In my previous posts I have always used a lot of economic data to back up any points I’ve made, this post will be slightly different. I am so furious about what is happening that I’m going to speak honestly about what I think is going on and focus less on the details.
Our brain trusts in Washington DC just signed an additional $789 billion stimulus package into law with members of Congress having little or no time to read it. The bill consisted of 1419 pages of creative ways to spend your money on everything from infrastructure projects to healthcare. The media hailed the bill’s passage as a victory for the Obama administration. The market on the other hand, seemingly has different views. The S&P and Dow indices have been crushed ever since the Obama administration took office. The Dow is less than half its record high and the S&P is at a 12 year low.
We hope that the Obama administration is realizing that no matter how much money they say they will spend (attained through taxes or by borrowing from other countries), or how many different “plans” they come up with, they aren’t getting any closer to the solution. It seems that Washington is not yet ready come to terms with the fact that the best and inevitable course of action would be for it to just step aside and let the market quickly and efficiently (albeit painfully) find its equilibrium. The politicians need to remember that the governments’ job when it comes to commerce and markets is to keep the playing field fair (which they seem to be incompetent at, think Madoff, Stanford, and so on). Continually propping up failed companies, especially without understanding the business plan or valuation is simply making things worse. With Citibank now trading at basically zero and the recent announcement that taxpayers are taking a 36% stake in the company (a deal that no prudent businessman would make), and Bank of America not much farther behind, how do we know that Mr. Geithner and President Obama won’t do the same with the rest of the nation's banks? As the stock market continues to plunge day after day, we hope that a light bulb is starting to go on in Washington that the current course of action will not work. As we have said in previous posts, throwing money at the problem will not make it better and it certainly hasn’t worked so far.
It’s now obvious that we are ever so slowly nationalization our banking system. The unfortunate thing is that most of the responsible people in Washington understand what happened in Japan, and Switzerland, and the numerous other banking crisis throughout history, yet they still pound away at the idea that “something needs to be done” in regards to our nation's banks. No matter how big, or how much money they plan on spending, the market has more money and power than any politician, lobbying group or central bank. A few readers have asked what is wrong with propping up failed banks, or “zombies”. Besides the moral and social aspects of playing favorites to save a certain industry group or company over another (basically the well connected or those were able to lobby the hardest), the economic consequences are far reaching. What was previously an industry that thrived on capital raising to give an entrepreneur the chance to build a business, is now a shell of itself unable to take the risks which in some cases need to be taken to expand the economy. The one good side effect that might come out of all this is the greater scrutiny of the bailed out banks and auto companies in terms of bonuses, perks, golden parachutes and parties. What makes me nauseous is that a tabloid TV show called TMZ broke the story of Northern Trust’s lavish parties including concerts by Sheryl Crow and Earth, Wind and Fire (right after they reported on Nicky Hilton eating at IHOP) before The Wall Street Journal even got wind of the story.
In a sense, by having the government take a position in the banking industry we are institutionalizing risk aversion. It’s a vicious cycle that could lead to years of slow growth, falling capital expenditures and little or no recovery in employment. It’s no coincidence that the second Obama announces the new budget with another $750 billion of taxpayer money slated for bank rescue the stock market takes a nose dive. Politicians should let go of the idea that they have the power to control the markets and allow true equilibrium to be found. Not to mention, the taxpayer money and resources that have been spent in executing these plans. By the way, has anyone figured out what happened to that first $350 billion tranche that the Bush Administration was in charge of towards the end of last year? Or is that ancient history?
In addition to stifling the banking sector, another problem with the stimulus package is that, in effect, it treats healthcare as a cost problem instead of a growth industry. The healthcare and biotech industries are a group that we follow closely at LRG Capital Group. Stifling innovation through legislation in these industries in an attempt to reduce cost is a dangerous idea that will not only hurt the industry’s profits, but also the ability for it to provide safe and reliable healthcare. There are many ways to cut costs in the healthcare industry, with the first being the number of people the plan intends to deliver healthcare to. This is a dangerous road to go down for this Administration and the way they are addressing the inadequacies of the industry have the potential to make things worse. Maybe we must deal with the fact that life isn’t fair and even though it would be great to provide healthcare to all right now, it would bring everything down to the lowest common denominator and everyone will lose out.
In further digging our economy into a deep hole, President Obama’s nomination of Tim Geithner was by far the worst pick for his administration. Besides the folks at the SEC, it would be tough to find another person who could receive more blame for the lack of regulation and foresight than the President of the New York Federal Reserve at the time, Mr. Geithner. Perhaps no one had a better view of what was going on during the boom years on Wall Street than Mr. Geithner. And to make matters worse, since his plans have gone so well in “repairing” the banking industry, President Obama has added Mr. Geithner to an inter agency task force that will help determine the fate of the auto industry. This is the same auto industry where Toyota and Honda are able to build cars profitably in the United States, while the domestic car manufacturers struggle with legacy costs and poor management decisions that they hope to dump on the taxpayer.
With all of the rhetoric and promise of hope and change coming out of the Obama Administration, the appointment of Mr. Geithner proves that the more things change, the more they stay the same. With the market making new lows yet again, the Treasury Department issued a statement that Secretary Geithner is planning to release yet another plan for the banking industry. Some are now speculating that some form of nationalization would be necessary at least temporarily. The “Swedish Model”, would call for a temporary nationalization of the weakest banks, auctioning off assets while cleaning up the failed banks’ balance sheets. Most importantly, we hope the plan will FINALLY set out a framework that would reveal the extent of the likely credit losses facing the banks. In a sense, the markets failure to respond in a favorable manner to all of the previous plans that were put together since the crisis began, has forced policymakers to admit total failure of those plans, and do what should have been done a long time ago, which is to have the banks completely come clean about what they are holding on their balance sheets. Hopefully we are prepared to swallow the terrible and painful pill of reality and begin the healing process.
Since the domestic economy and the global economy, in our view, are dangerously close to implosion, I’d like to, as my last point, draw a very grave parallel between the recession and a serious illness that, in some way or another, has probably affected each one of us: cancer. A diagnosis as serious as cancer requires a quick and forceful plan of action, working to heal the patient (the economy) not just make the symptoms (the recession) go away. There is simply no way we can play Wizard of Oz and close our eyes, click our heels and wish and forecast the problem to go away, which in many ways is what we have seen the previous and current administrations attempting to do with the recession. The only cure our government has tried thus far is to feed the recession with as much money as taxpayers can handle (or not handle?) and the cancer only seems to grow. A doctor comes up with a treatment plan with varied methods of combating the illness and similarly our president needs a list of completely different treatments for our economy. Just as most doctors would quickly check off a method that wasn’t working, Obama must dismiss the idea that more and more taxpayer money will help. It’s time to move onto the next treatment option. As everyone knows treatment of such a serious problem will be difficult and extremely painful, so we are perplexed as to why people think that finding a true end to this recession will just be a mere pin pick. Once we can accept that the treatment for this recession will really hurt, we can abandon the “easy” way out and get down to really fixing our economy. Sometimes you have to stop all growth, good and bad in order to stop the cancer from growing before the healing process can begin and the same may be true of the economy. Here’s the cure to the recession we believe in (definitely a painful one): finally writing down all the assets, wiping out equity and debt in companies that owned troubled assets, treating Americans’ addiction to over-leveraging their lifestyles and start saving instead. Swallow the horrible pill and start anew.
In closing, Obama’s most recent treatment attempt, the stimulus package, we find it looks more like a disguised Federal Budget than anything else and is basically more of the same. This package attempts to treat the symptoms of the recession not provide a cure. The moral of the story is that the administration and Congress need to realize that people are watching what they are doing now more than ever before. People are struggling and suffering today in ways that haven’t been seen in decades. The end of the President’s elected term of four years may seem like a long time away from now, but if the new administration and the entire Congress for that matter want to keep their jobs, the time has come for some straight talk and solutions that we all know will take some sacrifice on all our parts. While sound bites, speeches and promises of a reduced deficit can play well with the media, they will do little good to get us through this mess if the government isn’t ready to face the reality of the pain we all are going to experience by writing down bad assets and extinguishing equity and bad debt of falling companies. It’s the only way we will truly be able to begin recovering from years and years of folly and excess.
Right on Larry! Our thoughts mirror the sentiment of your blog. Nothing good comes easy...as soon as the current administration (and a sizeable portion of the population) "come to grips" with the fact that you cannot spend your way out of this one and let the economic "flushing mechanism" do its thing...we are quickly on our way to becoming Japan. Cannot lessons be learned at others' expense, or are we and our children destined to be paying for these mistakes now being made... for some time to come.
Posted by: Kevin | March 05, 2009 at 11:03 AM
Interesting blog, but I am compelled to, respectfully, disagree with many of your main points.
I am no fan of nationalizing the banks, but they let Lehman go down and the entire financial system almost went with it.
And, I don’t happen to think that it’s the President’s performance should be judge based on the performance of the stock market. Especially over the first 30 days of his administration. Yet, on the one hand you advocate allowing the institutions to fail and on the other hand, you blame Obama for the stock market drop. Don’t you think that’s a little inconsistent?
Geithner’s plan involved allowing the private markets to price the “toxic assets”. The holders of bank shares want/need that pricing to be much higher, so their stocks fell. No big surprise there. These shareholders were asleep at the switch for years and years while allowing their management to make terrible decisions and loot the companies for their personal gain. They allowed their money to be lost. I have no sympathy for them. Apparently you don’t either.
The stimulus plan may not work, but they had to do something. As you probably know, there are two schools of thought among economists for dealing with a severe recession; fiscal stimulus and an increase in the money supply. They’ve increased the money supply and it hasn’t worked. At least not yet. They could continue to wait, but that had huge risks. Spending a bunch of money on everybody’s favorite projects combined with enough tax cuts to get the three GOP votes in the Senate was the political solution that could be passed, so Obama went for it.
If you don’t think that our system of healthcare is broken, then you won’t want to fix it. But, the US government is currently spending more per capita on healthcare than any other country, and we still aren’t covering our citizens. That’s a big problem for me. US businesses that offer healthcare are at a competitive disadvantage to those of nations who have a healthcare system that covers all its citizens. That’s a big problem, too.
Posted by: Anonymous | March 16, 2009 at 10:36 AM
We need to stop trying to solve economic issues using political solutions. This thing is now a “political” juggernaut and I fear we may not be able to pull it back. Where’s the real “economic” plan? Where’s the faith in capitalism?! Fear as a political tool to solve a economic crisis? Where is the leadership…and I don’t care who you voted for!
How is it possible that free market capitalism is now the enemy of prosperity? Bailouts for failing industries that refuse to change? What? When did “pain” lose its value proposition? Moral hazard? What happened to the law of equitable exchange? Why do we insist on a pain free society?
The stimulus plan is a form of “economic self-medication” and not a cure for the sickness.
“No pain no gain” used to be a “uniquely” American battle cry. There is blame and shame enough to go around, however, our current approach is pathetic.
This is madness!
Posted by: Anonymous | March 16, 2009 at 10:39 AM