From Bloomberg….

California Governor Arnold Schwarzenegger today ordered all state workers to take two days of unpaid leave each month to conserve money amid a record budget deficit and a legislative impasse over how to fix it.

The furloughs will begin in February and will last through June 2010, Schwarzenegger said in an executive order. He also ordered all departments to cut 10 percent of their workforce costs, through firings if necessary.

“Every California family and business has been forced to cut back during these difficult economic times, and state government cannot be exempt from similar belt tightening,” Schwarzenegger said in a letter to state workers.

The unions do not like this. They argue (proably correctly) that it violates collective bargaining agreements and they plan to sue. If they are correct, this order to should be overturned. A contract is a contract and rule of law is our most important resource. That goes out the window, and nobody will have anything for long.

The flip side of this is that Governor would be 100% within his rights to lay people off. That would mean cutting back on services, but he could do it.

But would the unions really rather 10% of the workforce laid off as opposed to everyone taking a 10% effective pay cut? The sad answer is yes.

Unions exist to serve the interests of people who have jobs. The 10% who lose their jobs will not be union members for very long. The 90% who keep their jobs will not have lost anything. From the stand point of a Union official there is no contest. They might protest long and hard against lay offs. But when push comes to shove, they always seem to go for layoffs as opposed to any other type of cut in payroll costs.

And that is one of the biggest problems with unions in a nutshell. Unions generally don’t have a problem with high rates of unemployment as long as their members are well paid and well treated.

From the Wall Street Journal….

The Bush administration’s plan to provide up to $17.4 billion in loans to GM and Chrysler will keep the two companies in business but pushes the problem on to President-elect Barack Obama and the next Congress, Mr. Jackson said.

“This is a punt. The congress punted to the president and the president punted it to Obama. But at least we got something. Without it [a bailout], it’s lights out for these companies.”

The difficulty of getting auto loans is a big reason auto sales have fallen so dramatically in the last two months and pushed GM and Chrysler into such deep financial holes, Mr. Jackson said. Many dealers around the country confirmed they are losing sales because even consumers with good credit aren’t being approved for loans.

As I have said before; if the consumers have money, the automotive industry will survive even if the Big Three go bankrupt. But the flip side of this is also true. If consumers don’t have the money to buy cars, it does not matter how much money is spent bailing out the Big Three.

From Newsday…

Proposals to shave pension entitlements for new employees emerge in every fiscal crisis, prompting resistance from public-service unions and from the lawmakers responsive to them. Each pension tier marks an effort at what policy-makers call fiscal reform. Over the years the state has had four such tiers. The constitution bars cutting pensions to those already on the job or retired.

Earlier in the decade, calls for a fifth tier for rookies failed. But this new push could carry unusual momentum. The clearest reason is the severe fiscal crisis fueled by Wall Street’s collapse and the search for savings in every corner. But also, a certain political wind is blowing. Mention public pensions these days and scandalous abuses come to many local minds such as school board pensions for non-employees or hearty Long Island Rail Road retirees collecting for phantom disabilities. Into all that figures the decline and thinning of pensions in the teetering auto industry and other businesses.

New York State is actually in a fairly good position in regards to its pension. At least, compared to many other states.

But local governments all over NY state are getting killed by pension costs. The problem is that they will go bankrupt long before this fifth tier has any effect on pension costs. It will be at least 10 years before the state realizes any savings from this “fifth tier” and many local governments are going to be killed by pension costs in the next 10 years.

From the Houston Chronicle….

An insurance company with a potential $25 million liability from a 2007 Houston office fire is claiming smoke that killed three people was “pollution” and surviving families shouldn’t be compensated for their losses since the deaths were not caused directly by the actual flames.

Great American Insurance Company is arguing in a Houston federal court that the section of the insurance policy that excludes payments for pollution — like discharges or seepage that require cleanup — would also exclude payouts for damages, including deaths, caused by smoke, or pollution, that results from a fire.

I don’t see how arguments like this can be appear in court with out the judge laughing them out of court. The fire caused the smoke. If you cover damages as a result of a fire, that covers the damages caused by smoke. End of story.

From the Reuters….

U.S. crude prices dropped more than 9 percent to $36 a barrel Thursday as slumping demand and swelling U.S. inventories offset OPEC’s record supply cut agreement.

The Organization of the Petroleum Exporting Countries on Wednesday agreed to cut output by 2.2 million barrels per day from January to counter oil’s collapse from record highs above $147 a barrel in July.

From Macro Man….

People who are acquainted with Macro Man, either personally or virtually, will know that he is very rarely lost for words. This morning, however, he has reached that milestone, as he’s watched prices flicker on his screen in slack-jawed silence.

Policymakers often reference a desire to avoid “excessive volatility” and the proper functioning of markets. Suffice to say that that we are now firmly in the presence of the former, with an utter absence of the latter. Regardless of your market view, right or wrong, you want to have a market in which to transact. The past couple of weeks, and the past couple of days in particular, has seen complete implosion of the market’s ability to reflect transaction flows and fundamentals.

This morning, for example, the German ifo survey printed a lower-than-expected 82.6, it’s worst reading since…err…ever. Regardless of what you think about the dollar, it would seem to be an excessive response for EUR/USD to rally 3 big figures in the ensuing hour.

Brad Setser spells it out a little more concretely…..

Only a few days ago, so it seems, it took about $1.25 to buy a euro. Now it takes closer to $1.45 (it was more earlier today, but the dollar subsequently rallied). And — as Macro Man notes — the dollar’s move pales relative to the recent slide in the pound. Not so long ago a pound bought 1.5 euros. Now it buys a euro and change. The Anglo-Saxon currencies haven’t had a good two week run.

Both the US and the UK had housing and finance centric economies. Both have significant external deficits. And both are inclined to use monetary and fiscal policy aggressively to combat a downturn.

Maybe this has something to do with the Fed telling everyone who will listen that they are going to print dollars until all their problems go away.

Macro Man argues other wise. He points out that Euro moved high against everything so he does not think that this move should be considered some kind of reaction against the dollar.

But a good part of the dollar’s recent strength has been the desire for a safe haven. Maybe a lot of people decided they wanted a new safe haven. I don’t see why that would not drive the Euro up against everything

From the Naked Capitalism…..

AIG’s loans so far come to $1.4 million per employee, and many of whom are stationed overseas. But their requests for more cash and better terms got speedy approval, while the auto industry, on whom far more jobs depend, may be dealt a deadly blow due to the failure to due a basic investigation of likely consequences.

I get the point. But throwing money down a rat hole is throwing money down a rat hole regardless if it is the Big Three or AIG. My solution for this injustice would be to stop giving money to AIG.

From Calculated Risk…..

Just checked some money market funds, and for a few of them the expenses are now greater than the yield – so you’d do better with a mattress.

From Pajamas Media…

But almost all of the discussion, when it comes to UAW culpability, has been on wages. The even larger issue, though, is the elephant in the room that seemingly no one discusses, even when given a political opportunity. For instance, I saw a “debate” on Fox News recently in which the Democrat defending the union said that it was partly management’s fault because of the poor quality of the cars, and the Republican failed to respond. And it’s not like people are unaware of it, at least people familiar with the industry. The issue isn’t wages — though those are a problem — so much as work rules. UAW work rules, which have evolved over the many decades since the passage of the Wagner Act, are the biggest reason that General Motors is uncompetitive with its non-union American counterparts.

What are work rules? They are agreements negotiated in the contract between management and the union covering how the employees are to be classified, how many breaks they get, how much time off they get, who can do which jobs, how discipline is to be enforced, etc. The goal of the rules is not to enhance productivity or production quality. It is to provide opportunities for featherbedding, increase numbers of (overpaid) jobs for union workers, and minimize how much they have to actually work. This is important because it’s at least in theory possible that the industry could be making money even at current wages, if they could be provided with the flexibility to increase worker productivity.

The article is full of little anecdotes to back up the author’s point. I have seen enough with my own eyes that I have no doubt that his point is correct.

But I still blame management for the problems. The power of unions is easy to overstate. A lot of times they are used as an excuse by managements for not doing their jobs.

Moreover, management could have refused to agree to those restrictions on their authority. But a lot of times, upper management thinks that such rules are relatively harmless compared to paying more money. I think they tend to think that all monkeys are the same. So they don’t feel like they are losing much when they give up the right to reward the better monkey.

From Euro Intelligence….

Frankfurter Allgemeine has cracking scoop this morning, having obtained an internal memo from the economics ministry, which expects a slump in growth of more than minus 3 per cent for next year, by far the worst economic decline in German post-war history. The ministry plans to make this forecast official in its annual economic report, due out January.

Worse still, the decline in the present quarter is estimate at 1.25-1.75%. Note these are actual, not annualized figures.