Thursday, February 21, 2013

The Pentagon is currently engaged in a marketing scheme which I like to call "Cancel the football program".  Every city and town in America has seen this before. Wherever there is a movement afoot to reign in the school budget because there is a bloated administrative structure or employee benefits have gotten out of control the first thing the entrenched bureaucracy says is they will be forced to cancel the most popular program like football in an attempt to rally support and maintain spending at the same wasteful level as before. As the March 1 sequestration approaches the Pentagon and their congressional supporters (which consists of all 100 Senators and 435 Congressmen) start screaming about weakening our national defense or talk about cutting benefits to our service people or veterans. What they are trying to protect is massive wasteful government spending that goes to their home state or district. We have enough tanks which the army says it doesn't need, or planes that don't fly all that well, or ships that leak. Politicians on both sides of the aisle are talking out of both sides of their mouths when they pretend to be concerned about the deficit caused by runaway government spending. The defense budget contains a large measure of corporate welfare.

Consequently I think a 10% cut across the board is probably a good thing, I would like to see the budget for Congress be included in this sequestration also.

The only ray of hope I see in this mess is people are finally admitting that reduced government spending will cost people their jobs. This has always been the case, it is simple economics. During the campaign it seemed as if the laws of economics were suspended as candidates tried to make people believe reduced government spending would create jobs. It won't. As a country we need an honest debate about economic choices and not live in some la-la land of economic fantasy.

Friday, February 8, 2013

This week the Department of Justice (DOJ) announced they are pursuing Standard & Poor's for fraud because of their behavior during the sub prime mortgage era. The DOJ contends that the rating agency knew the securities they were rating AAA were not that creditworthy and they were influenced by the fees they were collecting rather than any objective analysis. I have been in the bond business for 40 years and an announcement like yesterday's is equivalent to coming down on Christmas morning and finding a pony under the tree. Finally the Feds are saying publicly what every bond market professional believes 100%. The rating agencies were selling ratings to the Wall Street banks with intentional, callous and complete disregard for the investors they claim to be protecting. Bond market professionals have been complaining about the mercenary nature of the rating agencies since I got into the business in 1972. I know it is too much to hope for but I would love to see Moody's be next.

I think across the board cuts in government spending is a good idea. I would argue that a 10% initial cut might be a little heavy but a 5-7% cut I believe would be absorbed by the recovering economy and while it will reduce growth it will not push us into a contraction. Everyone in the country knows we spend plenty of money on defense, education, social security etc., so a reduction should not affect the quality of life. I hope we don't have another last minute session of Congress where the Senators and Congressmen find a way to protect the status quo and try to sell us on the idea that they have actually made progress on the fiscal situation. Cut everybody equally and move on.