Bloomberg TV's economist Rich Yamorone commenting Friday on Fed policy, low interest rates and what he foresees as the coming "fallout".
"You don't have to be an economist to know that this isn't going to end well ... If you see a 500 lb man standing on a street corner, smoking a cigarette and eating a box of donuts, you don't have to be a doctor to know that this isn't going to end well."
Reminds me of Ed Studzinski's reference to "la-la land" in David's March 1 Commentary.
http://www.mutualfundobserver.com/2015/03/march-1-2015/Honestly, I don't know what to think. Any views on which types of investments will prosper and which ones will suffer over the next 1-3 years (admittedly a short-term focus) as a consequence of the period of exceptionally low interest rates worldwide we have witnessed in recent years?
Comments
LOL, no really. I thought QE was like Tinkerbell with magic fairy dust that fixed everything and years of ZIRP and QE end without any sort of bill or negative effect.
If anything, the sad thing is that the economy is much like Eddie Lampert and Sears. It's all about financial engineering while many of the problems with the "core business" are being ignored, then people wonder why we need continued stimulus - I mean, look at the market after each of the QE's. You can't neglect the core business and think everything's going to be okay and problems are just going to solve themselves.
We live in an environment where the asset economy has become incredibly addicted to stimulus and negative news about the real economy is greeted with relief because it means more easy money. Yet, fewer and fewer of the masses see benefits from the asset economy and it wouldn't surprise me if that leads to further social unrest down the road.
It's a completely unhealthy environment, but the asset economy doesn't want the status quo to end and economists believe that pushing assets higher will fix everything and not just wind up with an endless boom/bust asset economy. This whole "buy the economy you'd like" mentality just ends up causing distortions and ends badly, but eventually you don't have so many tools left to deal with it.
Here we are, several years later with weak GDP growth after trillions in stimulus and with little in the way of options if things start to falter again.
The fact that this period doesn't end well is, in my opinion, without question. That said, I question whether another crisis looks different than 2008. Where I see things potentially going leads me to stay with what I'm currently invested in and really kind of follow the core principles that I tend to (with the occasional exception) follow.
1. Hard, productive assets. Class A real estate, infrastructure, grain silos (I continue to believe that what is left of the smaller publicly traded grain handlers will be bought up - the Andersons now reportedly has multiple interested parties and was up 10% at one point yesterday; I think Archer Daniels may try again with Australia's Graincorp after they were denied by the Australian government; Glencore bought Viterra and has been mentioned as a possible buyer for the Andersons), railroads (UNP and CP selling land recently). etc.
2. Moat. I hate things that I believe to have no moat. I tend to look for at least a moderate moat, but prefer a wide moat (rail, among others)
3. No to "First to go"'s. I do not want to be in something where I feel like it's "the first thing to go" when things go South. I like Starbucks a lot in terms of Howard Schultz, but to me that (the complicated latte a day) is the kind of thing that people start to lessen or stop when things go South. I like hotels, but hotel stocks were the first to be obliterated in 2008 - I mean, look at the hotel REITs, which were not only annihilated but most of them either cut the dividend or dropped it entirely. I like Whole Foods, but WF sort of falls into this, as well.
4. Needs over wants. I prefer things that provide or serve a need vs things that are wants. Hence, large allocation to health care.
5. "Toll Roads". I tend to love situations where the network is set up and the more volume comes through the network, the more money. Exchanges (CME, ICE), Railroads, Pipelines and credit card companies are examples.
PLUS: "'opolys": Duopoly, Oligopolies, etc. I like when there's an industry that is useful and necessary that is dominated by a few companies. FIS and FISV (financial tech; FIS is the largest global provider of banking and payment tech to the financial industry; In 2012, FIS moved more than $5.5 trillion across the globe), IFF (flavors/fragrance, which is an industry where the top three or four companies have more than 55% of the market) are among examples I like. Exchanges, rails, credit cards and others fall into this.
Everyone is different and that's okay. These are just some of the top things that I try and focus on and use to filter. Additionally, as I've noted before, I do like Buffett's quote regarding buy what you would be okay with holding if the market was closed for 10 years and I do think that is a good filter to try and narrow down one's best, most high conviction ideas.
Lastly, pretty much everything I own has some thought as to inflation, as inflation as the eventuality remains a concern to me.
My first reaction on seeing that statement (yet again) was to nod my head in silent agreement: Scott certainly isn't the only one to note this; in fact I've said it myself more than once. But then, for some reason, I took that thought a bit further, and began chewing on it like a dog with a bone-toy.
WHO "didn't learn a thing"? Our major financial institutions? The government? The Fed? We investors?
The capitalist financial system: Before pejorative terms like "left-winger" or "commie" start flying, I want to be very clear here that I am neither criticizing what we call "the capitalist system", nor am I proposing any other system to replace it. But that doesn't mean that we can't take a hard look at what we've got going here.
Fundamental characteristic: Probably the most fundamental characteristic of the capitalist financial system is that it is designed, at it's root core, to allow individuals to attempt to better themselves financially. Conceptually, short of homicide, there are few if any limits on the means that individuals or entities may theoretically employ to achieve that end.
Documented behavior: Misrepresentation, cheating, fraud and outright theft have been so well documented, for so many hundreds of years, that it's reasonable to stipulate that such behavior is to be expected in such a system, if not by all participants, at least by such a substantial number as to make this type of behavior completely predictable.
Practical system restraints: There are only two methods of restraining some of the less attractive and dangerous qualities of an unfettered system: either internal to the system itself (self-regulation), or external to the system. The only external social entity with sufficient resources to accomplish this is government.
Historical experience: Historical experience shows that self-regulation is generally inadequate to accomplish meaningful system improvement. This is not necessarily because all players are trying to evade regulation, but a sufficient number always exists to make self-regulation very problematical. Unfortunately, this leaves only government as a potential system regulator.
"Regulation": Whether electronic, mechanical, or financial, control mechanisms typically utilize some form of feedback which samples the ongoing activity, and then uses that sampling to govern the forces employed by the control mechanism. Humans have proven to be quite resourceful in designing such systems for mechanical and electronic systems. Not so much for the financial systems. A well-designed and stable electronic or mechanical apparatus is a fixed, known entity. Not so any endeavor where human beings are involved, because by nature we are built to try and overcome restraints, and generally are pretty successful at that. If one method doesn't work, we'll keep experimenting until we find another that does.
Attempted regulation of human financial entities is usually by one of three methods:
1) Outline the nature of the problem, and leave it to the humans involved to develop a suitable governing mechanism which can evolve as required to achieve the desired system regulation. This approach is sufficiently close to "self-regulation" that it typically proves pointless.
2) Attempt to categorize each and every possible existing problematic operational area, and attempt to anticipate each and every possible situational combination with respect to possible future problematic operational areas. This approach is typically taken by entities such as Congress: the Dodd-Frank act would be an example of this approach.
3) Attempt to construct an external governing mechanism which utilizes ongoing system feedback so as to continuously adapt the governing input as the situation evolves. Ongoing actions as taken by major central banks would typify this approach.
Other "Feedback": We've discussed feedback in the sense of an input to a control mechanism. In the financial apparatus, because humans are involved, the apparatus itself is quite capable of independently generating feedback in an attempt to either neutralize or even subvert the intentions of the regulatory mechanism. This feedback is called "lobbying", and it's primary energy source is called "money".
One of the main attack modes of this independent feedback mechanism is to decry "excess government regulation". Because congressional and administrative government frequently attempts method #2, above, and because that approach is inherently rigid, these regulations do indeed sometimes prove to be inefficient, and possibly "excessive" or counter-productive.
"no one learned a thing": It's a little unclear exactly who the "no one" is in this regard. It's pointless to expect the capitalist financial mechanism to "learn" anything, except possibly new ways to evade regulation. Humans, again.
Government regulations which have attempted to micro-manage every possible route to trouble are inherently inflexible, tend to be fairly inefficient, and certainly cannot come to general agreement over what, if anything, is to "be learned". Humans, again.
One entity that does try to adjust their regulatory efforts as events evolve are the various central banks. Of all of the actors involved, they have the potential to at least try to "learn" from the past. Since what happened in the past wasn't always optimal, they are inclined to be somewhat flexible in trying different approaches.
And we, the investors? If we perceive that none of the other actors have "learned anything since 2008", then it would seem reasonable that we should withdraw from a financial system that we believe to be fatally flawed. But we don't. So we, again as humans, keep hoping that somehow the system will finally be regulated in such a manner as to allow maximum flexibility to all investment entities, while somehow restraining the foolishness and cupidity which is humanly natural to that very system.
Good luck on that.
All four. In terms of "investors", I say it as a generalization.
"Misrepresentation, cheating, fraud and outright theft have been so well documented, for so many hundreds of years, that it's reasonable to stipulate that such behavior is to be expected in such a system, if not by all participants, at least by such a substantial number as to make this type of behavior completely predictable.."
Oh, come on. We're in a system where the government has practically admitted that it has allowed financial institutions to run rampant because they'll just play the "armageddon" card if they are threatened with anything more than a slap on the wrist. It's FAR worse since 2008 than it ever was in the past. I mean, after the financial crisis there's not a month that goes by that a major financial institution isn't hit with a fine for this, that and the other.
Just because it's utterly predictable that BAC is probably going to be fined for something more than once this year doesn't make that right or acceptable, especially because nothing will probably come of it aside from a slap on the wrist. We haven't learned? Well, Too Big To Fail has gotten even bigger - and that was let to happen.
"they have the potential to at least try to "learn" from the past." (re: the Fed)
This trailer offers a discussion of the Fed and 2008. A lot of the things that people discuss in that trailer are things that are occurring again today or were never fixed. It also offers a lot of Fed governors (mainly former FOMC members) who speak/admit to far more reality in this 2 minutes than they do otherwise in general. Additionally, despite what they say in the video, no one on the FOMC seems to have grasped any of it.
I mean, from the trailer:
"Printing money doesn't produce goods and services, it doesn't hire people. It may seem like the right short-term medicine, but can the cure be worse than the disease?"
- Philly Fed governor Plosser. (elsewhere in the trailer speaking about 2008, "The Fed kept rates too low for too long." (Gee, how long have we had ZIRP?)
"The US has consumed more than it has produced for at least a decade. What country, ask yourself, in history, can do that indefintely, forever?"
- Former FOMC member Hoeing.
Holy shit, some truthiness!
Wish other FOMC members could take some of that mentality but no, no, blowing asset bubbles is the idea. Ooops, the economy isn't reaching takeoff speed this time around and every time the stimulus stops, the economy starts to head lower before we've gotten yet another round of stimulus. Ooops, we're stuck at ZIRP. Want to raise rates? Do it already and stop with the BS or just start talking the inevitable next round of stimulus. I mean, you have Janet Yellen talking about stock valuations are high. Well, Janet, are you entirely oblivious to the fact that the Fed policy is a significant cause of that high valuation? No? Gee, stocks seem expensive but it's not at all because the FOMC's intent is to create asset bubbles.
I've said all this all again and again. We have a Federal reserve that believes that they can take a complex system and dial it up or down like the economy is an air conditioner when it's something far more complex and potentially volatile. It is far more difficult than that and you cannot control where money flows or psychology - and the latter is far more fragile than people give it credit for. We have a Fed that believes that pumping assets is a way to fix the economy. It isn't. It's simply financial engineering that doesn't end well again and AGAIN and AGAIN throughout HISTORY.
Asset bubbles are not the freaking cure for what ails us, despite the fact that it's clearly what the FOMC believes is the case. It's infuriating and we have a congress and government that is so foolish and corrupt and focused on idiotic political games that they don't give a s***. It's a lot easier and more popular to spray the money hose than think or make difficult decisions and when it goes bad and you can't just throw money at problems anymore, then it's some other politician's problem. Am I wrong? It's happened again and again and again and moreso as the years go on.
Meanwhile, our education system suffers and no one in this government gives a **** about infrastructure until they have to - and really, when suddenly government is forced to care about infrastructure, they turn it into a political game! "No, the republicans are blocking it, so we aren't going to accomplish anything there." "No, it's all the democrats fault." It's all BS and people let it happen because they are so caught up in their political religion that they love to get angry at the other side when it solves ab-so-lutely nothing.
I mean, none of this **** is new (I mean, tech bubble, housing bubble and those two are just in the last 15 years!), but when it all goes wrong YET AGAIN, people (read: especially CNBC anchors) will go, "Whocouldaknown?" Well, ANYONE could have known if they'd just bothered to look at reality rather than listen to the continually over-optimistic (and wrong) predictions of economists and the FOMC. We have an asset economy that's far ahead of the real economy, but no one cares because hey, who wants the easy money to be stopped? No one who's benefiting from it, that's for sure.
It's Sears - don't look at the problems over here, it's a "real estate" story. Don't look at the fact that many data points aren't good about the economy, that just means the "QE story" continues. It didn't end well in 2008 (see the above trailer) and a lot of what they have done - several years of QE and ZIRP - just sets up for this ending badly again, not for anything sustainable or lasting.
I mean, I've gone over the same road a thousand times and it's clear that we are going to agree to disagree. I mean, it's to the point where I'll just cut and paste what I said above that you don't really touch on.
"We live in an environment where the asset economy has become incredibly addicted to stimulus and negative news about the real economy is greeted with relief because it means more easy money. Yet, fewer and fewer of the masses see benefits from the asset economy and it wouldn't surprise me if that leads to further social unrest down the road.
It's a completely unhealthy environment, but the asset economy doesn't want the status quo to end and economists believe that pushing assets higher will fix everything and not just wind up with an endless boom/bust asset economy. This whole "buy the economy you'd like" mentality just ends up causing distortions and ends badly, but eventually you don't have so many tools left to deal with it."
We're going to continue to disagree on this. I mean, I read the above and I see a lot of excuses for bad behavior and reckless policy. I'm sorry but "Hey, we're only human" does not excuse what this period likely leads to, nor does it excuse 2008.
Actually, I wasn't really agreeing or disagreeing with you personally. The thrust of my observations is simply that:
• What you are seeing is in fact the naked capitalist system running out of control, because the governing mechanisms have been successfully bypassed by the financial markets. This is normal for financial systems, and happens intermittently throughout history.
• As you just said: "none of this is new... but when it all goes wrong YET AGAIN, people go, "Whocouldaknown?" Well, ANYONE could have known if they'd just bothered to look at reality" . Exactly- nothing new to see here... move along please.
"I read the above and I see a lot of excuses for bad behavior and reckless policy. "Hey, we're only human" does not excuse what this period likely leads to, nor does it excuse 2008."
Read it again. No "excuses", just facts. If there are humans involved in trying to make a profit, expect chicanery. Simple as that. Always has been, always will be.
My point: I fail to see the point of constantly ranting about something which is normal to the capitalist system. It's still better than any alternatives that I'm aware of. The only mechanism available to control the financial system is the government. That isn't working so well right now, is it? Are you asking for yet more government control? If so, by whom and how?
If not government, by whom and how? What exactly is your proposed solution?
I don't know if there is a better way. Other countries are using our strategy. This looks like it's going to go on for quite some time to come.
This has the makings of a great discussion.
@JohnChisum- Thanks, John. That's what I was hoping to do. Not trying to argue with Scott- I agree with him in a lot of areas. But I just don't see how "wishing" for a better setup is going to get us anywhere. That, it seems to me, leaves the investor with only two options: recognize the game for what it is: rigged, and play accordingly. That, I think, is pretty much Catch 22's approach. Or, just get out and watch to see what happens next. Ted seems to be more or less taking that option.
The problem as I see it is that there is no easy answer. Do we take the medicine and suffer through a sharp economic downturn or do we try to fix on the fly? The powers to be picked the second option but there is still pain for the middle and lower class.
As for investors like us, another 2008-09 could be disastrous, especially for the boomers who are at or near retirement.
You have:
1. A financial class that has been allowed to run amok because regulators have allowed it to and lobbyists have considerable push. Corruption and the "heads I win, tails I win" mentality sucks away more and more resources from the real economy into the financial economy. The problem is that you have government who falls all over itself to cater to the financial industry and who points to the asset economy to say that everything is great and as an excuse that they don't have to address the problems of the real economy because they have pumped up the asset economy.
The kicker is that the government and wall street is basically a revolving door from the former to the latter, including former Federal Reserve chairmen working for financial firms that used to have the world's biggest bond fund and now merely have the second largest one.
"The group, a non-partisan investigative watchdog, said information it obtained through a Freedom of Information Act request shows 419 former SEC employees filed at least 1,949 disclosure statements revealing that they planned to represent a private-sector client with SEC business from 2001 to 2010. SEC employees are only required to file disclosure statements for the first two years after leaving the agency.
The flood of former SEC officials pressing the agency to go easy on their new private sector clients has influenced the outcome of dozens of cases in which the SEC issues official waivers exempting companies from standard penalties, the report said. These waivers appeared especially generous in cases involving repeat offenders -- companies that the SEC sanctions for multiple violations within a few years." (http://www.huffingtonpost.com/2013/02/11/sec-revolving-door-wall-street_n_2648355.html)
2. A government that is basically useless because they play moronic political games to the detriment of the masses and sit on their hands because there are no leaders in Washington, simply people who point fingers at each other. Or they just throw money at problems because they know when it goes bad it'll probably be someone else's problem.
3. A Federal reserve that basically has the belief that if they artificially boost asset prices via easy monetary policy, things work themselves out. People think tech companies grow to the moon ... until they don't. They think that house prices go to the moon ... until they don't. They think that stocks can rise forever ... until they don't. It's not about building anything sustainable, it's entirely short-term thinking and it just ends badly. It has before, it will again. This doesn't even get into the malinvestment that several years of ZIRP has created.
There's a lot of things that, in concert together, add up to a system that is broken, fragile and results in a completely unhealthy economy. I mean, am I insane to say that an economy where we are addicted to easy monetary policy to the point where bad news is cheered because it means more easy monetary policy is not a healthy one?
Basically, no thought is given to a plan. No thought is given to things like education or infrastructure. We have no energy plan. We think that financial engineering will make everyone happy and not require difficult or unpopular decisions ... until it things sour again and we're back to square one. There's also the level of inequality, which has rapidly increased over the last 8 years and it would not surprise me if it resulted in more and more social unrest.
Only this time, we'll be back to square one with little in the way of tools. This period ends badly too, and I have no question of that.
"Do we take the medicine and suffer through a sharp economic downturn or do we try to fix on the fly"
We'll eventually be forced to do the former (and who knows what that will look like) and haven't made any real efforts to do the latter.
"This looks like it's going to go on for quite some time to come. "
Oh, yeah, we're so far down the rabbit hole of monetary policy that I tend to worry that this is all the "new normal" more than Pimco's "new normal" was.
The problem is that there is a mentality where everyone is scrambling to get their piece of a smaller and smaller pie, but our leaders are guilty of standing as terrible examples and focused on their own political goals over leading the country forward. Monetary policy is all about pulling forward demand, everything is entirely done with a short-term mentality and then we're shocked, just shocked when small problems that we've ignored suddenly grow into massive ones - or worse, crises.
One great thing about traveling the world is that you see things and wonder, why don't they do this back home. We were raised to believe that the United States is the greatest country on earth. It is a great country indeed but it is being severely mismanaged by the powers to be. We the people are to blame as well. We elect people with no experience, only those that look good or speak well. The latest federal administration is proof of that. Many democrat friends I speak to admit that now. The problem is, who is capable of leading?
Infrastructure is easy to pick on. It's visible and we use it. Every year I travel through airports like Hong Kong and Tokyo. As busy as they are, they are easy to get through and efficient. Then I get to the U.S. and it's like several steps back. Nobody cares anymore. I saw this same attitude in the late 60's and 70's, which I have called before, the Carter Malaise.
We have no future vision in this country. Infrastructure, the financial system, you name it. It is all for the moment. This year as we walked off the plane and into Seattle-Tacoma airport, garbage lined the path of the arrivals all the way to immigration. Previously, we transited Narita which is far more of a airport than SeaTac. No garbage. Efficient security screening where the attendants helped you rather than bark orders at you like in boot camp.
I don't have the complete answer either. It is going to take a long time to correct all of this. But we need leadership at the top that has vision and will show the citizens a better way.
Really, the only area of disagreement between us concerns the Fed. While I make no suggestion that the Fed efforts will turn out to be helpful in the long run, it's true that unlike Congress they at least attempted to do something, untried as it may have been. It may very well prove to have been an exercise in futility, but at least they tried, which is more than I can say for any of the other actors.
Since you don't share that opinion, I'd be interested in knowing what you would have attempted if you had been the Fed chairman since 2008. Remember, though, that you will have gotten nothing but abuse from Congress during this period, much less anything helpful like spending on national infrastructure or an energy plan.
(I'll give federal spending on education a pass for now, because it's quite controversial, and there are a lot of good points on either side of that debate.)
Yeah, but government not doing anything is no excuse and part of the problem. One of the things that I call upon again and again and that I think is symbolic of what's wrong is the moment when Senator Schumer told Bernanke to, "Get to work, Mr Chairman". It's basically illustrating the idea that the government believes that Fed policy in and of itself can be the answer while they continue to play political games and point fingers.
Just doing something quickly is usually not as good as taking the time to make sure that you do something right. To get to the core of it, I'd rather problems be fixed in a lasting manner than be patched over.
"Remember, though, that you will have gotten nothing but abuse from Congress during this period, much less anything helpful like spending on national infrastructure or an energy plan."
So what if I get abuse from Congress? WHO CARES? It's called being a leader and doing what I think is best and trying to work with others to find progress rather than being a baby and saying the Republicans are being mean to me so no one gets anything and I'll just sit on my hands - if you don't like it, it's their fault. This idea that everything is a political game for points is just creating an absolute clusterbleep for this country. It's bringing any sort of progress (not that we really had any) to a halt. Politics have created such a deeply divided country that I have no idea if we can come together to create progress in this country. What really makes me mental is that I tell people who I know lean one way or another politically that both sides are bad and they go, "Oh, I know...but those right/left wingers are terrible." People are so bleeping desperate to be angry at each other rather than productive.
All that said, I would have focused on a scenario where bad assets would have been ring fenced and you would have a good bank/bad bank situation and bad assets would have been sold off. If a bank closed, a bank closed. Banks have closed before and the sun has come up the next day. You get assets out of incapable, weak hands and into new hands and new institutions. For those who weren't bad actors and took down the financial system, here's your lucky day: sale time.
You can't just paper over everything, you have to begin to clear the rot and maybe some people lose, but I as the governor of the Federal Reserve have to realize that the reality is that there are economic seasons, and Winter is a reality. I do not want to reward bad bets as much as ensure liquidity in the system to the point where bad assets can find new owners. Someone made a bet and lost, someone else now has an opportunity. You provide supportive monetary policy and make sure the system is functioning to the point where you can begin to clean up the mess and find buyers for bad bank assets, and you know what? Maybe it's at pennies on the dollar - good for the institutions who prepared for a rainy day.
I would have pushed for a massive infrastructure program, which would have created jobs and money would have went towards efforts that would have kept us competitive as a country. I would have eased requirements for small business loans and attempted to boost lending for those capable. I would have pushed for stimulus direct to consumers, which might have been left over as I wouldn't have dumped the world at the feet of the banks.
Would have pushed for mortgage modifications to some degree, which is a complex thought that I'm not going to try to explore at this point of the night, but the idea becomes to try to help people stay in their homes rather than making it so that Wall Street can come in thanks to easy monetary policy and buy up homes people were just kicked out of en masse. To quote Marc Faber: “Yes. Property prices in the South of the U.S. are very inexpensive compared to property prices around the world. The tragedy is that the people that were evicted from these homes have no access to credit. They have no money. They can’t buy them. So, with easy money by the Fed well-to-do people can buy these properties and then rent them out to the people that were kicked out of these homes. What a great achievement of the Fed. First they create the property bubble and destroy the wealth of poor people, then the poor people have to rent and the rents have been up over the last 12 months. What a great achievement. Thank you, Mr. Bernanke."
Perhaps if people have demonstrated the ability to pay rent above the mortgage amount for a period of years prior and have reasonable credit, they would be allowed to get a mortgage? Again, this is not the point of the day where I want to delve into this, but it becomes a matter of you have this situation in the economy where many people are paying high rents and could benefit (or could have, as prices have risen) from buying a house that actually works out to be cheaper but for whatever reason cannot. If someone demonstrates the ability to pay X rent over a longer period of time and the mortgage and property tax would work out to be less, can there be exceptions? This gets into trying to figure out a series of guidelines but you get the drift.
To me, it really becomes a matter of asking how do I boost the broad economy directly rather than focusing entirely on the asset economy and hope that that trickles down.
You focus on the broad economy and that the organic strength that gradually builds is the engine for the asset economy rather than the other day around.
There will be banks tomorrow, they may not have the same names as the ones today. If they cannot be reasonably good actors in our economy, then perhaps I'll ask myself why I would give them another chance instead of someone else who is willing to take the assets.
Maybe this takes longer, but it is done with an idea of attempting as much to clear the board and start new so that we can go forward with a greater degree of confidence in the system.
Extraordinary measures are required for stability in an attempt to clean things up and doing it in a way that is lasting and in and of itself provides a manner of stability. It is not about easy answers, quick sugar highs or the like. But when everything is cleaned up and things normalize, it's not about having banks that are too big to fail or people who aren't confident in the economy because they know nothing's really changed and many things have gotten worse. Financial institutions will know that there are consequences to reckless behavior. The hope is that policy would touch the economy at many points broadly rather than focusing on one sector and hoping that that will fix everything. Again, I can try to delve more deeply into this at some other point, but the idea broadly becomes focusing stimulus on the real economy and creating organic, sustainable growth in the real economy that acts as an engine for the asset economy, rather than pouring every F'ing thing into the asset economy and hoping that the real economy broadly comes with it.
And doing that takes a lot more work and difficult decisions but I'll continue to contend that it ultimately would lead to a more rewarding economy that more people could have confidence in. And I think we wouldn't as likely be sitting around here talking about what the next crisis might look like because no one learned anything from 2008 and that this is the way the system is now so we have to adapt to it or whatever. Perhaps I'll put more thought towards this tomorrow.
Also, firmly agree on a broad infrastructure project. While FDR might have prolonged the Depression with his policies, this one I agree with. We put people to work and in return enjoy the fruits of that labor. Many of those projects are still in use.
Perhaps there was denial that this was not a depression? (I'm speaking of 2008 now). I think it was very close. Some of the actions the Fed did take may have forestalled that. If banks had gone on holiday and closed, the result might have been 1929 all over again. We may never know. But we cannot keep this life support going forever. The problem is nobody wants to cause harm instead of thinking of the bigger picture.
This is indeed a great thread.
Saying that they have outsourced their decision making is a great way to put it and I agree. Again though, I just see comparisons to Sears, where the core business is basically neglected in favor of financial engineering, then it comes as a surprise when the financial engineering doesn't fare as well as expected when the core business is problematic on many levels.
"The problem is nobody wants to cause harm instead of thinking of the bigger picture."
Yeah, and it's the idea that no one wants to take any medicine whatsoever. Winter is inevitable. and attempting to throw money at it to avoid is an exercise in futility. There is no thought to the bigger picture or the economy broadly.
I mean, how did we get here:
"The World Economic Forum’s Global Competitiveness Report for 2012-2013 exposes that U.S. infrastructure compares unfavorably with that of most advanced countries and even some developing nations.
The report investigated the quality and availability of roads, railroads, ports, air transport, electricity, and telephones.
In terms of overall infrastructure, the U.S. ranks 25th, behind nations such as Oman and Barbados, and only one spot ahead of Qatar." (http://www.businessinsider.com/us-infrastructure-behind-developed-world-2013-1)
In 2002, we were ranked 5th.
If this is an accurate measurement of how quickly the United States has slipped down the ladder in terms of competitiveness, that starts us during the Bush (W, of course) presidency and has continued under Obama and shows how quickly leadership in this country at all levels in this country has deteriorated, not to mention an effect of it.
Sounds about accurate.
Basically, as a younger person, I sit here and watch as this country has basically lost its way to some degree. We slip down the ratings in terms of global competitiveness and perhaps it's because our priorities are so wildly out of whack, not to mention our leadership has basically outsourced its decision making to another organization who basically has one or two tools to choose from and thinks that its "cure" could never, ever possibly turn into a destructive or dangerous force.
Another 10 years out on this path, have we gone from 25th to 40th? Is there a point where it's difficult to turn things around. Is there a point where the dollar is no longer the reserve currency? (and I think that will happen during my lifetime and probably during that of people on this board, it's just an inevitability; the dollar certainly was not the first reserve currency and has will not be the last, they have lasted for about 100 years each, more or less.)
It's not being conspiracy minded or grim as much as it becomes looking at the unfortunate reality of how broken our political system is, the effects of that and pondering what that might eventually lead to.
"Some of the actions the Fed did take may have forestalled that"
It's not that they didn't forestall that, it's more the idea that if someone is riding their bike and has a hole in the tire and doesn't patch it, they shouldn't wonder why the tire keeps leaking air as they're sitting their pumping away trying to put air back in it. Things take time to do right and well, and we basically said, "How quickly can we reboot the economy to what it was like three years prior." We have attempted to build a recovery without thought to trying to build a foundation.
"Said Summers: “The European Central Bank is right in its concern that punishing creditors for the sake of teaching lessons or building political support is reckless in a system that depends on confidence.” But can we build or maintain public confidence in markets or governments upon castles made of sand? Yet somehow both Rubin, Summers and their minions, such as Treasury Secretary Timothy Geithner, seem to think that we can ignore these changes and simply continue along without making any fundamental fiscal and financial decisions — especially changes that will inconvenience them or their associates and clients on Wall Street.
But confidence based on mere rhetoric is an illusion. (edit: My bolding and I agree with that, largely because I think we live in a MOPE - Management of Perspective Economy....) Confidence in the financial markets starts and ends with getting paid, with the ability of counterparties to perform on their obligations, of investors to value financial assets and consumers to purchase or sell homes. So while the arguments of Summers and others — that we should not reduce debt and compel the bond holders of the largest US banks to contribute to solving the problems in the banking and housing sectors may seem attractive today — they ultimately lead us down the road to long-term economic malaise and political instability." (http://blogs.reuters.com/christopher-whalen/2011/08/23/barack-obama-and-the-cost-of-doing-nothing/)
It's not even a matter of punishing the big banks as much as a new reality of moral hazard and catering to the big banks in a way that makes it all the more laughable when this administration has talked about financial reform when it is abundantly clear that they have no real interest in beginning to approach it, lest the fear that the banks will threaten to sink the economy again.
It goes back to the idea that maybe if you approached the financial crisis differently, maybe there isn't the bounce back in March 2009. Maybe it's not until 2011. It's not about how fast you can reboot the system and furiously pump air into a tire with a hole in it. It's about patching the tire/getting a floor under the system and beginning to do it right, so that people can actually have confidence in the system and that monetary policy isn't a "Hotel California" situation that keeps needing to be revisited again and again, costing trillions of dollars and not getting the kind of return on investment that one might expect from the easiest monetary policy in the nation's history.
Where do the interests of this government lie, though, and where did they during the bailout? Again, this idea that "your party" (either one) is looking out for your best interest and that FOMC members are concerned about the average American is ... perhaps laughable is a good way to describe it. The intent was never to begin to think about how to make sure that this kind of a crisis would not happen again, clearly, because that was not in the interests of Wall Street, who was clearly involved in decision making in this administration early on.
"Barack Obama was still just the president-elect when it happened, but the revolting and inexcusable $306 billion bailout that Citigroup received was the first major act of his presidency. In order to grasp the full horror of what took place, however, one needs to go back a few weeks before the actual bailout — to November 5th, 2008, the day after Obama’s election.
That was the day the jubilant Obama campaign announced its transition team. Though many of the names were familiar — former Bill Clinton chief of staff John Podesta, long-time Obama confidante Valerie Jarrett — the list was most notable for who was not on it, especially on the economic side. Austan Goolsbee, a University of Chicago economist who had served as one of Obama’s chief advisers during the campaign, didn’t make the cut. Neither did Karen Kornbluh, who had served as Obama’s policy director and was instrumental in crafting the Democratic Party’s platform. Both had emphasized populist themes during the campaign: Kornbluh was known for pushing Democrats to focus on the plight of the poor and middle class, while Goolsbee was an aggressive critic of Wall Street, declaring that AIG executives should receive "a Nobel Prize — for evil."
But come November 5th, both were banished from Obama’s inner circle — and replaced with a group of Wall Street bankers. Leading the search for the president’s new economic team was his close friend and Harvard Law classmate Michael Froman, a high-ranking executive at Citigroup. During the campaign, Froman had emerged as one of Obama’s biggest fundraisers, bundling $200,000 in contributions and introducing the candidate to a host of heavy hitters — chief among them his mentor Bob Rubin, the former co-chairman of Goldman Sachs who served as Treasury secretary under Bill Clinton. Froman had served as chief of staff to Rubin at Treasury, and had followed his boss when Rubin left the Clinton administration to serve as a senior counselor to Citigroup (a massive new financial conglomerate created by deregulatory moves pushed through by Rubin himself).
Incredibly, Froman did not resign from the bank when he went to work for Obama: He remained in the employ of Citigroup for two more months, even as he helped appoint the very people who would shape the future of his own firm. And to help him pick Obama’s economic team, Froman brought in none other than Jamie Rubin, a former Clinton diplomat who happens to be Bob Rubin’s son. At the time, Jamie’s dad was still earning roughly $15 million a year working for Citigroup, which was in the midst of a collapse brought on in part because Rubin had pushed the bank to invest heavily in mortgage-backed CDOs and other risky instruments."
"If you had any doubts at all about the primacy of Wall Street over Main Street," former labor secretary Robert Reich declares when the bailout is announced, "your doubts should be laid to rest."
(http://www.rollingstone.com/politics/videos/obamas-big-sellout-20100115)
I was in the Coast Guard during this time. Training was cut to bare minimum. Fuel was rationed so we couldn't go out and train. It really affected our readiness. All services were hindered due to the "peace dividend" which was the popular theme. Morale was very low and drug use in the services peaked. The Iran Hostage crisis was the icing on the cake. Operation Eagle Claw showed the failure of lack of training. Then, Reagan was elected and things started to turn around slowly. By this time I was out of the service but looking for work was a daily depressing chore. Most businesses had signs that said no hiring and no applications accepted.
But eventually things improved. It started with the mindset. People started to be proud of their work again. Everything else fell into place over time and the result was the biggest bull market in our time.
I hope history repeats itself.
Ben Inker of GMO forcast is sobering.
morningstar.com/cover/videocenter.aspx?id=688589