Posts Tagged: Bernanke

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19
Aug 10

Artificial Sweeteners

Artificial sweeteners have been the subject of health concerns.  Aspartame, for example, has been found to be a migraine headache trigger.  Products containing it carry a health warning for PKU, a rare hereditary disease.  Today we learn that diet sodas markedly increase the risk of pre-term deliveries.  See Add Diet Soda to the List of Things to Avoid While Pregnant.

Similarly, the Federal Reserve and the Administration have not trusted that the economy can heal through natural market forces.  Instead we have been served up the economic equivalent of artificial sweeteners.  Concerned by slow growth, not even negative growth, the government again is firing up the machinery for money printing and stimulus.

In each instance, the government is intervening, distorting, and artificially “sweetening”  the bond market, the housing market and, indirectly, the stock market.  What are the consequences?

There is No Free Lunch

Martin Hutchinson in The Peril of False Bottoms targets faulty government policy as the reason for our anemic economic recovery.  Excessive economic stimulus and a misguided zero interest rate policy has created false bottoms in the housing and stock markets.    A false bottom is defined as a stabilized “price far above the likely long-run price equilibrium of the assets concerned.”

Bernanke has precedent for providing excessive liquidity and holding interest rates too low for too long.  Greenspan reacted to the internet stock market crash by flooding the market with liquidity.  Doing this drove the market to over 14,000 on the Dow Jones Index and created a housing boom.   In the 2008-2009 real estate and stock market crash we learned  how flawed this policy was.

More on False Bottoms

Hutchinson points out federally inspired housing market distortions:

House prices are currently 47% above their level in January 2000, according to the S&P Case-Shiller 20-city index, compared to a 49% rise in prices since that time – in other words, they are in real terms at the same level as at the top of an immense speculative boom.During the recent contortions, the U.S. monetary and fiscal authorities have established false bottoms in two markets. The first is housing, where subsidies to first-time buyers, ultra-low mortgage rates, government guarantees on $700,000 home mortgages and foreclosure-avoidance schemes have prevented the housing market from falling even to its average level where the average house price is about 3.4 times average earnings. The Peril of False Bottoms

These misguided policies have consequences:

…with additional buyers having been sucked into the market, it is now likely that house prices will fall further than this. Indeed, if the appalling suggestion put forward last week that the government through Fannie Mae and Freddie Mac forgive $1 trillion of defaulted home mortgages is put into effect, they will undoubtedly do so. Nothing could be more designed to destroy confidence in the housing market than a massive subsidy to the most foolish and improvident home buyers, at the expense of the thrifty and careful renters who are the major source of potential new demand for housing.

If the buyer pool is attacked in this way, or forced into unnecessary losses by being made to buy too soon, house prices may not bottom out at the market-clearing level … but may continue falling.  The Peril of False Bottoms

Wither the Stock Market?

The stock market is the second false bottom:

Currently at 10,650 as I write, the market is 35% above its appropriate “middling” target. The “trailing” P/E ratio of 20.4 on the Standard and Poors 500 is also above its historic average, even though corporate and bank earnings are currently inflated by ultra-low financing costs and a steep yield curve. Thus at some point we can expect reality to intrude, and the market to drop to its likely cycle low in the region of 5,000 on the Dow Jones index.

Again market prices are too high for any intelligent buyer.  And worse, buyers will then be unavailable to buy stocks at the bottom. The Perils of a False Bottom

Politics v. Economics

Politicians are worried about the next election.  Thus, we see the desperation of the Administration to throw economic caution to the wind.   Zero interest rates, forgiveness of imprudent debt, subsidies to overpaid public sector workers (with no corollary “give backs”) are all hallmarks of erratic and misguided government policy.  They also sacrifice long-term prudence for the feel good of short term stimulus.

Who will pay this price?  Unfortunately, it will be stock market investors, pension plans, life insurance companies and homeowners.  Directly or indirectly, that is virtually all of us.  We need to beware politicians handing out artificially sweetened candy. Just like aspartame and our physical health, artificial economic sweeteners can be harmful to our financial health.

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4
Apr 10

Nothing from Nothing

Nothin’ from nothin’ leaves nothin’
You gotta have somethin’
If you wanna be with me…
I’m not tryin’ to be your hero
‘Cause that zero is too cold for me

Nothing from Nothing – Billy Preston

Zero interest rates have a clear and pernicious effect upon the elderly. See Is The Administration Determined to Make the Elderly Poor? Worse, this policy has broader implications for all savers and our national competitiveness. A robust household saving rate is integral to investment and long term American prosperity.  America’s two major competitors have healthy household savings rates, Germany (10.9 % in 2008) and China (30% in 2009) vs. 1.8% in the US in 2008.  Not surprisingly, the export led economies of China and Germany have fared better than the US during the financial crisis.  And while the mainstream media has not focused on the zero interest rate strangle hold, more voices on the subject are appearing.

Genesis of the Problem

Our low savings rate has been US economic policy for the past decade.  An “emergency” interest rate cut to near zero has followed every financial crisis from the dot.com bubble burst to the housing market crash.  Unfortunately, these “emergency rates” have robbed savers, pension funds and insurance companies.  In a recent Wall Street Journal op-ed Charles Schwab laid out the problem of seniors in particular:

Today’s historically low interest rates may be feeding banks’ profitability, but they are financially starving our seniors.

In February 2006, when Ben Bernanke was first sworn in as chairman of the Federal Reserve, the federal-funds target rate stood at 4.5%. That same year, the average yield on a one-year certificate of deposit was 5.4%. A retiree who diligently saved for a lifetime and had amassed a nest egg of $100,000 could count on an added $5,400 in retirement income per year. That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed incomes that extra money improved the quality of his life.

Today’s average rate for an identical one-year CD is roughly 1.3%. On the same nest egg, that retiree will now get annual payout of just $1,300—a 76% decline in four years. See Low Rates are Squeezing Seniors

The Administration is Tone Deaf

Mr. Schwab is way too well mannered in his criticism: banks are now profitable at the expense of the entire economy, and the government endorses this policy.  Tim Geithner on the Today Show almost offhandedly asserted that:

It’s “deeply unfair” that some financial institutions that got taxpayer-paid bailouts are emerging in better shape from the recession than millions of ordinary Americans.

Geithner also argued that President Barack Obama had no choice when confronted with a financial crisis. See Pickpocketing Trillions from the People to Give to the Oligarchy was Deeply Unfair

What Secretary Geithner did not mention is that the banks can now virtually mint money by way of this zero interest rate policy.  The Secretary portrays himself as a powerless actor when in reality he is an architect of this policy and could encourage the end of this detrimental policy.

For Every Action There is an Equal and Opposite Reaction

From 1959-1994 the historic savings rate averaged 8.45%.  Given the damage done to net worth in the recession we need to return to that savings level or higher.  However, the government focused on restoring consumption with the “cash for clunkers” program and new home buyer tax credits.  Provisions of the new health care legislation (which imposes a 2.9% Medicare tax on “unearned income;” that is, interest, dividends, etc.) further discourage savings.

Finally, a graphic rendering from Michael Panzner of how low interest rates undercut savings attempts:

Panzner Savings Chart

The savings problem falls heavily to baby boomers heading into retirement.  In the recently released Employee Benefit Research Institute 2010 Retirement Confidence Survey 27% of participants had less than $1000 in savings and 54% had less than $25,000 of savings. (Primary residence value is excluded in this analysis, but we know how variable and ephemeral that asset can be.)  With a zero interest rate policy we are encouraging those who should not be speculating to invest in an overvalued stock market or take inflation risk with longer dated fixed income products. Worse, people are dipping into savings for living expenses.

Charles Schwab concludes with a plea for the government to keep the plight of the seniors in mind.  We need an outcry from pension funds, insurance companies, AARP, Congress and others who rely on safe fixed income investments to stop the insanity. We need to stop artificially depressing interest rates.  Messrs. Geithner and Bernanke: ’cause that zero is too cold for me (and for the country).

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16
Mar 10

The Failure of Extrapolation

The human mind loves linear extrapolation over time.  We build 5-year plans.  Graphically, five-year plans look like hockey sticks: first, slow and minuscule income, revenue growth in the first year, and then spectacular growth by the fifth year.  I have sat through a dizzying number of presentations for start up businesses which rarely, if ever, achieve their predicted spectacular growth.  For every Apple or Google there is a Pets.com and bankruptcy. ­­­ However, hope springs eternal.

Rosy Scenario and Her Evil Twin

Investment analysts, CEOs and government officials constantly project questionable positivity.  Prosperity is always around the corner, green shoots of recovery are everywhere, and a chicken will appear in every pot.  We pillory realistic if negative analysts as pessimistic naysayers, prophets of doom or worse.  But we ignore reality at our peril. More often than not Rosy Scenario often clashes with her evil twin Dashed Expectation.  The results are often calamitous.

Ignoring Reality

The last decade has brought ignoring reality to a high art form.  Linear extrapolation has brought the following prophesies:

  • Dow 36,000
  • Internet businesses with no customers and unrealistic business plans worth several times the value of established companies (IBM, DuPont)
  • Ever-rising housing prices
  • The FIRE economy (Financial, Insurance, Real Estate) supporting the entire American economy
  • Sustained non-problematic leverage ratios of 30 and 40:1
  • Debt growth several standard deviations greater than GDP
  • Counterparties to derivative contracts always making good
  • Never defaulting on sovereign debt
  • Pension fund assets always earning between 7-9%
  • Federal debt growing faster than tax receipts
  • Public sector wages growing faster than GDP and tax receipts
  • Aggressive accounting (Enron, Lehman) considered good financial engineering
  • Zero interest rates restoring economic prosperity.

Past is Not Always Prologue

We are prisoners of our past experiences.  We expect the Federal Reserve to cut interest rates and the economy to magically recover.  We are surprised when the nominal unemployment rate is at 9.7% and the actual is 17%.   We are surprised when Wall Street bonuses soar and Main Street suffers.  We are surprised when Moody’s threatens to downgrade US debt from AAA rating. See Moody’s Says U.S. Debt Could Test Triple-A Rating

Rarely do we say that this time is different.   As a society, we have incurred debt far exceeding our capacity to repay.  Balance sheet recessions/depressions are far worse than previous inventory recessions.  Just as the Vietnamese fooled our World War II trained generals, the Federal Reserve and Administration are intent on fighting an outdated economic war.

It is time for some nonlinear thinking.  Instead of posturing, Congress should be asking Ben Bernanke for a Plan B.  Averting financial Armageddon is not enough.  JP Morgan CEO, Jamie Dimon, projected a banking crisis every five to seven years.  See Elizabeth Warren Exposes Jamie Dimon. As a society we can ill afford another year like 2008.  Reality is gaining on us.

How well did the five-year plans work out for the brittle Soviet system?   Is it time to ditch Rosy Scenario and deal with reality?

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2
Mar 10

Goldman and the Winner Take All Society

Finally, Goldman Sachs has gone too far.  In A Reputation as Good as Goldman?  Part I, we discussed Goldman’s selling of mortgage backed securities, and its role in the current Greek budget crisis.  These activities clearly contributed to its self-inflicted reputational damage.

Perhaps the hubris went further.   Does Goldman believe that its status as a favored Federal Reserve “too big to fail” firm will insulate it from government investigation? Last week Ben Bernanke put a dent in Goldman’s Teflon shield:

Ben S. Bernanke, the Federal Reserve chairman, told Congress Thursday that the Fed was ‘looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece.’

Mr. Bernanke said the Securities and Exchange Commission was also concerned about how derivatives — financial instruments that are largely unregulated and do not trade on public exchanges — have contributed to Greece’s problems. ‘Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive,’ he said. See In Greece’s Crisis, Fed Studies Wall St.’s Activities.

In Is Goldman Finally About to Be Leashed and Collared? Yves Smith observes and analyzes Goldman’s corporate culture.  As a former employee, she reports on colleagues’ piggish and overly aggressive behavior. But in an otherwise excellent post, I believe she overlooks the role of current compensation systems.

Pay Practices and Reputation

In previously discussing the banking crisis, we pointed out a fundamental principal: you get what you incent.

Banks were interested in generating upfront fees. Incentives were predicated on “making the deal.”  The best way to make a deal was to ignore the creditworthiness of the borrower.  The banker who made the bad loan suffered no personal financial penalty.  There was no “skin in the game.” Why not write as many loans to poor credits as possible? See Hard Truths from the Banking Crisis.

The Goldman culture incents a “winner take all” mentality.  Since it is a public corporation rather than a partnership everyone is an employee.    A highly mobile employee rather than an owner is far less concerned about the firm’s long term reputation.  That employee wants to maximize current compensation; worrying about future consequences is for suckers.  Drawing on this paradigm, we are not shocked by headlines excoriating the firm for trading against its clients’ interests, shorting the municipal bonds it helped underwrite, skirting EU rules, or tanking the housing market.

Goldman operates in a larger Wall Street and indeed general culture that encourages greed at the expense of overall civic good:

  • Successful hedge funds report individual earnings in the hundreds of million dollars per employee.
  • Loyalty is dead.  Employees change firms. Highly paid athletes change teams without a second thought.
  • The media treats great wealth as reason for great celebrity.
  • Compensation validates individual worth.
  • Government backstops losses and allows gains to remain private.
  • The zeitgeist promotes: “I better grab as much as I can now before the economy implodes.”

Does It Have To Be This Way?

Any alert Board of Directors should be asking some difficult questions.  Why aren’t we concerned about the long-term firm reputation?  What do we want the corporate culture to be? Just because we can legally do a transaction should we be doing it?  How do we blend partnership-based personal accountability with a public corporation structure?   How do we get employees to care about the long-term view?  How do we meet the competitive threat of hedge funds and private equity without damaging corporate reputation? How does our compensation system comport with these concerns?

Yves Smith noted that it was as dangerous for anyone to get in the way of a Goldman employee and a profit making opportunity as it was to get between a predatory animal and its kill.  Goldman has managed to get itself between a very worried Obama Administration and a very angry public.  How ironic if the Goldman predatory lion becomes the Administration sacrificial lamb.

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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
Nov 09

Can We Continue the Status Quo?

Every so often one comes across a brilliant essay that cuts to the heart of the problem.  Writing for the Prudent Bear in “Wanted: Iconoclasts,” Martin Hutchinson identifies the rising political anger at the “partnering” of the Obama Administration and Wall Street:

In such an atmosphere, with unemployment above 10% and rising, and U.S. living standards descending inexorably towards those of the Third World, it is not surprising that the public beyond the Washington Beltway is in an iconoclastic mood. Its iconoclasm is rational, economically speaking. The tight oligopoly of Wall Street is profiting excessively from its 2008 bailout by taxpayers, with the payments to Goldman Sachs and others on the AIG credit default swaps coming to seem increasingly misguided and possibly corrupt, given Goldman Sachs’s close connection with the Treasury Secretary Hank Paulson who disbursed taxpayers’ money in such an unproductive manner. AIG and Citigroup remain in business, with even AIG Financial Products, the cause of much of 2008′s pain, still in operation. Fannie Mae and Freddie Mac remain dispensing their guarantees to the housing market, noticed by the media only at the end of each quarter as they tote up their losses and demand further billions of the taxpayers’ money. The economically damaging subsidies to home purchase, diverting as they do scarce U.S. capital towards yet more unproductive housing, have just been extended both in time, for a further six months and in scope, to existing homeowners. The economic recovery, such as it is, appears to [be] sic producing almost no jobs but only an ever-widening spiral in commodity prices, affecting the costs of everything the public consumes and eroding the value of its meager savings.

Mr. Hutchison levels his criticism of the management of the financial crisis at the behavior of Obama, Bernanke and Geithner, whose knee jerk response was to maintain rather than reform system.  They chose to bolster bankrupt financial institutions at taxpayer expense. Further, they chose zero interest rate policies which punish savers and trillion dollar deficits ad infinitum which punish all taxpayers and future generations.  They created a giant irrational structure. (See Why Do All Irrational Structures Fail?).

Offering Solutions

Mr. Hutchinson does not deliver a jeremiad.  Instead, he departs from dire rants and prognostications and points to a rational way out of the ongoing crisis.  Recognizing that the current economic-political trajectory we are currently on is unsustainable, he provides policy prescriptions to end the crisis:

It will thus have become obvious that the housing market needs to be restored to a fully private market state, in which government subsidies are confined to the truly indigent. Zombie banks must be closed down, while the beneficiaries of “too big to fail” must be forced to slim down and divest operations until they are of a size where failure is conceivable. Commercial banks will simply become regional entities, whose failure would damage a regional economy but not the entire financial system. The trading behemoths will be broken into several competitors, whose market share will be too small for them to profit from “insider information” about market flows – a modest transactions tax will also reduce trading’s dominance. Home mortgages will once again be granted locally, with derivatives and securitization technology used only to prevent cost squeezes in high-growth areas. The obvious cost reductions in health-care, eliminating the current system’s cross-subsidizations, will be legislated to reduce the sector’s oppressive cost growth. Public expenditure generally will be put on a strict diet, with expansionist foreign policy ended, both in its belligerent and its globalist forms.  Finally, monetary policy will set interest rates at a level that rewards savers properly and prevents bubbles.

Conclusion

Staying on our current course of action is irrational.  Mr. Hutchinson clearly links together politics and economics.  Often economists take a narrower view, ignoring political realities.  Since this is not a normal recession and has all the hallmarks of a depression, “business as usual” policy measures taken to date have been ineffective and have deepened the crisis. There is a growing political reaction among the masses of Americans who face unemployment, inflated gasoline prices and foreclosure.  Democratic losses in recent elections were an early harbinger of that discontent.  There is still time for Obama, Bernanke and Geithner to become iconoclasts, break with orthodoxy and restore economic growth which will benefit all Americans.  Continuing the status quo will be harmful to the current ruling political class, the Wall Street elite and the economy.

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18
Nov 09

Consistently Inconsistent

Attorney General John Mitchell  ”Watch what we do, not what we say.”

The Obama Administration was elected on a platform of “hope and change” and transparency.   Americans want their leaders to be honest and fair.  The first year of the administration has been nothing short of a disappointment.   Economic policy making has been elitist, deceptive and unfair to the constituency who voted for this President.  Let us examine just three programs and initiatives: the stated goal, the outcome and the inconsistencies.

  • Cash for Clunkers – A program to provide incentives to Americans to trade in their “gas guzzlers” for a new car and a government rebate.  Outcomes – Why are we incenting car purchasers when we are running out of oil and mass transit is in disarray?  Doesn’t this continue to promote the inefficient model of suburban homes, driving long distances to work or shopping?   The program also adds to the debt burdens of consumers who took out auto loans.  Auto analysts at Edmunds.com estimate that each car costs the taxpayer $24,000. The program had additional energy costs in destroying the clunkers.  Finally, it added to the trade deficit as many of the cars purchased were imports.  Inconsistencies: trade deficit, energy conservation, debt.
  • Zero Per Cent Interest Rates – The Chairman of the Federal Reserve vowed to keep interest rates at zero as long as the economy was weak. Outcome- This policy has encouraged consumers and speculators to take on more debt. It has discouraged savings and it has had a particularly pernicious effect on elderly retirees.  It has revived leverage and the same risk taking behavior in the financial community that caused the initial crisis.  By allowing banks to borrow at zero percent and either park the money in safe treasuries or lend to consumers and speculators at higher rates, they have been able to earn risk free profits and pay large bonuses.  And since we manufacture little here, the trade deficit has risen. Finally, the dollar has weakened with the side effect of commodity prices soaring and most importantly, the price of a barrel of oil doubling from its low. Inconsistencies: More speculation and risk taking, inflation in key commodities, added debt and discouragement of desperately needed savings.
  • Health Care Reform – The Administration has a monomaniacal focus on achieving some form of national health care.  Outcome:  If passed Obama’s favored proposal will add enormous costs to employers at the same time that employers need to cut costs to remain competitive.  The Congressional Budget Office conservatively calculates that these proposals will add at least $239 billion to the already out of control government budget deficit.   Finally, taxes will increase to pay for the “reforms”  further delaying economic recovery.  Inconsistencies:  deficits expanded, businesses made less competitive through added costs and tax increases.

A Visit to Never Never Land

I have picked three policy areas but there are more, ranging from adding troops to Afghanistan to bonus pay for bankers. There is an air of total unreality or naiveté emanating from President Obama. Today’s statement from the President unfortunately says it all:

BEIJING, Nov 18 (Reuters) - President Barack Obama gave his sternest warning yet about the need to contain rising U.S. deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.

After piling up one debt laden program or initiative after another, the above statement is incomprehensible and amazing. Where is the mainstream media to criticize the Administration on these inconsistencies?  Obama’s statement only strengthens my view that this Administration is consistently inconsistent.

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11
Sep 09

Can You Invest in the US Equity Markets?

In the past there were investment benchmarks that a serious investor could examine before making a decision on what stock to buy.  Classic fundamental benchmarks were discounted cash flow, free cash flow, price earnings ratio, book value and other value determining measures.   Technically-oriented investors could examine 50 and 200 day moving averages, support and resistance lines, short sales coverage ratios, accumulation and distribution patterns among a myriad of indicators.  That was the world that existed pre-autumn 2008.  Then the new “Save the World” trio of Paulson, Bernanke and Geithner took unprecedented steps of direct government intervention to pick stock market winners and losers.  Add the Obama administration’s aggressive interventional programs such as healthcare, unionization and energy. We have now transformed from a free market economy where companies rise and fall on their business acumen to a state dominated economy where success is determined by political acumen.

We have turned classical economics on its head.  In the market place, weak companies with political connections are saved and efficient companies are punished.  I will return to the punishing of efficient companies later in this posting.

Much has been written about the financial industry.  But examine the automobile industry and the unprecedented level of government intervention.  The government has demonstrated that it will stop at nothing to “save” the Big Three American automakers and their union jobs. First, at the expense of creditors, government has intervened in the bankruptcy process to ram through pre-packaged bankruptcies and reorganizations.   Government now appoints management and favors unions.  It also guarantees new loans so these companies can borrow at favorable interest rates.

With the government firmly entrenched in the car business why not have a cash for clunkers program?  Demand is artificially stimulated for a short period of time under the guise of better gas efficiency and economic stimulation.  A few obvious flaws with this program:  1) we may have merely shifted future demand to the present with an almost certain drop in future demand; 2) politically we cannot limit the program to the Big Three since many of the most fuel efficient cars are foreign made by companies such as Toyota and Honda, thereby adding to our trade deficit; 3) many of the “clunkers” were probably quite serviceable vehicles and owned outright with no debt. Instead, we have induced consumers to take on more debt and 4) if we are truly interested in fuel efficiency why are encouraging an auto-centric, long commute, shopping mall culture when mass transit is woefully inadequate.

I have only picked one set of companies, the US Big Three, but this type of interventional behavior knows no bounds: GE, AIG, money center banks, credit card companies, builders, airlines, money market funds and the list is virtually endless.   All an industry needs is a good lobbyist, some union support or an “End of the World” story and the government coffers are emptied. It beats the hard work of developing new products and services, funding these new products and services, marketing, billing and collecting that real world companies face without government intervention.  The efficient company must compete in the capital markets for scarce capital with these government supported enterprises.  The efficient company must pay more for such capital, which is the lifeblood of the business, which ultimately is reflected in product and service pricing, profit margins and ultimately stock market valuation.

As we go forward, technical and fundamental analysis is probably useless.  What is needed is a bona fide political analyst to help with the next company to be showered with government largess.   Perhaps we need a new index – Government Owned and Dominated 500 – the Deity index.  There must be an investment bank (with assistance from the Treasury) already cobbling together an exchange traded fund.  I would submit it is near impossible to safely invest in the US equity markets when the playing field has shifted from economics to politics.

Note -Nothing in this post or blog constitutes investment advice.  Consult your own investment adviser for such advice.

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9
Sep 09

Why Is It So Hard To Say I’m Sorry?

On August 12, 1985, a Japan Airlines jumbo jet crashed killing 520 passengers and crew.  Yasumoto Takagi, President of Japan Airlines, resigned and said he was sorry.  He moved to a modest apartment in downtown Tokyo and spent the remainder of his life doing penance and communicating his and the company’s sympathies to the families of the victims.

In 2008, we had a financial crash.  Where were the apologies from our leaders? Why is it so hard to apologize?  Humility is one of the traits for which Moses, Jesus, Gandhi and other great religious figures are revered.  Who should apologize? To name a few:

-          Alan Greenspan and Ben Bernanke for worrying more about politics than ensuring the integrity of our financial system

-          Angelo Mozilo for overseeing the fiasco that was Countrywide Financial

-          Ken Lewis for mismanaging Bank of America

-          Henry Paulson for mismanaging the US Treasury Department

-          President George Bush for justifying the war in Iraq on dubious intelligence

-          Raymond Gilmartin, CEO of Merck for failing to withdraw Vioxx from the market

-          Your financial advisor for losing a significant portion of your retirement money.

Everyone makes mistakes. I was a practicing lawyer and a business executive and Lord knows I made many mistakes.  If any professional is honest, they will tell you that the only way to grow in their profession is to make mistakes and learn from them.  I also learned that besides having a plan to remedy my mistakes, I must sincerely apologize to my co-workers and superiors and resolve to do better the next time.  In a corporate environment, apologies are so rare that they are disarming when they occur. In my experience, more often than not a simple apology diffused the anger of my bosses and everyone was able to move on to corrective action.

As a culture we have lost our way.  In a recent Wall Street Journal article, Peggy Noonan cited the example of John F. Kennedy who was able to admit that the Bay of Pigs was his mistake. Significantly, Kennedy did not blame the affair on his predecessor Dwight David Eisenhower.  Ms. Noonan suggested that President Obama could learn much from President Kennedy.

Without a sincere apology for misdeeds we cannot go on. Instead of sincere apologies for the current financial debacle, we get dissembling and finger pointing. How often have we heard that last year’s financial crisis was unforeseeable, was a “Black Swan” event, was the fault of the Democrats, the Republicans, the poor who borrowed in excess of their financial capacity and took out subprime loans.  When you ask a 3 year old how the broken milk glass found its way to the floor, the answer is:  “it fell.”  There is no human subject in the sentence. The glass just animated itself, defied the laws of physics and launched itself off the table. Our leaders would have us believe the same about the economy and the financial markets: “it broke.”

Frankly, I’m sorry; I don’t buy it.  There needs to be an open honest recognition: I made a mistake, I was wrong, I am willing to resign or I am willing to fix the problem. Please give me another chance.  Instead we are insulted with record bonus announcements for the same individuals who made the mistakes.  The first step is at least to say “I am sorry”. The second step is to emulate the great religious figures, to show some action-based humility and eschew the bonuses.  Maybe we all cannot be Mr. Takagi, but saying I’m sorry is a start.

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