A Holiday Gift Idea, Worth Sharing

The prevailing mood seems to reflect that the end of the world, as we have known it, is near. Wherever I turn, I hear people groaning:

Europe is headed for bankruptcy;

China has a new leader coming and is stepping on its brakes;

the U.S. is in a death spiral of gridlock;

and the global economy is doomed to decades of stagnation!
There is, of course, some truth in all those observations and the sad overall conclusion that follows is both difficult to swallow and to discredit. However, if we in America seize the opportunity that is upon us, we can turn coming events to our advantage and actually emerge ahead in the global economic game in the relatively near future. As you will see, there is another side to each of those points and the overall conclusion.

Europe has been skating on the thin ice that has kept Greece afloat for far too long. The core of that problem was that even though the Eurozone created a common currency and a monetary union, they deliberately delayed creating a fiscal union with a common euro-wide budget (as we have in the United States) because they simply could not have agreed on that at the time Euroland was created about 15 years ago. Consequently, Greece went completely uncontrolled fiscally and fell deeper and deeper into a hole by borrowing to cover their deficits from unthinking European banks for far too long. The strong European nations have been jockeying for most of this year to find a solution, which will be overall expensive, and fall heavily on the richer countries. They are slowly finding a solution; the failure to do so likely would be far more expensive to everyone. Though it is impossible to accurately predict timing and outcomes, it really is at least a 70/30 bet that Europe will get its act together in 2012.

China is inscrutable in many ways. The facts that are clear are: China will not kill the goose that lays its golden eggs, which is largely the United States of consumers; China will give ground slowly on the revaluation of its currency versus the dollar, but it will continue to move in the direction of loosening its controls; China will be careful to avoid excessive economic and financial overheating, which could lead to bubbles and all the adverse consequences that they have seen follow in the advanced market economies; and lastly China is engaged in a generation change of national leadership, at the top, and as in previous changes in the past, they deliberately slowed growth to maintain political stability. China is maturing in modern socioeconomic terms and will continue to be a vitally significant leg under the world economy.

The United States, in a largely different way from Europe, but with some common elements, has been struggling with the political challenges of reining in its fiscal deficits for much of the past year. The pressure has come entirely from within the U.S. caused by self-imposed debt limits and political disputes about how to reduce deficits. The incontrovertible evidence of the pressure coming from within is that the dollar and U.S. bonds have continued throughout to have strong demand from abroad, indicating that the United States has some reasonable period of time ahead to work out a solution to its deficit problems, because financial markets are well known to anticipate events for at least two years ahead.

I do not suggest for even a second that we as a nation can now suddenly breathe a sigh of relief and go back to our profligate ways. Basically we have 12 months to do something substantial and real. By good luck, that 12-month period includes a presidential election which will amount to a national referendum on competing plans for dealing with the deficit issues. Also by good luck, the famous Bush tax cuts of 2002 expire on December 31, 2012. By themselves, the expiration of those cuts would contribute to well over $3 trillion in deficit reduction over the following decade. President Obama will be president, regardless of the outcome of the 2012 election, when those tax cuts are due to expire. (His first term expires on January 20 2013 and until then he has all the powers of the presidency, including vetoes, even if he fails to gain a second term.)

If and when those tax cuts expire, the political burden of reestablishing those cuts, or some other new tax plan, is significantly different from the political calculus of simply letting them expire, which requires no action unless a veto-proof majority in both houses of Congress has previously passed an extension or new tax plan before January 20, 2013, which, regardless of the election, is almost impossible. That fact alone gives the president, primarily because of his veto power, and the Democrats in Congress a powerful negotiating tool in reaching a compromise deficit plan before that drop dead date occurs.

Similarly, the sequester plans to cut defense and social benefits, currently in place to begin on January 1, 2013, also bring strong pressure to bear on both Democrats and Republicans to resolve their differences before the end of 2012 and perhaps even before the presidential election, depending on what the polls suggest as the year proceeds.

What does all that political speculation reveal? The answer is that unless the whole nation has put their heads in the sand or gone crazy, (yes, a not universally discounted possibility) before the end of 2012, there should be a definitive plan to seriously address our deficit issues. And, there is something like a 90/10 chance that the currency and bond markets will remain positive about the outlook for the U.S. economy.

All of the above can be seen to add up to a new vision of the future by the end of 2012. Of course, much will depend upon the leadership throughout the world. Mrs. Merkel in Germany has been showing real strength of character, vision and confidence. Though not too much is known about the new Chinese leaders, early signs are promising. The United States may be the biggest question, but big challenges often bring out the very best in people and Obama, and whomever the Republicans come up with, will surely be called on to stretch their leadership skills to find the right policies as well as sell them to the American public.

Europe should be beginning to emerge by then from its travails with a new fiscal union creating new discipline in conjunction with the European Central Bank’s support of the Euro. The United States should have the bulk of its deficit problems dealt with and the beginnings of a real recovery from the 2008 recession in sight. And China will have a new leader who should be finding his accelerator.

Overall, if the above assessments are anywhere near correct, there should be some clearer sailing ahead and doomsday thinking will have to wait again for another confused period to regain its adherents.

March on, mes amis!


Arrogance of Self-Appointed Judges of U.S. Credit

First, S&P and Moody have made hash out of their duty to be independent and assess the worthiness of bucketsful of real estate-related securities in the first decade of this century. Now on the rebound they are trying to regain their balance and reputations by heroically assessing and talking about their intentions to DOWNGRADE the AAA rating of the credit of the United States of America. I have seen a lot chutzpah in my 80 years. This may take the cake!

While it is true that it may seem late to be criticizing them for downgrading, since they have been holding a AAA rating for decades, it now seems clear that they should never have been rating U.S. government credit because whenever they changed their mind the horrible situation that now prevails was inevitable and should have been anticipated.

Their gall in sitting in judgment appalls me because, while the first amendment obviously applies, there is one major exception to the first amendment which is that “one cannot cry fire in a crowded theatre.” This bit of theatre coming out of Washington (and it is real political theatre with all its foibles) is crowded beyond debate. They are piling on in ugly fashion and making a bad situation worse.

And beyond the bad taste and judgment they are exhibiting, they are probably (or should be) violating some National Security law which prohibits people from doing or saying treasonous things which could be harmful to the national interest. And, even if they are and/or turn out to be right, their involvement is likely to have a self-fulfilling effect on the outcome. Therefore they have a serious conflict of interest (brought about by their motives at this time) which should be immediately and thoroughly reviewed in the national interest.

And, even if they are right, (which they very well may be), they are brutally and blatantly entering the political arena and trying to affect the political process. While I agree with almost everything they have said, and I normally would metaphorically kill to protect their right to say whatever they think, this case is so special and different I think their whole involvement in the sovereign rating of the U.S. should be reconsidered.

Moreover, what they are doing is not necessary. The bond markets do not need their views to make assessments of the situation. The markets by themselves are the best indicator of what everyone needs and wants to know. Rating agencies exist to tell investors what they cannot easily learn on their own. Our domestic bond and equity markets and the global market for the dollar, are open and transparent and are better judges of the sovereign risk of the United States than traditional commercial credit analysts. At best or worst, rating agency views are most likely misleading icing on the cake.

Ironically there is one plus to their mistake: it should put increased pressure into the political system to fix the problems. Still, it seems inappropriate for such a group of incompetents to be this deeply and importantly involved in such an important political problem — even if they are, in fact, correct!

There is another related problem with PIMCO, probably the largest owner/manager of fixed income securities including vast quantities of U.S. treasuries of various denominations and duration. Pimco has been in recent months making very clear their negative view on U.S. credit and they claim they have sold all their U.S. treasuries. NOW they are making loud pronouncements AGAINST the credit standing of the U.S. contributing to further weakness in those markets. Don’t they have a rather serious conflict of interest? It smacks of promoting a run on a bank to benefit from the fall of the bank shares to cover a short position. It may be one thing to attack a bank but perhaps there is or should be a national security issue in promoting a run on the credit of the U.S.  If a foreign government were doing such a thing, there surely would be a big stink!

These are unusual issues that may be a case of first impression, because this may be the first situation in modern times in which these kinds of facts have occurred and come together. At a minimum it would be a good idea to air widely these issues now and start a discussion.

An Imagined Speech, Yearned for by Many

Folks, people keep telling me I have lost the narrative and am not coming across in a way that explains the economy and what my administration is trying to do about it. I thought I was laying it out in a straightforward and simple way, but perhaps it requires more ‘personality’ to connect to you all who are caught up in the horrible drama we find ourselves in today. So listen up, here is a new type of message, with the same basic facts, to help you think about the America we are living in today.

Just about the same time that I secured the nomination for President in June 2008 things began to really turn sour in our financial system and economy. Two giant investment banking firms on Wall Street failed before the election in November, brought down by their greedy mistakes and excesses largely due to real estate finance and something related called derivatives, which are as risky as atom bombs.

As a result, also before the election, the nationwide banking system of the country began to freeze up and banks no longer trusted each other or even their best customers. That led to thousands of businesses all across the country letting employees go, as customers who could not borrow stopped buying and suppliers also stopped manufacturing and shipping. By January 20, when I actually became President, the unemployment rate had already risen to close to where it is today. The economy was clearly in free fall. So we had to move really fast to put a tourniquet on the bleeding country and find some way to prop up things and reverse what was about to become a slide into a full-fledged depression.

Why do I tell you this story now? Some people say I am simply trying to set up an excuse for why we are still struggling with these problems three years later. It is tempting to make that mistake, I know. The truth is, you really have to understand how we got to where we are now and what it will take to get us all out of this mess.

It is irrelevant that we got there on another President’s watch and I am not saying not to hold me responsible simply because I did not cause the problem. But, as I am responsible now, I am saying we have to be careful not to compound the kind of mistakes that got us in the mess in the first place with new mistakes now, which Republicans in the House and Senate, who are bent and determined to bring me down, are trying to force on us, even if they have to bring the whole economy, and you, down at the same time.

I would be willing to sacrifice a second term, if I believed that my successor could and would do the things necessary to get your bacon out of the fire. But, given what we all see they are proposing, it is clear to me, and most serious economists in the country, that what they are proposing now would almost surely push the whole country into a deeper and longer lasting hole. I cannot stand by passively and let that happen to you, my friends, and to our country.

Now, let’s go back to January 2009. We held taxes to the level they had been; we passed a $750 billion stimulus package (which, with hindsight, probably should have been bigger); we got the banks (too slowly, I agree) back into their business of lending; we saved General Motors and Chrysler and a few hundred thousand jobs; we took painfully slow first steps to get the real estate world back on its feet; and despite ferocious resistance, we started to reform Wall Street.

But we also know that the only way to get the country back to work is to regain peoples’ confidence. Trust and confidence is the bedrock of a free economy. We have to fear the fear of failure. I have always believed that when we get the country to regain our self-confidence in our future, while the path ahead will be thorny and arduous, it will take us to where we all want to be.

To get people back to work and into stores they need both confidence in the future and opportunity; that in turn leads to more goods and services and jobs. It truly is a virtuous circle. Only the private sector and its private employers can make that happen. Your government cannot simply order it. (If only we could, we would have.)

Our job is to create the conditions that enable and encourage private employers to add employees. While more infrastructure investment is essential, by itself it cannot be sufficient to get the economy fully back on track. And the last thing we need today is to expand public employment simply to replace lost private jobs.

We also knew that because it took a long time (like a couple of decades) to create the problem — 10 million excess homes and several million excess cars, just for starters — that it is inevitable that it must take a fair amount of time for those excesses to be worked off and recreate the kind of equilibrium that can become a new springboard to growth again.

Those are the hard, simple facts we faced in January 2009 and still face today to a greater degree than anyone would like. We did get the auto business back on track. But housing still is struggling with an excessively large overhang of foreclosed and abandoned homes.

Happily, many larger companies are doing a lot better today, but unhappily they are not the most important part of the economy that can create the most new jobs. Small businesses, taken as a whole, are by far the largest source of employment in America. Despite all the headwinds we have all faced there have been two-and-a-half million new private sector jobs created in the past two years, far short of what we need, but a reassuring start in the right direction. We are definitely on the right track but we have to stay the course and reinforce the policies and programs that my administration has begun.

That is where the current stalemate with Congress has become the big stumbling block. Yes, we need to work on our ever-growing national deficit, but if we try to do that too fast we are very likely to throw a body block to the economy and knock it back on its heels again. We must create more employment incentives as well as continue to protect the unemployed. The very rich can definitely afford somewhat higher taxes and we can seek some reductions in entitlement programs. But, if we make the kind of across the board budget cuts the Republicans propose, there is a very great risk they will throw the economy back into a recession or worse.

My program is not rocket science. It is straight forward, plain vanilla, sound economic good sense. And, I will continue to try to tell you the story in terms that you can relate to your personal everyday lives. Please do not think of me trying to save my job. That will take care of itself, if I can make you understand how I will save your job and help your neighbor regain his. Then, even though it may take longer than we all wish today, we can get back to the American dream of a bright future.

Economics Without Tears?!

It is certainly neither accidental nor irrelevant that economics was dubbed “the dismal science” by Thomas Carlyle in the 19th century. The term was intended then to be derogatory, as an inversion of the phrase “gay science” which meant “life enhancing knowledge.” In all events, ‘dismal’ implies ‘gloom and depression’ and, sadly, today economic discussion tends far too often to move in that direction. In fact, there remains a long-running debate about whether economics is a science at all.

That said, economics is now more real and important than ever, but simultaneously it also seems to be more opaque than ever.

When I was a child 75 years ago I had a book entitled Reading Without Tears, which I loved and still credit with my lifelong passion for reading. Perhaps a book today called Economics Without Tears might make the subject more accessible to more people. It certainly could not hurt.

A real problem is that far too few people in modern society have any real idea of what experts are talking about when they start talking about the all-important subject today, the economy, in ecospeak terms. And, that includes our brilliant, law professor, experienced President who mainly speaks soundly and wisely, but often not understandably, to the public about vital economics issues — issues which underlie the policies he proposes to fix the economy and create jobs. And, if they fail to understand his language, often they fail to understand his arguments and have a hard time supporting his ideas and goals.

Sometimes it verges on the embarrassing to test that hypothesis. For example, start with yourself: can you simply, quickly and easily explain the difference between ‘fiscal’ and ‘monetary’ policy? That question, put to a random but educated collection of acquaintances, yielded only one person out of about 20 who answered affirmatively, and his answer was only about 75 percent correct.

Actually, the answer is really pretty simple and straightforward:

  • fiscal policy is about taxes and government expenditure;
  • monetary policy is about interest rates and availability of money and the Federal Reserve Bank.

People who deal with the subject every day appear to assume that everyone understands and then rarely speak in anything other than ecospeak. There is nothing wrong with people who do not know ecospeak, but there is something the matter with our system that keeps them in the dark.

The big problem with the public’s (which surely includes most of the Congress) incomprehension of economic discussions is that, as a democratic society, we are doomed to have to live with economic policy making that requires actual public involvement and support, which today often springs out of serious distortions and misunderstandings of reality.

One way of thinking about economics is to think of it as beginning with a language that creates a kind of shorthand notational system for recording and describing societal/human behavior into terms that can be measured, tracked and influenced by various factors to create better conditions for all who are touched by economic activity, which is just about everybody.

As an illustration, for example, in the mid 20th century, one of that period’s first and great conglomerate builders and managers was a British-born accountant who was the driving force behind a then very successful giant company. He was known to devour endless pounds of heavy statistical reports on every nook and cranny of his businesses in order to put his operating executives on the rack to defend their quarterly reports.

Asked once what he learned from all that data, he said, “All that data sounds and looks to me the way music and ballet scores must appear to musicians and dancers. The difference is that I see trucks backing up to warehouses, machines churning out products, customers in stores and offices as well as endless everyday activities which add up to ordinary economic life. It is the real life stories of what is happening in my companies. That enables me to understand and manage such a wide range of businesses and their managers. The data is the shorthand of business and finance.”

What he said, of course, was absolutely right (and still is) but, surprisingly, relatively few people ever get to the point of recognizing what he meant. Most financial analysts and business experts become mesmerized by the data in and of itself and often draw vital conclusions from trend lines and even random discontinuities simply from the data by itself. For example, data spread sheets like Excel and others make data dance to assumptions as they are changed and projections are accordingly modified interactively for years ahead with an appearance of precision that too often deludes people into stupefying and mistaken beliefs.

It is very useful, when properly utilized, to size the effect of changing assumptions in economic and financial assumptions both public and private. But people have to be very careful to recognize the limitations of such exercises on decision making. That is where having an understanding of a common economic language becomes so important in both business and public policy circles.

The same manager above was often accused by his executives of being a tyrant. His retort was uniformly, “I m not a tyrant. The facts are the tyrant!” Again, he was absolutely right. The same thing applies today with the national economy. The politicians argue endlessly about the meaning of the facts, when the facts are blaring, like a neon sign, clear signals of danger: “FIX ME.” But, because there is so much noise in the system of ecospeak, the real messages get drowned out and misunderstood. And, nothing gets done, until it is often too late to head off serious problems.

There is consistent talk in business circles about the need to support better education in this country to be sure we have an educated workforce that can compete in the world economy. That is absolutely correct. And there is another equally crucial reason to support such education, and that is to ensure a population at large that is economically literate. Perhaps a start in that direction would be for the Department of Education to sponsor a competition to write an Economics Without Tears with several levels of sophistication to enhance nationwide understanding of enough economics to help push the political process to make more informed and intelligent choices for the country.

Are the Best Things in Life Still Free?

What people get free in life, they tend not to value highly, conversely, when people become invested in something — via money and/or effort — they generally attach real importance and value to it. That principle applies pretty equally to gorgeous sunsets as well as to more personal and tangible things.

It appears that this type of human behavior in modern society has been growing in recent decades and may be becoming something of a systemic problem that should be addressed.

A few examples will make this clearer. Then let’s see if there are any themes which could be deconstructed.

  • People with non-contributory health benefit plans rarely are fully familiar with those plans, yet they take for granted that they have full protection and are often shocked to discover serious gaps in their coverage. Also there are cases when a non-contributory plan is modified to require as little as a 10 percent contribution, beneficiaries frequently drop the whole plan because they either have/had other coverage or they simply do not see their benefit for their share of the cost. In the meanwhile their employer and others had been incurring real costs for no useful purpose. And, if they get sick with no coverage, hospitals care for them a lot of the time and charge those costs to the whole system and thus all the people who do pay have to pay more.
  • People who get free transportation fare cards or free passes to various places or events rarely connect those benefits to the fact that they received something of value. They take it for granted, as a matter of right, and often use the benefits casually and excessively.
  • People who get a tax break – like favorable capital gains treatment for carried interests in investment funds – not only take their tax benefit for granted, they frequently laboriously articulate justifications for why they deserve such a rich tax break because it raises more capital for American industry. In fact there is essentially no connection to such an outcome. The carried interest is basically a method for determining the size of a bonus which is simply additional normally taxable compensation, when a profit is earned by the real capital at risk.
  • There are people who believe they are “entitled” to Social Security and Medicare because they have rights flowing simply from having attained a certain age. Unless they (and/or their employer) paid Social Security taxes which were deducted from their pay checks during their working years they have no rights. Those for whom payments were made frequently receive several multiples of what was contributed for them and they tend to have no interest in the subject except to protect that amount. The recipients do expect what they get BUT they often do not value it as something they earned because it comes out of a mysterious system of what they think of as entitlements.
  • Over the air free television is struggling in competition with pay TV and cable channels, yet to date the best and most professional offerings still come from over the air. At the same time many people complain a lot about the infernal advertisements that also come over the air. People take for granted what they get for free and object to the form in which they get it. At the same time they pay for movies and other cable offerings which they obviously value. They seem to take for granted the free over the air simply because for a long time that’s all there was.
  • Within families it is common and traditional for parents and grandparents to provide shelter and sustenance to children and other relatives and frequently, when there are sufficient resources, they also supply educational and other opportunities to their young. In far too many cases when those benefits come as a matter of course and easily, they are taken for granted and often utilized irresponsibly. On the other hand when a young person has to invest her/himself in obtaining that education by working and obtaining scholarships they very frequently stay with the challenge longer and better and get far more out of it.
  • People who are employed really tend to value their jobs. Some of the same people, when they become unemployed and receive unemployment benefits, have a tendency to take those benefits for granted until they are about to run out, at which point panic sets in. When the checks keep coming without going to work, with notable exceptions, there are people who get lulled into believing it could go on forever. The unemployment insurance is not really free, but employees seem not to notice what they have paid or what the limitation on the real benefit is.

It is not easy to tease out an answer as to why these and other examples indicate an increase in today’s world of taking free for granted, yet valuing what is sought out more highly. One reason is that as the modern developed world’s societies have properly created greater paternalism, there has been a corresponding growth of expectation of basic human rights to entitlements, which in turn has attenuated the links between the source of those benefits and understanding by recipients of what it took to create those benefits. A century ago almost everyone who needed or wanted most of the types of benefits illustrated in the above examples had to seek out and invest themselves to obtain them. Therefore the balance between what people get in life seems to have shifted considerably from self-help to expectation of automatic free receipt. That tendency has been encouraged as time passes by a political process, which, to gain support, has encouraged people to seek more for themselves at the expense of others.

How can modern society get a better balance between self-help and entitlement? The first step would be to illuminate the fact that what may seem to be free really is not. Obviously there are costs associated with most of the free benefits that people expect and receive. Perhaps, as with all foods today in which the container is required to show the caloric content and nutritional analysis, it might be possible to put some form of labels on all free benefits to illuminate constantly to the recipients the real value of what they are getting. Perhaps there might be better ways to make the free available conditionally. For example, if it is a scholarship, and the recipient fails to complete the course, then he/she would end up owing something for having failed to take appropriate advantage of it.

A final observation is that while there are no obvious or simple ways to reverse this observed trend, the best starting point may be simply to be aware of the issue and to acknowledge that it needs to be thought about in the context of future consequences, the most important of which is that much of the hidden costs of free will, in due course, fall on our descendants.

Perhaps when “the best things in life are free” was more ascendant, fewer of life’s essentials were free and thus because of scarcity they were valued more then? An increase in necessary societal paternalism may have unwittingly and unintentionally weakened many people’s appreciation and determination that the free things in life need to be valued to be properly appreciated.

An Insider’s View of Occupy Wall Street

To begin, I should point out that what is called “Wall Street” is not a monolith. Rather, it is like a giant global octopus with a central purpose (raising money for productive investment) and many different tentacles that have a broad reach, not all of which went awry in the last decades. Thus, people have to be careful not to oversimplify the subject and risk killing the entire octopus rather than targeting only those tainted tentacles.

I have spent most of my 80 years on or around Wall Street. I believe I know it pretty well and have enjoyed many of its benefits. I also still believe that the genius of “Wall Street” was and remains an essential ingredient in making possible American dreams. Now, however, I find myself agreeing with what appears to be the basic idea underlying the “Occupation.”

I hear the Occupiers’ message to be:

What happened in the economy of the country in recent years does not seem right or fair. Wall Street got us — the whole U.S. — into this mess by plying the country with excess unaffordable housing, creating too much easy credit for everything we wanted to buy, and at the same time reaping vast profits trading among themselves. The resulting bubble inevitably burst. Yet, its dire consequences linger and now we, the rest of America, are continuing to pay a stiff price for Wall Street’s selfish mistakes. At the same time Wall Street appears to have pretty much gotten off scot-free and has gone back to minting fortunes again, at our expense.

Broadly viewed, that message seems to be very close to the truth. And, it is hard and perhaps unwise to argue, or even quibble with, the relatively few points that may be overstated or exaggerated by some of the Occupiers.

Many people say correctly that they — the occupiers — have not sufficiently specified either their complaints or their wishes. Still, that does not diminish the powerful truths embedded in their overall basic message.

Frustration, a sense of helplessness and a feeling of abandonment are perfectly normal human reactions to the conditions which today embrace far too many Americans. While the Occupiers are still a relatively small number of people, they are clearly the leading edge of 15+ million Americans underemployed and unemployed, whose pains and foreclosures have been largely swept under the political rug.

Credit President Obama, Paul Volcker and the sponsors of the Dodd-Frank Wall Street Reform and Consumer Protection Act for setting out to rein in and correct much of the obvious Wall Street excesses, despite that they did it with kid gloves to avoid killing the whole octopus. But, remember also that Wall Street’s vastly well paid lobbyists quickly and powerfully thwarted too much of the original plan.

Now that the Occupiers have brought the issues front and center, what can and should be done, at least with respect to the Wall Street part of the overall larger economic problems?

  • Simply dissing the Occupiers as a rag tag lot of poor losers is not a productive idea. They are as real as rain.
  • Simply counting on bad weather to shut them down is wishful thinking because it is already clear they are striking a vibrantly resonant chord in many places.
  • Simply appearing to be broadly sympathetic, without seriously addressing basic issues, is likely to exacerbate their anguish, anger and behavior.

Wall Street needs to start by publicly presenting a credible group of leaders who loudly say, “We get it!” and pledge to start doing the things that they already know very well need to be changed. That list includes:

  1. Wall Street has to stop playing games with government about the reasons their special tax breaks (for example capital gains treatment on carried interests) enhance profits to allegedly raise more capital for America, when in all honesty they really are mainly to pay ever bigger bonuses from outsized profits in competition with everyone else in the business.
  2. People forget that Wall Street has poured ever larger amounts of money (simply as the economy grew) through the same pipes and made the relatively few people manning those pipes (traders and investment bankers) seem to themselves, at least, like geniuses who deserved ever more pay when really all that was happening was more money was passing the meters in their pipes. Their equivalent “unit” pay for most similar functions over the years increased by many multiples in relation to most other similar types of jobs, which deflected a lot of talent away from science, engineering and education. Modern computers made ordinary people seem much smarter (and apparently more valuable) than they really are.
  3. Rhetoric to the contrary, Wall Street was and is perfectly capable of creating sufficient investment capital for American industry at reasonable — in historical terms — levels of pay. It boggles imagination to believe that an investment banker will quit, if the pay for raising money goes down from $4 million to $2 million a year, if global ground rules uniformly change. It may be unpalatable, but is still a better deal than many alternatives, which (heaven forbid!) could lead them to being Occupiers too.
  4. Wall Street preached competition while it systematically undermined it. Elimination of the Glass-Steagall Act of 1933, which separated commercial banking from investment banking, was politically powered through in 1999 during the last big wave of prosperity. That led to eliminating many competing independent players on Wall Street, which in turn, enabled the remaining too few giant players to dominate, as well as obscure, many of their most profitable activities. This led directly to the bubble and other excesses, which ended in the collapse in 2008.
  5. Capital adequacy and proprietary trading have also become serious problems. Wall Street loves — lives on, in fact — leverage and therefore deplores being required to have more capital to protect its depositors, lenders and counterparties. They have turned somersaults to justify their capital adequacy and frequently have pulled blindfolds over regulators’ eyes. Proprietary trading became a very large part of their profits, even though that activity truly has little to do with their avowed purpose of providing capital to American business. They really should come clean on these issues and put into effect the sound and sensible rules that have been proposed by Volcker and others to put their houses in order.

The above five categories of issues obviously involve many detailed and complex matters that go way beyond the basic purpose of this note. However, by seriously addressing those topics in the context of a genuine “we get it” attitude, Wall Street could legitimately put itself on a path of reform which could become an important part of the larger goal of restoring confidence in the American economy.

That might lead the Occupiers to getting behind the other crucial issues like overall tax reform (including more taxes from the super rich) and getting broader consensus behind sufficient economic stimulation and putting more Americans back to work and back into the malls of America.

Frank A. Weil is the Chairman of Abacus & Associates, Inc., Investments; formerly Vice Chair and Chief Financial Officer of Paine Webber and General Partner, Loeb Rhoades & Co.

Answers to Questions Rarely Asked

One of President Obama’s (POTUS) clear frustrations today, as Drew Westen pointed out in his August 6th prominent New York Times article, is the difficulty in telling “stories” necessary to support his current and strategic goals, as FDR used radio fireside chats. There are even better media today that can lend themselves to powerful dissemination of the President’s message. YouTube and Facebook can be powerful vehicles for communicating his narrative.

People have many questions which they are reluctant to ask in town meetings for fear of looking foolish – questions that need to be raised and answered by POTUS himself to help everyone in the country better understand what he needs and wants to accomplish.

Currently, for example, extension of unemployment benefits – to help friends, neighbors, cousins and millions of others, who through no fault of their own got caught in the unemployment trap sprung on them by the near collapse of the banking system in 2007-8. “When we find folks swimming in a sea of trouble, it is the American way to throw them a life preserver. I am sure you agree it simply is not the American way to force them to just fend for themselves!”

Following is a scenario which is intended to illustrate several questions and answers, and there are, of course, many others, that could help the national dialogue.

There is merit in looking for the kind of metaphors that can be the funny bones to unlocking public understanding and acceptance. They could magnify and improve how POTUS reaches out and better connects to more Americans.

It was late Tuesday afternoon, one week after President Obama signed the legislation lifting the limit on US indebtedness, five days after S&P downgraded the rating of US bonds from AAA to AA+, four days after the stock market fell about 600 points on the Dow Jones Average and not long after the close of the New York Stock Exchange, when the Dow average had risen about 500 points.

Three old friends living in a small town on the outskirts of Cleveland gathered in a local joint for a beer, and to catch up on what was going in their lives. Andy sells ads for the local newspaper whose circulation is sinking like a stone; Barbara is a currently unemployed forewoman in a small manufacturing plant making parts for GM cars; Charley is an emergency room doctor in the local hospital working on an hourly basis. They got together occasionally for a drink, some conversation, and the town gossip.

Beers and pretzels in hand, they headed to an empty table. Andy said, “For Pete’s sake, has the world gone crazy?” Charley shot back, “It hasn’t just gone crazy; it has been crazy.” Barbara asked, “What is so crazy? It seems to me business as usual — only a little faster and more exaggerated. I just wish someone could explain this mess, without pointing fingers or covering their own . . . .” she trailed off.

At that point, a man sitting alone at the next table piped up, “You seem to be asking the right questions, but wouldn’t you rather have some decent answers?”

Andy said to their new friend, “Who the heck are you? And can you really shed some light on what we’re talking about?”

The new guy said, “My name is Dave. I’m a field reporter for CNN. At the moment I am on special assignment to find out what people are thinking about, what they are talking about, what they understand and what they do not understand, and what they would do about things.

“You’re just the sort of folks I’m looking for,” Dave added. “Would you guys be willing to talk to help me get at those questions? I also have a surprise participant available to respond to you via YouTube if you’re interested?”

“Whoa, that’s a mouthful of stuff!” said Charley the doc. “What in the world do you want our views for? You already heard us say that we don’t get it.”

Dave came right back with, “That’s just it – if people like you don’t get it, how can the political system ‘get it’? You’re the ones sending people to Washington and paying the bills. Without sensible input from citizens like you, elected officials can’t possibly do their jobs well. But it almost seems that some politicians are quite happy to keep their constituents in the dark and confused – you guys can really help yourselves and everyone by asking questions people rarely dare ask, for risk of sounding stupid.”

“Who is your mystery genius?” asked Barbara. Dave then said, “Well, you may not believe me, but it’s the President.” The group looked suspiciously at one another. “It’s true. President Obama is prepared to answer your questions directly on You Tube. He suggests that you start by listing several questions you don’t quite ‘get.’ He will then take a crack at answers which will be on YouTube and you all and others can put on Facebook so more people can hear the same answers. I suggest taking them one a time. That will help us avoid scrambling everything all together and creating more confusion.

Andy said, “Let’s start a list; here goes:

  1. What is trade protectionism and what can we do about it?
    2. What is the difference between fiscal and monetary policy?
    3. Isn’t the plea for time to restart the economy simply a lame excuse?
    4. How it is that stock and bond markets predict the future without a crystal ball?”

Then Barbara added,

5. “Why do deficits matter?
6. Why do taxes, up or down, make a difference to economic growth?”

Charley suggested,

  1. “Why does the size of government really matter?
    8. How does liquidity, or more money in the banking system, restore growth?”

“That’s a great list!” Dave said. “Now, Mr. President, would you take a crack at answers simple enough to be understandable and complete enough to be credible and useful?”

The President said, “That is a tall order but I will try. Let me whack at each question first and then perhaps we can talk about issues you may have.

  1. TRADE – I have long believed that the best solution to a trade problem is MORE trade not LESS trade – we tried less in the 1930s by keeping things out and it was a disaster – watch out. That may have been the biggest cause of the depression.
  2. FISCAL/MONETARY – Fiscal policy is taxes and government spending and monetary policy is the Fed’s domain of interest rates and availability of loans. They are very different and distinct and that must be remembered.
  3. TAKES TIME – have you ever tried to push a wet noodle? At best it is a slow delicate process. The economy has been swamped everywhere with unemployment and lack of confidence, so the noodle is wet and very hard to move around. If you do not believe me, play with a noodle.
  4. MARKET PREDICTIONS – There is an old saying that ‘markets never lie’ – all that means is that a market is an accurate measure of what A LOT of people are thinking at a given moment. BUT markets, like the people who make them work, are emotional and fickle and are susceptible to stampeding often in the wrong direction. HOWEVER, when you average the views of a lot of people over some reasonable period of time, you do usually get some idea of what may be coming because people are definitely trying to anticipate the future so they can buy low and sell higher.
  5. DEFICTS – There is an old wisdom that says if a person wants a fish you can choose whether to sell them a fish or teach them to fish. BUT if they borrow money to buy a lot of fish, sooner or later they will owe more than they can afford to pay. If you teach them to fish, they quickly become self-sufficient in fish. Deficits matter more to individuals than to whole economies of people. If you are simply lending to one person you worry about whether she will break a leg. If you are lending to a million people, not that many people will break their legs, so that loan, as a whole to the larger group, is a much less risky proposition. Deficits do not have to be a problem for nations that are rich and diverse like the US. We have to be careful not to be too simplistic about this particular question.
  6. TAXES – A simple answer is that less taxes for a lot of people can mean more consumption:-cars, clothes, houses, and so forth, that makes the economy grow. More taxes, of course, means less money to spend and/or invest therefore less growth. But it is not just up or down; it is fairness in distributing the overall burden of taxes. We have too many special arrangements that tend to favor the powerful and rich and which sap away public confidence in many ideas about changing, raising or lowering taxes.
  7. SIZE OF GOVERNMENT – This is not an easy question. One way to think about it is to imagine what it would feel like having an elephant in your living room instead of a cow – clearly the elephant takes up more room. BUT if you need to lift a grand piano it would be more help. But if all you needed was more to drink, the cow, of course, would be more help. So the question really is, ‘what do people really need?’ I think the needs today are more like trying to lift a piano –think of trying to lift 15 million people up and help them find work – milk alone probably will not do the trick.
  8. LIQUIDITY – Basically liquidity by itself can NOT do the job – it is a necessary but not sufficient condition. Think of it like swimming with or against the current – against the current (or less liquidity) is real tough – but when the current is pushing you along too it helps. Liquidity lubricates the economic system.”

Then the President said, “Ok folks, let’s hear your complaints and questions.”

Dave said, “Thanks Mr. President, your comments are now being posted on You Tube and we have no doubt that this will start a lot more useful, helpful discussion among a lot of people who are honestly interested in knowing enough to really contribute to the national conversation.”

Andy, Barbara and Charley said more or less in unison, “That is a great start on understanding more and better. We hope you will find a way to keep it up. The country needs it, whether people agree or not.”

Let’s hope that something along these lines happens to help get the country out of its present state of mind.


Believe it or not there is a town with that name deep in the lakes of Maine, off of what has been known as the Airline road since before airplanes became ubiquitous, which, despite its remoteness, is thriving in its own backwoods way. The biggest mystery about this wonderfully named town is not how and why it thrives BUT how it got and kept such an unusual name.

To understand, one first has to understand Maine dialect. When most down-east Maniacs say the words, “many bumps” it does sound quite like “meddy bemps.” Or perhaps local American Indians used words/sounds like this to describe the place. In any event maps of the northeastern counties of the State of Maine in the mid-19th century largely showed nothing but empty space with few exceptions. One was MeddyBemps on MeddyBemps Lake.

The shortest (but often longest) route between Bangor and Calais was, until recent years, one seriously rough unpaved road with many, many bumps. With typical Maine directness, commonsense and wry humor MeddyBemps became, and remains, an appropriate name, despite the fact that the road to get there for a long time was mainly paved with good intentions and still has lots of bumps. Very few people can remember or explain how the town came to have that unforgettable name but it has stuck proudly and tight.

So what does that little footnote to history have to do with life in the U.S. and the world today? Of course the answer is that we are still living through periods of many bumps of various types and will continue to for a long time to come. AND, it might be a good idea for all of us to adopt Maine’s temperament of directness, common sense and wry humor.

Today’s bumps are not just speed bumps — though such warnings would be a good idea — but they are serious, wrenching shifts in the tectonic plates of modern society brought on by great surges in growth and wealth and population. The inevitable road to make the adjustments that necessarily follow such surges will be long and bumpy.

We are coming off a period when housing prices were rising so fast and consistently that more people were buying and building to speculate than to habitate. They were using the easiest money in man’s memory, often with no equity, nothing down and scant evidence of capacity to pay, because they figured next year’s increase in home values would take them out at a nice profit. Evidently they had never played musical chairs as kids.

We are coming off a period when 17 million new cars a year were being sold in the U.S. Loans with no down payment and “easy” monthly obligations were tempting more and more people to trade up and often. Now 12 million cars a year is big news.

We are coming off a period when we were enjoying practically full employment. Pay was rising and dependable. Now we have 9+ percent unemployment and the needle is stuck.

We are coming off a period when the economic growth of the 1990s, following the dot com boom, brought increased tax revenues, and by 2000 we had balanced current budgets and our overall national debt was headed down. Now we are back to the biggest current and accumulated deficits ever.

We are coming off a period when our sense of national security dictated the need to engage in what have turned into two of the longest and costliest wars in all our history. Now we are stuck with gigantic defense budgets as far as the eye can see.

We are coming off a period when advances in modern medicine and way of life have extended life expectancy by as much as 20 years compared to the previous generation. But still 30 million Americans have no health insurance.

We are coming off a period when the cost of health care in the U.S. is growing like a cancer and will grow much faster than any possible economic growth essential to pay for it unless we take serious real steps to rein it in.

We are coming off a period when the discretionary portion of our national budget is under 20 percent. The non-discretionary balance of 80 percent is defense, entitlements (social security and health) and interest costs on our national debt, all of which defies any political knowhow or will to address. There is no real room to maneuver unless we tackle the non-discretionary balance of the budget as well.

We are coming off a period when almost all citizens have come to expect that they will have jobs and security from cradle to grave. Where has our residual sense of self reliance gone?

I’ll bet you would prefer not to hear a lot more about what we are “coming off.” Well, there are more than have been listed and they all are serious bumps in our road ahead.

The President is right that the only way to deal with all those bumps is to take them in stride in good humor and in a collective way agree somehow that the pain has to be shared rationally and fairly by all segments in our society.

It really should not be a surprise that the recent “compromise” makes almost no one happy. If it did clearly those people would have been just plain lucky and their luck is surely unlikely to hold.

MeddyBemps is still there and its citizens are still folks who see the world like it is — replete with bumps. They have learned over time that though they may be in the middle of nowhere, they still are part of a larger world. That world whose many bumps and problems, over which they have little or no control, can make their lives worse, no matter how hard they try by themselves to pave a smoother road. WE ALL owe it to all the MeddyBempers in the U.S. to try hard to get it right and not just score political points in DC debates. Better to risk an election than risk the future of our children.

A Prudent Method to Rebuild America

As the nation begins to emerge from what has been called a disastrous period of reckless endangerment, we are entering a new period in which reckless disengagement, as it relates to the crumbling infrastructure of our bridges, roads, and tunnels, may emerge as an even greater threat. At the same time, the burden of too much debt and staggering deficits raises the specter of a Grecian-style collapse with unthinkable consequences for government and its citizens alike. Together, these twin challenges portend a fate far worse than the seemingly endless malaise of the most recent bursting of an artificially maintained bubble. But that presents an almost impossible conundrum: too few resources and too much need. There may, however, be seeds of hope that can be mined from the causes of the mess we now confront.

One of the principal causes of the economic disaster of the last few years was an excessive use of cheap money to fuel a vast over-expansion of housing for millions of Americans. Under cover of the worthy social goal of extending home ownership to all Americans, that money was generated and deployed by an ingenious, but as it turns out, blind, greedy and occasionally corrupt financial system built on a longstanding and dependable public-private invention called Fannie Mae.

Fannie Mae was created by Congress some 70 years ago originally as a government agency and then in 1970 converted into a “Government Sponsored Entity” (GSE), to enable more Americans to buy their own homes. Like many inventions of government, it began as a sleepy intermediary designed to both lower the cost of borrowing and increase availability by clothing Fannie Mae with the strongest credit standing in the world, namely that of the US government. Guess what? It worked — incredibly well, in fact — until it developed a liquidity problem from which it recovered brilliantly and then fell into financially inexperienced hands of political managers in the early 1990’s, who manipulated its mission beyond anything its founders and designers had ever intended.

Fannie Mae and its offspring, including the copy cats that emerged in its wake, lowered lending standards to the point of reckless endangerment — homes could be had with virtually no money down, no documented ability of the buyers to pay, and with interest-only mortgages that disguised, and ultimately ignored, the true cost of ownership. Coupled with greed-driven goals to deliver more and more such obvious risks into the secondary mortgage market, this “foolish money” policy brought the bubble of the first decade of the new millennium to its horrifying conclusion.

But Fannie Mae didn’t start out as a disaster waiting to happen, and the things that made it great for decades offer something of a roadmap to navigating current challenges. Vast sums of private sector money were generated toward an acknowledged public good by the implicit imprimatur of the United States, and the perception of lower risk served to lower costs. Money flowed as intended into housing without utilizing the government balance sheet at all. (That is, until the system was badly abused and the bubble inevitably burst.) But, if proper and adequate safeguards had been maintained, the problems that collapsed the “house” (literally) of cards could/would never have happened and the U.S. Treasury should/would never have had to bail out Fannie Mae and its offspring, and various ancillary victims deemed “too big to fail.”

Let’s be clear: there can be no illusions that the history of Fannie Mae might be enough to keep political cats from getting onto a hot stove ever again. Nevertheless we should have learned from recent experience to be grownups enough to be able to manage better than cats how to deal with hot stoves. After all, as today’s challenges illuminate, we do still have to keep cooking!

Today, we face an unmet need as large — and perhaps much more dangerous — as that of the housing market in the mid-20th century: the collapsing infrastructure of our nation’s physical capital. It will require trillions of dollars over time to restore this infrastructure to a reasonable condition. Simultaneously, we are, as a nation, are struggling with solvency. There is simply no way government can, on its own, produce the money to fund those infrastructure needs. And we desperately need to create jobs to get millions of people back to work — but again, without actually spending government money.

We also have the excellent precedent in the collaboration between the public and private sectors that Fannie Mae once epitomized. Utilizing the best of that precedent, and protecting against the worst, is where the seeds of a solution lie to address today’s horrible conundrum.
The idea is really is quite simple in concept, though implementation will be in practice — both politically and operationally — neither simple nor easy.

To begin, Congress will need to create a new GSE entity modeled after the now infamous Fannie Mae. An InfraStructure Funding Corporation (ISFC) would have the power to borrow in private financial markets with a Federal mandate that would enable it to purchase obligations of and backed by various public and private “owners” of the tens of thousands of infrastructure projects that need to be built and rebuilt across the whole country. In theory, those “owners” could continue to go case by case directly to financial markets as they do today but as a practical matter that would be highly inefficient as well as extremely difficult and unlikely to succeed.

All those “owners” would have to be judged to be qualified to (1) properly manage and utilize the borrowed funds and (2) generate enough money from fees and tolls to pay all the interest and amortization repayment costs of the funds borrowed from the ISFC.

Many of those “owners” today are public entities that have no specific responsibility or even authority for infrastructure restoration and maintenance. Those entities, to become qualified borrowers from the ISFC, would have to face up to their need to generate income locally in some fashion.

That will require some adaptation by many communities to the reality that if they want a modern infrastructure they will have to pay for it one way or another. That fact will bring to bear an appropriate use of market forces which should cause communities to be carefully selective and not blindly go overboard. Technologies exist that make it possible relatively easily and inexpensively to cause users to pay for what they use. For example in central London today drivers either pay for a permit to allow them in or their license number is read by cameras and they are automatically charged if they enter prohibited areas. Communities will have to figure out how much they need to add to local taxes and/or how much to charge on a use type basis.

That may very well lead them to create various kinds of collaborative governance structures between public and private entities to create and maintain a balance between competing forces: on the one hand, a desire for continued free public services and, on the other, the reality that there is no such thing as “free parking” when your car is on a bridge that is beginning to crumble.

If all the moving parts in such a system are maintained in a proper way (granted, a very big IF, but isn’t that always the case?), billions, even trillions of dollars could be deployed over several decades to rebuild America, generating hundreds of thousands of jobs, and utilizing virtually no government funding. At the same time, we can reasonably hope that the balance of our national fiscal structure will work its way back to normality and millions of new jobs will have been created to fix and maintain the physical capital of America.

Happy days can again lie in our future after all!

A Beer Standard of Exchange

In 1950 a beer cost about the same (about 25 cents in U.S. dollars at the time) in Pounds Sterling, French Francs, German Marks, Japanese Yen and many other local currencies that hinged on those bigger countries. But for Americans traveling abroad at that time, the local cost converted back into US Dollars was about 10 cents. Wow! The good old days!

Since then a lot has changed in the world of currencies. The U.S. dollar is no longer the only reserve currency of significance. There is the Euro for most of Europe, the Yen for Japan and the Renminbi of China and the effect of different and fluctuating exchange rates on balances of trade, flows of capital and movements of tourists, etc. is sometimes downright as amazing as a 25 cent beer for 10 cents.

Today the question from the point of view of an American tourist is no longer how strong or weak the dollar is but also how strong or weak the local currency is where that tourist is buying his beer. For example in Switzerland, which still uses the Swiss Franc, they say the Franc is too strong, not that the dollar is weak. But whichever way it is, beer can tell an average person what is really going on. Today in Switzerland a beer is 4 Francs, which the local people find perfectly reasonable. But when an American pays 4 Swiss Francs that beer costs him 6 U.S. dollars, which is pretty outrageous by American standards.

So what should that simple real fact mean to an average Swiss and American?

For the Swiss person it should mean that he should plan a trip to finally see New York, or to convert his retirement savings into American investments, or to order his children’s school clothing from Amazon.

For the American it should mean that he should take his next trip to the Grand Canyon, make sure his long-term investments are in American companies and have hand-me-downs make do for his growing children. And, if the American is adventurous, he may want take a suitcase full of popular toys, mini cameras, etc., when he goes to Europe and become a sometime peddler to help pay for his trip.

But, should the American who may be financially clever sell Swiss Francs short since he is already long dollars in his savings account? The short simple answer is NO.

Just because the U.S. dollar may be cheap and the Swiss Franc expensive no longer means it will quickly and easily readjust to what is called purchasing power parity. The world of exchange rates has gotten much too complicated to make that bet except for the most sophisticated financiers. The dollar may have to become a lot cheaper before it gets stronger and the Swiss Franc may get even stronger because of problems in Greece and with the Euro.

Still, it may help average Americans plan their short-term daily lives if they can see a schedule in their local news giving the price of a beer in many different places priced in dollars at that moment. The currently published exchange rate schedules may be useful to some, but a beer standard would be helpful to everyone.