The Tragedy of Consensus Economics

It's pretty clear that Obama's current economic approach is "all hands on deck".  Exhibit 1 is the financial stability plan passed by Congress that splits the economic stimulus baby down the middle:  1/2 spend, 1/2 tax relief.  There isn't really anything wrong with that per se, but I think that a strong view one way or the other would actually be more helpful.  While Obama seeks to build consensus by keeping both camps happy, he is giving up greating a stronger foundation that the entire country can rely on.

I'm not a believer in Reaganomics, but the positive side of Reaganomics was that everyone knew what the underlying philosophy for the country was for the next 20-30 years.  Everyone understood that the key to success was to be a strong capitalist in the face of laizze faire regulation. You knew the rules of the game.  Even if you didn't like the rules, at least you knew why they were unfair.

The markets appear to be reacting to the fact that they don't know what the rules of the game are. While strong capitalism seems on its way out, it's not clear what is replacing it.  Liberals and long-suppressed Democrats hope we are dawning a new day of Strong Liberalism.  But I don't see it that way.  Based on everything I have seen from Obama, he seems to be walking the middle and will venture far into historically "conservative" efforts.  The amount of tax relief in the stimulus bill is a good indication of that.

The problem with this approach is that if Obama were clearly biased towards a single approach, everyone would know what to do.  Government regulations clearly going to increase?  If you're unemployed, then apply at the government.  If you're a business, investing in your government contracting business is a clear investment.  As a CEO, I would be building plans on how to manage and leverage the coming government tidal wave.  It was clear when Reagan said "government is the problem" that it was time to lessen spending on regulatory compliance.

Clearly Obama is changing the balance towards regulation, but I wouldn't call it a strong form of regulation.  And I shouldn't lay this all on Obama, it's clear that voters provided a mandate with a Democratic majority in Congress that they wanted change.  And Congress is delivering it.  So much so, that Obama's challenge is reining in the strongest liberal horses.

But that being said, Obama needs to set the rules of the game for businesses and entrepreneurship very clearly.  The more clarity on which philosophy (or even a new philosophy) drives our economy will allow people to invest.  Right now the rules are not clear at all.

Stimulus Package: ANY spending is good spending...

Consider the truth of this quote:

Even if the entire sum were to be stolen by federal employees and spent entirely on fast cars, fancy homes, gambling junkets and fancy clothes, it would still be an $800 billion increase in the demand for goods and services -- a pretty good working definition for economic stimulus.

It comes from an opinion piece in the Washington Post by Steven Pearlstein that makes an excellent point:  our Congressmen in Washington do not have any financial literacy.  To say that the Stimulus Package that is being worked through Congress is a spending plan but not a stimulus plan is to say that ceasing to live is not dying.  And, as expected, this type of Orweillian "black=white" dialogue is coming from the Republican party.  How do they do this and look themselves in the mirror late at night?  It's clear that they would rather delay or destroy any chance of resolving the economic crisis quickly by standing on flawed principles.

The creation and evaluation of the Stimulus Plan should focus on three things:

1. What will have a quick impact?  The quicker we get the money into the market, the better.
2. What will have the largest "multiplier"?  Who will spend this money?  Clearly, the rich in our country are very effective at hoarding assets.  If you give someone with a high net worth an extra dollar these days, it will likely go back into their bank account in order to regain the investment funds they lost over the last year or so as they hunker down for an economic winter.  However, if you give someone who makes less than $50K/yr an extra dollar, the probability that it will be spent and spent quickly is much higher.
3. Spending should largely go towards either:  Fixing large problems in our current society (see education and healthcare) or creating national strategic assets (see broadband, education or refreshing our civil infrastructure).  Spending the extra money on both of these things will create assets that all businesses and citizens will be able to leverage for years to come in the future.  The highway system is an excellent example of government spending that has probably resulted in a tremendous amount of wealth creation for every person and business in the U.S.A.

The stimulus package should not go to preventing the necessary Darwinian pressures that are being exerted on our Financial System.  We are simply overbanked in the U.S.  However, we should definitely enable the Treasury Department to mitigate this creative destruction so that it plays out over time and not all at once.  To allow the mistakes of their credit derivate positions to manifest at market speed right now would create too much financial pressure for our economic system, which is what we're experiencing at this time.  Again, we should not be trying to "save the banks", but rather allowing them to "fail gracefully" or in a manner that doesn't cause our citizens and our businesses to become more fearful and contract their spending.  If it becomes clear that the Treasury Department has a command of the situation and will be able to protect deposits, then people will stop worrying about the safety of their current balances and can start thinking about how to grow them again.

Investing for the future is the DNA of American progress.  The question isn't whether it should be private or public capital, the question is how to do it well in either forum.

Jeremy Grantham's January Letter To Investors

I love the Internet.  Direct access to real people and their real thoughts is such a great thing.  Here is Jeremy Grantham's January Letter Investors.  It's a fantastic read.  In fact, he references a piece that I highlighted awhile ago in the NY Times by Einhorn and Lewis as "a great job of summarizing where we are and how we got here, as well as offering some helpful advice for the future".  Couldn't agree more.

First, who is Jeremy Grantham and why do I listen to him?  From Wikipedia:

Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo, an American investor well known among institutional investors, but relatively unknown to retail investors. He is regarded as a highly knowledgeable investor in various stock bond and commodity markets. Grantham started one of the world's first index funds in the early 1970s and currently manages approximately $120 billion US. Grantham's quantitative research has revealed reversion to the mean in all bubbles in all commodity, stock and bond markets studied excluding timber.

This guy knows his stuff and has been very right about the direction and severity of our current crisis.  I don't think he's a "broken clock" either, he seems to me to be right for the right reasons -- a critical distinction.  This is why I take his perspectives on how we got here very seriously (that and the fact that meshes well with my own understanding of things).

Here's a key quote from the letter that I am in love with:

Ingenious new financial instruments certainly facilitated and exaggerated these weaknesses, but they were not the most potent ingredient in our toxic stew. That honor goes to the economic establishment for building over many decades a belief in rational expectations: reasonable,

economically-induced behavior that would always guarantee approximately effi cient markets. In their desire for mathematical order and elegant models, the economic establishment played down the inconveniently large role of bad behavior, career risk management, and flat-out bursts of irrationality.

He's taking another pot-shot at economists and Objectivism again, which I'm perfectly fine with.  If you're a regular reader of this blog, you know that I have been aggressively illustrating the fallacy of relying on economists as a source of financial guidance.  And don't get me started on Ayn Rand or Objectivism! 

The dominant economic theorists so valued orderliness and rationality that they actually grew to believe it, and this false conviction became increasingly dangerous. It was why Greenspan and Bernanke were not sure that bubbles – outbursts of serious irrationality – could even exist. It was why Bernanke, who had studied the bubble of 1929, could still not see it as proof of irrationality and could still view the Depression (à la Milton Friedman) as a mere consequence of incredibly bad, easily avoidable policy measures.

I wish I could transmit my thoughts with such clarity.  Until that happens, I will settle for surfacing the great works of others.

Richard Parson's to become Chairman of Citigroup

What part of "He drove TimeWarner straight into the ground without passing Go or collecting $200 do people not understand?"  Seriously, yet another "up is down" development in regards to the governance of our financial institutions.  Story here.

Obama: Why Geithner?

So, I'm in the camp of wanting Obama to succeed.  We simply can't afford for him to fail.  However, I am not in the camp of Whatever-Obama-Wants-Is-A-Great-Idea-To-Me.  First I had a problem with Bill Richardson, his nominee for Treasury Secretary.  It was a purely political move and I thought we were about Change We Can Believe In.  Now I have a real problem with Timothy Geithner, Obama's nominee for Treasury Secretary.  Geithner was the top executive in NYC while the entire credit derivatives fiasco went down.  In fact he calls it his "life's work".  Uh, really, your life's work was to oversee the greatest build-up and explosion of financial destruction seen since the Great Depression of the 1930's?!

Who wants this guy to lead our Treasury Department again?  

Why aren't people stepping up and asking these questions?  I'm reading NYT's LiveBlogging of Geithner's confirmation hearings and the only sane people in the room are Jim Bunning and Charles Grassley!  Trust me, I do not find myself agreeing with conservative Republicans often as they have as much to do with this as anyone.

Sure, Geithner's tax problems are troubling, but this is one step above driving in the carpool lane alone in my book.  I'm more concerned about whether Democrats are falling all-over themselves to endorse him based on his connections, rather than his ability to critically understand the drivers of the economic and financial crisis and create solutions that will solve the problems.

Right now, my bet is not.

I hope I'm wrong.

Paulson's Capital Cram has no Multiplier

I have to change my anti-media rants because there are some outlets and some writers who refuse to submit to the errors of their business overlords and the mediocrity of their colleagues.  NYT and Newsweek, I'm looking at you.  Great article in the NYT discussing how smaller, healthier banks are hoarding the money they received through the TPILF...I mean TARP.  The author, Mike McIntire, did a very simple thing, he went through the transcripts of as many earnings calls and investment conferences, he was able to get a more candid view of the banks plans for the money than what they are providing through worthless press pronouncements.

“With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.” (Walter M. Pressey, president of Boston Private Wealth Management)

This has some amazing implications.  Before the TARP was approved, I had a discussion with a friend of mine who invests in financial institutions for a big-time money manager.  His argument was that TARP should be approved because it would inject money into the economy, which through the magic of an economist's Multiplier Effect would have an outsized effect on the economy.  Looks like Boston Private is exhibit #1 in how that's not going to happen.  If the banks take the money and sit on it, as it appears they are more than happy to do, then it doesn't have any impact other than making already healthy banks wealthier.

And they just approved part II of this beast?  Not only is our government not responsibly regulating bad industries, they now appear to be magnifying their bad decisions.

I'm pretty sure that putting $750 Billion dollars into the hands of the lower economic stratus of our economy would have a much, much larger multiplier effect than these idiots.

Finally, someone in the media calls it like it is!

There's a great article by Daniel Lyons of NewsWeek illustrating how the media gets played by corporate P.R. departments.  He does a great job taking apart one of my least favorite business media types -- Jim Goldman.  I've seen him in action, up close and personal, and he epitomizes the typical empty-suit media type that is eating mainstream media from within.

Great quotes:

"That's what happened to the poor guy at CNBC. Sure, he got his share of "exclusive" ten-minute spots with Steve Jobs. You can find them on YouTube. They look like training videos for a correspondence course on bootlicking. Now, of course, the CNBC guy says he's outraged. He sputters about how Apple has been irresponsible and "deplorable." His pals at Apple won't care. They're already moving on to the next useful idiot. Among the Silicon Valley press corps there is no shortage of them."

Exactly, and that's one of the main reasons why people are turning to blogs as a new medium.  There are others of course (timeliness, etc...) but this reason is the one that not enough people are talking about.  Now of course, the hypocritical part of this post is that I sourced from a mainstream media itself.  So maybe I should divide my evaluation of the media into:  Those who get it (Newsweek & Daniel Lyons) vs. Those who don't (CNBC & Jim Goldman)