On May 25, 2010 I wrote the following:

It’s all Greek to me

In a past column I discussed the crisis in Greece as a proxy for a wider problem in the world economy.  Current headlines bear out this prediction.  The point I was trying to make is that there is nothing unique about the Greek financial situation. We now see the Spanish Banks are in play soon to be followed by the Italians and Portuguese. The second point I believe bears repeating is that the same situation exists in the United States in re municipal finance.

The bond markets are skittish because 2008 has proven that we cannot know how and where the crisis will manifest itself. From January 2007 through the fall of 2008 the talking heads on TV assured us the “crises” was over about 18 times until finally they threw in the towel and declared things would be bad forever.

Currently money is flowing into short US Treasury bonds as a “safety” trade and there is selling pressure on the stock market.  What is an investor to do?

1.       Accept reality: the country is in a serious recession and even though there are some signs of life it is going to take time until the problem is solved and sustainable economic growth can resume.

2.       Understand that not everything about a recession is bad. The country has financial problems that need to addressed like run away employee benefits in the public sector, complete lack of regulatory oversight, no viable risk management on Wall Street and wasteful government spending at all levels. The country is ready to attack these issues in a real manner.  It will be difficult but necessary.

3.       Don’t Panic: Not every company or household experiences an economic downturn the same way or at the same time. There are investment opportunities created as companies respond to the economic challenges facing them.

4.       The US economy is a powerful force that continually reinvents itself. Look at the major companies which did not exist thirty years age (Dell, Microsoft, Google etc) and realize that there are opportunities every day.

5.       Take your time; the economic slowdown gives the investor more time to research investments and makes a rational decision, the smart investor will use it.

I do not mean to suggest that the economic pain is over. Many households and businesses are going through an extremely difficult time and it is going to be a while before it ends. Capitalism is a harsh system because the creation and destruction of enterprises does not happen in a vacuum and the impact on the people involved can serious. The smart investor will understand the current downturn is ongoing, significant and creates opportunity, all part of the economic cycle of capitalism.

Still valid 1 1/2 years later

The current slate of potential Republican candidates for the nomination is a “Confederacy of Dunces” to borrow a phrase from John Kennedy Toole. The gibberish they feel necessary to spout on economics is embarrassing. Is it too much to ask that one of them shows some backbone and stands up for something that makes sense or is actually good for the country? Some want to jail the Federal Reserve Chairman, some want  the banking industry to be allowed to gouge the consumer, some want the banking industry destroyed, some want no regulation on Wall Street, some want no taxes on our most fortunate citizens, some don’t want to improve our infrastructure. This collection of idiots has not produced one workable idea concerning our economic problems. This is especially true of Romney who as Governor of Massachusetts showed promise, innovative approaches and flexibility. Lost in all the over the top babble from this group is the needs of the country and the citizens who are affected.

College kids cannot find work, laid off workers cannot get rehired, China and the Far East are becoming larger and larger economic competitors, we are still dependent on foreign oil which tortures our foreign policy. Why don’t they care? Why don’t they have any ideas? Why do they advocate the exact same policies that produced the economic malaise? Why don’t they deal in reality? Is there some IQ test to run for the Republican nomination that eliminates all people who score over room temperature? What happened to the Grown-ups in the GOP?

Every instance when a potential candidate has shown some moderation the far right attacks and the candidate retreats faster than a speeding bullet. Rick Perry felt it was unfair to children of illegal immigrants to be charged out of state tuition at Texas schools. He reasoned it was not their fault and getting a good education would ultimate make them better citizens, yet he couldn’t backtrack fast enough when the wacko’s attacked him. Mitt Romney worked out a health care plan that benefited the citizens of his state when he was governor but has gone to great lengths to deny it even exists. If you are trying to get a leadership job (President of the US) shouldn’t you show some real leadership by stating what you believe, acting on it and standing up to those who disagree?

One of the lessons we should have learned from 2008 was that the crises and financial meltdown was a true systematic failure. Currently the banks are fighting increased oversight and any attempt to reign in their risk appetite. One of the most powerful tools when someone wants to rewrite history is nomenclature. If you follow the business channels, the Wall Street Journal and other media outlets you will notice a subtle shift in references to 2008. Now everyone is talking about the Lehman collapse as if that was the major problem in 2008. This trivializes the event. Lehman was a major firm and part of the problem but it was not the only company to collapse. The list includes, Bear Stearns, Wachovia, Fannie Mae, Freddie Mac, Washington Mutual, Merrill Lynch, AIG, CIT, General Motors, MBIA, and AMBAC. Companies that came close to failing include Morgan Stanley, Citibank, Goldman Sachs, GE Capital, and a host of commercial banks to numerous to mention. Along with these failures or near failures there was a steady stream of hedge funds and special investment vehicles that disappeared also.

The cause was a reckless use of leverage for short term gains with a complete disregard for the longer term consequences. Now Wall Street is acting as if Dick Fuld and Lehman Brothers was the only problem. One hears constant references to “worse market since Lehman collapsed” “not since the Lehman collapse” etc. Beware this line of thought, it will lead us right back down the rabbit hole. September of 2008 was a disaster but it was not caused by one firm but rather the entire industry who are now trying to pretend they had no hand in the debacle and it was the responsibility of one firm.

This is the banking equivalent of the Wizard’s  “Please ignore the man behind the curtain”

The country has two current problems. First we have too much debt and the budget deficit keeps expanding with no end in sight. Second the economy is weak and unemployment is too high. Monetary policy has done all it possibly can to avoid a deeper recession than we currently have. Any further monetary policy steps are just rearranging the deck chairs. The next step is for fiscal policy (Congress) to address these problems.

The solution to either of these issues will by definition make the other problem worse. The question facing policy makers is it possible to stimulate the economy without increasing the deficit. (NO) or can we cut the deficit without hurting economic growth (again NO). Congress needs to pick its’ poison and try to craft a consistent approach. We are already seeing the effect of Federal, state and local government spending cutbacks as the economy heads toward a double dip. Neither of these problems exists in a vacuum. Each side of the aisle needs to acknowledge that both of these issues are a concern and there must be a compromise to get started on a solution that is good for the country.

Personally I find it difficult to address the deficit first because suppression of the economy could lead to a deflation scenario which would be very difficult to correct. I believe we need to stimulate the economy and hope that increased economic activity will allow us to pay down our debt. Increases in income, business spending and tax receipts are necessary to give us the breathing room we need to put our fiscal house in order.

The only other issue for Congress is to“stop threatening to shut down the government” over every little thing. Grow up, shut up and get to work.

Ronald Regan was elected in 1980. He immediately implemented an economic agenda that consisted of less regulation of the financial industry, tax breaks for the wealthy and massive increases in government spending. This led directly to the Mike Milken / Drexel junk bond scams, the destruction of the saving and loan industry and the stock market crash of 1987. The economy and the taxpayer paid a heavy price for these reckless policies. The US had to make good on all the CD’s issues by the S & L’s and the country had a ten year recession in the housing industry.

George W Bush was elected in 2000. He immediately implemented an economic agenda that consisted of less regulation of the financial industry, tax breaks for the wealthy and massive increases in government spending.  This led directly to the subprime housing disaster, the almost destruction of the world financial industry and the credit market meltdown of 2008. In 2008 we found out that Bear Stearns, Lehman Brothers, Merrill Lynch, Countrywide, Washington Mutual, Wachovia, and AIG to name just the larger companies were insolvent and went out of business. The country is now mired in a ten year recession (if we are lucky)

Today John Boehner and Eric Cantor are advocating an economic agenda that consisted of less regulation of the financial industry and tax breaks for the wealth. They are giving lip service to less government spending but one suspects it’s is only because they don’t have control of the entire government yet. Recent history leads to the unavoidable conclusion that neither party shows much spending discipline unless they are out of power.

Stop the madness. Is it too much to ask that an elected Representative from Ohio will care more for the workers in his home state than the hedge fund managers in the Hamptons? Apparently it is.

The early part of the 20th century saw the “Progressive” movement in the US. Men like Robert Lafollette and Louis Brandeis were it most notably adherents. As I understand their philosophy the Progressives thought that if society is to make progress it must address its problems. In the early part of the 20th century this focused on the social disruptions caused by the industrial revolution. Today one of the issues that must be addressed is the high cost of health care and the effect this has on our economy, consumer spending, job creation and general economic well being of the US economy.  As every business owner knows the cost of health care has been rising between 15 and 30% per year for the last fifteen to twenty years. Business’ response is to push more of this cost onto the employees. This means that an increasing part of discretionary income is being used to pay insurance companies, drug companies and doctors.
Every year business waits in dread fear for the insurance renewal quote from their health insurance company. Every business wants to keep this as low as possible because the increase in premiums will pressure business costs and employee expectations in re compensation. The medical profession, tort bar, drug and insurance companies seem to be happy with the current system but it cannot go on forever.
There is intense debate about the Obama administration’s recent health care reform plan. From the standpoint of the business owner I don’t know whether this will be a good or bad plan but at least someone has started to try to address the issue. As a country we can no longer pretend that this is not a pressing issue. To date the only plan we have had is to force people without health coverage to the ER, prohibit hospitals from denying care and ignore the fact that the more charity care the hospitals provide the greater tax on those of us who have insurance. Congress can no longer act as if nobody has to pay for this service. Insurance rates and hospital rates have to rise to cover this care and we all pay.
As more of our discretionary spending goes to pay for the one specific area (health care) the less is available for other areas of consumer activity. You cannot leave health care out of the national discussion about economic recovery.

Hurricane Irene / Stimulus Package

One of the side effects of the recent hurricane on the east coast will be the economic consequences. On the national level there is a debate about fiscal policy and the deficit. One party wants to keep revenue the same (no tax increase for anyone) and reduce spending. The other party wants to increase revenue (tax the wealthy) and stimulate the economy with a jobs or infrastructure spending package. The first group maintains that the over spending of the last decade is the greatest threat to the long term economy and must be reined in this second. The other side contends that with massive unemployment we need to get people to work to stimulate the economy first and the subsequent growth will create the additional revenue to reduce our borrowings in the long run. This is why Hurricane Irene becomes so interesting.
The storm caused enormous damage from North Carolina to Vermont. The near term economic effect will be to increase spending at the state level to repair bridges, roads and other infrastructure. The states will be forced to borrow and increase their budget gaps in the immediate future to fund this. The second part will be increased jobs for electricians, carpenters, plumbers as people need to repair their homes and businesses. The money for this will come from insurance companies which serve as a proxy for the wealthiest Americans. Insurance companies have saved or stored money in their investment portfolio and the size of the claims following the storm will recycle their savings to people who must spend the money immediately. The storm will force investment money into the economy at a fairly rapid rate. This will enable us to measure whether the stimulus theory is valid or whether the deficit reduction party is right.
Over the next ten to twelve months look to the economies of the affected states as to retail sales (Lowes, Home Depot, etc), state tax receipts both income and sales, and housing activity one year from now.