European Credibilty

In a solvency crisis, the question of credibility always arises.  The issue is one of trust…who can one trust?

The European Banking Authority (EBA), which opened for business this year, is now under the gun.

One of the jokes of the earlier European sovereign debt meltdown was the stress test that was administered to European banks.  The “stress” of the tests were not that stressful and the results were dismissed as irrelevant.

One goal the EBA set out to achieve was to administer a stress test that was credible and would provide a “realistic” view of how European banks would weather a new round of financial distress.

The tests were begun in March…the results of the stress tests were to be released in June.

The EBA has now asked banks to resubmit their information because “The EBA is currently assessing and challenging the first round of results from individual banks.  This will mean that another round of data will be required…Errors will have to be rectified and amendments made where there are inconsistencies or unrealistic assumptions.”

That is, there are “concerns that some countries and institutions made mistakes or used overly rosy assumptions.” (http://www.ft.com/intl/cms/s/0/cf770d00-8c6f-11e0-883f-00144feab49a.html#axzz1O1hWLIwZ)

But, there seems to be another problem imbedded in these European stress tests.  “As with 2010, the EBA has also failed to include the possibility of a sovereign debt default, in spite of bail-outs in Greece, Ireland, and Portugal.”

What?

Much of the discussion surrounding the issue concerning what the European Union should do about Greece and the restructuring of Greek debt hinges on the inability of European banks to handle a write-down of Greece’s sovereign debt. 

I quote from my Tuesday morning post:

“Moody’s Investors Service estimates the European banks hold about €95 billion in Greek sovereign and private debt—and could lose one-third of it in a worst case scenario.”

European banks hold some €630 billion in Spanish debt. If Greece defaults in any way, shape, or form, the question is, “What about Ireland? And, Portugal? And, Spain? And, Italy? And…?” (See http://seekingalpha.com/article/272549-how-long-will-the-bailouts-continue.)

Where is the credibility in the stress tests, even if the banks use more pessimistic scenarios in the information they resubmit to the EBA?

And, as I suggested yesterday, leaders in America should be paying attention to the lessons being generated by the events now going on in Europe. (http://seekingalpha.com/article/272746-european-choices-continue-to-narrow-more-debt-is-not-the-solution)

The monetary and banking authorities are facing a situation in which one out of every seven commercial banks in the country is on the FDIC’s list of problem banks.  About one out of every four commercial banks in the country is “troubled.”  The number of banks in the banking system dropped by 320 banks in 2010 and we are on track for the number of banks to decline in 2011 by about the same number, which is about 5 percent of the commercial banks in the United States. 

The American banking system is not that healthy.  And, as a consequence, commercial banks, as an industry, are not lending.  The housing market continues to sink.  And, commercial real estate continues to be listless.  There are big pieces of the economic picture missing.

Maybe the leaders in the United States need to admit to these problems.  Maybe they need to learn something from the European situation in which the severity of the banking problems are hidden in incomplete stress tests while the whole “relief” program for Greece…and others…are being based upon the weaknesses in the banking system. 

The credibility of the European leadership is not doing well in the face of their lack of transparency.

The credibility of American leadership is facing similar shortcomings.

Maybe this is why Sheila Bair is leaving the FDIC…the end of her term of appointment being just a convenient excuse.  Maybe Sheila Bair knows something that the current administration does not want out in the public domain. 

My friends tell me that if the way a person talks does not match up with the way a person walks…then there is a credibility problem!  That is, watch the hips…not the lips!

I see this problem in Europe.

I see this problem in the United States.  President Obama and others in his administration, Ben Bernanke and Tim Geithner, are explaining their actions in ways that do not seem to be consistent with the facts.  The result is public and investor confusion, uncertainty…and discontent…with their policies.

Europe does not seem to have anyone that can provide the leadership it needs…and this does not bode well for its future.

One keeps hoping that Obama will step up and provide the leadership for the United States.  But, I am afraid that this will not happen.  After all the number one responsibility of any government official is to get re-elected.  And, we are in that season.      

"Sharing the Pain: Dealing with Fiscal Deficits"

Over the past week or so, I have spent a lot of time on sovereign debt and the problems being faced by various nations across this planet with respect to their budget deficits. I suggest the article “Sharing the Pain” in the March 4, 2010 edition of The Economist as a good compilation of issues relating to the situation many countries are now facing. This piece is contained in the briefing, “Dealing with Fiscal Deficits,” http://www.economist.com/business-finance/PrinterFriendly.cfm?story_id=15604130.

We can separate the discussion into three categories: the problem, the pain, and the pragmatic response.

First, the problem. History shows us that when economies slow down, budget deficits appear or widen. Revenue growth declines as the needs to increase outlays rises. Put this general movement on top of decades of undisciplined management of government budgets and you can get “one hell of a problem”

The Economist article states that “deficits in several countries have increased so much and so fast during the economic crisis of the past 18 months or so that it is generally agreed that remedial action will be needed in the medium term. Deficits of 10% or more of GDP cannot be sustained for long, especially when nervous markets drive up the cost of servicing the growing debt.” It continues, “when markets do lose confidence in a government’s fiscal rectitude, a crisis can arise quite quickly, forcing countries into painful political decisions.”

Second, the pain. History shows, according to Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, that it is highly unlikely that the “rich countries” of the world will experience a burst of rapid and prolonged growth. “Sluggish growth is more likely” and “the evidence offers little support for the view that countries simply grow out of their debts.”

“So, short of debt default or implicit default via inflation, that leaves just two other ways of closing the deficit. Spending must be cut or taxpayers must pay more.” Hence the pain!

Here we can point to the situation in Greece where much of the effort to return some fiscal discipline to the country is falling on cuts in government wages and in social benefits. This has resulted in substantial personal retrenchment and civil unrest. Today we read of a second general strike in the nation that closed all public services. See, “New Strike Paralyzes Greece,” http://www.nytimes.com/2010/03/12/world/europe/12greece.html?ref=business.

The deficits are so large in most of the affected countries that minor adjustments to spending or taxes will have little or no impact. The budget adjustments that must be made are quite substantial: hence the depth and breadth of the pain.

In recessions that are relatively minor, government monetary and fiscal stimulus seems to restore economic growth, thereby rectifying the situation and minimizing the pain. But, in a recession of the magnitude of the Great Recession the government does not seem to be able to “buy” itself out of the trouble. Hence, the spread of the pain.

Furthermore, there is an added difficulty that enters the picture in the more extreme cases. Those that are more affected by the recession and by the adjustments that need to be made in government budgets may come to see the changes as a break in the “social contract” of the country. This government that saw to their welfare, put them to work, and sustained them through the minor crises of the past, now seems to be abandoning them. And, for whom? The international financial community!

Obviously, if we get into this state of affairs, the emotions can become quite high, as in Greece.

This leads us into the third category which has to do with what government can do in such situations. The problem with the situation brought on by large budget deficits and a growing national debt is that there are no good solutions. Anything the government does in an attempt to get the budget under control while encouraging the economy to recover hurts someone.

This is why governments must be very pragmatic in what they propose. Doctrinaire approaches just do not seem to work. There are only two suggestions from the historical perspective that seem to have borne some fruit in the past. The first is that there needs to be some “social cohesion” in the country to achieve some success in the effort to get the country’s budget under control. The second is that governments “should focus on spending cuts rather than tax increases.”

The article in The Economist points to two instances where successful government tightening has taken place in recent memory: Sweden and Canada. In both cases the crisis in the country became acute enough and the ruling governments acted in a sufficiently pragmatic way so that voters finally got behind the efforts. However, this social cohesion was not always achieved on the first attempt.

Some of the social cohesion can be gained by raising some taxes, especially on the “better off”. This may be the “quid pro quo” for the less well off to accept the other things that need to be done. The downside to this is always that the “better off” have more escape hatches that will allow them to avoid any imposition of taxes they feel are excessive. And, many countries in the past twenty years or so have built up reputations as “low tax havens” to attract business. Ireland, for example, lowered its corporate tax rate to just 12.5% and is very reluctant to increase this and harm the climate they benefitted so much from. If taxes go up on these people and businesses, they can be very mobile and move to less oppression environments. Also, tax evasion can be a huge problem especially against sales or value-added taxes.

So, the burden of fiscal tightening falls on the spending side but this is not an easy road either. And, when one looks at the “big” targets for cuts, good arguments for not making cuts abound. Military spending is not a major item in many countries needing budget cuts, but it is in the United States. Here, there are two wars being fought and the need to maintain the world’s “top” military machine and keep it current through research and development makes the budget almost non-touchable.

The next major item that comes up on the list to consider is government employment. Over the last 50-60 years, governments throughout the world have exploded in terms of providing employment. Over the last several years the rate of government hiring has gone up, especially in the United States, in an effort to deal with the financial crisis and the Great Recession. Is it realistic to think that governments will shrink in size or in terms of payroll expenses? This is where Greece and Ireland and Portugal and Spain have promised to do something. And, of course, this is where much of the civil unrest has come from.

Next, social programs, a huge item in many government budgets and the primary cause of the expansion of government budgets in the post World War II period. (For more on this see Niall Ferguson’s book “The Ascent of Money: A Financial History of the World.) The Economist suggests that one area that can be rationalized here is the pension system in these countries.
And, there are other ideas available.

The thing the article (implicitly) points out is that the way out of the fiscal dilemma is not easy. But, I suggest three further things that need to be considered. First, leadership. The countries facing the problems discussed here need to have someone out in front that is understood and trusted. The only way out of this situation is pragmatic: not progressive, not conservative, not liberal, not socialist, or any other dogmatic approach. But, to achieve the “social cohesion” necessary for success, there must be leaders that draw people together.

Second, the proposed solutions cannot just force people back into the way things were. One reason for the depth and breadth of the Great Recession is the changing structure of the society and culture. (For more on this see my post, http://seekingalpha.com/article/192713-the-trouble-with-recovery.) If this is true, then the leadership must be forward-looking rather than serving just entrenched interests.

Finally, this will not be easy. As The Economist article closes: “There are many battles over deficits to come. Well chosen policies that foster growth may make them less fierce. They may be bloody even so.” Amen.

Obama and Leadership

Where do I stand on the Obama Presidency?

I stand at about the same place I did last year at this time.

President Obama has put too many projects into his “top priority” list. After a year in office with not a whole lot to point to, he still insists that he will stay the course and continue to pursue the things he has been pursuing.

My experience in leadership cautions me that a leader cannot have too many top priorities. This is true if things are running pretty smoothly and it is especially true if one is in a turnaround situation.

To me, Obama’s job was to execute the turnaround of a pretty sick patient!

Leadership is to bring focus to a situation, identifying what is immediately important and what can be put off for awhile. Leadership is about communicating this focus to others so that they know what they are to concentrate on and they can get on board with the leader. Then the leader needs to bring sufficient resources to bear on the problem so that the goals and objectives of the organization can be met.

There will be diversions along the way. That is just the way the world is. Because the leader knows that she or he will face these other, unknown bumps along the road, having a disciplined agenda will allow the leader to take care of these “diversions” while still pursuing the major goals and objectives.

President Obama put too many projects on his “top priority” list. He did not focus. He had the “Audacity of Hope” driving him on. And, while that may be very appealing and good speech material, everything would have had to go “just right” for the president to achieve all the goals he set for himself.

Someone once was elected to office by focusing on the claim, “It’s the economy, stupid!”

But, this tunnel vision never seemed to be a part of the Obama persona.

Looking back one year, however, it is easy for us to now say, “It was the economy, stupid!”

Last year at this time we were tottering on the brink of another “Great Depression.” There was a lot of fear in the country. America’s biggest banks were on the edge, the economy was in the tank, and unemployment was growing. Foreclosures were rising as were bankruptcies. And, most of the rest of the world was in at least as bad shape as was the United States.

The Obama administration, along with Congress, produced a stimulus plan. There was the interjection of the government into the auto industry and one or two other efforts to head off problems. The Federal Reserve pursued “quantitative easing” keeping its target interest rate around zero.

Things did get better. Analysts are claiming that the “Great Recession” ended somewhere in the second half of 2009. But, unemployment still remains high. Foreclosures and bankruptcies are still taking place at near record rates. There remain over 550 banks on the problem bank list of the FDIC. And, the economy seems lethargic. Our consumer advocate, Elizabeth Warren, is raising concerns over the demise of the middle class. There is the criticism that the focus of the recovery was on Wall Street and not Main Street. Some prominent economists, Stiglitz, Krugman, and Roubini, are worried about a double-dip in the economy.

News about the President’s efforts on the economy were quickly displaced by trips around the world, about health care reform, about global warming, about energy policy and a myriad of other initiatives.

Of particular concern here was the Obama health care effort. I will just make three points here. First, President Obama turned the development of the legislation over to the Reid/Pelosi leadership in the Congress to craft the bill. Obama disappeared. Questions about where the president stood or what he was for received vague, disconnected answers because he was not leading the charge.

The story I heard for this tactic was that the health care bill presented by President Clinton failed because it was crafted in the White House and did not include sufficient Congressional participation in the process. Obama was not going to make this mistake. President Clinton, of course, denies this reason for the failure of the 1993 effort at health care reform.

Second, the emphasis that was placed on obtaining 60 votes in the Senate to pass the legislation put several self-seeking Senators in the driver’s seat. (Who says ‘moral bankruptcy’ is just centered in the Wall Street banks?) Rather than focusing on the health care bill itself, the nation was appalled by the behavior of a few of America’s elite holding everyone else hostage in order to get their special interests taken care of.

Third, the size of the effort was overwhelming. All people heard was universal coverage, coverage of pre-existing conditions, public option, and so forth and so on. The picture that came through to ordinary people was “huge plan” must be connected with “huge cost.” This was the way the government worked. All the efforts and machinations of the politicians to build a plan that would not cost the American people “one dime” just did not resonate with the public. Universal efforts were expensive and always cost more than expected. And, this would just add to the huge deficits predicted for the next ten years or so.

And, this was going on while the president spoke, always eloquently, about his other concerns.

Then, there was Iran, and Iraq, and Afghanistan, and the Christmas terrorist bomber, and Massachusetts (and Virginia and New Jersey) and other detours.

The consequence? Confusion, uncertainty, frustration, anger, you name it, on the part of the people. What are the priorities? Where does the president stand? What does the president want us to do? What are the rules? Who is in charge, Congress or the President? What is important?

And, the economy? I don’t know when I have seen a situation in which such uncertainty exists. First, the big banks are helped. (Yesterday we heard that the crucial thing was that the economy did not collapse, not how much money Goldman or the French or whoever got.) Then the big banks became the big bad guys. Now we need to re-regulate them. But, how are they going to be regulated? What about foreclosures? Can anything be done about them? And, then the small- and medium-sized banks aren’t lending. How can we get credit flowing again? And, so on and so on.

People and businesses can’t follow if they don’t know where their leaders are heading, what their main priorities are. People and businesses can’t plan if they don’t know what the rules and regulations are going to be. People and businesses can’t commit if they are plagued with uncertainty.

The State of the Union address last evening did not resolve any of these issues for me or lessen my concerns. To me the issue is leadership and the respect for a leader is earned. This is a question of the rubber hitting the road and no speech, no matter how eloquent it might be is going to change this fact. I am still waiting for the focus of intention and the focus of effort.

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.

Why haven't the financial markets responded?

The stock market has experienced a serious decline since the passage of the Paulson Plan. The money and bond markets still seem to be frozen in spite of a coordinated cut in world central bank target rates. The only way that this behavior can be explained in my mind is that without strong leadership…from the very top…the financial markets will continue to be weak. Even though others…Paulson and Bernanke…have tried to provide some form of leadership, the leadership that must be exhibited from the very top continues to be missing. (See my post of September 25, 2008, “The Absence of Leadership.)

Missing this leadership, members of the Bush 43 administration were hoping and praying that events would be relatively quiet until they were able to sneak out of Washington in January 2009 and let someone else handle the situation.
They didn’t make it!

And, like any other organization that does not have a leader, good people with good intentions when faced with calamities try to come up with some plan or some action that will plug the hole in the dike. The problem with this is that they have to work around the leader. And, there is no unifying force present is such situations, no calm hand on the tiller listening to alternatives, asking questions, and guiding responses. And there is no one around to punish dissidents.

Up until a couple of weeks ago, Treasury Secretary Paulson and Fed Chairman Bernanke tried to band aid the system, proposing temporary responses to the growing crises that would tide things over until the new government came into office to deal with the problems. It seemed as if Paulson and Bernanke had reached a game plan…a bailout took place for Fannie and Freddie…and, Lehman was to fail with no help and nothing would be done for AIG.

Then, it appears by all reports…Bernanke reached a turning point!

Bernanke called Paulson and indicated that the financial markets were falling apart and that if nothing were done the economy might not be there the next Monday. The Congressional leadership had to be informed of this development and brought on board for a major flood of liquidity. In no instance could the financial system and the economy come up short of liquidity!
Paulson set up the meeting with the Congressional leadership and at that meeting Bernanke poured out his story of woe. And, according to some of the members of Congress that were there…Bernanke scared the life out of them!

One question needs to be asked at this point…where was the “decider”?

The Treasury plan was assembled as quickly as possible for passage by Congress as quickly as possible…no hearings…really, no questioning…things were so bad that there was no time for these niceties that could take place when things were not so dire.

And, then the financial markets froze!

Why not?

Here was the Chairman of the Board of Governors of the Federal Reserve System saying that the economy might not be there on Monday. What did he know that market participants didn’t? What was going on in Europe and elsewhere? Here was a major case of asymmetric information. And the people that were without information were the suppliers of funds.

Bear Stearns had failed. Merrill Lynch had failed. Fannie and Freddie had failed. Lehman had failed. Washington Mutual had failed. AIG had failed. Wachovia had failed. Who was going to be next? What did the Fed and the Treasury know that market participants didn’t know?

The initial effort to get “the bill” through Congress failed! There was no one in a leadership position that could call the troops to order. (Even presidential candidate John McCain road out at the head of his Calvary to lead the charge to get the bill passed…only no one followed him! No leadership here.) Paulson could not do it…he was not the leader…there was no leader!

The “decider” was marched out…but he was dazed and only mouthed the words that were given. Why should anyone have any confidence in what was being done?

Is the bill passed last Friday any good? After what went on in the two previous weeks the bill seems somewhat irrelevant…a very costly irrelevant. There is still no vision going forward. There is no strategy. There is no structure. There is little or nothing. At best we are told that maybe in four weeks the “Paulson Plan” will be up and running.

That will be after the election and we will have a president-elect. But, the president-elect will have to wait for over two months before he can do anything about the financial crisis.
Meanwhile the Fed floods world financial markets with liquidity?

Bernanke’s study of the Great Depression taught him that during such a crisis the world cannot have too much liquidity. And, so “Helicopter Ben” is acting on that premise. Total reserves in the United States banking system, for the two weeks ending September 10, averaged about $44 billion on a non-seasonally adjusted basis. For the two weeks ending September 24, the total reserve figure was about $111 billion. Never has the United States banking system received so many reserves so rapidly. And look at the sources and uses statement of the Federal Reserve System…the H.4.1 release. In the last three weeks the sources of reserves in the banking system increased by more than 50%!!!!!

Never have we seen anything like this! Never!

This is what happens when there is no leadership. One cannot blame this situation on previous administrations or other conditions within the world. The current leader of the free world is MIA.
Unfortunately for the financial markets, for the economy, for workers, for families, for everyone else…there will not be a new president for several months yet. And, we still have to uncertainty with respect to what the newly elected president will do. Will he, when in office, be able to provide the leadership that is so badly needed?

So, there is still an enormous amount of uncertainty with respect to the future and this enormous amount of uncertainty will reign in the markets until such leadership surfaces. And, the financial markets will still remain tentative as they attempt to discern who will fail next…and then next after that…and then next after that…

It' One World Now!

The headlines this morning…The Federal Reserve, the European Central Bank, the Bank of Japan and other counterparts entered into a coordinated effort to provide liquidity to world markets so as to revive confidence in international financial markets and, hopefully avoid a melt-down. Now, almost $250 billion of dollars can be auctioned off around the world via swap lines within the world central banking network. Almost one quarter of a trillion dollars of liquidity is now available!

To my mind, the tipping point has been reached. The era of go-it-alone, unilateral, cowboy nation behavior has collapsed. It should be very, very difficult for a nation to act independently in its own interest in the future.

This has been coming for many years now, but, as usual, it takes a crisis to pull it off. Four major books in recent years have given us a picture of this world and the lessons of these books should be taken to heart. These books should be “must” reading:
Mohamed El-Erian—“When Markets Collide”;
Thomas Friedman—The World is Flat”;
David Smick—“The World is Curved”;
Fareed Zakaria—“The Post-American World”.
None of these books contends that America will lose its premier position in the world. What all of these authors imply, however, is that the United States must become a partner with other countries rather than the arbiter of world behavior. Not only has the world become more connected and interdependent, the world has also become more uncertain. The only way nations can function within such a world is to cooperate with one another and seek solutions together because the problems and difficulties they face are huge and affect everyone.

Historically, I would place George W. Bush alongside François Mitterrand in terms of country leaders that got caught up in an ideological dead end. In the 1980s, Mitterrand, who was the president of France and a Socialist ideologue, attempted to “go-it-alone” and introduce a very socialist program which included substantial budget deficits underwritten by the French central bank, capital controls and a possible government take-over of industries. Capital fight followed and private business investment dried up. Finally, in March 1983, Mitterrand, after many fierce battles, gave in to world financial markets, gave up his ideological stance and moved to tighten up the budget, make the French central bank independent, and fight inflation. This whole experience “was a brutal warning to all political leaders that the regime of global capital made it much harder for any government, whatever its democratic political mandate, to go its own way.” (This quote comes from Steven Solomon, “The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy,” pgs. 286-287.)

George W. Bush, upon election to the U. S. presidency, established a “go-it-alone” effort, only in his case, the ideology was tilted to the Reaganomics of the 1980s…cutting taxes was the true test of his conservatism, everything else be damned. (It was a remarkable experience to listen in the primaries to ALL of the Republican candidates running to become their Party’s presidential nominee. They ALL bent over backwards attempting to convince people that they were the true heir of Ronald Reagan because they were going to provide the most tax cuts to Americans when they were elected President.)

Bush 43 got his tax cuts…and the Federal Reserve supported the tax cuts by keeping real interest rates negative just like a good member of the administration should…and now, like Mitterrand, Bush 43 is getting his market response. The only difference is that Bush 43 is not repenting and not changing his administration’s policies. He doesn’t have to…he’s a lame duck.

Another world leader facing his “Mitterrand moment” is Vladimir Putin, Prime Minister of Russia. Putin is finding out that even a Russian oligarch cannot “go-it-alone” and escape unscathed in terms of the opinion of world financial markets. Since the invasion of Georgia, the Russian stock market has fallen 55% and capital seems to be fleeing the country. The Russian stock market was closed on Wednesday and Thursday to stop the decline and the Russian government pledged the equivalent of almost $20 billion to shore up market confidence.

Bottom line—world leaders must decide on one of two choices going forward with respect to globalization. Either they can pull in the carpet through a national catering to populism, protectionism, and withdrawal from free-trade agreements or they can work with other nations to build a coordinated, cooperative world economic order that is composed of equal partners and not prima donnas.

To me, this is no choice at all. True leadership is going to come from those that realize the need of world partnerships and don’t pander to a national populist frenzy. True leadership is going to come from those that subscribe to the basic fundamentals of economics and finance (as discussed in my posts of September 15 and September 17). And true leadership is going to come from those that do not believe that their nation can just “go-it-alone”.

Leader-less

It all starts at the top!

How desperate are things? Well, the “Decider” stepped out yesterday to calm the American people’s fears about the financial system and the economy. Here is a person who has no credibility…a person that has been put in front of the American people time-after-time to build up their confidence and encourage them to stay-the-course…a person who is worn out and has no energy…and we hear from him that things are “OK”. Thank goodness he didn’t call us a bunch of whiners!

It is apparent, however, that his leadership permeates his whole executive team. The result was dramatically seen elsewhere in Washington, D. C. yesterday. U. S. Treasury Secretary Henry Paulson carries little or no weight in the current exercises. (See, for example, http://www.bloomberg.com/apps/news?pid=20601068&sid=aWssvqlta37Q&refer=home#.) The testimony of Federal Reserve Chairman Ben Bernanke was weak and muddled. Who can we turn to?

In my experience the Chief Executive sets the tone for the organization…the culture, if you will. Everything the Chief Executive does, or says, or seems, is reflected in his or her team and the performance of the institution he or she leads. The “Buck Stops” with the Chief Executive, whether or not the Chief Executive accepts this fact or not.

How are things going in the world? Mister leader…you are the captain of the ship…responsibility falls to you!

Secretary Paulson and Chairman Bernanke are honorable men. They are also capable men. But, so is Colin Powell. The performance of the team is always, for better or worse, overshadowed by the boss. If the Chief Executive is a capable leader…if the Chief Executive has good people around and facilitates the use of their talents…if the Chief Executive doesn’t fall victim to the flattery and ego-inflation of some of his team…that Chief Executive can produce extraordinary results. However, if the Chief Executive does not possess these talents…even good, capable people perform way below what is possible.

In my estimation we are beyond specifics when attempting to judge where the economy is and the soundness of the financial system. We have a leadership void and as a consequence we face a situation in which things can only deteriorate further until some form of real leadership is re-established within the United States government. The scary thing is that we seem to be facing a minimum of six months before the possibility of a change can become a reality. Not only do we have the “Gang that couldn’t shoot straight” in office, but the “Gang” is also a “lame duck”!
What needs to be done, in my estimation, is greater than just specific responses to market conditions. We need leadership in the following areas.

· International cooperation and coordination in economic advancement. The United States is still the one super power in the world but it needs to be a part of the development taking place in other nations and areas. The United States may be disliked and resented by others but the United States is still needed by these nations and areas and can still be a facilitator in the development and advancement of the rest of the world. (You might also look at the T. Friedman editorial this morning http://www.nytimes.com/2008/07/16/opinion/16friedman.html?hp.) And, the United States cannot close itself off from other parts of the world as “Reverse Globalization” takes place. Conversation and communication needs to be expanded from just the G-8 to the G-20.

· The United States must get it monetary and fiscal policy “in sync” with the rest of the world. The government must cease to believe that it can continue to operate its economic policy independently of the world. The budget of the United States government must be brought under control and managed with a firm discipline. Monetary policy must be directed to focus on the value of the dollar and possibilities of future inflation. The Federal Reserve must not be burdened with more and more responsibilities that can present it with conflicting goals and objectives. We have seen what difficulties can arise by just having two objectives—inflation and economic growth.

· The United States must develop a “real” energy policy! Enough of band aids. Enough of political posturing. Enough of catering to the financial interests of a small segment of the economy. If T. Boone Pickens can move on this issue…surely others can also move! (http://www.pickensplan.com/)

These, of course, are longer run concerns, but they pertain to the strategic direction of the United States. If we don’t have a vision of what is needed and if we don’t have leaders that can express a vision we can buy into and trust, then the responses and reactions that happen within the short run result in nothing but a ‘random walk’ and we end up with a hodge-podge of consequences that do not serve us well over the longer run.

Yes, I know…in the long run we are all dead. (Keynes) But, we only become desperate for fixes in the short run when there is an absence of leadership and no one seems to know where we are going.

My short run concern is that since participants in domestic and international markets have little or no confidence in the leadership that exists within the United States…in the business and financial community as well as in the political sphere…the drift in the financial markets and the economy will continue to be on the downward side. Economists and other pundits can continue to come up with suggestions and schemes to contain the trouble or dreamscapes to resolve the whole problem…but, that is all they will be until leadership is established once again. Unfortunately, the current players seem to lack this skill.