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Government Should Listen To These Wealth Managers

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A good deal of Mitt Romney’s appeal as a Presidential candidate is based on his experience as a private equity fund manager – despite the “vulture capitalist” moniker, favored by some of his critics.  Many voters believe that America needs someone with more “business sense” in the White House.  Listening to Mitt Romney would lead one to believe that America’s economic and unemployment problems will not be solved until “government gets out of the way”, allowing those sanctified “job creators” to bring salvation to the unemployed masses.  Those who complained about how the system has been rigged against the American middle class during the past few decades have found themselves accused of waging “class warfare”.  We are supposed to believe that Romney speaks on behalf of “business” when he lashes out against “troublesome” government regulations which hurt the corporate bottom line and therefore – all of America.

Nevertheless, the real world happens to be the home of many wealth managers – entrusted with enormous amounts of money by a good number of rich people and institutional investors – who envision quite a different role of government than the mere nuisance described by Romney and like-minded individuals.  If only our elected officials – and more of the voting public – would pay close attention to the sage advice offered by these wealth managers, we might be able to solve our nation’s economic and unemployment problems.

Last summer, bond guru Bill Gross of PIMCO  lamented the Obama administration’s obliviousness to the need for government involvement in short-term job creation:

Additionally and immediately, however, government must take a leading role in job creation.  Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed.  The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper.  That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities.  Our labor force is too expensive and poorly educated for today’s marketplace.

*   *   *

In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is.  Government must step up to the plate, as it should have in early 2009.

In my last posting, I discussed a February 2 Washington Post commentary by Mohamed El-Erian (co-CEO of PIMCO).  El-Erian emphasized that – despite the slight progress achieved in reducing unemployment – the situation remains at a crisis level, demanding immediate efforts toward resolution:

Have no doubt, this is a complex, multiyear effort that involves several government agencies acting in a delicate, coordinated effort.  It will not happen unless our political leaders come together to address what constitutes America’s biggest national challenge. And sustained implementation will not be possible nor effective without much clearer personal accountability.

One would think that, given all this, it has become more than paramount for Washington to elevate – not just in rhetoric but, critically, through sustained actions – the urgency of today’s unemployment crisis to the same level that it placed the financial crisis three years ago.  But watching the actions in the nation’s capital, I and many others are worried that our politicians will wait at least until the November elections before dealing more seriously with the unemployment crisis.

On October 31, I focused on the propaganda war waged against the Occupy Wall Street movement, concluding the piece with my expectation that Jeremy Grantham’s upcoming third quarter newsletter would provide some sorely-needed, astute commentary on the situation.  Jeremy Grantham, rated by Bloomberg BusinessWeek as one of the Fifty Most Influential Money Managers, released an abbreviated edition of that newsletter one month later than usual, due to a busy schedule.  In addition to expressing some supportive comments about the OWS movement, Grantham noted that he would provide a special supplement, based specifically on that subject.  Finally, on February 5, Mr. Grantham made good on his promise with an opinion piece in the Financial Times entitled, “People now see it as a system for the rich only”:

For the time being, in the US our corporate and governmental system backed surprisingly by the Supreme Court has become a plutocracy, designed to prolong, protect and intensify the wealth and influence of those who already have the wealth and influence.  What the Occupy movement indicates is that a growing number of people have begun to recognise this in spite of the efficiency of capital’s propaganda machines.  Forty years of no pay increase in the US after inflation for the average hour worked should, after all, have that effect.  The propaganda is good but not that good.

*   *   *

In 50 years economic mobility in the US has gone from the best to one of the worst.  The benefits of the past 40 years of quite normal productivity have been abnormally divided between the very rich (and corporations) and the workers.

Indeed “divide” is not the right word, for, remarkably, the workers received no benefit at all, while the top 0.1 per cent has increased its share nearly fourfold in 35 years to a record equal to 1929 and the gilded age.

But the best propaganda of all is that the richest 400 people now have assets equal to the poorest 140m.  If that doesn’t disturb you, you have a wallet for a heart.  The Occupiers’ theme should be simple:  “More sensible assistance for the working poor, more taxes for the rich.”

I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  Back in November of 2010, economist John Hussman of the Hussman Funds discussed the consequences of the administration’s failure to do what was necessary:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The plutocratic tools in control of our government would never allow the stockholders and bondholders of those “too-big-to-fail” banks to suffer losses as do normal people after making bad investments.  It’s hard to imagine that Mitt Romney would take a tougher stance against those zombie banks than what we have seen from the Obama administration.

Our government officials – from across the political spectrum – would be wise to follow the advice offered by these fund managers.  A political hack whose livelihood is based entirely on passive income has little to offer in the way of “business sense” when compared to a handful of fund managers, entrusted to use their business and financial acumen to preserve so many billions of dollars.  Who speaks for business?  It should be those business leaders who demonstrate concern for the welfare of all human beings in America.


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Barack Oblivious

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As I’ve been discussing here for quite a while, commentators from across the political spectrum have been busy criticizing the job performance of President Obama.  The mood of most critics seems to have progressed from disappointment to shock.  The situation eventually reached the point where, regardless of what one thought about the job Obama was doing – at least the President could provide us with a good speech.  That changed on Monday, August 8 – when Obama delivered his infamous “debt downgrade” speech – in the wake of the controversial decision by Standard and Poor’s to lower America’s credit rating from AAA to AA+.  This reaction from Joe Nocera of The New York Times was among the more restrained:

When did President Obama become such a lousy speech-maker?  His remarks on Monday afternoon, aimed at calming the markets, were flat and uninspired — as they have consistently been throughout the debt ceiling crisis.  “No matter what some agency may say,” he said, ”we’ve always been and always will be a triple-A country.”  Is that really the best he could do?  The markets, realizing he had little or nothing to offer, continued their swoon.  What is particularly frustrating is that the president seems to have so little to say on the subject of job creation, which should be his most pressing concern.

Actually, President Obama should have been concerned about job creation back in January of 2009.  For some reason, this President had been pushing ahead with his own agenda, while oblivious to the concerns of America’s middle class.  His focus on what eventually became an enfeebled healthcare bill caused him to ignore this country’s most serious problem:  unemployment.  Our economy is 70% consumer-driven.  Because the twenty-five million Americans who lost their jobs since the inception of the financial crisis have remained unemployed — goods aren’t being sold.  This hurts manufacturers, retailers and shipping companies.  With twenty-five million Americans persistently unemployed, the tax base is diminished – meaning that there is less money available to pay down America’s debt.  The people Barry Ritholtz calls the “deficit chicken hawks” (politicians who oppose any government spending programs which don’t benefit their own constituents) refuse to allow the federal government to get involved in short-term “job creation”.  This “savings” depletes taxable revenue and increases government debt.  President Obama — the master debater from Harvard – has refused to challenge the “deficit chicken hawks” to debate the need for any sort of short-term jobs program.

Bond guru Bill Gross of PIMCO recently lamented this administration’s obliviousness to the need for government involvement in short-term job creation:

Additionally and immediately, however, government must take a leading role in job creation.  Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed.  The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper.  That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities.  Our labor force is too expensive and poorly educated for today’s marketplace.

*   *   *

In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is.  Government must step up to the plate, as it should have in early 2009.

Back in July of 2009 – five months after the economic stimulus bill was passed – I pointed out how many prominent economists – including at least one of Obama’s closest advisors, had been emphasizing that the stimulus was inadequate and that we could eventually face a double-dip recession:

A July 7 report by Shamim Adam for Bloomberg News quoted Laura Tyson, an economic advisor to President Obama, as stating that last February’s $787 billion economic stimulus package was “a bit too small”.  Ms. Tyson gave this explanation:

“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum.  “We probably have already 2.5 million more job losses than anticipated.”

Economist Brad DeLong recently provided us with a little background on the thinking that had been taking place within the President’s inner circle during 2009:

In the late spring of 2009, Barack Obama had five economic policy principals: Tim Geithner, who thought Obama had done enough to boost demand and needed to turn to long-run deficit reduction; Ben Bernanke, who thought that the Fed had done enough to boost demand and that the administration needed to turn to deficit reduction; Peter Orszag, who thought the administration needed to turn to deficit reduction immediately and could also use that process to pass (small) further stimulus; Larry Summers, who thought that long-run deficit reduction could wait until the recovery was well-established and that the administration needed to push for more demand stimulus; and Christina Romer, who thought that long-run deficit reduction should wait until the recovery was well-established and that the administration needed to push for much more demand stimulus.

Now Romer, Summers, and Orszag are gone.  Their successors – Goolsbee, Sperling, and Lew – are extraordinary capable civil servants but are not nearly as loud policy voices and lack the substantive issue knowledge of their predecessors.  The two who are left, Geithner and Bernanke, are the two who did not see the world as it was in mid-2009.  And they do not seem to have recalibrated their beliefs about how the world works – they still think that they were right in mid-2009, or should have been right, or something.

I fear that they still do not see the situation as it really is.

And I do not see anyone in the American government serving as a counterbalance.

Meanwhile, the dreaded “double-dip” recession is nearly at hand.  Professor DeLong recently posted a chart on his blog, depicting daily Treasury real yield curve rates under the heading, “Treasury Real Interest Rates Now Negative Out to Ten Years…”  He added this comment:

If this isn’t a market prediction of a double-dip and a lost decade (or more), I don’t know what would be.  At least Hoover was undertaking interventions in financial markets–and not just blathering about how cutting spending was the way to call the Confidence Fairy…

President Obama has been oblivious to our nation’s true economic predicament since 2009.  Even if there were any Hope that his attentiveness to this matter might Change – at this point, it’s probably too late.


 

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