Saturday, February 21, 2009

Fiddling with the economy while Rome burns

As Obama campaigns for his various economic recovery plans, he doesn't seem to realize that people have smelled leadership failure already and voted with their money; they're selling off everything related to the financial systems he's trying to preserve in the hard-to-dispute belief that he's going to bankrupt them in spite of anything else he might say or believe. It's as if all the man knows how to do is campaign and he and his team are unable to shift into real "here's the plan let's make it work" leadership. For all the leadership failures of the Bush team, the new order formed from the "anyone but Bush" camp seems unable to actually look forward and lead. By focusing on keeping people with unsustainable credit problems in their mortgages, he's effectively offering more painkillers to a patient that's in cardiac arrest from overdosing on them in the first place. Encouraging zombie home-ownership won't give us non-zombie banks.

Is it any wonder entrepreneurs and investors are worried about an Atlas Shrugged scenario and holding off on action and investment while the rules keep changing? I defy anyone to find one truly stimulative action in his plan, one action that communicates to someone ready to put time and money at risk that in some measurable way incentivizes the kind of entrepreneurial risk taking that powered us through the 80s and 90s after the last economic disaster brought on by government fiddling in the 70s.

True leaders look forward and enroll the country's collective imagination not on a vague concept of hope, but a concrete vision of the future. Kennedy had the space program. Reagan had the unabashed embrace of the virtues of capitalism that he shared with the world like a man on a mission (something we haven't truly seen since the Clinton years, despite the rhetoric). Yet Obama seems to want to define himself by what he's not going to be, not going to do. I'm not going to claim McCain would have done a better job at this point - his best days of leadership were clearly behind him and while I think he would have and should have been where W was, he blew his opportunities; his time has passed. But if we're never going to define what "Hope" really is, what's the point?

A true leader identifies the core problem and then looks for the fastest way to fix it. Once that's identified, the problems with that approach appear and mechanisms to address fairly the side-effects of the fast fix are considered. If reasonable mechanisms are available, then he rolls out the full plan. In this case, housing prices need to bottom to a level that attracts investment and the healthy kind of speculation--and the fastest way to get there will pile a lot of extra stress on the financial system in the short term. Those who can afford their payments can stay. Those who can't need to be able to go through a bankruptcy process (perhaps under another name) very quickly so they can buy again as soon as they're able. In the mean time, we need to allow banks and their equity and debt holders (who are generally citizens as well) to preserve their long-term interests while accelerating the short-term declines in housing values.

If we go straight to bankruptcy we risk unraveling the whole system, so the hardest part may be the conversion of equity and debt in failing institutions to equity in reconstituted institutions at a level proportional to the prior stakes they held. Forcing any one stakeholder to lose their share entirely for the greater good is a recipe for chasing private capital out of these institutions permanently so we must find an alternative at all costs lest we find the blood of the death of capitalism on our hands.

Is this a hard thing to do? Absolutely. But the alternatives are all much worse and until now it seems this belief among the political class that their actions are not jeopardizing capitalism (because their ends are well intentioned) won't be challenged until it's too late. So when folks like Rick Santelli on CNBC make an understandable rant about the mortgage plan that clearly hit a nerve, you get responses like this that paint a picture of a condescending and tone-deaf Obama administration claiming we are just don't understand their program because the ends justify their means. Bollocks. He's administering painkillers in a way that will arbitrarily create winners and losers, rewrite the rules midway through the game, and curtail any healthy economic speculation that creates jobs and entire industries to the sidelines while we figure out how to play the new game.

Like everyone else, I'll adjust my behavior to account for the new rules but in the mean time I'm going to be even more cautious about spending and new investment even while I consider extreme actions with my own obligations that might have been unthinkable when credit was so easy to get. The more likely the rules will change, the more comfortable the players get with pushing the envelope in ways that further stress the system. Instead of letting patience and time do their work, we add more perturbation until no stakeholder is left with hope. Eventually, desperation for stability in waters made more choppy by bad leadership enables the crowd to consider sacrifice the very essence of capitalism they used to hold sacred for the false hope of government mandated stability that has ended poorly in every society that has tried it.


  1. When the goal is to take money from people who have it, and distribute it to people who don't, there are no safe investments.

  2. The sad thing is, as bad as it will get over the coming four years, the electorate will learn NOTHING, and will vote for more tax-and-spend Democrats--if not outright socialists--in the future. An electorate incapable of critical thinking paves the way for a dictator.

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  4. "Yet Obama seems to want to define himself by what he's not going to be, not going to do."

    And therein lies the problem.

    It's what you do that defines who you are!
    Any talk of what he could be is BS until he tells us what he'll do!

  5. Capital goes were it is welcome and leaves quickly where it is not. I talk to people who voted for the new prez and even when they had to take a pay cut,less hours even layoffs they don't want to hear any bad news. It almost like zombie town here in NY. Markets will always tell the truth. What have we become?

  6. I feel like I'm in the back of a bus being driven by a 12 year old...through the Grand Canyon.

  7. Staying out of the market seems like the best alternative, at least while the future returns look so un-guessable.

    Personally, I'm using the cash I have left (and what comes in for the next few months) to pay down any debts I have - credit cards, mortgages, and the like. It's probably the best investment, since all my other assets are fast sinking.

  8. I think you're misreading Obama. It's not that he doesn't know his vision of the future, it's rather that his vision is radically different than one which we would recognize as typically American. He couldn't care less about the markets except as they impact his possibilities of getting his future vision enacted. He really does believe that America is unequal and unjust and that we need to spread the wealth. This false utopianism has now been the primary view in our universities for over a generation and this is where Obama has spent a good chunk of his life; and just look at his close associations: Rev. Wright, Bill Ayers, ACORN, the list goes on and on. You don't have long-term friendships with these types unless you agree at some level with their views.

    We have a leader who really does believe that spreading the wealth is more important than creating the wealth and so we are now testing Rand's theories. If his first month is any indication, we are facing a John Galt moment: when the socialists comes to bleed the capitalists, the wealth has already gone.

  9. Nero fiddled while Rome burned. Obama, Reid, and Pelosi went a step further, they took the opportunity to pilfer the treasury.

    For an explanation of why the Keynesian multiplier is generally negative in peacetime, see

  10. Once the gov't decides a contract (mortgage) isn't really a contract, where does that leave us? Why couldn't they void other contracts at will?

    Of course, there are two types of contract they will consider sacred and unbreakable:
    Labor contracts
    Overgenerous pensions/benefits to public workers. (more precisely, any contract that benefits the gov't and/or its employees)

    All private contracts will be suspect and subject to change "for the public good".

  11. JeanneB is spot on.

    A nation that does not honor contracts will see its capital flee.

    Would you invest in Venezuela under Chavez as he nationalizes productive businesses?

    Would you invest in Zimbabwe and its 231 million percent inflation?

    The most basic contract a nation has is its money. We use it to convert labor (capital) into a common tradable entity.

    Obama, Reid, Pelosi, Summers and Geithner are inflating our currency by Keynesian design. That robs our money of its value and meaning.

    Capital (a concept beyond money) will flee to a safe haven.

    We cannot trust our government to honor contracts. Banks are being required to void their contracts made with delinquent high risk borrowers. Car companies are being required to build cars they cannot sell.

    Ever rising taxes on every conceivable area of life take more than half of our production.

    Keep this up and Atlas will shrug. We will simply stop.

  12. JeanneB,

    SCOTUS decided back in the 1930s (Home Building & Loan vs. Blaisdell, 1934), despite very plain language to the contrary in the U.S. Constitution, that contracts weren't really contracts, as long as the government stated that the contracts could be ignored. Such precedents have led to terrible changes in U. S. law. In any case, the Big O can likely do what he wants, provided the rather compliant Congress votes for it.

    Unfortunately, I think Bruce [above] is correct: Obama is a die-hard socialist who will destroy the economy of the U.S. [not that his predecessor didn't it the task a go].