Wednesday, March 11, 2009

Episode 43: The New Economy


Lately I have been reading lots of blogs and news sites from both left and right leaning critics. Though democrats and republicans have wildly different views on how to handle to economy, both critics have been using the DOW index as a barometer to measure the success President Obama’s policies. I think that is a big mistake.

The economic crisis is so big in scope that just about everyone has no idea what is going on. We have to take our leaders at their word when they have a steady hand on the tiller. However, the one part of the crisis that everyone can site as a major contributor to the economic disaster is the incredible amount of toxic assets on the market. I suspect that the bailout money, particularly the TARP money from the initial bailout before Obama’s inauguration is aimed at paying those assets down. However, if there are that many bad assets on the market, then it stands to reasonable logic that most every business wasn’t worth the money CEOs reported in their fiscal reports. I can’t help but think that the DOW was never really worth 14,000 points as it was in August.

Looking at it this way the problem actually seems simple to me (keeping in mind I am no economist by any means). America for the past six to eight years was like a teenager with an American Express card – we engaged in no limit spending for far too long, sporting Dolce&Gabbana sunglasses, Prada bags, and a $10,000 watch with a $20,000/yr salary, pretending we were richer than we actually were. It was the culture of the time, and most every one of us is guilty of biting more than we could chew. Now the credit card is maxed out, and we are paying interest on interest.

Our system is completely deflated now. The 7000ish marker where the DOW currently stands is probably closer to where the market was supposed to be all along. It is sad that 700 Starbucks closed and something like 2,100 of those workers lost their jobs, but is the closing of these stores an indicator of a failing economy, or rather a company that way over extended itself? I kid you not that the Third St. Promenade in Santa Monica has at least 2 Starbucks on the same street – not even 2000 ft of each other!

So the solution as I see it is twofold. First, we need to directly help homeowners who got caught in the bad assets game, as they have the most affected by this crisis. Fixing that problem would seem to simultaneously repair the bank system as well. We need to create and enforce very strict regulations to ensure everyone is playing by the same rules, and enforce strict punishment for rule breakers. Second, we have to let the infection bleed out. I have a suspicion that after we stop the bleeding (helping home owners, fixing the healthcare system, and revitalizing manufacturing in America and not rely so much on imports, and in the long term, fix education in American), the markets will begin to heal itself. Investors, CEOs and the American publics have to realize that the top 2% wealthiest Americans are in denial. As Jon Stewarts piece on CNBC indicates, I think (to give the benefit of the doubt) these financial news commentators were operating on bad intel or (not giving them the benefit of the doubt) there was a great deal of cronyism going on behind the scenes, and they thought they could pull up from a nosedive before we realized we were crashing. They refuse to believe that their companies are not worth as much as the ledger indicates, and they damn well know that government regulations mean a few of them are going to jail. These people are the proverbial puss, and we need to squeeze it out of the wound. When these people are gone and businesspeople with integrity replace them, the market will heal on its own. I am endlessly confident in American ingenuity and resiliency. What the American people have to realize that the infection is deep, and its going to take a pretty long time to see a “return to normalcy.” If we want to watch the DOW to measure our economic prosperity, we’ll have to wait at least 9 months for to deliver a remotely accurate reading. Still, the DOW surged 349 points today… Obama had a good day. =)
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7 comments: on "Episode 43: The New Economy"

Alex said...

yeah most people don't realize that the value of any stock is about half assets and half speculation...searching for Starbucks los angeles gives 10,000 results and the map is just silly

Del or Alice Patterson said...

Yep! You have it down pretty well.

What most people are missing is the major issue known as "credit default swap". Unless and until we (the citizens and leaders) get a true understanding about how it works we will never get the capitalistic system back on track. I know that sounds simplistic, but in reality that's what this whole disaster boils down to, save for the realty market.
I have a sort of different take on it. Perhaps you could view:

The Law said...

I've always believed that even the most complex problems have relatively simple solutions. Part of getting it right as you suggest Del, is the gov't and businesses realizing they have made a bunch of mistakes... admitting there is a problem is the first step to recovery after all...

Del or Alice Patterson said...

Thanks for the response.
I like the way you think.
Keep it up!

conservative generation said...

Hey tL,

Not an economist eh? I think you sell yourself a little short. Sounds to me like you've got a pretty good handle on the market. We were inflated, but I actually believe we are some what deflated. I want to defer some of my comments however, because I'm not sure who exactly you are identifying in some parts. Are you talking consumers, home buyers, corporations, banks, investors? For example you talk of CEO's balance sheets, do you mean bank CEO's or CEO's in general?

You are absolutely right, our market was inflated. I think it is now actually over deflated at the moment. I'd say more than 50% speculation. PE ratio (which is price to earnings ratio not profit to earnings as Obama stated) is a good indicator of this speculation. The average PE prior to the crash was about 13, meaning you are paying 13 times the companies earnings (pretty large). However, keep in mind, the stock market is all about the future not the present. If the market drops because Obama makes an announcement, it's not that they think it's wrong now, but in the future. I don't think it should wholly be ignored.

I may have miss it, but haven't heard anything from Obama aimed at manufacturing? I don't think health care nor education are going to stimulate the economy (I guess it may depend on how you do it). For all intensive purposes, any money spent by the government today will need to be paid back by the government tomorrow. If we use government money to pay down the inflated mortgages, then we are buying nothing and still need to pay them down later. This may not be a bad idea, but I think it's important to know the consequences.

I actually think that we don't need old regulations on banks, just need to bring back the old one's that Clinton removed like Glass-Stegal. It would prevent banks from becoming so big they can't fail. Also, one more interesting tidbit. In my job I speak to a lot of Owners, CEOs and CFOs. One of the CEOs I was talking to the other day was having trouble getting credit with the large giant bad mortgage ridden bank name redacted. However, he had no trouble getting that credit moved and issued at a smaller bank that had not gone crazy with the bad mortgages. It just shows you that there are smart business people out there that can get us out of this mess. It's a shame to see all this money going to banks that made bad choices (100% blame) and people who made bad mortgage choices (not 100%, but a good percentage).

I'm running out of time, I may be back to share my Citibank experience since I worked with them on their mortgage portfolio.

The Law said...

Thanks for your kind words Del =)

To CGen:

I was referring to corporate balance sheets, not the CEO or Banks CEOs personal income.

Manufacturing as part of the bailout has not been explicitly stated by Obama, but he constantly refers to the need to develop our manufacturing sector, particularly in the fields of green tech (a BIG reason why I personally don't want the big 3 auto makers to fail - in the way we needed them in WWII, we need them again for the future of hybrid, fuel cell, or plug-in electirc cars and such).

Reforming health care and education are not stimulitive in the sense that it will have an immediate impact on the economy - in fact it won't. Health care reform is a short to midterm goal to stablize the economy (though it will be enacted within 6 months I think). The exorbident amount of waste in our current system is a huge strain on businesses and a governemtn program woudl go a long way to alleviate that burdern, AND provide every American with some kind of coverage.

Education needs a MASSIVE overhaul to produce the workers that need to compete with Asia. Yes, we're losing on the technological front to them... only our massive head start in the tech world is what keeps us afloat now. The investments in health care and education need to be made now, or the foundation laid down with a new infrastructure will not be in sync with new technologes to utilize these resources.

With regards to what kind of regulations we need, I know you are the economist, so I defer to you for commentary on that front... I just think we need to establish a fair playing field and punishment for rulebreaks.

conservative generation said...


We may need to come back to Health Care and Education. I haven't had the time to look at the details. they may definitely be beneficial down the road, though I fail to see how we are going to pay for them after already spending 2 trillion in the last year.

Can't argue with the rest.

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