Economic policy has social implications. I don't want to be too negative, but the social unrest in the world is increasing. In Madrid there was a demonstration against the austerity measures which numbered 65,000 people (the estimate was from the government not the organizers). There was also a huge demonstration in Lisbon the same day. The dilemma facing policy makers in every country including the US is what measures to take to rein in runaway spending and debt in a way that is politically viable. Economies do not exist in a vacuum. The mark of an effective government is its ability to steer large complex societies without causing counter productive social disruptions. The current fiscal policy debate in this country consists of one side who regard any compromise on any economic issue as treason and the other side who doesn't have a thought in their collective heads. This doesn't bode well for the Republic.

I know it is the silly season of politics but at some point shouldn't the person running for office be out of second chances? How many times can a candidate or an office holder say," that's not really what I meant to say" or" I misspoke"? If you want to hold high office shouldn't you be able to express yourself correctly the first time? How hard is this?

Finally, I believe the economy is still in some sort of OK going into the election. It feels like it is pausing which I view as temporary until the November elections after which I expect a pick up based on the resolution of uncertainty rather than an endorsement of the victorious party.

As a small business owner (R.Seelaus & Co., Inc. employs 55 people) I am discouraged by the senseless chatter of the politicians and TV commentators about small business.

First: Nobody starts out to create a “small business”; we all want to create the next Microsoft

.

Second: We are not motivated by taxes, we are motivated by revenue and profits. If we have to pay taxes it means we are successful. We would rather pay fewer taxes, of course.

Third: We live in the reality based community. We are driven by opportunities.  We don’t hire people because we have “confidence” that Congress will address the deficit; we hire people because we see the chance to expand our profits.

Fourth: We are dependent on infrastructure. We need an environment that allows us to conduct our business efficiently. R. Seelaus & Co., Inc. is located in Summit, NJ. The town is accessible by two interstate highways, two NJ toll roads and a rail line. This is important for our employees and clients.  If politicians want to help they should engage in a meaningful discussion of the infrastructure needs of the country both cyber and physical.

Random Thoughts:

• Pressure on the euro will come from the wealthy nations thinking of leaving the currency 
• The Federal Reserve has done everything it can to stimulate the economy. QE3 will not make any difference to the economy. The Fed wishes the public to think it is still capable of helping the economy but the reality is we are dependent on Fiscal policy at the state and national level.
•  Leadership in regulatory matters concerning Wall Street has moved to NY State and NYC while the SEC and FINRA continue to be ineffective.

Part of the revisionist history of the financial crisis that is driving me nuts is the Lehman Brothers bankruptcy. If you listen to the media, the financial crisis was caused by somebody buying a home in Detroit they couldn't afford and Lehman declaring bankruptcy. The financial meltdown in 2008 was the result of reckless behavior by everybody; big spending fiscal policy, incredibly bad monetary policy, reckless borrowers and lenders and incompetent regulators all compounded by Wall Street greed. It was a lethal brew. The Government could have just as easily let Morgan Stanley or Goldman Sachs go out of business as opposed to Lehman. I am not defending Lehman in any way and I believed they deserved to go under. It was the way they were allowed to close that created the subsequent problems in the market especially for commercial paper. By the time Lehman went belly up, Bear Stearns was long gone, Countrywide and Merrill had been absorbed by Bank of America, Fannie Mae and Freddie Mac had been nationalized because of insolvency, IndyMac Bank had been closed, the US Treasury was pumping money into AIG like it was a second job, and Washington Mutual and Wachovia would be gone in the next two weeks. Everyone of these institutions were guilty of too much leverage with a rapidly declining balance sheet. Lehman was the poster child for this problem but it was not an orphan.

Decisions matter. Because this is a presidential election year there is concentrated focus on economic issues. As the public debate rages I think it is important to remember that the country is facing choices in its fiscal policy and these choices will matter. The next administration will be faced with the choice of stimulating the economy or cutting the deficit. It is important to note that not only the policy direction but the implementation of the policy is important. If the policy is to reduce the deficit, it does no good to cut social programs if you concurrently increase defense spending. If you wish to stimulate the economy through tax cuts it matters which segment of the population gets the tax cut. The financial meltdown of 2008 was the direct result of bad choices, it did not have to happen. Hopefully the country will learn from past mistakes, certainly there is no evidence that Wall Street has learned anything i.e. JP Morgan, MF Global, and Knight Capital.

Knight Capital now takes its place in the long line of Wall Street failures. If you think that Washington, the SEC, FINRA, the Federal Reserve, or the banking industry have learned anything from the 2008 meltdown, you must be in a parallel universe. One would think that after Lehman Brothers, Bear Stearns, Wachovia, Washington Mutual, Merrill Lynch etc. went out of business and the world wide banking system was a heartbeat away from total collapse that the survivors would be more careful in their actions. Instead we have had in quick succession MF Global, JP Morgan and now Knight Capital. The common theme is the boys have no idea what they are dealing with in terms of risk. Stop the madness!!

Just to recap
MF Global allows the head of the firm (who is in fact the risk control officer's boss) to trade an enormous position. Who is going to tell him to stop?

JP Morgan loses 5 Billion dollars in a department that the senior management encouraged to take huge positions. The bank's position is" we are big and we can absorb the loss easily". The loss is still 5 BILLION  DOLLARS.

Knight Capital in a rush to meet a deadline introduces an automated trading interface with the NYSE without proper safeguards. The system cannot handle the trading and they lose 400 million in about an hour.

We will now witness the usual Congressional inquiry, the usual SEC promise to do something and the usual talking heads on TV huff and puff about how this never should have happened.

All this begs the question "What's next"? It is illogical given recent history to not expect there are other events already set in motion that will wreak havoc in the future. There is absolutely no evidence that anything has changed since 2008. In fact the recent events are all the more egregious because with a little analysis they are all preventable. Keep your helmet on, the next preventable financial disaster is lurking.

Things have occurred this week which makes me think we are through the looking glass:

Moody's Investor Service has downgraded the US banks. Moody's announced in February they were going to downgrade the banks, in effect stating their conclusion before they did their analysis. During their "comprehensive review" they missed the JP Morgan debacle thereby putting to rest any claim to actually understand these financial institutions. Leading up to the financial meltdown of 2008, Moody's and Standard & Poor's were selling their ratings for money to Wall Street firms who were slapping their AAA's on absolute junk mortgage bonds. Today Moody's does not have a clue about the financial health of anything and the sound you hear after their latest pronouncements is laughter.

The other day I saw Alan Greenspan on television talking about the US economy. Alan who is vying with Arthur Burns for the title of Worst Fed Chairman Ever, did not understand how the economy was doing when he was privy to all the information at the Fed's disposal. Is the media so desperate for content they have to drag out the former chairman, whose policy decisions would have to rally to get to disastrous? We are still paying the price for his incompetence and will be for another 5 years.

I am sure both Barack Obama and Mitt Romney are smart guys .Mitt Romney's current economic suggestions for the US are a combination of the worst of the previous administration, that lead to the financial meltdown in 2008, combined with all the policy mistakes Europe made post meltdown, which are pushing their economies into recession. The Obama administration seems uncertain about which course they should pursue, one day leaning towards stimulus and the next day flirting with austerity. The voters need better than this. The economy is a serious issue and deserves a serious discussion. 

"The best lack all conviction, while the worst

 Are full of passionate intensity." - WB Yeats

This quote neatly summarizes the current state the world. Whether it is politics, investments or economic policies nothing seems to be related to anything else.  Normally an investor can relate various events to other occurrences and draw some rational conclusions about market direction or make an economic forecast. In today's world there are no rational conclusions to be drawn. Historical relationships between investments, patterns, co-relations, etc do not make any sense in today's environment. Buyer beware!  

Europe is approaching their problems like a group of firemen trying to put out a house fire one room at a time. Unless the Europeans admit the whole house is on fire and work on a total solution, there will be no resolution. Today China and Indonesia were telling the Europeans that enough is enough, quit pretending Spain / Greece / Ireland / Portugal etc. are isolated events. 

Certain things about the current European situation are obvious. The Spanish banks hold billions of euros worth of bad real estate loans. The Government has arranged for the banks to receive billions of euros of money so people will be confident that they will be able to meet their obligations. Meanwhile the Spanish government pursues austerity measures guaranteed to make the economy (and the bad real estate loans held by the bank) worse. Where do they think this will end? Is there an alternative system of math that allows this to all work out? You can't contract your economy to get out of a recession.

Up next on our European Financial crisis hit parade: Italy followed by France.

There is an article this morning about Morris County NJ. Morris County is an affluent county in an affluent state and the article points out the use of food stamps is up 240% since the start of the recession. Economics is more than just numbers, in this silly season of overheated political rhetoric we should keep in mind that all our political/economic choices affect real people. If we decide to cut state employees we should realize someone just lost their job. This does not mean we shouldn't make these choices but we should be aware of the human cost involved.