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05
Feb 10

It is All a Derivative of Productive Enterprise

The bulls on CNBC touted the increase in health care employment in the most recent Non-Manufacturing Institute for Supply Management Report on Business. Similarly, Fox Business News trumpeted growth in health care employment, but did point out these jobs paid substantially less than jobs in the manufacturing sector.  What both news outlets missed was that these jobs were derivative.  These positions are substantially funded by the productive sectors of the economy.

Economic Illiteracy

Michael Shedlock this week focused on a major theme plaguing America, economic illiteracy. See Are Teachers to Blame for Economic Illiteracy? Nowhere is this lack of economic literacy more evident than in the service sector in general and health care in particular.  If polled, most Americans would most likely answer that the government or insurance companies provide health care in the United States.  Medicare and the current debate on health care reform only add to this misperception.

Thank Goodness for the Private Sector

Health care money comes from the support of the private sector which directs a portion of a workers’ compensation to paying health insurance premiums for their employees.  Public sector employers also pay health insurance premiums for their employees.  However, in the case of the public sector, that employer is recycling tax receipts, real money, received from private sector activities.  In short, without a productive private sector there would be no health care support.

Restoring Economic Literacy

Americans have come to expect a “free lunch” from the government. Of course, this is fantasy; there is no free lunch.  Health care is paid for by our productive enterprises and manufacturing was the lynchpin.   Further, other service industries such as law, insurance, travel, leisure, entertainment, and others are derivatives of productive manufacturing enterprises.  When the economy turned down law firms were among the first to layoff partners and associates.  Without a vibrant private economy legal activity declined, with fewer contracts real estate transactions, mergers, acquisitions and frivolous lawsuits.  Corporations reduced their legal budgets.  Similarly, other service businesses contracted.

Outsourcing lucrative manufacturing jobs and global wage arbitrage have only worsened the unemployment situation in the United States.  Reliance on a service economy and public sector employment has been false bedrock for our system.  If we want first class health care, we must bolster the private manufacturing sector and reduce the public sector.  Government dominance of our health care system and other service sectors (think banking) only ensures larger deficits, continued recession, higher unemployment and an inadequate, underfunded, cheap, quick and dirty, band aid solutions health care system.

That is not a good prescription for anyone’s health.

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02
Feb 10

Timothy Geithner and Plausible Deniability

Congressional hearings often make wonderful theater.  Last week at the House Oversight and Government Reform Committee, the American public heard testimony from Timothy Geithner, former head of the Federal Reserve Bank of New York and now US Treasury Secretary and Henry Paulson, former US Treasury Secretary.  Both men’s testimony relied on one premise: if we did not bail out AIG and pay its counterparties 100 cents on the dollar, the financial world as we know it would have ended,  i.e., the US would have plunged into a second Great Depression.  By written statement, Fed Reserve chair Ben Bernanke informed the Committee of his full support for this decision.  In person, Henry Paulson agreed.  However, both men said they had nothing to do with the decision.  Further, Mr. Geithner testified that he had relied on his staff or details of the bailout.  And even further than that, he later distanced himself from the decision whether nor not to disclose the details of the bailout. America was treated to the concept of “plausible deniability.”

Plausible Deniability

Working in a corporation one gets a firsthand look at the concept of “plausible deniability.”  Plausible deniability works something like this: a crisis starts; an important decision must be made; a senior executive is charged with making a decision; the senior executive delegates much of the preparatory work to  staff or a trusted lieutenant; the staff or trusted lieutenant ultimately makes a recommendation which later becomes “The Decision. “  If or when something goes wrong in the future, the senior executive denies involvement and places the blame on the staff or the trusted lieutenant.  Almost every time, the superiors of the senior executive accept this scenario.  The senior executive survives.

Let’s Get Real

Harry Truman said “the buck stops here,” meaning that the most senior executive has ultimate responsibility for a decision.  Perhaps with President Clinton or at some time it became fashionable for the senior person to distance himself from the decision so that he would have plausible deniability.  Further, it was expected that subordinates would “throw themselves on their swords” to preserve their boss.

It stretches credulity that the three most senior financial executives in government, The Chairman of the Federal Reserve, the President of the New York Federal Reserve and the Treasury Secretary did not know the intimate details of the AIG bailout.  At stake at the time was $62b of taxpayer money to effect this phase of the bailout.  All three men agree that if the bailout did not take place financial Armageddon would have ensued.

More is expected of our public servants. We appointed these individuals because of their unique skills, judgment and character. Apparently, these individuals were unavailable in the AIG crisis to make critical decisions.  Based on these stated actions, I deplore the confirmation of Ben Bernanke.  Moreover, I would ask for the resignation of Timothy Geithner.

It is time that high level government officials took responsibility and become the watchdog of the public purse. Trying to blame subordinates should elicit the response from the public: “that dog won’t hunt!”

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27
Jan 10

We Can Handle the Truth

“You can’t handle the truth!” Col. Nathan R.Jessep in A Few Good Men

After his election President Obama had the opportunity to educate the public on the causes of the financial crisis and the necessary steps to help us emerge from it.  Over this past year, he has squandered this chance, and in so doing has created the political backlash that is occurring today.

Policy Making and the Truth

With great fanfare, we inaugurated President Obama against the backdrop of the greatest financial crisis since the Great Depression.  In any new Administration, policy making is never easy and advisors at times seem to operate in virtual echo chambers, hearing only themselves.  They presented Obama with a range of options: nationalize the banks; let them fail and let the bankruptcy courts sort it all out; continue the Bush/Paulson bailout policies.  From the beginning, Obama advisors took the middle of the road policy to continue the bailouts.  As voters and participants in a democracy, we can now see the missing piece in this scenario. President Obama owed the public an explanation of this policy choice.  My guess is that his advisers warned against candor.  I would further conjecture these advisers felt that candor would have made the crisis worse.  Elites always worry about scaring the masses. This was confirmed at today’s Congressional hearings on AIG.  AIG was viewed by both Timothy Geithner and Henry Paulson, as the “end of the financial world as we knew it.”  The Administration and we are now suffering the consequences of this subterfuge.

Back to the Future

President Obama could have made a few simple points that would have educated the public, built a consensus for his policy choice and left open future policy options if the bailout approach failed.

President Obama could have made these simple and direct points:

  • We are facing the greatest financial crisis since the Great Depression
  • We got into this problem by borrowing too much, and producing and saving too little
  • At the center of this crisis are the large money center banks and Wall Street investment firms
  • Using inappropriate levels of borrowing and creating non-transparent products, derivatives, which could not be accurately valued or traded, these banks and firms gambled with our money.
  • Banks, however, are the transmission mechanism for getting money into the economy through check clearing, making loans and other services.
  • We are going to provide enough support for the banks to continue their necessary and transparent functions.
  • There will be a consequence to any bank for needing this ad hoc and unusual government support.
  • Shareholders and creditors of the banks must share in some of the losses.
  • Bank employee bonuses will be severely limited or eliminated until the banks recover.
  • The government will take part ownership in the banks until they return to financial health.
  • I have asked my Attorney General to investigate whether these institutions committed any crimes.  I will ask him to hold indictments in abeyance until we are on our way to recovery.
  • Let me assure you that the government will punish wrongdoing.

We Build Prisons of our Own Making

We know this fictional address to the public did not take place.  The Obama Administration now owns the policies of failed bailouts.  The recovery is precarious and now the government asserts that the health of the stock market hinges on re-appointing Ben Bernanke as Federal Reserve Chairman.  The Massachusetts senatorial election was a wakeup call that the middle class is “mad as hell and isn’t going to take it anymore.” See The President Wakes Up and Smells the Election Results.

In tonight’s State of the Union Address, President Obama scratched the surface of candor. He stated that he hated helping the banks, but that failure to do so would have led to greater unemployment, business closure and lost homes.  President Obama, it is not too late for complete candor. It is not too late to commence investigations and prosecutions.

Col. Jessep was wrong: the American public can handle the truth!

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26
Jan 10

The President Wakes Up and Smells the Election Results

In Barbell Economy posted on January 21, I hypothesized that the Democrats lost the Massachusetts election because the Obama administration ignored the needs of the middle class.  The systematic destruction of the middle class is the most potent issue of 2010.  It appears the White House finally woke up and smelled the coffee.  President Obama yesterday proposed a series of initiatives to aid the middle class. The Christian Science Monitor reported the President’s remarks:

We … need to reverse the overall erosion in middle-class security so that, when this economy does come back, working Americans are free to pursue their dreams again,” said Mr. Obama Monday at a meeting of the administration’s Middle Class Task Force.

A White House fact sheet listed some of the specific initiatives:

Child care. The administration is proposing to nearly double the child-care tax credit for families whose income is less than $85,000 a year. For those folks, the percentage of child-care expenses eligible for reimbursement via the credit would rise from today’s 20 percent to 35 percent.

In dollar terms, the maximum credit for a two-child family making, say, $80,000 a year, would increase from $1,200 to $2,100. That’s a $900 benefit.

Families with incomes up to $115,000 a year would be eligible for at least some increase in their child-care tax credit, on a sliding scale.

The administration also is proposing to increase by $1.6 billion the amount of money in the Child Care Development Fund, which pays for child care for poor families, including those receiving public assistance.

Dependent care. The White House is proposing to add $52 million to the Caregiver Initiative, a Department of Health and Human Services program that provides temporary respite care, counseling, and referrals to critical services for hard-pressed families taking care of elderly relatives. According to the administration, this extra cash means the program will serve an additional 200,000 people.

The administration is also proposing to add a further $50 million to programs that subsidize adult day care, transportation, and aides who help seniors bathe and cook.

College expenses. …[T]he administration is proposing to limit the amount of student loan money that a borrower must repay to 10 percent of the borrower’s income, over and above a basic living allowance.

The proposal would also cap the total amount of money a borrower must pay. For borrowing students who enter a field of some kind of public service, all remaining debt would be forgiven after 10 years of payments. For others, forgiveness would follow 20 years of payments.

Retirement savings. About 40 percent of working heads of households don’t have any kind of employer-sponsored pension or retirement plans. The administration thus is proposing to require employers who don’t offer such plans to enroll their workers in automatic, direct-deposit IRAs (individual retirement accounts).

Employees could opt out if they wanted to. All contributions would be voluntary.

The administration also wants to streamline the process by which workers enroll in 401(k) retirement plans.

Where are the Jobs?

While providing some benefits to the middle class these initiatives do not create jobs.  The Administration seems to miss the larger point, perhaps the only point:  we have too much debt, too little savings and too little demand.   Economically it is impossible to return to the pre-2007 level of prosperity because we have not liquidated or paid off our massive debt.  Zero interest rates misprice risk.  Banks are hoarding money to reserve against future losses in their loan portfolios. There are few credit-worthy borrowers.

And so, both parties remain guilty of legislative gimmicks.  Bailouts and tax credits do not get to the heart of our problem, too much debt. When will we reach a moment of recognition that there are no quick fixes?  Debt must be liquidated or paid off, savings must become more important than spending, and we will all have to be more productive.

What we need now are leaders who understand these truths.

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25
Jan 10

Freedom to Fail

In his 1941 State of the Union address, President Franklin Roosevelt articulated four iconic freedoms:

  • Freedom of speech
  • Freedom of religion
  • Freedom from want
  • Freedom from fear

In our current situation, capitalism needs a fifth freedom, the freedom to fail

The Systematic Destruction of the Freedom to Fail

In the 1950’s, Dr. Benjamin Spock’s child rearing advice focused on a child’s self-esteem rather than discipline, performance, success or accomplishment.  This emphasis correlated to a new and pervasive permissiveness which sought to prevent failure as a childhood experience rather than process it for personal growth when it inevitably occurs.  And so the advent of the “Lake Wobegon effect:”

where ‘all the women are strong, all the men are good looking, and all the children are above average,’ … used to describe a real and pervasive human tendency to overestimate one’s achievements and capabilities in relation to others. The Lake Wobegon effect, where all or nearly all of a group claim to be above average, has been observed among drivers, CEOs, stock market analysts, college students, parents, and state education officials, among others.

And so we coddled the Baby Boom Generation.  If our child failed a course, get a tutor.  If College Board scores were not high enough, enroll the child in a review course.  Everyone was entitled to a college education, a house and a good paying job. Originally, affirmative action was designed to overcome discrimination.  It morphed from its original intent, equality of opportunity, to equality of outcome.   In the corporate environment, one’s status (that is, minority, female, disabled among others) many times trumped one’s accomplishments. I am in favor of the original purpose of affirmative action, but not its wrong-headed incarnation.

The Financial Crisis and the Freedom to Fail

The government stepped into the breach to prevent major institutions– AIG, GE, American Express, Capital One, GM, Chrysler, Fannie Mae and Freddie Mac– from failing.  In an economic analogy to Dr. Spock parenting, the Fed reacted as a permissive and nonjudgmental parent to a child eminently deserving of a failure experience from which to learn something.  By not permitting these institutions to fail, we may have exposed ourselves to much larger systemic failure with a default or devaluation of our currency.

Failure is Integral to Success

We should think about our own personal life paths.  Did we learn more from success or failure?  If we are honest with ourselves, we would admit that we learn much more from failure.  It builds resilience, humility and,  if we absorb the lessons, a path to success.  It is almost immoral to take away the ability to fail and learn.

Joseph Schumpeter, an Austrian economist, in Capitalism, Socialism and Democracy, theorized that “creative destruction” was integral to capitalism:

the same process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. . . .

Failure is an excellent teacher.  Permitting smaller failures after the internet boom would have saved the country the anguish of millions of people losing their houses, the near destruction of our banking system and the collapse of the stock market.

Now the government would be prudent to permit business failures regardless of business size or political connections.  Sparing the rod of failure only spoils the childlike business with more reckless behavior.  Without the “hell” of failure, there can be no “heaven” of success.

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21
Jan 10

The Barbell Economy

Political statements come in all shapes and form.  Tuesday it arrived with the election of Republican Scott Brown of Massachusetts to the United States Senate. Pundits conjured instantaneous rationales for this upset: the proposed health care bill, bailout of the banks, high unemployment rate, rise in the price of gasoline, declining home prices among others.

We can attribute Brown’s victory to any or all of these rationales; however, we are describing the symptom and not the disease.  The disease is the “barbell economy.”  On one side of the barbell we have the rich who have been rewarded with bailouts, large bonuses, hedge fund profits, at the expense of taxpayers.  These people appear to be insulated from the recession. On the other side of the barbell are the growing numbers of poor people who utilize our many social safety nets: welfare, food stamps, loan modification programs, Medicaid and others.  The dwindling middle class, the fulcrum of American society and the bar that holds up the barbell, is being disenfranchised and economically destroyed.

The Destruction of the Middle Class

We have witnessed the slow destruction of the middle class over the last 30 years.  Two wage earners were needed to maintain a middle class life style.  Then middle class wealth was destroyed in the stock market crashes of 2000 and 2008.  Easy credit and low interest rates mired the middle class in a cycle of debt.  Good paying jobs were outsourced to low wage foreign countries.  Unemployment soared and wage growth was eliminated.  Inflation in necessary commodities such as gasoline siphoned off more income.  The coup de grace was the implosion in house prices.

Albert Edwards, Global Strategist for Societe Generale, opines that the Federal Reserve has destroyed the middle class:

Some recent reading has got me thinking as to whether the US and UK central banks were actively complicit in an aggressive re-distributive policy benefiting the very rich. Indeed, it has been amazing how little political backlash there has been against the stagnation of ordinary people’s earnings in the US and UK. Did central banks, in creating housing bubbles, help distract middle class attention from this re-distributive policy by allowing them to keep consuming via equity extraction?  The emergence of extreme inequality might never otherwise have been tolerated by the electorate (see chart below).  And now the bubbles have burst, along with central banks? credibility, what now?

He cites the Census Bureau analysis that median income failed to rise in real terms for the entire decade, the first time that median income did not rise in all US history. See Scandal Edwards Alleges Central Banks were Complicit in Robbing the Middle Classes.

The middle class is now left with 10% percent unemployment (effectively 17% or more), decimated retirement income, skyrocketing health insurance premiums,  rising state and local taxes, a high debt load and a house with zero or negative equity.  Further, middle class tax payers are not stupid.  They know that taxes will soar to pay for these deficits and expansion of entitlement programs.  Promised a new political regime of hope, change and transparency, the middle class has endured a year of betrayal.

The Politics of Anger

Both Democrats and Republicans misread the current situation.  Middle class voters feel abandoned by both parties.  Backroom deals on health care legislation are only symptomatic of a deeply flawed and corrupt political system where the rich and connected obtain special favors and ignore the middle class.

The middle class is the bedrock of America.  Paraphrasing George Bailey’s defense of his father’s character in It’s a Wonderful Life, the middle class “does most of the working and paying and living and dying” in America.   The middle class needs real hope, not false promises of hope.  The two parties need to pay immediate attention to the middle of this economic barbell.  If they do not, more of this current group of elected officials might just be added to the unemployment rolls.

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19
Jan 10

Citigroup, Branch Rickey and the Theater of the Absurd

In 1951, Pittsburgh Pirate Ralph Kiner led the National League in home runs, but his team lost 112 games and finished last.  In response to Kiner’s request for more money, legendary general manager Branch Rickey said: “We finished last with you; we can finish last without you.”

Where is Branch Rickey when you need him?

Citigroup 2009 Earnings

This morning Citigroup announced that it lost $7.6b in the fourth quarter of 2009 and $1.6b for the full year. The Wall Street Journal pointed out the positives: better than last year’s fourth quarter; narrowing losses in the consumer credit area; greater efficiencies and financial stabilization.

The main stream media seems determined to make poor performance sound better than it is. I guess we don’t want to ruin the self esteem of executives, who are trying really really hard.

What the media fails to point out is that Citigroup has been given every financial advantage.  The government has given it TARP funds, participates in its capital structure with a 34% ownership stake, and has permitted the bank to mint money with a zero interest rate policy.

Citigroup Bonuses

Citigroup announced a bonus pool of $24b and the media again has obfuscated the real story.   The headline in the Times Online (London) is: “Citigroup Cuts Compensation by 20% as Losses Fall.”  Dig into the story a little further and there is virtually no reduction in compensation.  Because of layoffs the compensation pool of eligible executives has been reduced by 18%.  Thus, the compensation pool is virtually flat year over year.  The company has lost $1.6b this year and $29.2b over two years.

The CNBC corporate apologists attempted to justify the bonuses: there was improvement, Citicorp needs to retain executives to remain competitive, and the bonus will be paid in stock.  One commentator did point out that the stock was immediately vested, and therefore indistinguishable from a cash bonus.

There was a Different Time

I have written about disconnecting effort and reward. See What Went Wrong? Disconnecting Effort and Reward. Citigroup results have made me think that we have also disconnected results and rewards.

In a different time, I worked for a company that one year paid no bonuses.  That year we had poor financial results, but did not lose money.  Based on the poor results, the Chairman and CEO engaged in no handwringing, no excuses, no attenuated intellectual justifications nor elaborate proofs. He merely reached the conclusion that poor performance equaled no bonus – amazing in its simplicity.  As a result, very few executives voluntarily left the company, the world did not end, we all worked harder, and did better the next year.

Maybe Mr. Pandit, Citigroup CEO, should channel his inner Branch Rickey and eliminate all bonuses for 2009.  His reply to whining executives who threaten to quit: “we lost $29.2b with you; we probably could have lost $29.2b without you.”

Branch Rickey applied one other perfect aphorism to a non- producing, disruptive ballplayer:

“It was addition by subtraction.”

Too bad Mr. Rickey is not around to advise Citigroup.

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18
Jan 10

Government Intervention and Bowmar Brains

In 1971, Indiana-based Bowmar Instruments introduced the first hand-held LED (Light Emitting Diode) calculator.  The “Bowmar Brain” was a huge success.  Other manufacturers developed cheaper calculators, and when the company could no longer compete, it went bankrupt in 1976.

What if the Government Intervened?

Starting with Chrysler in the 1970’s to GM and Chrysler in 2009 government has intervened to either prevent bankruptcy (Chrysler) or to distort the bankruptcy process (GM and Chrysler).  It has justified its intervention by touting the vital importance of these businesses to economic recovery, the need for jobs in severely depressed Midwestern states or national security.

What if the government had intervened in the Bowmar bankruptcy? After all, the first hand-held LED calculator was economically important to both Texas and Indiana.  Texas Instruments supplied Bowmar’s calculator chips.  Further, the hand-held calculator and LED technologies had important scientific and military importance.

In 2010, it seems absurd to even raise the possibility that government should have “saved” Bowmar.  However, we know from our current circumstance that government is whimsical and has indeed prevented private entities from going bankrupt.  This prompts us to consider “what if?”

In the 1970’s calculators were expensive: more than $100 for a Bowmar and $500 or more for HP business and scientific models.  Government intervention would have kept prices artificially high.  Today calculators are included at no extra cost in the basic Windows computer package and banks give away inexpensive calculators as promotional items.

Government intervention would have stunted development of LED technology. Today LED technology is ubiquitous; it is used in signage, energy efficient illumination and in photo optical applications such as remote controls.  See Wikipedia LED. Would the government have been able to innovate?  I would suggest not.

The Heavy Hand of Government

Today we witness the spectacle of the government intervening in numerous traditionally private activities:

  • Banks
  • Money Market Funds
  • Auto Manufacturers
  • Health Care
  • Mortgage Lending

Even conceding that the current Administration never intended to socialize broad swaths of private industry, the speed and scope of current federal involvement has put us on exactly that road. Financial media and the White House credit these measures with saving the economy and condition us to accept government solutions to private economic problems. This role is more than that of a regulator.  Government has become a major operator in direct competition with other domestic and foreign private enterprises.

What is the Real Cost?

One cost is the recent proposed special tax on large banks who accepted TARP funds. Government largesse is an inappropriate “free lunch,” but even this mistake is not the greatest harm.  Government intervention encourages investment based on political rather than economic considerations.  Did we really solve the problem of costly union collective bargaining agreements when the government took control of Chrysler and GM?  That would have jeopardized union support for Administration policies. See The Greediest Generation – Where Has Shared Sacrifice Gone?

Will these companies produce cars that consumers want to buy, or cars that meet the government’s environmental agenda?  The heavy hand of government will ultimately stifle all industries that it touches.   In the health care industry, this is of more than academic interest. We may pay with our lives.

If current governmental policy was in force in 1976, we all might be using very expensive and very large hand-held Bowmar Brains.  It is a worrisome trend that we should all be concerned about.

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15
Jan 10

Decision Making in a Crisis

“Act in haste, repent at leisure.”  – Source unknown

US Treasury Secretary, Timothy Geithner is in real trouble. The New York Times (Jan. 13) reports:

Representative Edolphus Towns of New York, said Wednesday that the committee had subpoenaed Mr. Geithner’s e-mails, phone logs and meeting notes from when he was president of the Federal Reserve Bank of New York in late 2008. The committee has already asked Mr. Geithner, now the Treasury secretary, to testify at a hearing next week about why the New York Fed told A.I.G. not to disclose that its trading partners were being paid 100 cents on the dollar to unwind tens of billions of dollars in derivatives.

Mr. Towns argued that A.I.G.’s counterparties would have received, at best, 30 to 40 cents on the dollar if the troubled insurance giant had filed for bankruptcy.

Mr. Geithner’s activities as Fed president drew additional scrutiny as he is suspected of encouraging, ordering or actually modifying AIG SEC-required disclosures to hide AIG’s payment of monies to its large bank counterparties.

It will take a Congressional investigation and maybe appointment of a special prosecutor to determine Mr. Geithner’s culpability.  Nevertheless, his behavior in crisis is instructive.

Lessons Learned from Crisis Management

After almost an entire career in a corporate environment, crises seemed to be an every day event to the point where I thought crisis was normal.   Crisis management yields valuable lessons and reveals the best and worst human behavior.  Some thoughts and advice:

  • A former boss said “fifty percent of the facts told to a manager of a crisis are correct the first time, and seventy five percent are correct the second time.”  Keep sending your subordinates back for correct information until you are satisfied they have done their due diligence.
  • The situation is never is bad as it looks.  One’s worst fears are rarely realized.
  • The cool hand always wins.  Those who panic and predict doom are seldom correct.
  • As a corollary, think more and react less.  At the inception of a crisis there is a lot of motion but, unless you have the skills of gurus like the ones described in Blink (Malcolm Gladwell), avoid “knee jerk” reactions.
  • Every problem has a solution.  Applying logic and keeping a cool hand allows the crafting of a solution.  Everyone may not like it, but some sort of solution presents itself.
  • Everything looks better the next day.   Every bad day ends. Every first day of a crisis is finite.  Putting some time and distance between the onset of a crisis and the arrival at a solution yields a better result.
  • If you  are willing to give up credit you can move mountains.  If you are truly committed to solving a crisis do not worry about getting credit.  Letting your superiors take credit is great, even better is letting them think that they came up with the idea.
  • Make the crisis a one day story. Own up publicly to the problem quickly and be as candid as possible.  Failure to do so will make the crisis a multi-day story. Avoid making the crisis a multiple day “Page One” story.
  • Avoid acting it haste, as it will only end in tears.  Throwing prudence, deep thinking and obedience to the law out the window leads to a bad result and often later prosecution.

Paulson, Geithner and Bernanke – The Committee to Save the World

I knew the country was in trouble when Henry Paulson, then Treasury Secretary at the start of the financial crisis, got down on his knees to beg Nancy Pelosi to pass the $700b TARP plan.  The original plan had panic written all over it: massive give away of funds, unreviewable actions and virtually dictatorial powers.  Somehow hundreds of years of constitutional development and the rule of law went out the window because our banks had some serious problems. Eventually, Paulson, Bernanke and Geithner were viewed as the Committee that Saved the World. See Steve Rattner article.

Given the panic displayed by senior members of government at a time of financial crisis it is no surpise that Mr. Geithner is being questioned by Congressional Committees.  Going further, I  doubt that he incorporated any or all of  the above bullet points in his management style or action planning at the time he made these decisions.

Perhaps we should end with the maxim – - ” Act in haste, repent at leisure.”

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11
Jan 10

The Organic Economy

Paul Samuelson, Nobel Prize winning economist, MIT professor and innovator of the mathematical approach to economics passed away last month.  See NY Times obituary.  Economics: An Introductory Analysis is still the leading textbook for introductory college economic courses.  Samuelson’s mathematical approach was the antecedent of econometric modeling wherein economic theory is combined with statistical methods to analyze and test economic relationships. Many of Obama’s advisors are proponents of mathematical modeling. Unfortunately, the real word is messier than Dr. Samuelson and his protégés would have you believe.

Economics and Hubris

An ivory tower economist who mixes math, economics and high powered computers as likely as not cooks up a stew full of hubris.  I have a friend who studied with Lawrence Klein, another Nobel Prize winner.  Econometricians believe that if one has enough statistical inputs and a big enough computer we can predict and control the economy.  From the public pronouncements of Obama’s economic team and endless reassurances of recovery, this hubris is alive and well in Washington.

The Human Equation

Mathematics overlooks the human element, with all its unpredictability:  fear, greed and yes – hubris.  We over borrow and take excessive risks in good times and over save avoid risk and hoard in bad times.

We have just had the financial equivalent of a heart attack.  What would an economic doctor prescribe to a post-heart attack patient?

  • Rest – save, don’t spend
  • Go on a diet and lose weight – get out of debt, don’t take on new debt
  • Exercise – engage in economically productive activities; don’t speculate, merely trading in financial claims
  • Quit smoking and drink in moderation – banks should avoid toxic lending and regulators should prosecute predatory lending practices

You Can’t Fool Mother Nature

Administration policy makers believe that their technocratic skills can immediately revive the economy.  Since the economy is the sum of human actions, it is perhaps more organic, lifelike and anthropomorphic than policy makers would like.  Armed with mathematical models and Keynesian dogma, technocrats believe they can accelerate recovery without harm to the patient.  Their prescription is to add more debt at every level, inviting our “patient”, the consumer and the profligate financial institutions return to their errant ways. These habits caused the financial heart attack in the first place.

Instead the Administration could have encouraged the patient to do the hard work of economic rest, weight loss and exercise, creating a path to long term recovery and preventing a relapse. We came close to the second Great Depression.  The actions of the Administration in short cutting much needed lessons can only lead to a worse and this time possibly fatal financial heart attack.

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