Posts Tagged: Bernanke

American Society / Economics / Financial / Political — 0 Comments
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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Financial — 0 Comments
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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American Society — 0 Comments
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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