When a person or an organization is disciplined, they usually have plenty of options…many of them good ones.
When a person or an organization is undisciplined, options are usually limited…and none of them are good!
We are seeing or have seen quite a few examples of the second of these statements in recent days and in recent months. Where does one begin?
· The auto industry…
· The financial industry…
· The housing industry…
· And the list goes on…
Discipline starts at the top…and if the discipline is not there and this lack of discipline spreads…others began to see that “lack of discipline” is the standard of the day and they too began to feast on the beast. And, the lack of discipline spreads throughout the land.
My biggest disappointment is that financial discipline broke down in a major way. My background is in finance and I was brought up with the idea that finance people were the ultimate arbiters of discipline, both in terms of individual behavior as well as organizational behavior. The first CEO I worked for told me that, as the CFO, I had to speak up strongly for the discipline of finance for if I didn’t…there was no one else in the organization that would take that position!
Well, we have seen that when the financial standards break down…there is no one left to maintain discipline.
That is the past. We now have to deal with the future. The options are not good for anyone!
Let me reiterate the statement I made above…
The culture of an organization starts at the top!
So here we are…and we still have to do something…invest our money…run our businesses…live our lives…
There are several things that I believe have to take place…
First, we have to re-establish discipline…individually…in our families…in our businesses…in our government.
Second, we have got to retrench. Here we have conflicting objectives. On the one side, we have to get back to basics, strengthen our balance sheets, and focus on what we do best. In this we have to do the best that we can…and we should not assume that someone is going to bail us out. If we do…we are bound for disappointment.
The other side of this is that retrenchment weakens the economy because the basic plan is to “pull back”, cut spending, reduce debt, and, if we can, save. This is the other side of the lack of discipline. It is fun on the upside when discipline is eased…it is tough on the down side when discipline is being re-established. This leads to the third point.
Third, we must also be community focused, locally, regionally, nationally, and internationally. While we are establishing discipline once again, we must not isolate ourselves and refuse to talk with one another. We must engage one another, talk and dialogue about what is needed, and work together to introduce solutions that build up communities in this time of trial. This will include government programs to stimulate the economy. This will include new regulations to improve the process of finance and economics. This will include new efforts at international cooperation to help us to work together and support one another. This must include the acceptance of change because the world that is coming is going to be different from the world that we have left behind.
But, this effort is going to require leadership and it is going to require leadership at the very top.
On another note, we still have much to be thankful for…so let us give thanks for what we have.
Everyone…have a Happy Thanksgiving!
Mase
Tuesday, November 25, 2008
Sunday, November 23, 2008
The Coming Stimulus Package
Yes, we do have a President (elect)! (See “A Whiff of Leadership?” posted November 22, 2008 at http://maseportfolio.blogspot.com/ . An economic stimulus package is in the works. The underlying philosophy…the risks of not doing something big are bigger than the risks associated with inflation and an economic cleanup when the economy shifts into first gear rather than reverse.
We have seen this attitude taken by the Federal Reserve. The Fed, as we have been writing about in this blog, has not wanted to be short in supplying liquidity to the financial markets. Federal Reserve assets have more than doubled in the past ten weeks. Chairman Ben Bernanke has been given the name Helicopter Ben during this barrage of funds. But, the argument goes, the risk is too great to not put money into the financial system until the financial markets begin to function again.
Liquidity is apparently not going to get the economy humming again…spending of the private sector is going into the tank. Lending in the financial markets is not going to kick-start consumer spending or investment spending…state and local government expenditure is also in decline…so the belief is that the federal government must step into the gap and stimulate incomes and employment.
The talk seems to indicate that the Obama economic stimulus package is going to be somewhere in the neighborhood of $700 billion…of similar size to the bailout package of a couple of months ago. The idea…like that of the bailout package…is that the stimulus package must be a large number.
One thing that is crucial in all of this is that the Obama administration must give off the impression that it is operating under control…that it is disciplined. This is a hard thing to do when the philosophy of the stimulus package is the one described above. However, the administration must appear to be very intentional, on top of the situation, and ready to do what is necessary in response to new information. That is, the Obama administration must rebuild confidence in the federal government. Establishing confidence at the top is necessary because it will help to rebuild the confidence of the whole system as I discuss in “Discipline or the Lack Thereof” posted November 20, 2009, at http://maseportfolio.blogspot.com/.
President-elect Obama seems to be aware of this need to set the tone for the future. I think people, and markets, will respond very well to this because they are so hungry for leadership at this time…and are very, very anxious. So, we see two things going on right now…first, the appointment of top quality people to important positions…and, second, the intentional effort to create programs and get the discussion in Congress and the economy going so that action can be taken as soon as possible. The important emphasis right now is that the effort is intentional, not passive or just reactive.
Just a final note about the apparent appointment of Larry Summers to head the National Economic Council: this may be an inspired choice. No one questions the intelligence and ability of Summers. Being in the White House, acting as the coordinator of the economic policies of the President, monitoring the President’s economic agenda, and serving as close advisor to the President may not only fit his personality best but may be the real place his talents can fill the needs of the nation. It also superbly complements the other appointments that the President-elect has made to build his economic team.
We have seen this attitude taken by the Federal Reserve. The Fed, as we have been writing about in this blog, has not wanted to be short in supplying liquidity to the financial markets. Federal Reserve assets have more than doubled in the past ten weeks. Chairman Ben Bernanke has been given the name Helicopter Ben during this barrage of funds. But, the argument goes, the risk is too great to not put money into the financial system until the financial markets begin to function again.
Liquidity is apparently not going to get the economy humming again…spending of the private sector is going into the tank. Lending in the financial markets is not going to kick-start consumer spending or investment spending…state and local government expenditure is also in decline…so the belief is that the federal government must step into the gap and stimulate incomes and employment.
The talk seems to indicate that the Obama economic stimulus package is going to be somewhere in the neighborhood of $700 billion…of similar size to the bailout package of a couple of months ago. The idea…like that of the bailout package…is that the stimulus package must be a large number.
One thing that is crucial in all of this is that the Obama administration must give off the impression that it is operating under control…that it is disciplined. This is a hard thing to do when the philosophy of the stimulus package is the one described above. However, the administration must appear to be very intentional, on top of the situation, and ready to do what is necessary in response to new information. That is, the Obama administration must rebuild confidence in the federal government. Establishing confidence at the top is necessary because it will help to rebuild the confidence of the whole system as I discuss in “Discipline or the Lack Thereof” posted November 20, 2009, at http://maseportfolio.blogspot.com/.
President-elect Obama seems to be aware of this need to set the tone for the future. I think people, and markets, will respond very well to this because they are so hungry for leadership at this time…and are very, very anxious. So, we see two things going on right now…first, the appointment of top quality people to important positions…and, second, the intentional effort to create programs and get the discussion in Congress and the economy going so that action can be taken as soon as possible. The important emphasis right now is that the effort is intentional, not passive or just reactive.
Just a final note about the apparent appointment of Larry Summers to head the National Economic Council: this may be an inspired choice. No one questions the intelligence and ability of Summers. Being in the White House, acting as the coordinator of the economic policies of the President, monitoring the President’s economic agenda, and serving as close advisor to the President may not only fit his personality best but may be the real place his talents can fill the needs of the nation. It also superbly complements the other appointments that the President-elect has made to build his economic team.
Saturday, November 22, 2008
A Whiff of Leadership?
In the last hour of trading Friday November 21, the stock market staged a significant rally.
The cause of the rally?
The leaked news that President-elect Obama was going to choose Timothy Geithner, President of the Federal Reserve Bank of New York as the next Secretary of the Treasury.
Market participants…hungry for leadership of any kind…reacted with enthusiasm to this possibility and began to buy. As I wrote in my blog of November 20, “Discipline or the Lack Thereof”, http://maseportfolio.blogspot.com/, the market, more than anything else right now, is thirsting for leadership.
It has also been leaked that on Monday President-elect Obama will introduce his economics team. Doing this will reduce a lot of uncertainty that has been hanging over the markets and provide some insight into the direction an Obama Presidency will head. If anything, Obama is showing with his choices that he is not afraid to have strong and intelligent people around him and will not be cowered by the presence of such people. In fact, he gives off the impression that he will thrive in such an environment.
And, the people he has indicated that he will appoint are pragmatic and successful people. They find what works!
I know there are many that are disappointed in the choices that Obama is making because they don’t think that these choices represent the “change” that Obama promised in the campaign. I think that they are wrong in this charge.
As I have written in many of my blog-posts, LEADERSHIP BEGINS AT THE TOP! It is the top person that sets the culture and it is the top person that sets the agenda. Change will come because the person at the top requests that those that report to him/her provide options that incorporate change. But, this kind of change is not going to take place with a bunch of neophytes that have to learn the ropes of government first and are unproven in working at this level of issue and pressure.
There must be tested members of the team…especially at this time! But, the charge that is given the team and encouraged is to provide some new answers and solutions to the problems that are now being faced. Top quality members of the team will jump at this opportunity and, with the continued strong guidance coming from the chief executive officer, they will produce results. Good leadership raises the level of performance of all those around the leader. As we have seen in the last eight years or so…weak leadership results in the sub-par performance of all those around the leader and none escape with an unblemished record.
One can be happy with the choices that are being made and still be concerned about the future of the financial markets and the economy. There is still a lot of bad news to come in the future. As Obama, himself, has said…there cannot be two Presidents at the same time. The new administration will not take office until January 20, 2009. And, even so, economies do not reverse direction overnight and there are a lot of dislocations in the United States economy and the world that need to be worked out.
There is still great concern that financial institutions have not really discovered or revealed just how badly their assets portfolios are underwater. The layoffs and dismissals of employees are growing and we have not seen how badly this is going to affect the spending of the consumer. The housing market still seems to be declining and no one knows how the situation with respect to foreclosures and mortgages that exceed housing prices are going to be worked out. With respect to businesses, bankruptcies are still increasing and a great deal of industrial restructuring is going to have to take place even though firms don’t go into bankruptcy. State and local governments are in bad shape financially. And, what about nonprofit organizations? Educational institutions? The sports and entertainment industries? And, so on and so on…
We are just in the early stages of this reconstruction of the United States…and the world…economy. Even with the best of appointments, the United States…and the world…is going to have to go through the process of restructuring.
However, let’s concentrate on what seems to be the good news for the present time. President-elect Obama is making appointments that are giving financial market participants some hope. Even though there is still a long, difficult road ahead of us…we will gravitate toward any sign of positive leadership that is available and hang on to the hope that is present in the possibility that that leadership will take us where we need to go!
The cause of the rally?
The leaked news that President-elect Obama was going to choose Timothy Geithner, President of the Federal Reserve Bank of New York as the next Secretary of the Treasury.
Market participants…hungry for leadership of any kind…reacted with enthusiasm to this possibility and began to buy. As I wrote in my blog of November 20, “Discipline or the Lack Thereof”, http://maseportfolio.blogspot.com/, the market, more than anything else right now, is thirsting for leadership.
It has also been leaked that on Monday President-elect Obama will introduce his economics team. Doing this will reduce a lot of uncertainty that has been hanging over the markets and provide some insight into the direction an Obama Presidency will head. If anything, Obama is showing with his choices that he is not afraid to have strong and intelligent people around him and will not be cowered by the presence of such people. In fact, he gives off the impression that he will thrive in such an environment.
And, the people he has indicated that he will appoint are pragmatic and successful people. They find what works!
I know there are many that are disappointed in the choices that Obama is making because they don’t think that these choices represent the “change” that Obama promised in the campaign. I think that they are wrong in this charge.
As I have written in many of my blog-posts, LEADERSHIP BEGINS AT THE TOP! It is the top person that sets the culture and it is the top person that sets the agenda. Change will come because the person at the top requests that those that report to him/her provide options that incorporate change. But, this kind of change is not going to take place with a bunch of neophytes that have to learn the ropes of government first and are unproven in working at this level of issue and pressure.
There must be tested members of the team…especially at this time! But, the charge that is given the team and encouraged is to provide some new answers and solutions to the problems that are now being faced. Top quality members of the team will jump at this opportunity and, with the continued strong guidance coming from the chief executive officer, they will produce results. Good leadership raises the level of performance of all those around the leader. As we have seen in the last eight years or so…weak leadership results in the sub-par performance of all those around the leader and none escape with an unblemished record.
One can be happy with the choices that are being made and still be concerned about the future of the financial markets and the economy. There is still a lot of bad news to come in the future. As Obama, himself, has said…there cannot be two Presidents at the same time. The new administration will not take office until January 20, 2009. And, even so, economies do not reverse direction overnight and there are a lot of dislocations in the United States economy and the world that need to be worked out.
There is still great concern that financial institutions have not really discovered or revealed just how badly their assets portfolios are underwater. The layoffs and dismissals of employees are growing and we have not seen how badly this is going to affect the spending of the consumer. The housing market still seems to be declining and no one knows how the situation with respect to foreclosures and mortgages that exceed housing prices are going to be worked out. With respect to businesses, bankruptcies are still increasing and a great deal of industrial restructuring is going to have to take place even though firms don’t go into bankruptcy. State and local governments are in bad shape financially. And, what about nonprofit organizations? Educational institutions? The sports and entertainment industries? And, so on and so on…
We are just in the early stages of this reconstruction of the United States…and the world…economy. Even with the best of appointments, the United States…and the world…is going to have to go through the process of restructuring.
However, let’s concentrate on what seems to be the good news for the present time. President-elect Obama is making appointments that are giving financial market participants some hope. Even though there is still a long, difficult road ahead of us…we will gravitate toward any sign of positive leadership that is available and hang on to the hope that is present in the possibility that that leadership will take us where we need to go!
Thursday, November 20, 2008
Discipline or the Lack Thereof
When a person or an organization is disciplined, they usually have plenty of options…many of them good ones.
When a person or an organization is undisciplined, options are usually limited…and none of them are good!
We are seeing or have seen quite a few examples of the second of these statements in recent days and in recent months. Where does one begin?
· The auto industry…
· The financial industry…
· The housing industry…
· And the list goes on…
Oh, how about the American government?
Doesn’t seem like our government has many options these days…and none of them seem to be good ones.
I have made clear over the past eleven months that I believe that culture starts at the top…and in this case, it starts with the leadership of the United States government. Right from the beginning the current administration exhibited an exceptional lack of discipline…except for the requirement of loyalty to its own people and programs. Large tax cuts followed by an expensive war underwritten by the monetary authority could in no way be considered to be a “conservative” economic program. And, this was just the start!
But, the culture spreads…and once others began to see that “lack of discipline” was the standard of the day, they too began to feast on the beast. And, the lack of discipline spread throughout the land.
My biggest disappointment is that financial discipline broke down in a major way. My background is in finance and I was brought up with the idea that finance people were the ultimate arbiters of discipline, both in terms of individual behavior as well as organizational behavior. The first CEO I worked for told me that I had to speak up strongly from the discipline of finance for if I didn’t…there was no one else in the organization that would take that position!
Well, we have seen that when the financial standards break down…there is no one left to maintain discipline.
That is the past. We now have to deal with the future. The options are not good for anyone!
Let me reiterate the statement I made above…
I believe that culture starts at the top!
Right now there is no leadership at the top and we will not have any until January 20, 2009. This is nothing new…we have not had any leadership at the top for quite some time now…and that is one reason for our current dilemma. Those at the top, early on, wanted to sneak out of the door before things broke loose in the financial or product markets…but they didn’t make it. Even though their hearts were not in it and they had no idea what to do, they were forced to act in some way in an attempt to alleviate the financial mess. But, now, more than ever, they are looking for the door.
So here we are…and we still have to do something…invest our money…run our businesses…live our lives…
There are several things, I believe, that have to take place…
First, we have to re-establish discipline…individually…in our families…in our businesses…in our government.
Second, we have got to retrench. Here we have conflicting objectives. On the one side, we have to get back to basics, strengthen our balance sheets, and focus on what we do best. In this we have to do the best that we can…and we should not assume that someone is going to bail us out. If we do…we are bound for disappointment.
The other side of this is that retrenchment weakens the economy because the basic plan is to “pull back”, cut spending, reduce debt, and, if we can, save. This is the other side of the lack of discipline. It is fun on the upside when discipline is eased…it is tough on the down side when discipline is being re-established. This leads to the third point.
Third, we must also be community focused, locally, regionally, nationally, and internationally. While we are establishing discipline once again, we must not isolate ourselves and refuse to talk with one another. We must engage one another, talk and dialogue about what is needed, and work together to introduce solutions that build up communities in this time of trial. This will include government programs to stimulate the economy. This will include new regulations to improve the process of finance and economics. This will include new efforts at international cooperation to help us to work together and support one another. This must include the acceptance of change because the world that is coming is going to be different from the world that we have left behind.
But, this effort is going to require leadership and it is going to require leadership at the very top. Hopefully, we are going to get that leadership.
Hopefully.
People are looking for the bottom…the bottom of the stock market plunge…the bottom of the housing collapse…the bottom of the financial crisis…and so on.
My view is unchanged. Until the United States gets some leadership in place with a strong vision of what it is going to do and moves forward in a very disciplined way…the search for a bottom in these areas is premature.
When a person or an organization is undisciplined, options are usually limited…and none of them are good!
We are seeing or have seen quite a few examples of the second of these statements in recent days and in recent months. Where does one begin?
· The auto industry…
· The financial industry…
· The housing industry…
· And the list goes on…
Oh, how about the American government?
Doesn’t seem like our government has many options these days…and none of them seem to be good ones.
I have made clear over the past eleven months that I believe that culture starts at the top…and in this case, it starts with the leadership of the United States government. Right from the beginning the current administration exhibited an exceptional lack of discipline…except for the requirement of loyalty to its own people and programs. Large tax cuts followed by an expensive war underwritten by the monetary authority could in no way be considered to be a “conservative” economic program. And, this was just the start!
But, the culture spreads…and once others began to see that “lack of discipline” was the standard of the day, they too began to feast on the beast. And, the lack of discipline spread throughout the land.
My biggest disappointment is that financial discipline broke down in a major way. My background is in finance and I was brought up with the idea that finance people were the ultimate arbiters of discipline, both in terms of individual behavior as well as organizational behavior. The first CEO I worked for told me that I had to speak up strongly from the discipline of finance for if I didn’t…there was no one else in the organization that would take that position!
Well, we have seen that when the financial standards break down…there is no one left to maintain discipline.
That is the past. We now have to deal with the future. The options are not good for anyone!
Let me reiterate the statement I made above…
I believe that culture starts at the top!
Right now there is no leadership at the top and we will not have any until January 20, 2009. This is nothing new…we have not had any leadership at the top for quite some time now…and that is one reason for our current dilemma. Those at the top, early on, wanted to sneak out of the door before things broke loose in the financial or product markets…but they didn’t make it. Even though their hearts were not in it and they had no idea what to do, they were forced to act in some way in an attempt to alleviate the financial mess. But, now, more than ever, they are looking for the door.
So here we are…and we still have to do something…invest our money…run our businesses…live our lives…
There are several things, I believe, that have to take place…
First, we have to re-establish discipline…individually…in our families…in our businesses…in our government.
Second, we have got to retrench. Here we have conflicting objectives. On the one side, we have to get back to basics, strengthen our balance sheets, and focus on what we do best. In this we have to do the best that we can…and we should not assume that someone is going to bail us out. If we do…we are bound for disappointment.
The other side of this is that retrenchment weakens the economy because the basic plan is to “pull back”, cut spending, reduce debt, and, if we can, save. This is the other side of the lack of discipline. It is fun on the upside when discipline is eased…it is tough on the down side when discipline is being re-established. This leads to the third point.
Third, we must also be community focused, locally, regionally, nationally, and internationally. While we are establishing discipline once again, we must not isolate ourselves and refuse to talk with one another. We must engage one another, talk and dialogue about what is needed, and work together to introduce solutions that build up communities in this time of trial. This will include government programs to stimulate the economy. This will include new regulations to improve the process of finance and economics. This will include new efforts at international cooperation to help us to work together and support one another. This must include the acceptance of change because the world that is coming is going to be different from the world that we have left behind.
But, this effort is going to require leadership and it is going to require leadership at the very top. Hopefully, we are going to get that leadership.
Hopefully.
People are looking for the bottom…the bottom of the stock market plunge…the bottom of the housing collapse…the bottom of the financial crisis…and so on.
My view is unchanged. Until the United States gets some leadership in place with a strong vision of what it is going to do and moves forward in a very disciplined way…the search for a bottom in these areas is premature.
Friday, November 14, 2008
Did Bernanke Panic?
I have been going over and over the events of the week beginning September 15, 2008 and I continue to come up with one basic conclusion: the reaction of Fed Chairman Ben Bernanke to the existing financial market strains was somewhat precipitous. A good start to understanding the time-line for that week is the article that appeared in the November 10 Wall Street Journal: “Paulson, Bernanke strained for consensus in Bailout” http://online.wsj.com/article/SB122628169939012475.html?mod=todays_us_page_one. The article begins “Federal Reserve Chairman Ben Bernanke reached the end of his rope on Wednesday afternoon, September 17.”
The week before, the week beginning September 8, the government nationalized Fannie Mae and Freddie Mac. Lehman Brothers was next. Secretary of the Treasury Hank Paulson put his foot down on this one…no bailout for Lehman…that’s final! Monday, September 15 Lehman Brothers filed for bankruptcy. The next troubled firm was AIG and frantic efforts were made to find additional cash for AIG. The basic signal being given to the market was…the bailouts are over. Lehman had to find its own way out or declare bankruptcy. AIG also had to find its own solution. The ‘free-market’ leanings of Paulson and others made for a reluctant leadership.
And then Tuesday evening came and the world changed. That evening the AIG $85 billion bailout was announced. When I heard this news around 9:00 PM that night, things just seemed to feel different: this was a different world than it was before. One didn’t know how…but it was different.
The Wall Street Journal article reports that by Wednesday afternoon “Bernanke reached the end of his rope”. He called Paulson and “with an occasional quaver in his voice” he spoke “unusually bluntly” to the Treasury Secretary. Paulson did not move immediately. He had to sleep on it. Thursday morning he committed.
Paulson called the leadership in Congress and asked for them to have a meeting with himself and Bernanke on Friday evening. The few members of Congress that talked with the press after that meeting said that Bernanke did most of the talking and “scared the daylights out of everyone.” Bernanke knew his history of the Great Depression and he knew currents events. He was very logical and very articulate. The leaders were told that they had to act and they had to act fast. The plan was to have a bill before Congress on Monday seeking Congressional approval (of both houses) by the following Friday. The Treasury Department had a bill ready (3 pages long) by midnight Saturday evening. The price tag…$700 billion. Why $700 billion? Because it was a big number!
As we know, the bill was rewritten and finally passed on Friday, October 3. What was the bill to do? No one really knew. The important thing, according to Bernanke, was that something was being done and that something was big!
And, the Fed did not stand idle. Helicopter Ben began to flood the financial markets with liquidity. The important thing was to get a lot of liquidity “out there” and worry about cleaning it up later, once the crisis was over. As I have reported elsewhere Reserve Bank Credit has risen from $890 billion in the banking week ending September 10, 2008 to about $2.2 trillion in the banking week ending November 12, 2008. (I have also noted that it took 94 years to get Reserve Bank Credit up to $890 billion and only nine weeks to have it more than double.) The rationale for this increase…the financial markets are in a liquidity trap and we don’t know how much is needed…we just cannot fail to supply enough!
Here we are in the middle of November. The basic conclusion relating to the financial crisis so far is that although we cannot tell whether or not the effort is working, we believe that things are better off than they would have been if the actions of Paulson and Bernanke had not been taken.
However, discontent is now being expressed. Paulson has changed the direction of the $700 billion bailout package and Congress is not particularly happy with this move and expressing its discontent. No one really seems to know what to do. Since events have slowed down and the ‘immediate’ need for the rapid passage of the package seems to have passed away…as might be expected…everyone and his brother and sister have got their hands out to get a piece of the bailout pie. Apparently, lobbyists are over-running the Treasury Department trying to get their share. And, Henry Paulson’s reputation has seemed to tank along with the stock market. (See the article by Rebecca Christie and Matthew Benjamin on Bloomberg.com titled “Paulson Credibility Takes Hit with Rescue-Plan Shift." It seems like no one can be a part of this administration without having their image tarnished.)
And, one question still remains. While Paulson and Bernanke seem to be running this whole show…where is the “decider”? The “decider” has apparently decided to hide out in the White House bunker. This has left Paulson and Bernanke hanging…trying to do something…with no steady hand overseeing their efforts and no vision for a plan.
It seems obvious that the driving force behind all the activity over the last nine weeks has been Ben Bernanke…he is, in a real sense, the initiator, if not the architect, of the hasty and ill-thought out bailout effort. On Wednesday afternoon, September 17 Bernanke reached the end of his rope. The rest, as they say, is history.
It is my personal hope that President-elect Obama will be able to name his own Chairman of the Board of Governors of the Federal Reserve System when he becomes President.
The week before, the week beginning September 8, the government nationalized Fannie Mae and Freddie Mac. Lehman Brothers was next. Secretary of the Treasury Hank Paulson put his foot down on this one…no bailout for Lehman…that’s final! Monday, September 15 Lehman Brothers filed for bankruptcy. The next troubled firm was AIG and frantic efforts were made to find additional cash for AIG. The basic signal being given to the market was…the bailouts are over. Lehman had to find its own way out or declare bankruptcy. AIG also had to find its own solution. The ‘free-market’ leanings of Paulson and others made for a reluctant leadership.
And then Tuesday evening came and the world changed. That evening the AIG $85 billion bailout was announced. When I heard this news around 9:00 PM that night, things just seemed to feel different: this was a different world than it was before. One didn’t know how…but it was different.
The Wall Street Journal article reports that by Wednesday afternoon “Bernanke reached the end of his rope”. He called Paulson and “with an occasional quaver in his voice” he spoke “unusually bluntly” to the Treasury Secretary. Paulson did not move immediately. He had to sleep on it. Thursday morning he committed.
Paulson called the leadership in Congress and asked for them to have a meeting with himself and Bernanke on Friday evening. The few members of Congress that talked with the press after that meeting said that Bernanke did most of the talking and “scared the daylights out of everyone.” Bernanke knew his history of the Great Depression and he knew currents events. He was very logical and very articulate. The leaders were told that they had to act and they had to act fast. The plan was to have a bill before Congress on Monday seeking Congressional approval (of both houses) by the following Friday. The Treasury Department had a bill ready (3 pages long) by midnight Saturday evening. The price tag…$700 billion. Why $700 billion? Because it was a big number!
As we know, the bill was rewritten and finally passed on Friday, October 3. What was the bill to do? No one really knew. The important thing, according to Bernanke, was that something was being done and that something was big!
And, the Fed did not stand idle. Helicopter Ben began to flood the financial markets with liquidity. The important thing was to get a lot of liquidity “out there” and worry about cleaning it up later, once the crisis was over. As I have reported elsewhere Reserve Bank Credit has risen from $890 billion in the banking week ending September 10, 2008 to about $2.2 trillion in the banking week ending November 12, 2008. (I have also noted that it took 94 years to get Reserve Bank Credit up to $890 billion and only nine weeks to have it more than double.) The rationale for this increase…the financial markets are in a liquidity trap and we don’t know how much is needed…we just cannot fail to supply enough!
Here we are in the middle of November. The basic conclusion relating to the financial crisis so far is that although we cannot tell whether or not the effort is working, we believe that things are better off than they would have been if the actions of Paulson and Bernanke had not been taken.
However, discontent is now being expressed. Paulson has changed the direction of the $700 billion bailout package and Congress is not particularly happy with this move and expressing its discontent. No one really seems to know what to do. Since events have slowed down and the ‘immediate’ need for the rapid passage of the package seems to have passed away…as might be expected…everyone and his brother and sister have got their hands out to get a piece of the bailout pie. Apparently, lobbyists are over-running the Treasury Department trying to get their share. And, Henry Paulson’s reputation has seemed to tank along with the stock market. (See the article by Rebecca Christie and Matthew Benjamin on Bloomberg.com titled “Paulson Credibility Takes Hit with Rescue-Plan Shift." It seems like no one can be a part of this administration without having their image tarnished.)
And, one question still remains. While Paulson and Bernanke seem to be running this whole show…where is the “decider”? The “decider” has apparently decided to hide out in the White House bunker. This has left Paulson and Bernanke hanging…trying to do something…with no steady hand overseeing their efforts and no vision for a plan.
It seems obvious that the driving force behind all the activity over the last nine weeks has been Ben Bernanke…he is, in a real sense, the initiator, if not the architect, of the hasty and ill-thought out bailout effort. On Wednesday afternoon, September 17 Bernanke reached the end of his rope. The rest, as they say, is history.
It is my personal hope that President-elect Obama will be able to name his own Chairman of the Board of Governors of the Federal Reserve System when he becomes President.
Thursday, November 13, 2008
The State of the Bailout
Treasury Secretary Paulson gave a press conference yesterday and indicated that things had changed…that the focus of the bailout effort would not be on the purchase of ‘toxic assets’ but would be aimed to assist the capital needs of financial institutions and consumer finance. This ‘shift’ in focus has been duly noted by the press.
Is the ‘bailout’ program having any success?
To answer this question, I am roughly in the same spot of someone I heard being interviewed on Marketplace on NPR radio: the ‘expert’ was asked the following question “Has the efforts to add liquidity to financial markets and financial institutions shown any results to date?” His reply: “I think things are better than they would have been if the efforts had not been made.”
Does that give you a lot of confidence?
I just don’t think that at this time anyone can say more. We are in the middle of a situation that no one present has ever been through. Fed Chairman Ben Bernanke, an expert on the Great Depression, has seen to it that financial markets and financial institutions have been flooded with liquidity. From the banking week ending September 10, 2008, Reserve Bank Credit has risen from about $890 billion to $2.1 trillion in the banking week ending November 5, 2008. This is roughly a 210% increase in a matter of 8 weeks. (Dare I remind you that it took 94 years for the total of Reserve Bank Credit to reach just $890 billion and only eight weeks to add $1,167 billion more!)
The $700 billion bailout bill…is now turning into a provision of capital for financial institutions…a provision that the Treasury hopes will buy time for institutions to work out their bad asset problems. The unknown question here is whether or not $700 billion is enough or will Congress have to float more funds.
The underlying rationale for the provision of all this liquidity is that either (1) officials are going to be blamed for allowing another MAJOR economic bust to take place or (2) these officials are going to have a problem cleaning up for all the liquidity that they have supplied to the financial markets on such short notice. Success, in the eyes of the officials means that they will have to clean up all the liquidity once the financial markets begin working again. Failure…”is not an option.”
No one knows at this time what is going to happen…
The idea is to keep tossing more and more liquidity into the pot until financial institutions feel that enough is enough! No one has been here before! This is all new!
Your guess is as good as mine…
And then there is the need for fiscal stimulus. The Congress is going to consider a stimulus package which seems to be similar to the first stimulus package they passed earlier this year. It will be aimed at consumers and, although it may not be any more effective than the first package, it can be done quickly, and it will show that the Congress IS doing something AND any little stimulus to the economy will be appreciated.
But, a second stimulus bill is being talked up. This one would be more capital intensive and aim at real projects like projects to rebuild the United States infrastructure. The idea here is that consumers are not going to start spending much until their job security is enhanced and they are sure that they will hold onto their homes. Businesses are going to have to restructure their balance sheets and have some confidence that consumers are going to start spending again before they loosen their purse strings and begin to invest in capital projects again. We seem to be a long way from either of these so the argument goes that the Government needs to engage in some real “Keynesian” pump-priming. The problem with a Government expenditure program like this is that it takes time to prepare and then, once the bill is passed, it takes time for the projects to be implemented. So, help does not come quickly.
And, what about the stock markets? When are they going to come back? Well, we hear all the time that the price an investor is willing to pay for a stock is dependent upon future cash flows. Right now, market expectations concerning future cash flows are pretty depressed and uncertain. Investors must be able to sense a turnaround in future cash flows for them to develop any confidence to begin purchasing stocks. And, investors don’t really know the value of the assets on the books of a large number of companies. To me, a good argument can still be made for more asset charge offs, more bankruptcies, and more depressed forecasts of future cash flows. In my mind, we are not near the bottom here, particularly given the situation described above.
What about uncertainty?
There is lots of it. Much of the uncertainty pertains to the programs that will be coming out of the new administration and the leadership that is put into place by that administration. It is still a long way until January 20, 2009. The current administration has been reluctant to do anything in the past until it became absolutely necessary to do something about the financial markets and the economy. They still want to pass on as much of the decision making as possible to the newly elected administration. So, we are still in a limbo as far as the national leadership is concerned.
What about the international situation and international leadership?
Also an unknown. People are talking about a new Bretton Woods…the international financial structure set up after the second world war. First off, that conference had two years of preparation and negotiation before the meeting was held. There has basically been little or no preparation for the meetings to take place this weekend. Second, the first Bretton Woods conference had seasoned world leadership behind it. That is not the case at the current time. Third, there is almost no intellectual consensus concerning the cause of the current situation and what should be done about it. Fourth, the world is still going through a economic downturn with more countries declaring every week that they are now in a recession.
International coordination and cooperation are going to have to be vital components of the world economic and financial markets in the future but for right now, I don’t think that we can expect much concrete to be forthcoming from the world community.
So, in my view, we will continue to see a downward drift to stock markets with a substantial amount of volatility. What else is new?
For bond markets, United States government securities are going to continue to be the pick for risk-averse investors and spreads will continue to rise between the least risky debt and that considered to be more risky. I saw that the spread between Baa corporate bonds and Aaa corporate bonds exceeded 300 basis points last week. For even lesser credits the spread has been increasing at an almost exponential rate. If there is any indication that the credit crisis is NOT over, it can be picked up from the market place.
The only thing that seems to be positive news at this time is that the Bush plan to get the price of oil below $60 a barrel has been tremendously successful so far!
Is the ‘bailout’ program having any success?
To answer this question, I am roughly in the same spot of someone I heard being interviewed on Marketplace on NPR radio: the ‘expert’ was asked the following question “Has the efforts to add liquidity to financial markets and financial institutions shown any results to date?” His reply: “I think things are better than they would have been if the efforts had not been made.”
Does that give you a lot of confidence?
I just don’t think that at this time anyone can say more. We are in the middle of a situation that no one present has ever been through. Fed Chairman Ben Bernanke, an expert on the Great Depression, has seen to it that financial markets and financial institutions have been flooded with liquidity. From the banking week ending September 10, 2008, Reserve Bank Credit has risen from about $890 billion to $2.1 trillion in the banking week ending November 5, 2008. This is roughly a 210% increase in a matter of 8 weeks. (Dare I remind you that it took 94 years for the total of Reserve Bank Credit to reach just $890 billion and only eight weeks to add $1,167 billion more!)
The $700 billion bailout bill…is now turning into a provision of capital for financial institutions…a provision that the Treasury hopes will buy time for institutions to work out their bad asset problems. The unknown question here is whether or not $700 billion is enough or will Congress have to float more funds.
The underlying rationale for the provision of all this liquidity is that either (1) officials are going to be blamed for allowing another MAJOR economic bust to take place or (2) these officials are going to have a problem cleaning up for all the liquidity that they have supplied to the financial markets on such short notice. Success, in the eyes of the officials means that they will have to clean up all the liquidity once the financial markets begin working again. Failure…”is not an option.”
No one knows at this time what is going to happen…
The idea is to keep tossing more and more liquidity into the pot until financial institutions feel that enough is enough! No one has been here before! This is all new!
Your guess is as good as mine…
And then there is the need for fiscal stimulus. The Congress is going to consider a stimulus package which seems to be similar to the first stimulus package they passed earlier this year. It will be aimed at consumers and, although it may not be any more effective than the first package, it can be done quickly, and it will show that the Congress IS doing something AND any little stimulus to the economy will be appreciated.
But, a second stimulus bill is being talked up. This one would be more capital intensive and aim at real projects like projects to rebuild the United States infrastructure. The idea here is that consumers are not going to start spending much until their job security is enhanced and they are sure that they will hold onto their homes. Businesses are going to have to restructure their balance sheets and have some confidence that consumers are going to start spending again before they loosen their purse strings and begin to invest in capital projects again. We seem to be a long way from either of these so the argument goes that the Government needs to engage in some real “Keynesian” pump-priming. The problem with a Government expenditure program like this is that it takes time to prepare and then, once the bill is passed, it takes time for the projects to be implemented. So, help does not come quickly.
And, what about the stock markets? When are they going to come back? Well, we hear all the time that the price an investor is willing to pay for a stock is dependent upon future cash flows. Right now, market expectations concerning future cash flows are pretty depressed and uncertain. Investors must be able to sense a turnaround in future cash flows for them to develop any confidence to begin purchasing stocks. And, investors don’t really know the value of the assets on the books of a large number of companies. To me, a good argument can still be made for more asset charge offs, more bankruptcies, and more depressed forecasts of future cash flows. In my mind, we are not near the bottom here, particularly given the situation described above.
What about uncertainty?
There is lots of it. Much of the uncertainty pertains to the programs that will be coming out of the new administration and the leadership that is put into place by that administration. It is still a long way until January 20, 2009. The current administration has been reluctant to do anything in the past until it became absolutely necessary to do something about the financial markets and the economy. They still want to pass on as much of the decision making as possible to the newly elected administration. So, we are still in a limbo as far as the national leadership is concerned.
What about the international situation and international leadership?
Also an unknown. People are talking about a new Bretton Woods…the international financial structure set up after the second world war. First off, that conference had two years of preparation and negotiation before the meeting was held. There has basically been little or no preparation for the meetings to take place this weekend. Second, the first Bretton Woods conference had seasoned world leadership behind it. That is not the case at the current time. Third, there is almost no intellectual consensus concerning the cause of the current situation and what should be done about it. Fourth, the world is still going through a economic downturn with more countries declaring every week that they are now in a recession.
International coordination and cooperation are going to have to be vital components of the world economic and financial markets in the future but for right now, I don’t think that we can expect much concrete to be forthcoming from the world community.
So, in my view, we will continue to see a downward drift to stock markets with a substantial amount of volatility. What else is new?
For bond markets, United States government securities are going to continue to be the pick for risk-averse investors and spreads will continue to rise between the least risky debt and that considered to be more risky. I saw that the spread between Baa corporate bonds and Aaa corporate bonds exceeded 300 basis points last week. For even lesser credits the spread has been increasing at an almost exponential rate. If there is any indication that the credit crisis is NOT over, it can be picked up from the market place.
The only thing that seems to be positive news at this time is that the Bush plan to get the price of oil below $60 a barrel has been tremendously successful so far!
Wednesday, November 5, 2008
What to do with the Fed!
There are two articles out this morning that discuss the Federal Reserve and the role of the Federal Reserve in the economy. One is in the New York Times and focuses upon Paul Volcker, “To Treat the Fed as Volcker Did,” http://www.nytimes.com/2008/11/05/business/05views.html?ref=business, and the other is in the Financial Times, “Deflation risk boosts case for inflation target,” http://www.ft.com/cms/s/0/19b92aea-aade-11dd-897c-000077b07658.html?nclick_check=1. Each of the articles recommends that the mandate of the Federal Reserve be changed from focusing upon inflation and full employment to just focusing upon inflation.
The basic argument of the articles is that focusing upon keeping inflation low and unemployment low is “structurally contradictory”…to quote the New York Times article. Whereas I agree with the fact that forcing the Fed to attempt to achieve these two objectives is “structurally contradictory” and that this dual mandate should be eliminated, I believe that we need to go even further in terms of the Fed’s mandated objective.
The Federal Reserve should be concerned with stable prices but there are problems with the use of inflation as the target of monetary policy. One of the problems is measurement. To use the Consumer Price Index (CPI) is troublesome. First of all, it is an index and is a constructed measure. Since it is an attempt to measure what happens during a period of time it is constructed in terms of “flow” variables and not “stock” variables.
The major example of this is the price of housing which needs to be the price of a “flow”…the flow of housing services consumed by consumers over a period of time…and not the price of the “stock”…the price at which a house sells for. Since there are many owner occupied houses in America, the price of the housing services…rent…must be estimated. How good this estimation is, particularly during a bubble like we have experienced in the past eight years, is questionable. And, the rental component is a relatively large one in the CPI because the consumption of housing services is a large portion of the consumer’s budget.
Second, there is the question about whether or not we should be concerned with the total CPI or only with the “core” CPI. By eliminating two of the more volatile components of the CPI we certainly get a more stable view of the movement in the prices of basic consumer goods, but does this really reflect the true rate of inflation that the consumer has to live with?
A third point, alluded to above, is the problem of “asset bubbles.” Asset bubbles occur in asset prices, not the price of the services…like the price of a house, not the rent one pays for the services one consumes over a period of time. Policymakers have a problem focusing on, say, rental prices, and the price of assets at the same time. There is no measure to balance the behavior of the two prices in terms of policy decisions. Hence, the dilemma that the Federal Reserve’s Open Market Committee has in making decisions as to the stance of monetary policy. Thus, I have problems with the idea that the central bank should focus on an inflation target as the sole objective of monetary policy.
What, then, do I recommend as a policy target for the Federal Reserve in its conduct of monetary policy? I believe that the policy target of the Federal Reserve should be the value of the United States dollar in foreign exchange markets. My support for this is…none other than…Paul Volcker. Volcker has written that “a nation’s exchange rate is the single most important price in its economy...So it is hard for any government to ignore large swings in its exchange rate….” This quote is from the book by Paul Volcker and Toyoo Gyohten, “Changing Fortunes: The World’s Money and the Threat to American Leadership,” (New York: Times Books, 1992), page 160.
There are two basic reasons for the Fed to focus on the nation’s exchange rate. First, a nation’s exchange rate is based upon the expectations of market participants. Market participants have expectations about relative rates of inflation in different countries around the world and are willing to put their money out into the market on the basis of these expectations. The inflation rates they are interested in are related not only to “flow” prices but also to “stock” prices. Thus, international investment managers move money around based upon inflation in asset prices as well as consumer prices.
The value of the United States dollar began to decline in early 2002. It declined almost steadily…with some periods of stability…into the summer of 2008. Something was going on in the United States economy relative to other countries during this period of time. As Volcker argues “it is hard for any government to ignore large swings in its exchange rate…” and yet the United States government did!
My point is…that participants in international financial markets were trying to tell us something. Market participants reacted to the huge deficits created by tax cuts and the ‘war on terror’ and the extremely low interest rates supported by the Federal Reserve by selling dollars. In terms of inflation they were telling us that the inflation taking place in the United States was going to be substantial relative to the inflation that was going to occur in other countries. Although this inflation did not seem to get out-of-hand in terms of the Consumer Price Index, other things going on in the United States…like the housing bubble!
Markets tell us something and we need to pay attention to them! Markets swings are based upon future expectations rather than on historical data as is used in the construction of price indices. We need to observe market prices and attempt to understand what the market is trying to tell us. My argument is that this is more relevant to the conduct of monetary policy than is focusing upon an inflation rate based on the historical record. I agree with Volcker, “a nation’s exchange rate is the single most important price in its economy.”
Therefore, I believe that the Federal Reserve should target the value of the United States dollar for the conduct of monetary policy. This does not mean that the target should be a fixed one. Conditions change…the economic policies of other countries may vary…and there may be other reasons such as the pricing of oil by the oil cartel or war breaking out somewhere in the world.
And, this leads to my second point…the United States must act as a partner in the world. Focusing upon the exchange rate forces the policy makers, when they are determining the direction of monetary policy, to consider what other nations are doing. America has ignored other nations over the past eight years until the current crisis began to unfold. We cannot afford to go forward into the future independent of what the rest of the world is doing. See my post of November 1, 2008, “The Need for an American Economic Strategy,” http://maseportfolio.blogspot.com/.
One final point about the Federal Reserve at this time: I believe that Chairman Ben Bernanke should step down as Chairman of the Board of Governors of the Federal Reserve System so that the new President can appoint a Chairman of his own choosing. Confidence and trust is going to be important for the success of the new President and I do not believe that Bernanke provides these commodities. My own choice for the new Chairman of Board of Governors is Timothy Geithner, the current President of the Federal Reserve Bank of New York. Geithner is not an academic and has been through many storms, not only in his current position, but in the Rubin Treasury Department. I think he would be an excellent choice and would come into the position with the confidence and trust of participants in international financial markets as well as in governmental circles around the world.
The basic argument of the articles is that focusing upon keeping inflation low and unemployment low is “structurally contradictory”…to quote the New York Times article. Whereas I agree with the fact that forcing the Fed to attempt to achieve these two objectives is “structurally contradictory” and that this dual mandate should be eliminated, I believe that we need to go even further in terms of the Fed’s mandated objective.
The Federal Reserve should be concerned with stable prices but there are problems with the use of inflation as the target of monetary policy. One of the problems is measurement. To use the Consumer Price Index (CPI) is troublesome. First of all, it is an index and is a constructed measure. Since it is an attempt to measure what happens during a period of time it is constructed in terms of “flow” variables and not “stock” variables.
The major example of this is the price of housing which needs to be the price of a “flow”…the flow of housing services consumed by consumers over a period of time…and not the price of the “stock”…the price at which a house sells for. Since there are many owner occupied houses in America, the price of the housing services…rent…must be estimated. How good this estimation is, particularly during a bubble like we have experienced in the past eight years, is questionable. And, the rental component is a relatively large one in the CPI because the consumption of housing services is a large portion of the consumer’s budget.
Second, there is the question about whether or not we should be concerned with the total CPI or only with the “core” CPI. By eliminating two of the more volatile components of the CPI we certainly get a more stable view of the movement in the prices of basic consumer goods, but does this really reflect the true rate of inflation that the consumer has to live with?
A third point, alluded to above, is the problem of “asset bubbles.” Asset bubbles occur in asset prices, not the price of the services…like the price of a house, not the rent one pays for the services one consumes over a period of time. Policymakers have a problem focusing on, say, rental prices, and the price of assets at the same time. There is no measure to balance the behavior of the two prices in terms of policy decisions. Hence, the dilemma that the Federal Reserve’s Open Market Committee has in making decisions as to the stance of monetary policy. Thus, I have problems with the idea that the central bank should focus on an inflation target as the sole objective of monetary policy.
What, then, do I recommend as a policy target for the Federal Reserve in its conduct of monetary policy? I believe that the policy target of the Federal Reserve should be the value of the United States dollar in foreign exchange markets. My support for this is…none other than…Paul Volcker. Volcker has written that “a nation’s exchange rate is the single most important price in its economy...So it is hard for any government to ignore large swings in its exchange rate….” This quote is from the book by Paul Volcker and Toyoo Gyohten, “Changing Fortunes: The World’s Money and the Threat to American Leadership,” (New York: Times Books, 1992), page 160.
There are two basic reasons for the Fed to focus on the nation’s exchange rate. First, a nation’s exchange rate is based upon the expectations of market participants. Market participants have expectations about relative rates of inflation in different countries around the world and are willing to put their money out into the market on the basis of these expectations. The inflation rates they are interested in are related not only to “flow” prices but also to “stock” prices. Thus, international investment managers move money around based upon inflation in asset prices as well as consumer prices.
The value of the United States dollar began to decline in early 2002. It declined almost steadily…with some periods of stability…into the summer of 2008. Something was going on in the United States economy relative to other countries during this period of time. As Volcker argues “it is hard for any government to ignore large swings in its exchange rate…” and yet the United States government did!
My point is…that participants in international financial markets were trying to tell us something. Market participants reacted to the huge deficits created by tax cuts and the ‘war on terror’ and the extremely low interest rates supported by the Federal Reserve by selling dollars. In terms of inflation they were telling us that the inflation taking place in the United States was going to be substantial relative to the inflation that was going to occur in other countries. Although this inflation did not seem to get out-of-hand in terms of the Consumer Price Index, other things going on in the United States…like the housing bubble!
Markets tell us something and we need to pay attention to them! Markets swings are based upon future expectations rather than on historical data as is used in the construction of price indices. We need to observe market prices and attempt to understand what the market is trying to tell us. My argument is that this is more relevant to the conduct of monetary policy than is focusing upon an inflation rate based on the historical record. I agree with Volcker, “a nation’s exchange rate is the single most important price in its economy.”
Therefore, I believe that the Federal Reserve should target the value of the United States dollar for the conduct of monetary policy. This does not mean that the target should be a fixed one. Conditions change…the economic policies of other countries may vary…and there may be other reasons such as the pricing of oil by the oil cartel or war breaking out somewhere in the world.
And, this leads to my second point…the United States must act as a partner in the world. Focusing upon the exchange rate forces the policy makers, when they are determining the direction of monetary policy, to consider what other nations are doing. America has ignored other nations over the past eight years until the current crisis began to unfold. We cannot afford to go forward into the future independent of what the rest of the world is doing. See my post of November 1, 2008, “The Need for an American Economic Strategy,” http://maseportfolio.blogspot.com/.
One final point about the Federal Reserve at this time: I believe that Chairman Ben Bernanke should step down as Chairman of the Board of Governors of the Federal Reserve System so that the new President can appoint a Chairman of his own choosing. Confidence and trust is going to be important for the success of the new President and I do not believe that Bernanke provides these commodities. My own choice for the new Chairman of Board of Governors is Timothy Geithner, the current President of the Federal Reserve Bank of New York. Geithner is not an academic and has been through many storms, not only in his current position, but in the Rubin Treasury Department. I think he would be an excellent choice and would come into the position with the confidence and trust of participants in international financial markets as well as in governmental circles around the world.
Saturday, November 1, 2008
The Need for an American Economic Strategy
The lead article in this week’s Business Week (November 10, 2008) is by Michael Porter, the Bishop William Lawrence University Professor at the Harvard Business School. Porter is calling for the next President to formulate an economic strategy for the United States.
Formulating and promoting such a strategy will help the country in two ways. First, it will start to provide some leadership to the country in economic affairs…leadership that has been sorely missing in recent years. Second, it will provide a framework that “embodies clear priorities” and will lay out an understanding of the strengths that the United States needs to preserve and the weaknesses that threaten the prosperity of the United States the most. Porter strongly argues that the “United States lacks a coherent strategy for addressing its own challenges.”
I could not agree more that the new President needs to provide strong leadership in establishing the goals and objectives to be strived for in the area of economic strategy and needs to direct everything that he does to reflect the effort to attain these goals and objectives. In my experience running companies or leading organizations I felt it was my responsibility as the leader of the organization to make clear what we were striving for and then back up this vision with my performance: that is by being consistent with this vision in all my actions and in all my statements.
Let me now highlight what I think are the most important things in Porter’s list of what should be included in the economic strategy. I can’t argue with the general thrust of what Porter says, but, of course, I have my own priorities. I will discuss three specific areas: education, innovation and entrepreneurship, and global integration.
This country was founded upon the spread of information and the role that education plays in this spread. To me, the modern world really started when moveable type was invented because this allowed for the printing of books and pamphlets and newspapers and all sorts of other things. With this invention, information spread and people got to read things they had never seen before and compare ideas in a way they never had a chance to do before. With this new knowledge they could debate different theories, see and compare different data sets, and argue and debate and dialogue. The result was the Reformation, the Counter-Reformation, the Enlightenment, Modernity, and even Post-Modernity along with many other less well known movements.
The founding of America was also a result of this spread of information and early on it was argued that a democracy such as this should have an educated people so that they could be aware of the issues being faced by the country and could intelligently elect their leaders. Being able to read was also considered to be very important in establishing the type of moral climate that would support a democratically elected government. Being able to read meant that citizens could read the Bible for themselves and interpret it for themselves…something that was not always allowed in the Old World. Schools…and colleges were important…education was stressed. And so major institutions of higher learning were established…Harvard, Yale, Columbia, Princeton, the University of Pennsylvania, and William and Mary, to name a few.
Americans found out later that having schools and colleges contributed to the expansion of knowledge and the expansion of knowledge was good for innovation and the expansion of trade. Technical schools and colleges evolved. And, this allowed for information to continue to spread and for new ideas to circulate and for new things to be tried…and the country grew and prospered.
The American success story hinges to a great deal on the creation, evolution, and enhancement of higher education in the United States. But, Porter writes, “America now ranks 12th in tertiary (college or higher) educational attainment for 25- to 34-year-olds. We have made no progress in this vital area over the past 30 years, unlike almost every other country.”
He goes on, “All Americans know that the public education system is a serious weakness….In the global economy, just being an American is no longer enough to guarantee a good job at a good wage. Without world-class education and skills, Americans must compete with workers in other countries for jobs that could be moved anywhere.” Early in this decade I spent four years taking classes in Princeton. I was amazed to see who populated the Firestone Library. I could not argue that Americans were even a significant minority in attendance there. I have also noticed a similar situation at Penn State’s main campus. Education is not a major priority of Americans these days, yet Americans will be the first to decry the movement of jobs elsewhere in the world.
Innovation and entrepreneurship have been the workhorses of the American economy. Porter writes, “The United States has an unparalleled environment for entrepreneurship and starting new companies.” He adds, “United States entrepreneurship has been fed by a science, technology, and innovation machine that remains by far the best in the world.” We have this engine as the primary driver of American growth and prosperity. Yet, “America’s belief in competition is waning.” Also, there is resentment and fear directed at new ways of doing things and new directions of research. People on the edge of their professions or fields of study are referred to as “elites”, as “celebrities”, as “anti-religious.” Change threatens people. New ideas threaten people. People that others don’t understand threaten people.
America is facing a split, as are other areas of the world. See my post, “The Split in America,” October 29, 2008, http://masepoliticalcommentary.blogspot.com/. We cannot allow the environment of innovation and entrepreneurship that has existed in the United States to fall away. The next President of the United States must work hard to ensure the continued presence of an environment that is receptive and encouraging to those that want to step out and take chances.
Finally, the next President must work to encourage a feeling of trust and partnership within the world community when it comes to economics and finance. For too much of the past eight years or so, America has tended to act unilaterally when it comes to policies and programs related to international trade and finance. The United States can no longer continue to do this. The current world crisis, if it shows anything, shows that the world is too integrated and nations are too dependent upon one another to act in any other way than in partnership with one another.
People believed at one time that other major economies could “disconnect” from the United States if the United States wanted to continue acting independently of them. This has proven to be a fallacy. Somehow, someway nations and the leaders of nations are going to have to work together to begin to build, even the most elemental and rudimentary parts of, a world system. We can all retreat into our own little shells like the nations did after World War I. But, like they found out then, this can only lead to further conflict and possibly an even worse war. American, even though it remains the largest economy and the most powerful nation in the world, must act as a partner and help to build up other nations, not ignore them or put them down.
The next President has a lot of business already on his plate. But, if America is going to move forward, the next President is going to have to show some leadership. Porter writes that “America’s political system, especially as it has evolved in recent times, almost guarantees an absence of strategic thinking at the federal level. Government leaders react to current events piecemeal, rather than developing a strategy that unfolds over years.”
The next President can deal in this little area or that little program or with this little disturbance if he wants to. What America really needs, however, is for the next President to give us a vision…something we can get behind…so that we, at least, know what direction he is trying to move us in.
“Now is the moment when the United States needs to break this cycle,” Porter cries. Now is the moment for some leadership.
Mr. President-elect…go for it!
Formulating and promoting such a strategy will help the country in two ways. First, it will start to provide some leadership to the country in economic affairs…leadership that has been sorely missing in recent years. Second, it will provide a framework that “embodies clear priorities” and will lay out an understanding of the strengths that the United States needs to preserve and the weaknesses that threaten the prosperity of the United States the most. Porter strongly argues that the “United States lacks a coherent strategy for addressing its own challenges.”
I could not agree more that the new President needs to provide strong leadership in establishing the goals and objectives to be strived for in the area of economic strategy and needs to direct everything that he does to reflect the effort to attain these goals and objectives. In my experience running companies or leading organizations I felt it was my responsibility as the leader of the organization to make clear what we were striving for and then back up this vision with my performance: that is by being consistent with this vision in all my actions and in all my statements.
Let me now highlight what I think are the most important things in Porter’s list of what should be included in the economic strategy. I can’t argue with the general thrust of what Porter says, but, of course, I have my own priorities. I will discuss three specific areas: education, innovation and entrepreneurship, and global integration.
This country was founded upon the spread of information and the role that education plays in this spread. To me, the modern world really started when moveable type was invented because this allowed for the printing of books and pamphlets and newspapers and all sorts of other things. With this invention, information spread and people got to read things they had never seen before and compare ideas in a way they never had a chance to do before. With this new knowledge they could debate different theories, see and compare different data sets, and argue and debate and dialogue. The result was the Reformation, the Counter-Reformation, the Enlightenment, Modernity, and even Post-Modernity along with many other less well known movements.
The founding of America was also a result of this spread of information and early on it was argued that a democracy such as this should have an educated people so that they could be aware of the issues being faced by the country and could intelligently elect their leaders. Being able to read was also considered to be very important in establishing the type of moral climate that would support a democratically elected government. Being able to read meant that citizens could read the Bible for themselves and interpret it for themselves…something that was not always allowed in the Old World. Schools…and colleges were important…education was stressed. And so major institutions of higher learning were established…Harvard, Yale, Columbia, Princeton, the University of Pennsylvania, and William and Mary, to name a few.
Americans found out later that having schools and colleges contributed to the expansion of knowledge and the expansion of knowledge was good for innovation and the expansion of trade. Technical schools and colleges evolved. And, this allowed for information to continue to spread and for new ideas to circulate and for new things to be tried…and the country grew and prospered.
The American success story hinges to a great deal on the creation, evolution, and enhancement of higher education in the United States. But, Porter writes, “America now ranks 12th in tertiary (college or higher) educational attainment for 25- to 34-year-olds. We have made no progress in this vital area over the past 30 years, unlike almost every other country.”
He goes on, “All Americans know that the public education system is a serious weakness….In the global economy, just being an American is no longer enough to guarantee a good job at a good wage. Without world-class education and skills, Americans must compete with workers in other countries for jobs that could be moved anywhere.” Early in this decade I spent four years taking classes in Princeton. I was amazed to see who populated the Firestone Library. I could not argue that Americans were even a significant minority in attendance there. I have also noticed a similar situation at Penn State’s main campus. Education is not a major priority of Americans these days, yet Americans will be the first to decry the movement of jobs elsewhere in the world.
Innovation and entrepreneurship have been the workhorses of the American economy. Porter writes, “The United States has an unparalleled environment for entrepreneurship and starting new companies.” He adds, “United States entrepreneurship has been fed by a science, technology, and innovation machine that remains by far the best in the world.” We have this engine as the primary driver of American growth and prosperity. Yet, “America’s belief in competition is waning.” Also, there is resentment and fear directed at new ways of doing things and new directions of research. People on the edge of their professions or fields of study are referred to as “elites”, as “celebrities”, as “anti-religious.” Change threatens people. New ideas threaten people. People that others don’t understand threaten people.
America is facing a split, as are other areas of the world. See my post, “The Split in America,” October 29, 2008, http://masepoliticalcommentary.blogspot.com/. We cannot allow the environment of innovation and entrepreneurship that has existed in the United States to fall away. The next President of the United States must work hard to ensure the continued presence of an environment that is receptive and encouraging to those that want to step out and take chances.
Finally, the next President must work to encourage a feeling of trust and partnership within the world community when it comes to economics and finance. For too much of the past eight years or so, America has tended to act unilaterally when it comes to policies and programs related to international trade and finance. The United States can no longer continue to do this. The current world crisis, if it shows anything, shows that the world is too integrated and nations are too dependent upon one another to act in any other way than in partnership with one another.
People believed at one time that other major economies could “disconnect” from the United States if the United States wanted to continue acting independently of them. This has proven to be a fallacy. Somehow, someway nations and the leaders of nations are going to have to work together to begin to build, even the most elemental and rudimentary parts of, a world system. We can all retreat into our own little shells like the nations did after World War I. But, like they found out then, this can only lead to further conflict and possibly an even worse war. American, even though it remains the largest economy and the most powerful nation in the world, must act as a partner and help to build up other nations, not ignore them or put them down.
The next President has a lot of business already on his plate. But, if America is going to move forward, the next President is going to have to show some leadership. Porter writes that “America’s political system, especially as it has evolved in recent times, almost guarantees an absence of strategic thinking at the federal level. Government leaders react to current events piecemeal, rather than developing a strategy that unfolds over years.”
The next President can deal in this little area or that little program or with this little disturbance if he wants to. What America really needs, however, is for the next President to give us a vision…something we can get behind…so that we, at least, know what direction he is trying to move us in.
“Now is the moment when the United States needs to break this cycle,” Porter cries. Now is the moment for some leadership.
Mr. President-elect…go for it!
Subscribe to:
Posts (Atom)
