The Leaders Of Our Country Are Mostly Intelligent, Mostly Noble, And I Trust Them (Mostly)
February 04, 2009
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Or: How I learned to stop worrying and love the Fed
Hey Fools - the first half of this is a defensive rant, and the second half is an "objective" educational profile.
The subject of the rant is that many people in CAPS (and elsewhere) have been doing a lot of hating with regard to our leaders/institutions during this crisis, and I see a lot of this hating as undeserved and/or uneducated.
The main thrust of my rant is this: steady, predictable inflation (say, 1% to 4% per year) is in EVERYONE'S interest, including households, government, and especially businesses. Since the Fed recognizes this, it will do everything in its power to achieve steady, predictable inflation. While people may be trying to screw you over in the market, NO ONE is trying to screw you over with hyperinflation, deflation, sustained "big" inflation, or stagflation. That is why I'm not buying gold - I'm predicting steady, predictable inflation over the long-term. It'll take a lot of sound arguments and real-world evidence to convince me otherwise - so far, I mostly just see economic conspiracy theories. Correct me if I'm wrong, but just as quickly as the government is printing money, it can take it out of circulation and destroy it, when lending and other major variables are back to normal. I'm guessing that's precisely what will happen.
While it's true that Bernanke's "helicopter printing press" and 0% interest rates would normally be extraordinarily inflationary, we're in extraordinary times - monetary policy no longer has much traction, and we're in what I view as a normal business cycle recession (that's been pumped full of steroids from bad debt and financial sector woes). With boom comes bust, and with bull comes bear. Since deflation can turn into a vicious cycle (the incentive to buy keeps decaying), we need to first worry about getting out of deflation before we worry about minimizing inflation. Obama's stimulus aims to do just that: shock the aggregate demand back into high gear with fiscal spending, which should snap us out of deflation. Unfortunately, the fiscal spending will take a while to kick in. If Princess Leia were in our mess, she might say, "Help me, fiscal policy, you're my only hope...unless interest rates can somehow go negative." (You never knew Leia was an econ geek, but she is, and it's hot.)
If (and when) inflation does hit >10% again (see 1980), I'm guessing it'll be due to extremely high oil costs, an overheating economy, or both. If this happens, I'm very sure that the Fed will have the good sense to make us swallow a big old interest-rate increase pill, straight up Volcker-style.
Contractionary monetary policy WORKED under Volcker, and it could work again. In fact, monetary policy acts much more quickly and easily than fiscal policy, and is therefore a much more desirable way to control the economy. But don't take my word for it, play this dorky but educational economic game that lets you control monetary and fiscal policy. See how easy it is to adjust the money growth up or down and either crash or boom your economy in the short term? Of course, this game is just a simplification of real life, but I hope you get the point. If not, then just take a Money and Banking class at your local higher education facility.
Last, I wanted to say that it is certainly understandable that people are angry - the $#!% is hitting the fan, and accountability and justice demand to be realized. I also understand that distrust of government, politicians, lawyers, government spending, taxes, and the boogeyman are healthy (to a degree), and about as American as apple pie (boston tea party, anyone?). However, I think it behooves us to be level-headed in our critiques and skepticism towards our leaders, especially now that the new Obama administration is underway, and is doing a lot of things right.
Also, one last rant on education, expertise, and credentials: don't knock it unless you've tried it, and know it like the back of your hand. I have a BA in economics, and have studied a decent amount with people with MAs and PhDs that really do know what they're talking about (I must say here that my time in college as Econ major and Political Science minor did color my views on our nation's political and economic institutions in a mostly positive way - go capitalism and democracy! (which are really the least bad of all the imperfect systems)). When Greg Mankiw presents an alternative view to Paul Krugman, I listen, because they both went to similar schools and talk about similar things in smart ways. When you (that is, any miscellaneous CAPS blogger) sling mud at public figures, economists, or their ideas and don't first establish some credibility or cite sources, I do not listen. Think of this as the premium that you might give to a 100.00 player vs. the natural skepticism with which you might regard a >20 player - one clearly knows what he's doing, while the other has yet to prove himself. (This is NOT to say, however, that all lowly rated players do not have good arguments or good ideas for investment.)
OK, the ranting part is over. For the second half of this post I wanted to maximize the educational content, and see if I could learn a thing or two and share with the community. So, I decided to profile our leaders, analyze who they are, what they've done, and what kind of trust I have in them. I decided to mostly focus on those that may have the biggest impact on the financial world, and/or those that have been hated-on the most. So, without further ado...
Changer of Things, Commander in Chief, Taxer of the rich, giver to the poor: Barack Obama
Preceded by much-less-competent: George "W" Bush
Why I (mostly) trust him: I'm a democrat. I feel like he's actually someone I can relate to - relatively young, academic but involved with the real world, cosmopolitan in background/belief, etc. I'm reading his Dreams From My Father, and enjoying it quite a bit. The man has a gift with words. He's also really intelligent, kind, and funny (which is a welcome change of pace):
He's also a dancer, which makes him at least 5% more trustable in my eyes:
I believe Obama is very forward-thinking, and that his time in office will still be paying dividends years later, in the form of better education/science/tech, better energy, more tolerance, and more acceptance of progressive ideas.
Things that make me go "hmm": He's proved he's smart, savvy, and diplomatic. How able is he to be a hard-ass with regards to security, if and when it becomes necessary? I'm guessing we'll see soon. Also, while I approve of his recent $500,000 income cap on bailed-out execs, it would be economically disconcerting to see this kind of thing in almost any other context. If he does somehow start to massively interfere with the private economy in ways that I view as unfavorable (which I view as unlikely), then I'll act against it.
Secretary of bailouts, stimuli, and phat $$$$: Timothy Geithner
Preceded by much-less-competent: Henry "Hank" Paulson
Why I (mostly) trust him: He grew up mostly outside of the US. Having lived a decent amount of time in other countries myself, this is big in my book - it provide invaluable perspective on the functioning of the USA (it's hard to be objective about ANY relationship when you're in the middle of it).
Also, he recently had the balls to call out China on their exchange rate manipulations, whereas Bush admin brought it up from time to time, but never had the cajones to push the issue. It now appears that Geithner and China are talking and not trade warring.
Things that make me go "hmm": Tax blundering - was it evasion, or just plain ineptitude? I'm guessing evasion, but it is good to hear that he's been forced to make things right, and has already apologized.
Interest rate d00d: Benjamin Bernanke
Preceded by much-less-competent: Alan "Maestro" Greenspan (who, to be fair, was revered until recently, and has already accepted his part in the mess)
Why I (mostly) trust him: He's smart and has studied and thought about deflation and the Great Depression for years.
Things that make me go "hmm": Lack of media savviness / leadership during this difficult time. Step up and reassure us, Ben! You're doing all that you know to be right and best for your country, so just let that come through. Long-term, I think interest rates need to be higher than they have been (just as gov't budget needs to be balanced), but in the short-term, that would spell Alstry levels of unemployment (30%+), and crazy amounts of crime. So yeah, trust your gut.
Head Econ Council to Obama, Possible next Interest rate d00d: Lawrence "Larry" Summers
Preceded by nebulous: Keith Hennessey
Why I (mostly) trust him: Fairly prominent conservative economist, whose hero was Milton Friedman. While I like a lot of these strains in theory, in practice I think liberals/Keynesians are closer to what's needed. While his personality and beliefs probably clash heavily with mine, I'm glad Obama has advisors from the right as well as the left.
Things that make me go "hmm": His Wikipedia article creeped me out in a variety of places, including his reliance on tax cuts, and the part where he justifies the lack women in technical fields.
SEC Chairman: Mary Schapiro
Preceded by possibly-less-competent: Christopher Cox
Why I (mostly) trust her: She's Obama's pick, and was unanimously supported by the Senate.
From the SEC website: "The SEC's foundation was laid in an era that was ripe for reform. Before the Great Crash of 1929, there was little support for federal regulation of the securities markets. This was particularly true during the post-World War I surge of securities activity. Proposals that the federal government require financial disclosure and prevent the fraudulent sale of stock were never seriously pursued.
Tempted by promises of "rags to riches" transformations and easy credit, most investors gave little thought to the systemic risk that arose from widespread abuse of margin financing and unreliable information about the securities in which they were investing. During the 1920s, approximately 20 million large and small shareholders took advantage of post-war prosperity and set out to make their fortunes in the stock market. It is estimated that of the $50 billion in new securities offered during this period, HALF (my emphasis) became worthless." Sound familiar?
A quote from Schapiro: “Seventy-five years after this great agency was founded, the SEC must play a critical role in rebuilding investor confidence, reviving our markets, and rejuvenating our economy,” said Chairman Schapiro. “I’m honored and grateful to be entrusted with leading this agency during such an important time – when the SEC must effusively be the investor’s advocate. Working with my fellow Commissioners and the agency’s talented staff, we will be committed to reinvigorating a financial regulatory system that must protect investors and vigorously enforce the rules. We will work to deepen the SEC’s commitment to transparency, accountability, and disclosure while always keeping the needs and concerns of investors front and center.”
Things that make me go "hmm": EverydayInvestor linked to this negative blog article somewhat recently. The article makes it clear that they don't think she's a good pick at all, but isn't convincing because it avoids detailing why. I'll take the investment community's word for it that the SEC could do better, but for now my eyes and ears are open.
Macroeconomic Lefty Spokesman: Paul Krugman
Preceded by: John Maynard Keynes (for interventionist economics)
Why I (mostly) trust him: His arguments for greater fiscal spending / stimulus should bump aggregate demand back up to a healthy level, and may end up snapping us out of a deflationary spiral. Extremely well-educated and a vocal opponent of the Bush administration, Krugman is unafraid to hold others accountable:
(in which Krugman dissects Paulson, his bailout, Bush, and Greenspan)
Things that make me go "hmm": Involved with Enron. He's occasionally elitist in tone / dismissive in writing, which can be off-putting. Dwot seems to think that his spending arguments will become a long-term drain on future generations. I would argue that lack of stimulus puts us in grave danger of an immediate depression, which would almost certainly and harshly impact our future generation as well. Doing nothing also puts us on path to follow the route of Japan, with deflation becoming long-term.
OK, kids... since no CAPS blog is complete without a funny and off-topic youtube embed, if you've eaten the above dinner, you can now enjoy dessert:
Critical-thinking and a variety of views are always welcomed, even if directly opposing my views. Just be respectful, you jerks. :P
-BFB
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