Thursday, October 02, 2008

Unintended Consequences--10/02/2008

I posted this on the Progressive Democrats of Delaware Yahoo Group today:

“We have had a bad banking situation. Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people’s funds. They had used the money entrusted to them in speculations and unwise loans. This was, of course, not true in the vast majority of our banks, but it was true in enough of them to shock the people of the United States, for a time, into a sense of insecurity and to put them into a frame of mind where they did not differentiate, but seemed to assume that the acts of a comparative few had tainted them all. And so it became the Government’s job to straighten out this situation and do it as quickly as possible. And that job is being performed.

[Later] After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people themselves. Confidence and courage are the essentials of success in carrying out our plan. You people must have faith; you must not be stampeded by rumors or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system, and it is up to you to support and make it work.”
Who said this? George W Bush? No. Ben Bernanke? No. Henry Paulson? No.
This came from FDRs first fireside chat. It is hard to find a more notable Progressive Founding Father than FDR.

I have been silent on this bulletin board in the past days, on the topic of the bailout (the framer in me strongly prefers the term rescue plan).

Part of the reason is that I have a horse in the race. I am a professional, fee-only investment advisor. The S&P 500’s 19% decline this year, and stocks’ 10% decline in September, have hurt my business, but much more importantly, my clients. While I have a few ‘millionaire’ clients, I have more clients with more modest life savings. For this reason, I worry that on this forum my words could be viewed as the words of Wall Street, and dismissed out of hand.

There is a risk that my silence can be viewed as agreement. This has not been the case. I reached my breaking point with the posts showing dismay over the tax breaks recently inserted into the bill the Senate approved last night. What the heck did you expect?

Due to populist, grass-roots opposition to the bill over the past two weeks, the house voted against it. What exactly did you think would result? This isn’t a game, it is a crisis. Legislators immediately looked to see what could be added to gain the necessary additional votes in the House.

I read that some folks do not like the views of NY Times’ Tom Friedman. I agree with many of his insights. I especially agreed with much of his Monday column, “As others have pointed out, you can’t save Main Street and punish Wall Street anymore than you can be in a rowboat with someone you hate and think that the leak in the bottom of the boat at his end is not going to sink you, too.”

I deeply respect the insight of Warren Buffett. In an interview yesterday he noted that when an EMT arrives at an accident scene he doesn’t say, “this guy wasn’t wearing his seatbelt, let him die.” That isn’t a progressive viewpoint. When did it become OK for progressives to adopt the paternalistic view that if Wall Street caused this problem, let them rot (and let the country rot with them)?

I agree that the initial 3-page Paulson/Bernanke plan was crap. But it was a start, and it was a 100% essential start. The Congress worked for days on fleshing it out. Then the public outcry was whipped up, and the House defeated the bill. Congratulations.

I have more respect for those who say ‘the current plan is fatally flawed in this manner, here is an alternative’, as long as that alternative has a good chance to pass in Congress now. Otherwise, it is as good a sentiment as saying ‘Bush deserves to be impeached, so let’s do nothing until we get this done.’ It is an idealistic waste of time.

Some of the alternative sure seem like crap to me. The “Net Worth Certificate Program” does the exact thing that the defeated bill does—it has the government (FDIC) give cash to the banks in return for promissory notes tied to the ‘toxic mortgages’. My favorite piece of this program is to suspend fair value accounting. In other words, it calls for a return to Enron accounting. Let’s solve this screw-up by forgetting the lessons of the last one.

Let’s admit the obvious—we are in a mess and there is no perfect solution. There isn’t even any good solution. There are merely a bunch of stinky solutions. Buffett states that “I’d rather be largely right than precisely wrong.” No bill going through Congress to address the economic situation will be wonderful, or even good. It can, however, be good enough.

We cannot wait 100 days to act. If we do, you won’t be able to buy a car with financing when yours breaks down next month, you won’t be able to take a job out of the area (as you won’t be able to buy a house, with a mortgage, there), you will likely find your existing home equity line of credit frozen, and many businesses will be unable to hire seasonal employees for the holidays. Waiting 100 days is no more a solution to today’s economic crisis than waiting for global warming to solve this winter’s problems with high heating oil prices.

Buffett describes the current economic situation as a financial Pearl Harbor. Buffett isn’t known for hyperbole. FDR didn’t wait until the next election to address the Japanese attack. FDR led.

We need leaders. We know that W is no leader, and he has zero credibility. This leaves us with the Congress, and to some extent our presidential candidates (and Congressional candidates). As our dearly departed Defense Secretary said, you fight wars with the army you’ve got. Well, we have a battle to wage now. The army we’ve got are our senators and congressmen and congresswomen. We cannot wait 100 days to act. Yes, get them good information, best ideas from the smartest economists. But please stop flooding them with ill-informed rhetoric (the ‘no Bailouts act’).

Their job now is to get a well-intentioned bill through Congress and signed into law to help revive the economy. The more resistance that is given, the more need there will be to insert bad policy to get more votes.

The current bill in several ways is worse than the one the House defeated on Monday. Last week’s objections deserve the credit.

“Let us unite in banishing fear. We have provided the machinery to restore our financial system, and it is up to you to support and make it work.”

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