began. On page 278 of THE PURITAN GIFT, we suggested that it started several decades ago; it now looks as it we were wrong.

Interesting light is shed by the American economist, Dean Baker, in his book: False Profits: Recovering from the Bubble Economy. He argues that between 1895 and 1995, American house prices tracked inflation almost exactly; they simply reflected demand and supply for a basic human need: somewhere to live. In other words, the market worked.

However, between 1995 and 2002, house prices increases exceeded consumer price inflation by 30%, creating a $3.0 trillion excess, which by 2008 had risen to $8.0 trillion. Under the new dispensation, annual price increases far in excess of inflation were deemed to be the New Normal. As in all Bubbles, this belief was self-fulfilling; people bought housing because they believed its value would rise; and it rose because people bought housing! And, of course, it all ended in tears with the financial meltdown of 2009.

For Dean, as for this blogger, the guilty men are the US regulators who witnessed the start of this Bubble in the 1990s. Not only did they do nothing  to prevent it – they actively encouraged it by lowering interest rates. Like him I am unhappy that a majority of them are not only still in power but have actually been promoted.

What is the price of retaining the Bernankes, Geithners and Summers in position of such influence? The answer is that, having failed to prevent this great housing Bubble in the first place, they have now re-inflated it; in many parts of the US and the UK, prices are back where they were before 2008. The guilty men have taken what I call the Low Road to the future — see my blogs of January 20 and December 22. In all probability they have condemned us to a decade of economic stagnation.

Yours aye,

WILL HOPPER,

joint author of THE PURITAN GIFT

w.hopper@puritangift.com

k.hopper@puritangift.com www.puritangift.com Follow me on: www.twitter.com/puritangift GIVE US EACH DAY OUR DAILY BLOG: http://thepuritangift.wordpress.com/

With the cancellation of the Moon, Mars & Beyond Initiative, common sense has prevailed.

Dear Puritans:

I promised to talk about the Scylla and Charybdis of international finance today — roughly, the inflationary and the deflationary threats  — but will postpone that to comment instead on yesterday’s big announcement from Washington: Obama has cancelled the Moon, Mars and Beyond Initiative, which Bush announced in 2005. The 43rd president decided to put a man back on the Moon by 2010; the 44^th says no. The US taxpayer has already spent $9 billion on this programme but will save ten times as much by cancelling it. Common sense has prevailed.

My brother and discussed this Initiative in some detail on page 135 of THE PURITAN GIFT,  dismissing it as the result of poor decision-making and  saying that it would cost America dear in terms in lives and money. In support of our view, we quoted from a report by the American Physical Society, which said:

‘The scope of the Moon-Mars initiative has not been well-defined, its long-term cost has not been adequately addressed, and no budgetary mechanisms have been established to avoid causing major, irreparable damage to the agency’s scientific program’.

We also suggested that, paradoxically, America was likely to set human beings on distant moons and planets faster and cheaper if it focussed, initially, on non-human space travel. In other words, you solve the problems with sophisticated machinery — and then you bring human beings into the picture. The trouble with sending a piece of machinery to the moon is that it barely rates a headline in the popular press. Is the fault with our media?

Yours aye,

WILL HOPPER, joint author of  THE PURITAN GIFT
w.hopper@puritangift.com
k.hopper@puritangift.com
www.puritangift.com

Follow me on: www.twitter.com/puritangift

GIVE US EACH DAY OUR DAILY BLOG: http://thepuritangift.wordpress.com/

Is the fourth phase of the credit crisis not already with us? (see blog)

Dear Puritans:

On page 212 of THE PURITAN GIFT, my brother and I suggested that the medium term prospect for the US economy was not so much a repeat of the Great Depression of the 1930s as a Lost Decade of economic stagnation à la japonaise. Nothing has happened since the original edition of our book (March 2007) to make us change our view. Our pessimism was based in large part on the fact that the US government (like its UK equivalent and certain others) simultaneously pursued objectives which were mutually contradictory. For example, it kept interest rates artificially low but asked financial institutions not to engage in speculative activities. This is bit like asking a drug addict to give up his bad habit – while simultaneously slipping a large line of cocaine into his back pocket.

Artificially low interest rates fuel a form of speculation known as the currency ‘carry trade’. For decades the proverbial Japanese housewife undertook this form of activity from the safely of her living room. Motivated by almost zero interest rates in her own country, she would borrow large amounts of yen and exchange the proceeds for Australian dollars, which offered a relatively high rate of interest. This drove the yen down, and the aussie up. Curiously enough, both countries benefitted, at least in the short term: Japan because its exports (mostly manufactures) were price sensitive and Australia, because its exports (mostly raw material) were not.

Today’s similar activity between the US dollar and other currencies is less benign. Because US interest rates are zero or even negative in real terms, the new ‘carry trade’ consists of borrowing trillions of dollars in New York and investing them in a developing world where (a) growth prospects appear to be better; and (b) interest rates are higher. By this means, non-US asset prices are now being vigorously inflated – for example, Brazilian equities. Those same low US rates have re-inflated the property Bubble back on the American ranch. Meanwhile the People’s Republic is doing much the same at home; in December alone, Chinese property prices rose 10%.

In a recent article, the FT’s John Kay predicted a fourth phase to the current global Credit Crisis but said he did not know what form it would take. Is it not already with us in the form of a worldwide inflation in asset prices, fuelled largely by low interest rates in New York and Beijing? For the answer, see tomorrow’s blog on the Scylla and Charybdis of international finance.

Yours aye,

WILL HOPPER,

joint author of THE PURITAN GIFT with Ken Hopper

www.puritangift.com   

Follow me on: www.twitter.com/puritangift

The Iraq War would not have been initiated, if proper decision-making procedures had been in place.

Dear Puritans:

I have written so much about the Credit Crunch in recent blogs that a casual reader might think that THE PURITAN GIFT was all about it. In fact, finance occupies less than 5% of our book, which is chiefly about the impact of good and bad managerial practices on the evolution of American society as a whole. We look at business, government, the military and many other subjects from this point of view. As examples of good and bad management in the military field, we compare America’s Occupation of Japan  from 1945 to 1952 with the current Occupation of Iraq (2003 – ).

The earlier event was, by any standard, an outstanding success; the later one has (so far) been a disaster. Why the difference? The answer must lie, in large part, in the quality of the forward planning. When the Supreme Allied Commander, General MacArthur arrived at Atsugi Airport on August 30, 1945, he had in his pocket a lengthy, detailed document called Secret Directive JCS 1380/15, which told him exactly what he was to do in a whole variety of circumstances. At a conference organized in Washington, DC in January 2005 and designed to teach soldiers and others lessons from the current Iraq War, it was disclosed – amazingly – that no contingency planning whatsoever took place in the Pentagon against the possibility that Saddam Hussein’s regime might collapse when attacked.

All of which opens up an interesting area of speculation: would the current Iraq War have been initiated if proper decision-making procedures had been in place? On page 95 we opine that, in all probability, wiser counsels emanating from the State Department and its head, the good ex-soldier Powell, would have prevailed.

Yours aye,

WILL HOPPER, joint author of  THE PURITAN GIFT
w.hopper@puritangift.com
k.hopper@puritangift.com
www.puritangift.com

Follow me on: www.twitter.com/puritangift

GIVE US EACH DAY OUR DAILY BLOG: http://thepuritangift.wordpress.com/

The traditionalist Paul Volcker now has the president’s ear.

Dear Puritans:

Yesterday’s State of the Union message by Obama contained no surprises but confirmed that he planned a serious assault on the structure of banking. I welcome this assault, not because bankers deserve to be punished (although they do) but because it is important to inhibit the creation of the new financial Bubble which may otherwise arise from measures already taken to offset the economic and social impact of the current one.

The only proper cure known to man for a financial Bubble is a recession, which is simply a Bubble-in-reverse. Until recently, recessions were regarded as a normal events in a healthy economy, a rebalancing of supply and demand in a complex system. The point of view was well illustrated in a famous remark by William McChesney Martin Jr, chairman of the Fed under President Eisenhower; he said that the function of the central bank was ‘to take away the punchbowl when the party is getting good’. (In other words, it should induce a slowdown in economic activity by raising interest rates — see page 208 of THE PURITAN GIFT.) This point of view was upheld by his successor, Paul Volcker, some decades later; when faced with ‘stagflation’ (economic stagnation accompanied by inflation) under President Reagan in the 1980s, Volcker did not hesitate to induce a recession, restoring sound economic growth after a period of adjustment.

By the 1990s, however, the world would be seized by a curious delusion, which may be referred to as Entitlement and which sprang out ot the psychology of the biggest financial Bubble of all time. It seemed that everyone was entitled to the good life. You could and should own a house, whether or not you could pay for it. You were entitled to a job, whether or not the economy could provide it. Company directors were entitled to earn extraordinarily vast sums of money, whether or not they had earned it. Above all, it was assumed that society as a whole was entitled to ever expanding prosperity. In these circumstances, any central banker who induced a recession would be regarded almost as a criminal; he would be interfering with what seemed to be the New Normal.

It follows that, when the then Chairman of the Fed, Alan Greenspan, detected the existence of a powerful financial Bubble in 1996, he did not set out to kill it in the traditional manner. Instead, he renamed it ‘irrational exuberance’. Far from seeking to deflate it by raising interest rates, he sought to keep it in being by lowering them. Instead of ‘taking away the punchbowl’, he poured vodka into it. And he did all this with the strong support of his acolytes, Tim Geithner and Ben Bernanke, today’s Treasury Secretary and Chairman of the Fed. In 2009, this terrible duo would add a line of cocaine to the vodka.

I am happy to say that the traditionalist Paul Volcker now has the President’s ear. Is a ghostly William McChesney Martin also whispering into it? I wonder: (a) if Bernanke will be re-appointed as chairman of the Fed on Sunday; and (b) if Geithner will be allowed to remain in his post as Treasury Secretary. Watch this space!

Yours aye,

WILL HOPPER, joint author of  THE PURITAN GIFT
w.hopper@puritangift.com
k.hopper@puritangift.com
www.puritangift.com

Follow me on: www.twitter.com/puritangift

GIVE US EACH DAY OUR DAILY BLOG: http://thepuritangift.wordpress.com/