Source: BusinessWeek

Beijing – D-22 looks like a Chinese version of New York’s seminal punk club of yore, CBGB. Young hipsters sporting Mohawks and ripped T-shirts chug Tsingtao beers and puff on Zhongnanhai cigarettes. Demerit, Carsick Cars, Snapline, and other Chinese bands flail at their guitars and drum kits on stage. Dancers pogo to the beat. So why is a 50-year-old former trader from Bear Stearns (JPM) standing behind the bar offering his opinions on exchange rates, the Smoot-Hawley tariffs, and Keynesian theory?

The bartender is Michael Pettis, a veteran New York banker who moved to China seven years ago to teach finance to graduate students. After 14 years of investment banking, the excitement of doing deals had faded, and a short visit to Beijing left him convinced that China was the place to be. “There was this sense of incredible change,” Pettis says. “I could have come as a banker, but bankers work too hard.”

It’s not like Pettis is slacking off. The lanky indie-music fan spends most evenings at D-22, which he founded three years ago. During the day he teaches finance at Peking University (in English—his Chinese is sketchy), and in between he tends to a blog that has made him an increasingly influential voice on China both in the country and abroad.

A couple of times weekly, Pettis makes voluminous blog posts at mpettis.com, where he weighs in on China’s trade relations, unemployment, fiscal stimulus, and a host of other economic topics. Scores of readers post lengthy responses to the blog, creating a lively forum for debates on China. “Anyone who cares about China is going to check in to see what Mike is thinking,” says Hans Humes, president of New York hedge fund Greylock Capital Management, who worked with Pettis in the 1980s at Manufacturers Hanover Trust. “They would be crazy not to.”

A recent theme has been what Pettis calls China’s demand dilemma. As consumption plunges worldwide, Pettis warns, China won’t be able to boost internal demand and might instead export its excess production, sparking protectionism abroad. On Feb. 17 and 18, Pettis brought those concerns to Washington, where he met with senators and Treasury Dept. officials and testified before a congressional commission examining China’s role in the global downturn. “He brings a real on-the-ground sense of how people actually behave in Chinese institutions,” says Daniel H. Rosen, a principal at the Rhodium Group, a New York-based consultancy, and a former Clinton White House adviser who oversaw negotiations on China’s membership in the World Trade Organization.

Pettis learned to navigate developing economies early. He was born in Spain to a French mother and an American father working as a geologist and civil engineer. He spent his youth in Peru, Pakistan, Haiti, and Tunisia, and attended high school in Spain. Before 1975, when he entered Columbia University (where he eventually earned a master’s of international affairs and an MBA), Pettis had spent a total of just two weeks in the U.S. “He’s been operating in the global economy his whole life,” says Eric R. Hermann, president of New York hedge fund FH International Asset Management, who knows Pettis from his days in New York.

CALLING CALAMITIES

That background piqued Pettis’ interest in emerging markets, which he focused on when he joined Manny Hanny’s sovereign debt team in 1987. Over the next decade-plus he jumped from firm to firm, doing work on Latin America, the Philippines, Macedonia, and Korea. At Bear Stearns, former colleagues say, he had a reputation for predicting calamities such as Argentina’s meltdown, and he played a key role in developing peso-denominated bonds for Mexico after the 1994 financial crisis there. His insights were often shaped during long, wine- and whiskey-fueled dinners in New York that brought together academics, policy wonks, and his emerging-market banker pals.

Pettis says he’s happy in his new role as finance professor and indie-rock impresario, though he’s not exactly making a killing. He and two partners (including a former Goldman Sachs (GS) banker) put $200,000 into D-22, which continues to lose about $1,000 a week even as it regularly sells out its 250-person capacity. His talent management company and record label, Maybe Mars, which has signed a handful of local bands, have yet to see a profit either. “You don’t leave Wall Street to get rich,” Pettis says with a smile. “But China is undergoing its own version of the 1960s, and the music scene is exploding.” How could someone passionate about both rock and finance go wrong in a country where the economy is at least as dynamic as the music scene? “I figured there’s only one opportunity in life,” Pettis says, “to get involved in something so historic.”

Another piece (source: wsj) on the worst timing to raise taxes during economic slump — New York is competing to become the tax capital of the world.

Like the old competition to have the world's tallest building, New York can't resist having the nation's highest taxes. So after California raised its top income tax rate to 10.55% last month, Albany's politicians leat into action to reclaim high-tax honors. Maybe C-Span can make this tax competition a new reality TV series; Carla Bruni, the first lady of France, could host.

They can invite politicians from the at least 10 other states that are also considering major tax hikes, including Oregon, Illinois, Wisconsin, Washington, Arizona and New Jersey. One explicit argument for the $787 billion "stimulus" bill was to help states avoid these tax increases that even Keynesians understand are contractionary. Instead, the state politicians are pocketing the federal cash to maintain spending, and raising taxes anyway. Just another spend-and-tax bait and switch.

In New York, Assembly Speaker (and de facto Governor) Sheldon Silver and other Democrats will impose a two percentage point "millionaire tax" on New Yorkers who earn more than $200,000 a year ($300,000 for couples). This will lift the top state tax rate to 8.97% and the New York City rate to 12.62%. Since capital gains and dividends are taxed as ordinary income, New York will impose the nation's highest taxes on investment income — at a time when Wall Street is in jeopardy of losing its status as the world's financial capital.

But who and where are all these millionaires to pluck? More than any other state, New York has been hurt by the financial meltdown, and its $132 billion budget is now $17.7 billion in deficit. The days of high-roller Wall Street bonuses that finance 20% of the New York budget are long gone. The richest 1% of New Yorkers already pay almost 40% of the income tax, and the top 0.5% pay 30%.

Mr. Silver thinks he can squeeze more from these folks without any economic harm, arguing that recent income tax hikes didn't hurt New Jersey. (Yes, the pols in New York actually hold up New Jersey, whose economy and budget are also in shambles, as their role model.) The tax hike lobby in Albany points to a paper by Princeton researchers reporting that the number of "half-millionaires," those with incomes above $500,000, increased by 60% from 2003-2006 after New Jersey taxes rose (the top rate is now 8.98%). But this was a boom time for the national economy, especially in the financial industry where many New Jerseyites work, or at least used to work.

The better comparison is how New Jersey compared to the rest of the nation. According to the study's own data, over the same period the U.S. saw an increase of 76% in half-millionaire households. E.J. McMahon, a budget expert at the Manhattan Institute, calculates that New Jersey lost more than 4,000 high-income taxpayers after the tax increase.

Mr. Silver says of the coming tax hikes: "We've done it before. There hasn't been a catastrophe." Oh, really? According to Census Bureau data, over the past decade 1.97 million New Yorkers left the state for greener pastures — the biggest exodus of any state. New York City has lost more than 75,000 jobs since last August, and many industrial areas upstate are as rundown as Detroit. The American Legislative Exchange Council recently said New York had the worst economic outlook of all 50 states, including Michigan. And that analysis was done before these $4 billion in new taxes. How does Mr. Silver define "catastrophe"?

Oh, and it isn't just high earners who get smacked. The new budget raises another $2 billion or so on top of the $4 billion in income taxes with some 100 new taxes, fees, fines, surcharges and penalties to be paid by all New York residents. There are new charges for cell phone usage, fishing permits, health insurance (the "sick tax"), electric bills, and on bottled water, cigars, beer and wine. A New York Post analysis found that a typical family of four with an income below $100,000 would pay more than $800 a year in higher taxes and fees.

This is advertised as a plan of "shared sacrifice," but the group that is most responsible for New York's budget woes, the all-powerful public employee unions, somehow walk out of this with a 3% pay increase. The state is receiving an estimated $10 billion in federal stimulus money, and Democrats are spending every cent while raising the state budget by 9%. Then they insist with a straight face that taxes are the only way to close the budget deficit.

And so Albany is about to make a gigantic gamble on New York's economic future. The gamble is that the state with the highest cost of doing business can raise taxes on everyone who lives, works, breathes, eats or drinks in the state and not pay a heavy price for it. If they're wrong, New York will enhance its reputation as the Empire in Decline State.