Godfather III

Remember the scene that has Al Pacino lamenting "whenever I try to get out, I get pulled back in." (I paraphrase, but you will ge the idea) I fully intended to move on from the housing crisis, budget debate and banking crisis. However, I feel the need for one more "clarification." I know I have repeated myself. I tend to do that every day. But, I'll try and crystalize my thoughts into one final (for now) blog. I feel compealed to do this because events keep changing. Presumably, President Obama and his administration are trying to raise the confidence levels of Americans, but every time he speaks, the stock market declines and so does consumer confidence. I would like to explore why, and propose a comprehensive plan to put our economy on a better road to recovery.

I will cover the housing crisis, the foreclosure crisis, the banking crisis, new regulations, and the budget issues such as health care and extended unemployment benefits.

First of all, let us all acknowledge, from the beginning, that President Obama inherited a mess; economically, internationally, politically, and in almost any other way you can think of. Let us also acknowledge that economically, there really is not much difference in how President Obama is approaching this situation and how Senator McCain or Senator Clinton would have handled it. There are some differences, but Mr. McCain supported the bank bailout last fall, and, by the end of the campaign, was ready to spend hundreds of billions, just like Mr. Obama is now. Senator Clinton was also in favor of spending hundreds of billions in relief, and health care reform. Some differences, but overall, the philosophy of spending our way out of the crisis was basically the same. That being said, here are my ideas for a change that has a better chance of working, in my opinion, than the plans being proposed currently.

Let me personally acknowledge, that, other than an insatiable appetite for economic news, and an interest in economics, in general, I really do not have anything that qualifies me to discuss this. I read a great deal, and try to keep an open mind. Finally I try and take a common sense approach to things. If something works, that is fine. If something will not work, we need to move on. All that said, let us proceed.

The banking crisis is still with us, and I have not changed my stance. All of the efforts to prop up banks have failed. More importantly, they have spent much needed money on failed policies, and this will limit our choices in the future. What is needed, and more importantly, what will bring confidence to the markets, is to let the banks who cannot go on without government help, fail. All of the doomsday predictions assume that no one will step in, as the markets plunge. That is where the money can be committed. Early in the crisis the Fed guaranteed money market funds as investors fled to Treasuries. While I felt that this was premature, if money is committed, it should be to something like that. Shore things up, very temporarily, as the markets sort things out. It may be too late for something like this, though. A return to an RTC type solution has never seriously been considered, at least in public, by Washington. If President Obama was to change his strategy so drastically, there might be a panic and even less confidence because of the seeming lack of direction. All in all, I am afraid we will just have to wait this one out, and hope for the best. Not what I want, but the political reality is that politicians often find it easier to throw money at a situation than lead us out of it. Remeber, you cannot simply implement a policy in a situation like this, without leadership. What this crisis needed, in my opinion, is a leader willing to allow the failed institutions to fail, and the successful ones to remain. This could have been achieved. It's probably too late for that now.

The mortgage continues, as well. To my dismay, although not to my surprise, a huge mortgage bill designed to stem foreclosures is on the way. While President Obama insists that irresponsible borrowers will not be helped by this bill, it will be hard to distinguish them from responsible borrowers. Besides, how would we define irresponsible? Is it only people who took so called "liars loans" that allowed them to simply state whatever salary they wanted to, or that they were told to by the mortgage broker? Or, should we include all of those folks who spent and spent, and then refinanced the debt. Living within ones means and preparing for the future took a back seat to big screen TVs and other luxuries most could obviously not afford. I have read that this credit was necessary to fuel the economic growthwe enjoyed, and that a return to spending is what is needed to pull us out of this funk. But, at what cost? If we would have spent less, we would still have enjoyed the highest standard of living in the world. Unsustainable spending is irresponsible. Do not let anyone get away with saying they ahd no idea times could get this bas. It is everyones responsibility to prepare themselves for any financial eventuality. If that means spending less and saving more, then the manufacturers and markets will adjust. Maybe the stock market would have only reached 8000, but, maybe it might still be climbing, slowly but steadily, still out pacing inflation and providing the wealth it wants to, only cannot because of current challenges. you want figures? Well, accroding to an article in last weeks WSJ since most of the loans Freddie Mac guaranteed, since mid-2004 were cashout refinances. At the peak of the refinancing boom Americans were pulling $300 billion in equity from their homes, each year. A home is a place to live, and should not be considered a piggy bank.

To prevent any of this from happening again, the Obama administration wants to increase regulation. I agree that this should be done. the 1980s and early 1990s saw us wrestle with the S & Ls. Now we have another real estate driven crisis. Somehow, this must all be prevented from happening again, although I am not sure traditional regulation is the best way. It seems that some in the lending business will always find a way to get around the rules. As we have seem, Congress and the President tend to go along, in the name of economic freedom or the right to won a home. So perhaps another approach. None of this would have happened if the credit rating agencies would ahve done their job properly. Instead, they caved into pressure and approved investment vehicles that they did not even understand. Anyone that chose to pay attention, though, recognized that no matter how you analyze it, an investment, whose underlying assets are subprime mortgages, is doomed to fail. We were repeatedly warned about subprime mortgages, yet, even Alan Greespan, a man who I still admire for how he guided the economy during his years at the helm, naively believed that investment bankers would act properly for the sake of the market. People act out of self interest. Usually they act responsibly. But we must always guard against those in power who will use their position to further their interests and deepen their pockets. Therefore, I propose that all future investments be put through tests similar to what a drug must go through before it is allowed on the market. It must be analyzed, tested on a small scale, long enough to generate proper data, and then a decision is made. If this means that investors have to wait, so be it. If certain mortages go away until they can be properly structured and priced, so be it. An FDA-type credit rating agency should be created, under the auspicies of the Federal Reserve, (or at least let it govern itself, like the Fed) to give it as much autonomy as possible, and reduce the pressure on it from politicians and investment folks, as well.

Next is the budget stimulus. For the most part, the budget consists of non-stimulus-type spending such as extending unemployment benefits and health care. Overall, I think that years of data show that we have developed a welfare-state in this country that gives very little incentive for anyone in it, to work properly. It might be argued that this type of spending is needed now to help people through tough times. I think, though, that we will find that we will just keep adding to these programs, as the recession gets worse, adding to our already over-whelming projected deficits. Overall, I would rather have seen all of this money go into road projects and other building projects to generate, at least temporarily, the jobs folks need, while the economy sorts itself out. This may take longer, but, the results would be better. In general, history has shown that government infrastructure programs often do not help economic growth that much. Japan's recent experiences can show us that. In fact, evidence shows that the New Deal of the Great Depression actually prolonged the economic woes. That being said, if I am given a choice, I'll take the building programs because, as we will find out, there is not end to the welfare programs.

Finally, there is health care for everyone. While this sounds good, it will be a disaster. I have yet to hear of an instance where this was tried and it did not lead to reduced standards of care. What tends to happen is the same thing that happens is taht people will go to the doctor for things they used to deal with by sleeping more, OTC meds, or good old common sense remedies. Costs do not decrease, in fact they increase. If we want to help get health care to more people, we should first reform the tort laws. I once had a lawyer defend the $180 million settlement against McDonalds years ago when a hot coffee spilled on a lady's lap. That mentality needs to be regulated, somehow with tort reform. In addition, we have to accept the fact that we may not be able to cure everything for everyone. Some health care goals may be out of our reach, economically. Let's start with reforms like these, and see how far we get. My guess is that these, coupled with other free market solutions and tax incentives will help more than guaranteed care for everyone.

My biggest concern is that we are not paying attention to consumer expectations and confidence. Not every government program is going to work. The one's I propose may have flaws. But, what about the next time? And there will be a next time. What then? My belief is that consumers will expect the government to bail them out once again, and when it does not, what will that do to confidence. Make no mistake, consumer confidence drives the economy. That is why I am adament about how we are handling this crisis now. Rather than dismantling a welfare system that only brings dependency, we are taking the easy road again.

That's all for now. I will return to this subject later. The next blogs will focus on schools. I consider approaching our nations education system as important as any of the above measures. One final word. If I could offer one piece of advice, it would be this. Stay informed, through sources that are as unbiased, as possible. I recommend the Wall Street Journal, Jim Lehrer's news hour weeknights on PBS, and the books Free to Choose by Milton and Rose Friedman and Basic Economics by Thomas Sowell, for starters. Take my advice, you will feel better when you stop listening to all the shouting and nonsense. Good luck.