The United States budget deficit will reach $1.48 billion in the 2011 fiscal year, according to the Congressional Budget Office.
The response: everyone seems to be pointing fingers at everyone else.
The President, on Wednesday evening in his State of the Union address, indicated that something needed to be done about the budget deficit.
Yesterday the CBO released its figures.
The evening news reported that the White House had some general things to say about the projection but would not come out with more specifics because they were waiting for the Republican response that they knew was coming.
There’s leadership for you.
No one in the top leadership positions in the country seem to be staking out a firm position on this. Like Health Care 1, the President is asking Congress to do something, but is not willing to step down from his intellectual tower to set out a path. As a consequence, like HC1, no one in the country really knows where he stands on containing and controlling the deficit.
As a consequence, no one really seems to be serious about the deficit.
The current estimate was constructed assuming that all current law will be used as the basis for the projection. If, for example, all the Bush tax cuts are allowed to expire, as is now the law, this will result in the budget deficit climbing to about 76% of GDP in 2020.
However, if Congress does not allow these tax cuts to expire and if Medicare programs are held constant, along with other spending and taxing programs, the budget deficit will rise to about 97% of GDP in 2020. This would place the cumulative total of deficits at around $12 trillion over the next ten years.
For the last 12-18 months, I have been arguing that the cumulative budget deficit for the next ten years will come in at least around $15 trillion, given the current attitudes about the budget deficit in Washington, D. C.. In my mind, Congress, given current attitudes, will not rescind the programs that are now in place, and, like always, will add more that will only cause the cumulative deficit to rise from current projections.
It seems as if the Congressional Budget Office is coming toward my forecast as time goes forward.
And the Gross Federal Debt continues to climb: the year-over-year rate of increase is now close to 20%. The compound rate of increase in the Gross Federal Debt between 1960 and 2007 was in slightly above 7% which some of us felt was excessive.
Since it took until fiscal year 2009 for the debt of the United States to approach $12 trillion, the idea that this figure would be doubled in the next ten years seems “unreal”. Yet, that is the way things look.
And, there are three major “holders” of this debt…Japan, China, and the Federal Reserve. Going forward it seems almost surreal the proportion of the new debt the Federal Reserve may have to acquire. There is, of course, the $900 billion that the Fed is intending to acquire as a part of QE2. But, what will the Fed have to do after that? With so much government debt coming on board it is frightening to speculate.
Why am I so pessimistic? Well, we really don’t know how much the health care program is going to cost us. We don’t know what military challenges we are going to be facing. The world is very unsettled now and I don’t see how commitments are really going to be lessened over the next ten years given all the turmoil taking place around the globe. We don’t know how the budget crisis affecting state and local governments is going to work out. Many are saying that the federal government will not play any role in state or municipal bailouts, yet, can you imagine the federal government not playing a role? And, what about the housing market and the government agencies called Fannie Mae and Freddie Mac? How much is this area going to impact the federal budget? One last unknown here is the cost of getting the commercial banking system back to full solvency. No one knows what these costs might be.
The problem with debt is that the more you have the fewer choices you have. Debt reduces your room to maneuver. And, as with Europe, it seems to me that the options are running out.
The other thing about creating more and more debt is that the options become less and less desirable.
That is why you don’t want to get yourselves “head-over-heels” in debt…you want to be able to make your own choices and you want the alternatives available to you to be desirable ones.
Right now, the choices are not good! And, we don’t seem to have any real leaders around in positions of authority that will step up to the table to take charge.
Funny, but the two Presidents that did take a leadership role in budget containment were George H. W. Bush (Bush 41) and Bill Clinton. Bush 41 made some decisions with respect to taxes that arguably cost him a second presidential term. But, Bush’s efforts set the stage for the Clinton era of strong economic growth and shrinking federal deficits.
There just is no leadership on this issue coming from the places that should be exercising leadership. To be more specific, in my experience, the top person, the CEO, the person where “the buck stops”, must take a leading role in getting something done or it just does not “get done” right. Secretary of the Treasury Robert Rubin was a major force behind the Clinton move on the budget, but the effort would have gone nowhere without Clinton getting on board and taking the lead.
As with the health care bill, people are not seeing Obama carrying the flag. Oh, he talks and talks, but where does he really stand? Tim Geithner has all but disappeared. The only real spokesperson for the administration on economics and finance seems to be Ben Bernanke and his “talk” has been getting lost in all the attention being given to other members of the Board of Governors of the Federal Reserve System.
The deficit problem is not going to be brought under control immediately. But, the lesson we can learn from the situation going on over in Europe is that someone eventually must take the lead. If no leader steps out in front of the crowd, the misery just drags on and drags on. The debtors just keep banging on the door. And, what happens during periods like this? Well, you lose focus.
I have seen this doing business “turnarounds”. When things start going downhill in a business and the debtors, or regulators, keep banging on the door, you stop doing what you should be doing in order to run a good business. You just have to “put out fires.” Thus, your organization continues to go downhill.
Likewise with a government: if the focus of the government is diverted from doing what it should be doing in order to resolve budget and debt issues, the government continues to experience problems in areas it should be focusing on.
It is past time to “get serious” on the federal government’s deficit problem. Are there any leaders in the room?
Showing posts with label leadership. Show all posts
Showing posts with label leadership. Show all posts
Friday, January 28, 2011
Monday, September 27, 2010
It's All About Leadership, Stupid!
I got on a Michael Douglas kick this weekend because his new flick “Wall Street: Money Never Sleeps” was coming out in the theaters. I, of course, took in Wall Street 1.0 again. Among the other Michael Douglas films I reprised, “The American President” caught my attention.
The particular line that got to me was one uttered by Michael J. Fox, who played a sort of George Stephanopoulos character to the President. The scene was set in the Oval Office of the President and the President and his chief advisors were discussing the direction that should be taken with respect to a crime bill. The conflict being addressed concerned whether or not the President should “play politics” and disappoint his friends, including his “girl friend” Annette Bening, or be true to his leanings and go for the environmental package.
He, at the time, chooses to “play politics”, and is taken to task for it by Michael Fox. The line that stuck with me was this:
“People want leadership and in the absence of leadership they’ll listen to anyone who comes to the microphone.”
This statement really resonated with me because I believe that is the situation we are in now in the United States. People want leadership, but they are not getting it.
Leadership starts with the CEO, the Chief Executive Officer.
There is no way others within or without the organization can exhibit leadership and set up the tone and the culture of the organization. But others try, especially opponents.
And, if the leader does not take charge, people will “listen to anyone who comes to the microphone.”
President Obama speaks. He is constantly speaking. Something small comes up and he goes out and makes a speech about it. Something large comes along and he goes out and makes a speech about it. The problem is that he is just speaking…not leading.
One of my firmest beliefs is that CEOs and their teams need to listen to the market and try and discern what the market is attempting to tell them. The “market” may be wrong, but, to me, the wisest action is to listen to the market and only claim that the market is wrong after a serious and thorough study attempting to support the fact that the market is correct.
What is the market saying right now?
Well, who is dominating the airways and printing presses these days? John Boehner. Christine O’Donnell. Stephen Colbert. Jon Stewart. Rush Limbaugh. Nancy Pelosi. Carl Rove. The Tea Party movement. The Party of “NO”. And, so on.
President Obama spoke at the United Nations this week…and it was just another of his many speeches. Who really listened to him?
President Obama is visiting homes trying to establish the “common touch.” Where is the leadership?
Obama is speaking a lot, but, people seem to be listening to other people who are grabbing the microphone. Conclusion: people do not feel that Obama is leading the nation.
A health care bill was passed on the watch of President Obama. But, the view of the voters is that Harry Reid and Nancy Pelosi and Congress did all of the work.
There is a new financial reform package the Chris Dodd and Barney Frank crafted. Where was Obama?
And, the earlier stimulus bill. The public perception was that the Obama administration turned this over to the Congress, fully supporting a bill that contained a lot of old programs that benefitted the interests of members in Congress. All Obama just praised the fact that a stimulus bill was passed.
The market perception seems to be that President Obama, himself, did not send up any bills to Congress in these areas; he turned the tasks over to Congress, urged them along, and accepted whatever Congress produced and sent to him.
The market does not see President Obama as “the” leader in any of these initiatives. His absence, then, has allowed the microphone to be dominated by others.
This lack of leadership has particularly been felt in the areas of economics and finance. No one seems to know where the administration is going or what the administration is going to do. What about another stimulus program? What about the Bush tax cuts? What about foreclosures? What about the big banks? What about the consumer protection agency? What about the insurance companies that are raising rates? What about the credit card companies that are raising fees? What about the Chinese currency? What about the government’s 61% ownership in General Motors? What about how GMAC pursued its foreclosure efforts? What about…you name it?
Talk about a free market!
If there is no leadership, then anarchy takes over.
There was the cry against big banks. But, the Obama administration (including the Fed) seems to be doing everything it can to help the big banks at the expense of the smaller ones. The administration talks about the United States being strong economically, yet its policies are just accelerating the re-positioning, economically, of China and Brazil, Russia and India, and other emerging nations. The administration talks about helping out the middle class and blue collar workers yet its policies promote the bifurcation of the work force, lessened capacity utilization in industry, and greater income inequality.
And, this is why people, other than the President, are dominating the microphone.
The Michael Douglas President finally did make a stand and began to tell the people where he really stood. The Michael Douglas President became a leader. Although this change came right at the end of the movie, it was the turning point of the movie. And, you knew what the President was going to do in the future, nothing more needed to be said in the movie. In taking this turn, the President began to dominate the discussion again.
Do you think this might happen in the real world? In the United States? Do you think it might happen in the near term?
The particular line that got to me was one uttered by Michael J. Fox, who played a sort of George Stephanopoulos character to the President. The scene was set in the Oval Office of the President and the President and his chief advisors were discussing the direction that should be taken with respect to a crime bill. The conflict being addressed concerned whether or not the President should “play politics” and disappoint his friends, including his “girl friend” Annette Bening, or be true to his leanings and go for the environmental package.
He, at the time, chooses to “play politics”, and is taken to task for it by Michael Fox. The line that stuck with me was this:
“People want leadership and in the absence of leadership they’ll listen to anyone who comes to the microphone.”
This statement really resonated with me because I believe that is the situation we are in now in the United States. People want leadership, but they are not getting it.
Leadership starts with the CEO, the Chief Executive Officer.
There is no way others within or without the organization can exhibit leadership and set up the tone and the culture of the organization. But others try, especially opponents.
And, if the leader does not take charge, people will “listen to anyone who comes to the microphone.”
President Obama speaks. He is constantly speaking. Something small comes up and he goes out and makes a speech about it. Something large comes along and he goes out and makes a speech about it. The problem is that he is just speaking…not leading.
One of my firmest beliefs is that CEOs and their teams need to listen to the market and try and discern what the market is attempting to tell them. The “market” may be wrong, but, to me, the wisest action is to listen to the market and only claim that the market is wrong after a serious and thorough study attempting to support the fact that the market is correct.
What is the market saying right now?
Well, who is dominating the airways and printing presses these days? John Boehner. Christine O’Donnell. Stephen Colbert. Jon Stewart. Rush Limbaugh. Nancy Pelosi. Carl Rove. The Tea Party movement. The Party of “NO”. And, so on.
President Obama spoke at the United Nations this week…and it was just another of his many speeches. Who really listened to him?
President Obama is visiting homes trying to establish the “common touch.” Where is the leadership?
Obama is speaking a lot, but, people seem to be listening to other people who are grabbing the microphone. Conclusion: people do not feel that Obama is leading the nation.
A health care bill was passed on the watch of President Obama. But, the view of the voters is that Harry Reid and Nancy Pelosi and Congress did all of the work.
There is a new financial reform package the Chris Dodd and Barney Frank crafted. Where was Obama?
And, the earlier stimulus bill. The public perception was that the Obama administration turned this over to the Congress, fully supporting a bill that contained a lot of old programs that benefitted the interests of members in Congress. All Obama just praised the fact that a stimulus bill was passed.
The market perception seems to be that President Obama, himself, did not send up any bills to Congress in these areas; he turned the tasks over to Congress, urged them along, and accepted whatever Congress produced and sent to him.
The market does not see President Obama as “the” leader in any of these initiatives. His absence, then, has allowed the microphone to be dominated by others.
This lack of leadership has particularly been felt in the areas of economics and finance. No one seems to know where the administration is going or what the administration is going to do. What about another stimulus program? What about the Bush tax cuts? What about foreclosures? What about the big banks? What about the consumer protection agency? What about the insurance companies that are raising rates? What about the credit card companies that are raising fees? What about the Chinese currency? What about the government’s 61% ownership in General Motors? What about how GMAC pursued its foreclosure efforts? What about…you name it?
Talk about a free market!
If there is no leadership, then anarchy takes over.
There was the cry against big banks. But, the Obama administration (including the Fed) seems to be doing everything it can to help the big banks at the expense of the smaller ones. The administration talks about the United States being strong economically, yet its policies are just accelerating the re-positioning, economically, of China and Brazil, Russia and India, and other emerging nations. The administration talks about helping out the middle class and blue collar workers yet its policies promote the bifurcation of the work force, lessened capacity utilization in industry, and greater income inequality.
And, this is why people, other than the President, are dominating the microphone.
The Michael Douglas President finally did make a stand and began to tell the people where he really stood. The Michael Douglas President became a leader. Although this change came right at the end of the movie, it was the turning point of the movie. And, you knew what the President was going to do in the future, nothing more needed to be said in the movie. In taking this turn, the President began to dominate the discussion again.
Do you think this might happen in the real world? In the United States? Do you think it might happen in the near term?
Monday, March 1, 2010
Who is going to be the next Greece?
This seems to be the major question asked by most commentators in most media outlets. Is it going to be Spain? Japan? The U. K.? Italy? Portugal? Just who might it be?
Might it be California? Or New York? Or some major city?
Who are the hedge funds attacking this week? Where is the bailout going to come from? What about the IMF, what role is it going to play? And so on and so forth?
As far as the United States is concerned, thank goodness for all the attention being paid to the problems being experienced by these other countries, and states, and cities. At least others governmental units are getting the headlines about the debt problems going on in the world, and not the U. S. government.
And, the nice thing about the problems going on in the rest of the world is that investors still consider the dollar and dollar-denominated securities to be the least-risky of the lot. Flee to the dollar! Flee to U. S. Treasury securities!
Sometimes it is good to rank things on a relative basis. The person who receives a grade of D can save his own self-respect and place in the world when compared with the rest of the class who received a grade of D-. Doesn’t say much, however, about the whole class.
The United States dollar, a currency under attack until the financial crisis of 2008-2009, once again finds itself gaining strength as the financial condition of other countries come under attack and their currencies come under selling pressure.
The value of the United States dollar, which was once again under attack in the late summer and fall of 2009, has risen by more than 6% against major trading partners since the beginning of December as investors “flew to quality.” The United States dollar has done even better against the Euro as it has risen by about 18% versus the Euro over this same time period.
And, what are central banks doing under these circumstances?
They are still primarily operating under the umbrella of “quantitative easing.” That is, the central banks cannot drive interest rates any lower so they continue to provide reserves to their own banking systems in order to keep those banking systems afloat.
For the vultures circling over the scene it seems to be banquet time. The big banks, the big hedge funds, and others seem to be prospering in this environment of close to zero borrowing costs. These organizations are earning record profits! Not so, of course, for the small- to medium-sized financial institutions that are hanging on for their lives.
There are no good solutions! Every path out of this situation is full of difficulty and pain. And the strong get stronger and the weak, weaker.
The problem faced by politicians is that they must appear as if they are being active in the attempt to resolve the problems that their countries are now facing. Yet, to increase stimulus packages only exacerbates already stretched budget deficits. But, to cut spending, because revenues are down due to the weak economic conditions, only causes greater misery and social unrest. The fiscal conservatives attack those that push for more economic stimulus; the social liberals attack those that push for more budget restraint.
The central bankers worry about what will happen when interest rates begin to rise and asset values and business expectations start to fall again.
The world is in a tough spot when the basic question being asked becomes “who is going to fail next?”
It seems as if all these countries (states and cities) can do is attempt to reach a balance between improving the fiscal discipline being demanded by investors and voters and between the safety-nets that need to be created to cushion the difficulties being faced by many of the people within their domains.
With no “good” solutions available, governments must “muddle through” as best they can. There is no panacea.
The thing that should be avoided, but, in the distress of the moment, will, in all likelihood, not be avoided, is to create programs or solutions that will not be helpful once the crisis period is over. Politicians and others tend to “rush in” during “crisis” times and create programs, rules, regulations, or laws. (As Rahm Emanuel has stated, ““You don’t ever want a crisis to go to waste; it’s an opportunity to do important things that you would otherwise avoid.”) Once on the books, however, these programs, rules, regulations, and laws remain in practice for a lengthy period of time, and, over the longer-run, many fail to achieve the positive effects that was desired when implemented.
It is important for leaders, in my mind, to appear as if they are in control during times like these. In essence, all of these leaders are heading “turnaround” situations. These leaders must be pragmatic in practice. They must re-establish discipline in all that is done under their watch. They must not be the slaves of some ideology.
What these leaders do will not be pretty, but they need to be strong in order to bring people behind them. These leaders need to build support and trust. The worst thing that they can do is to look as if they are not in control for the vultures will jump on this appearance and dominate events.
What do the markets seem to be saying in response to the efforts of current leaders?
The headlines we are now reading in the newspapers and hearing on newscasts indicate that governmental leaders are not in control. It appears as if the future is being driven by hedge funds and others who are taking advantage of the feeble conditions in the various political units around the world. No one seems to be in charge and no one seems to be rising to the task!
Might it be California? Or New York? Or some major city?
Who are the hedge funds attacking this week? Where is the bailout going to come from? What about the IMF, what role is it going to play? And so on and so forth?
As far as the United States is concerned, thank goodness for all the attention being paid to the problems being experienced by these other countries, and states, and cities. At least others governmental units are getting the headlines about the debt problems going on in the world, and not the U. S. government.
And, the nice thing about the problems going on in the rest of the world is that investors still consider the dollar and dollar-denominated securities to be the least-risky of the lot. Flee to the dollar! Flee to U. S. Treasury securities!
Sometimes it is good to rank things on a relative basis. The person who receives a grade of D can save his own self-respect and place in the world when compared with the rest of the class who received a grade of D-. Doesn’t say much, however, about the whole class.
The United States dollar, a currency under attack until the financial crisis of 2008-2009, once again finds itself gaining strength as the financial condition of other countries come under attack and their currencies come under selling pressure.
The value of the United States dollar, which was once again under attack in the late summer and fall of 2009, has risen by more than 6% against major trading partners since the beginning of December as investors “flew to quality.” The United States dollar has done even better against the Euro as it has risen by about 18% versus the Euro over this same time period.
And, what are central banks doing under these circumstances?
They are still primarily operating under the umbrella of “quantitative easing.” That is, the central banks cannot drive interest rates any lower so they continue to provide reserves to their own banking systems in order to keep those banking systems afloat.
For the vultures circling over the scene it seems to be banquet time. The big banks, the big hedge funds, and others seem to be prospering in this environment of close to zero borrowing costs. These organizations are earning record profits! Not so, of course, for the small- to medium-sized financial institutions that are hanging on for their lives.
There are no good solutions! Every path out of this situation is full of difficulty and pain. And the strong get stronger and the weak, weaker.
The problem faced by politicians is that they must appear as if they are being active in the attempt to resolve the problems that their countries are now facing. Yet, to increase stimulus packages only exacerbates already stretched budget deficits. But, to cut spending, because revenues are down due to the weak economic conditions, only causes greater misery and social unrest. The fiscal conservatives attack those that push for more economic stimulus; the social liberals attack those that push for more budget restraint.
The central bankers worry about what will happen when interest rates begin to rise and asset values and business expectations start to fall again.
The world is in a tough spot when the basic question being asked becomes “who is going to fail next?”
It seems as if all these countries (states and cities) can do is attempt to reach a balance between improving the fiscal discipline being demanded by investors and voters and between the safety-nets that need to be created to cushion the difficulties being faced by many of the people within their domains.
With no “good” solutions available, governments must “muddle through” as best they can. There is no panacea.
The thing that should be avoided, but, in the distress of the moment, will, in all likelihood, not be avoided, is to create programs or solutions that will not be helpful once the crisis period is over. Politicians and others tend to “rush in” during “crisis” times and create programs, rules, regulations, or laws. (As Rahm Emanuel has stated, ““You don’t ever want a crisis to go to waste; it’s an opportunity to do important things that you would otherwise avoid.”) Once on the books, however, these programs, rules, regulations, and laws remain in practice for a lengthy period of time, and, over the longer-run, many fail to achieve the positive effects that was desired when implemented.
It is important for leaders, in my mind, to appear as if they are in control during times like these. In essence, all of these leaders are heading “turnaround” situations. These leaders must be pragmatic in practice. They must re-establish discipline in all that is done under their watch. They must not be the slaves of some ideology.
What these leaders do will not be pretty, but they need to be strong in order to bring people behind them. These leaders need to build support and trust. The worst thing that they can do is to look as if they are not in control for the vultures will jump on this appearance and dominate events.
What do the markets seem to be saying in response to the efforts of current leaders?
The headlines we are now reading in the newspapers and hearing on newscasts indicate that governmental leaders are not in control. It appears as if the future is being driven by hedge funds and others who are taking advantage of the feeble conditions in the various political units around the world. No one seems to be in charge and no one seems to be rising to the task!
Tuesday, November 25, 2008
The Need for Discipline
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
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
Wednesday, October 8, 2008
A Liquidity Trap?
Is this what a liquidity trap looks like?
A liquidity trap gives one the feeling that the monetary authorities are pushing on a string. The amount of liquidity the Federal Reserve and other central banks around the world have provided for the financial markets has been huge. The Paulson Plan was supposed to create confidence that illiquid assets would now have some liquidity. The Fed Plan to purchase commercial paper was supposed to create confidence that illiquid assets would now have some liquidity.
Yet, the financial markets remain silent.
Seemingly, no one wants to commit because no one is sure about the solvency of other participants in the financial markets.
Bernanke spooked the financial markets again yesterday as he talked about a possible cut in interest targets…which he did follow through on. The speech was to the National Association for Business Economists at their 50th anniversary get-together in Washington, D. C.
The message the market heard, however, was how dire things were.
And, the market asked…what does Bernanke know that we don’t?
The absence of leadership seems to reach new heights daily. (See Mase: Economics and Finance for October 7, 2008.)
But, now we are apparently in a liquidity trap. Consumers are pulling back their spending…the latest figures out on consumer credit even show a decline. Businesses are consolidating and cutting spending and hiring plans. State and Local governments are going to the Federal Government to get cash to help them meet payrolls. And, then the Federal Government…
Get out your old copy of Keynes’ General Theory.
A liquidity trap gives one the feeling that the monetary authorities are pushing on a string. The amount of liquidity the Federal Reserve and other central banks around the world have provided for the financial markets has been huge. The Paulson Plan was supposed to create confidence that illiquid assets would now have some liquidity. The Fed Plan to purchase commercial paper was supposed to create confidence that illiquid assets would now have some liquidity.
Yet, the financial markets remain silent.
Seemingly, no one wants to commit because no one is sure about the solvency of other participants in the financial markets.
Bernanke spooked the financial markets again yesterday as he talked about a possible cut in interest targets…which he did follow through on. The speech was to the National Association for Business Economists at their 50th anniversary get-together in Washington, D. C.
The message the market heard, however, was how dire things were.
And, the market asked…what does Bernanke know that we don’t?
The absence of leadership seems to reach new heights daily. (See Mase: Economics and Finance for October 7, 2008.)
But, now we are apparently in a liquidity trap. Consumers are pulling back their spending…the latest figures out on consumer credit even show a decline. Businesses are consolidating and cutting spending and hiring plans. State and Local governments are going to the Federal Government to get cash to help them meet payrolls. And, then the Federal Government…
Get out your old copy of Keynes’ General Theory.
Thursday, September 25, 2008
The Absence of Leadership
The New York Times has it right this morning. There is an absence of leadership in this country. See the lead editorial, “Absence of Leadership”: http://www.nytimes.com/2008/09/25/opinion/25thu1.html?_r=1&hp&oref=slogin.
Over the past six or seven months I have tried to emphasize two things. First, leadership must begin at the very top of an organization. The leader determines the culture and he or she must project this culture in everything that the leader says or does. My experience in business, government, and the not-for-profit sector is that if there is a leadership void at the top, even though others in the organization attempt to pick up the leadership reins, they cannot completely succeed. This is because there are others that will not go along because there is no one to “hold them in line” if they don’t follow those that are trying to pick up the leadership. Thus, things just don’t get done efficiently or effectively…and morale deteriorates.
Last night, the President referred several times to what “his” administration has been trying to do under “his” guidance. Yet, as the Times editorial points out, the whole rescue effort led by Hank Paulson has been highlighted by the fact that the President has been no where in sight. The President was pulled out of his bunker last week to speak to the press about the need for a bailout package, but his performance was like a puppet on strings and the voice that came out of his mouth was not his own. (See my post of September 22, 2008.)
Last night, with the whole Congressional effort lagging, the President was pulled out again to tell the American people that the thing we need to fear is fear itself and if the bailout bill was not passed quickly, Congress…not the administration…would be held responsible.
Again, the performance was less than believable, put on by someone that has no credibility.
In fact the show looked like a feeble re-run of past claims of impending disaster.
And, what does the absence of leadership get us? A bailout bill with little or no specifics; A Congress that is not cowered anymore by the idle threats of a lame duck; A nation that is not rallying to the call and is more against the bailout bill than for it; A brewing class war…the common man on main street and the greedy predator on Wall Street; and a market that has no idea where to go.
And, this is the second point I have tried to make…the increase in uncertainty faced by the financial markets. Yes, there are very wide swings in the stock market on a day-by-day basis. Yes, there has been a rush to quality and shorter term bonds. Yes, lending has dried up. This is what happens to markets that have little or no idea about what the future holds for them. Greater and greater volatility!!!
This, to me, is the bottom line of the current situation: there is little hope that we will get any leadership from the White House and the leadership of the Secretary of the Treasury does not substitute for the leadership of the President. There is a void in terms of “the leader of the people.” Hence, any bailout package that is forthcoming at this time will be less than satisfactory…and I believe that this is an understatement. And, this will mean continued uncertainty for the financial markets which can only lead to more volatility surrounding a weakening economy.
I fear that the pain is far from over.
And, I guess, what further disturbs me is that I don’t see the candidates for president “stepping up to the plate” to fill the void in leadership. They, of course, have to be careful in what they say with the pending bailout bill before Congress. However, people are claiming that the time is the worst since the Great Depression…that we are heading for a Second Great Depression…that those living have never faced anything like this…and so on and so on. The President says that times could get really, really bad. And, the responses we have gotten from our potential “Leader” leave us sadly with little confidence that the role will be adequately filled come January 20, 2009.
Financial markets…and the economy…thrive on confidence and trust. Confidence and trust allow market participants to make projections about the future and then confidently commit on an action plan. Without this confidence and trust, the future looks extremely hazy leading to only a tepid willingness to commit resources to any possible action plan.
The consequence of this…in general, stay as risk free as possible and as short as possible.
People may argue that this is not in the common interest. My answer is that, no, it is not in the common interest but our leaders have brought us to this point.
This is the same answer that I bring to the comment that “unbridled greed” brought us to the chaos that we are now experiencing. The leaders that set the economic policy of this country created the environment that rewarded people for acting in the way they did.
People respond to the incentives that are created by those individuals that determine the culture in which we live. It is always good to refresh ones’ mind on this point by reading and re-reading “Freakonomics”. It is also good to refresh ones’ mind to the fact that it is as normal for human beings to respond to ‘negative’ incentives as it is for them to respond to ‘positive’ incentives. See, for example, why Sumo wrestlers are like grade school teachers in Chicago!
Until we get some real leadership at the top in this country, my prediction is…hang on for the swings!
Over the past six or seven months I have tried to emphasize two things. First, leadership must begin at the very top of an organization. The leader determines the culture and he or she must project this culture in everything that the leader says or does. My experience in business, government, and the not-for-profit sector is that if there is a leadership void at the top, even though others in the organization attempt to pick up the leadership reins, they cannot completely succeed. This is because there are others that will not go along because there is no one to “hold them in line” if they don’t follow those that are trying to pick up the leadership. Thus, things just don’t get done efficiently or effectively…and morale deteriorates.
Last night, the President referred several times to what “his” administration has been trying to do under “his” guidance. Yet, as the Times editorial points out, the whole rescue effort led by Hank Paulson has been highlighted by the fact that the President has been no where in sight. The President was pulled out of his bunker last week to speak to the press about the need for a bailout package, but his performance was like a puppet on strings and the voice that came out of his mouth was not his own. (See my post of September 22, 2008.)
Last night, with the whole Congressional effort lagging, the President was pulled out again to tell the American people that the thing we need to fear is fear itself and if the bailout bill was not passed quickly, Congress…not the administration…would be held responsible.
Again, the performance was less than believable, put on by someone that has no credibility.
In fact the show looked like a feeble re-run of past claims of impending disaster.
And, what does the absence of leadership get us? A bailout bill with little or no specifics; A Congress that is not cowered anymore by the idle threats of a lame duck; A nation that is not rallying to the call and is more against the bailout bill than for it; A brewing class war…the common man on main street and the greedy predator on Wall Street; and a market that has no idea where to go.
And, this is the second point I have tried to make…the increase in uncertainty faced by the financial markets. Yes, there are very wide swings in the stock market on a day-by-day basis. Yes, there has been a rush to quality and shorter term bonds. Yes, lending has dried up. This is what happens to markets that have little or no idea about what the future holds for them. Greater and greater volatility!!!
This, to me, is the bottom line of the current situation: there is little hope that we will get any leadership from the White House and the leadership of the Secretary of the Treasury does not substitute for the leadership of the President. There is a void in terms of “the leader of the people.” Hence, any bailout package that is forthcoming at this time will be less than satisfactory…and I believe that this is an understatement. And, this will mean continued uncertainty for the financial markets which can only lead to more volatility surrounding a weakening economy.
I fear that the pain is far from over.
And, I guess, what further disturbs me is that I don’t see the candidates for president “stepping up to the plate” to fill the void in leadership. They, of course, have to be careful in what they say with the pending bailout bill before Congress. However, people are claiming that the time is the worst since the Great Depression…that we are heading for a Second Great Depression…that those living have never faced anything like this…and so on and so on. The President says that times could get really, really bad. And, the responses we have gotten from our potential “Leader” leave us sadly with little confidence that the role will be adequately filled come January 20, 2009.
Financial markets…and the economy…thrive on confidence and trust. Confidence and trust allow market participants to make projections about the future and then confidently commit on an action plan. Without this confidence and trust, the future looks extremely hazy leading to only a tepid willingness to commit resources to any possible action plan.
The consequence of this…in general, stay as risk free as possible and as short as possible.
People may argue that this is not in the common interest. My answer is that, no, it is not in the common interest but our leaders have brought us to this point.
This is the same answer that I bring to the comment that “unbridled greed” brought us to the chaos that we are now experiencing. The leaders that set the economic policy of this country created the environment that rewarded people for acting in the way they did.
People respond to the incentives that are created by those individuals that determine the culture in which we live. It is always good to refresh ones’ mind on this point by reading and re-reading “Freakonomics”. It is also good to refresh ones’ mind to the fact that it is as normal for human beings to respond to ‘negative’ incentives as it is for them to respond to ‘positive’ incentives. See, for example, why Sumo wrestlers are like grade school teachers in Chicago!
Until we get some real leadership at the top in this country, my prediction is…hang on for the swings!
Friday, August 22, 2008
It's The Supply Side...
This is the third of three posts in which I aim to present the outline of my vision of where the economy is going into the fall. The first, “The Candidates and Economic Leadership” (August 18, 2008) framed the political environment, and the second,” The Most Important Price in the Economy” (August 20. 2008) presented my view of where the focus needs to be centered for economic policy making. This third post will be more specific as it tries to define the dilemma the policy makers are facing within the current environment.
In my view the implicit model of aggregate economic activity that we default to is one in which the aggregate supply of goods and services is assumed to be fixed or constant. That is, the aggregate supply curve is perfectly inelastic with respect to the aggregate price level. (This, of course, is a very simple picture and does not take into account the potential growth of the economy. Both of these points can be addressed. I am just trying to KISS the analysis for reasons of space and exposition.)
In this simple model, the only way that one can get a fluctuation in output is when the aggregate demand curve shifts. If output is observed as less than ‘full employment output’ (or growth is less than “full employment growth’) the only explanation that can be given for such performance is that aggregate demand must be less than is needed to achieve ‘full employment output.’ That is, demand is deficient.
If demand is less than supply at a given price level shouldn’t the price level fall?
Here we face another assumption, pervasive in modern macroeconomics, which sneaks into our analysis without our really realizing it. This is the assumption that prices either do not fall in a modern economy or at least adjust downwards at a very slow pace.
Our basic instincts tell us, therefore, that the only way we can avoid unemployment and unused resources is to “juice up” aggregate demand. We must create an economic stimulus package that will “goose” the economy so that it will achieve full employment once again. This is what the tax stimulus package enacted earlier this year was all about.
But, what if the drop in economic output (or the slowdown in economic growth) is not due to deficient aggregate demand but due to a shift in the aggregate supply curve?
In this case, with no reduction in aggregate demand, we would face a decline in aggregate output AND a rise in prices!
And, in such a case, what would happen it the economy was stimulated through an economic stimulus package? Possibly economic output would increase a little bit, but the stimulus package would certainly put more pressure on prices! This seems like the situation called STAGFLATION, a replay of the 1970s!
Stagflation is a situation in which there has been a backward shift in the aggregate supply curve combined with economic stimulus. The supply curve shift has resulted from factors, independent of demand, that impact producers…like an energy shortage or changing trade patterns or difficulties in the financial sector or government policies…and cannot, therefore, be offset by an economic stimulus package. Any government efforts in such a situation must be directed at overcoming the things that are causing businesses to produce fewer products and services at given prices.
The attempt to stimulate aggregate demand at such times does very little in the way of creating much additional output. The demand pressures that are created go into price increases that help producers to weather the difficulties they are facing in terms of their output decisions. It is a fact of life that the factors that impact the producers at this time create greater uncertainty for their businesses. Changes in the future of motor vehicles using alternative fuels as energy sources are having a major effect on auto makers. Uncertainty about the structure and regulation of the financial industry cloud the decisions of bankers. The lack of a clear vision of the future economic policy of the government affects us all. In such an environment businesses will take fewer chances with respect to increasing their output but will gladly take any increase in cash flow that they can get from increases in prices. This is the less risky strategy at this time.
How is one to get out of such a bind?
Well, my first response to this is that we need good leadership. No one likes uncertainty. But, uncertainty is rampant in the United States at this time. We see this on the evening news broadcasts. Families are cutting back on school supplies for the fall because of the uncertainty they face with respect to their budgets. What is going to happen to gas prices? What is going to happen to food prices? What is going to happen to employment? And so on, and so on. How should producers respond to this? A tax break to these families is not going to get them to spend more on school supplies. So businesses are uncertain about their future.
What about energy policy? Off-shore drilling or reducing oil reserves is not going to solve our problems. Regardless of the short term responses of the presidential candidates, uncertainty is going to hang over businesses concerning what they should be doing about their future energy sources. Solar panels on all malls or strip centers? Wind sources for electrical energy companies? Companies focusing on these big issues are not focusing on output.
What about the financial system? What about the infrastructure? What about…?
We need a leader who provides us with a vision we can believe in and in whom we can develop trust in to deliver on that vision. We need a leader who can help reduce the uncertainty that exists in the United States at this time.
My second response is that we need to get away from an emphasis on stimulus, stimulus, stimulus. What does such an attitude do? First, is that it creates an atmosphere of go, go, go. Everything is up, bailouts will be given for making mistakes, but, after any short crisis, the emphasis will always be to push the limits. This is the kind of environment in which inflation flourishes. Why should I worry about a slowdown? Inflation will be back and I can let prices buy me out of any mistakes I make. Why should I worry about over-leveraging a position? I will just be bailed-out and the process will start over again. In such situations we concentrate more on financial outcomes rather than on real production and creation.
And, finally, I believe that we need economic policies and regulations that are based upon process and not upon outcomes. An unemployment policy based upon a target number for unemployment, say 5%, is one based upon an outcome. An employment policy based providing education and transition support is a policy based upon process. Anti-trust regulation based upon market statistics and market structure is regulation based upon outcomes. Business oversight based upon openness and full disclosure is regulation based upon process. Taxing corporations that creates incentives to “go offshore” so as to avoid taxes is a tax policy based upon outcomes. Taxing corporations so as to change behavior or to punish those earning “excess profits” is a tax policy based upon outcomes. The tax system that creates incentives to focus on creative accounting and ingenious corporate structure distracts businesses from what they really should be doing. Taxing businesses must be based upon processes…and not outcomes.
I could go on…and I probably will in the future…but, at this time, I firmly believe that we need to focus on what is impacting the supply side of the economy and not the demand side. If we do not focus on the supply side at this time I believe that we are in for continued volatility in the markets and continued fragility of our financial institutions and consequently our whole economic system.
In my view the implicit model of aggregate economic activity that we default to is one in which the aggregate supply of goods and services is assumed to be fixed or constant. That is, the aggregate supply curve is perfectly inelastic with respect to the aggregate price level. (This, of course, is a very simple picture and does not take into account the potential growth of the economy. Both of these points can be addressed. I am just trying to KISS the analysis for reasons of space and exposition.)
In this simple model, the only way that one can get a fluctuation in output is when the aggregate demand curve shifts. If output is observed as less than ‘full employment output’ (or growth is less than “full employment growth’) the only explanation that can be given for such performance is that aggregate demand must be less than is needed to achieve ‘full employment output.’ That is, demand is deficient.
If demand is less than supply at a given price level shouldn’t the price level fall?
Here we face another assumption, pervasive in modern macroeconomics, which sneaks into our analysis without our really realizing it. This is the assumption that prices either do not fall in a modern economy or at least adjust downwards at a very slow pace.
Our basic instincts tell us, therefore, that the only way we can avoid unemployment and unused resources is to “juice up” aggregate demand. We must create an economic stimulus package that will “goose” the economy so that it will achieve full employment once again. This is what the tax stimulus package enacted earlier this year was all about.
But, what if the drop in economic output (or the slowdown in economic growth) is not due to deficient aggregate demand but due to a shift in the aggregate supply curve?
In this case, with no reduction in aggregate demand, we would face a decline in aggregate output AND a rise in prices!
And, in such a case, what would happen it the economy was stimulated through an economic stimulus package? Possibly economic output would increase a little bit, but the stimulus package would certainly put more pressure on prices! This seems like the situation called STAGFLATION, a replay of the 1970s!
Stagflation is a situation in which there has been a backward shift in the aggregate supply curve combined with economic stimulus. The supply curve shift has resulted from factors, independent of demand, that impact producers…like an energy shortage or changing trade patterns or difficulties in the financial sector or government policies…and cannot, therefore, be offset by an economic stimulus package. Any government efforts in such a situation must be directed at overcoming the things that are causing businesses to produce fewer products and services at given prices.
The attempt to stimulate aggregate demand at such times does very little in the way of creating much additional output. The demand pressures that are created go into price increases that help producers to weather the difficulties they are facing in terms of their output decisions. It is a fact of life that the factors that impact the producers at this time create greater uncertainty for their businesses. Changes in the future of motor vehicles using alternative fuels as energy sources are having a major effect on auto makers. Uncertainty about the structure and regulation of the financial industry cloud the decisions of bankers. The lack of a clear vision of the future economic policy of the government affects us all. In such an environment businesses will take fewer chances with respect to increasing their output but will gladly take any increase in cash flow that they can get from increases in prices. This is the less risky strategy at this time.
How is one to get out of such a bind?
Well, my first response to this is that we need good leadership. No one likes uncertainty. But, uncertainty is rampant in the United States at this time. We see this on the evening news broadcasts. Families are cutting back on school supplies for the fall because of the uncertainty they face with respect to their budgets. What is going to happen to gas prices? What is going to happen to food prices? What is going to happen to employment? And so on, and so on. How should producers respond to this? A tax break to these families is not going to get them to spend more on school supplies. So businesses are uncertain about their future.
What about energy policy? Off-shore drilling or reducing oil reserves is not going to solve our problems. Regardless of the short term responses of the presidential candidates, uncertainty is going to hang over businesses concerning what they should be doing about their future energy sources. Solar panels on all malls or strip centers? Wind sources for electrical energy companies? Companies focusing on these big issues are not focusing on output.
What about the financial system? What about the infrastructure? What about…?
We need a leader who provides us with a vision we can believe in and in whom we can develop trust in to deliver on that vision. We need a leader who can help reduce the uncertainty that exists in the United States at this time.
My second response is that we need to get away from an emphasis on stimulus, stimulus, stimulus. What does such an attitude do? First, is that it creates an atmosphere of go, go, go. Everything is up, bailouts will be given for making mistakes, but, after any short crisis, the emphasis will always be to push the limits. This is the kind of environment in which inflation flourishes. Why should I worry about a slowdown? Inflation will be back and I can let prices buy me out of any mistakes I make. Why should I worry about over-leveraging a position? I will just be bailed-out and the process will start over again. In such situations we concentrate more on financial outcomes rather than on real production and creation.
And, finally, I believe that we need economic policies and regulations that are based upon process and not upon outcomes. An unemployment policy based upon a target number for unemployment, say 5%, is one based upon an outcome. An employment policy based providing education and transition support is a policy based upon process. Anti-trust regulation based upon market statistics and market structure is regulation based upon outcomes. Business oversight based upon openness and full disclosure is regulation based upon process. Taxing corporations that creates incentives to “go offshore” so as to avoid taxes is a tax policy based upon outcomes. Taxing corporations so as to change behavior or to punish those earning “excess profits” is a tax policy based upon outcomes. The tax system that creates incentives to focus on creative accounting and ingenious corporate structure distracts businesses from what they really should be doing. Taxing businesses must be based upon processes…and not outcomes.
I could go on…and I probably will in the future…but, at this time, I firmly believe that we need to focus on what is impacting the supply side of the economy and not the demand side. If we do not focus on the supply side at this time I believe that we are in for continued volatility in the markets and continued fragility of our financial institutions and consequently our whole economic system.
Monday, June 23, 2008
Credibility?
This is what it all boils down to…
Saturday, the Wall Street Journal put it on the line. In an editorial titled “Bernanke’s Market Week”, the Journal states that “The most precious commodity a Fed Chairman has is credibility.” The article goes on to say, “the Fed has a growing credibility problem” related to the weakness in the value of the dollar. You can find the editorial at http://online.wsj.com/article_print/SB121400288407493271.html.
Unfortunately, this is only one piece of the picture. This whole administration has a credibility problem. And, it starts right at the top. (You might note Thomas Friedman's column for Sunday June 22: "Mr. Bush: Lead or Leave." http://www.nytimes.com/2008/06/22/opinion/22friedman.html?em&ex=1214366400&en=fd288df78dd325e6&ei=5070)
The culture of an administration…whether it be a business…a family…a non-profit organization…or the national government…is determined by the leader. Everything that a leader says…or does…should reflect the culture that he or she wants to see permeate his or her administration. It is reflected in the people that the leader chooses to join the administration. It is reflected in what happens to people once they join the administration. That is, everything that is done by the leader “hangs together”.
The consequences of the culture created are ultimately there for all to see.
The leader cannot control events…the leader can only control how his or her administration anticipates or respond to events. And, the actions of an administration reflect the thing that it can directly influence…the culture established by its leader. And this culture engulfs all who are a member…the talented as well as the less talented.
This administration only has a few more months left. Lost credibility cannot be regained in that period of time. The world has begun to focus on the credibility of the people now seeking to become the leader of the United States. What kind of culture will these people create once they achieve the goal they are chasing?
Within this kind of environment, it is hard to imagine that the financial markets will settle down. There will be rallies here and there. There will be sell-offs here and there. Given that there is little or no credibility to be found these days in Washington, D. C. who can place a bet on what anyone says.
In the waning days of this administration…
this is what it all boils down to!
Saturday, the Wall Street Journal put it on the line. In an editorial titled “Bernanke’s Market Week”, the Journal states that “The most precious commodity a Fed Chairman has is credibility.” The article goes on to say, “the Fed has a growing credibility problem” related to the weakness in the value of the dollar. You can find the editorial at http://online.wsj.com/article_print/SB121400288407493271.html.
Unfortunately, this is only one piece of the picture. This whole administration has a credibility problem. And, it starts right at the top. (You might note Thomas Friedman's column for Sunday June 22: "Mr. Bush: Lead or Leave." http://www.nytimes.com/2008/06/22/opinion/22friedman.html?em&ex=1214366400&en=fd288df78dd325e6&ei=5070)
The culture of an administration…whether it be a business…a family…a non-profit organization…or the national government…is determined by the leader. Everything that a leader says…or does…should reflect the culture that he or she wants to see permeate his or her administration. It is reflected in the people that the leader chooses to join the administration. It is reflected in what happens to people once they join the administration. That is, everything that is done by the leader “hangs together”.
The consequences of the culture created are ultimately there for all to see.
The leader cannot control events…the leader can only control how his or her administration anticipates or respond to events. And, the actions of an administration reflect the thing that it can directly influence…the culture established by its leader. And this culture engulfs all who are a member…the talented as well as the less talented.
This administration only has a few more months left. Lost credibility cannot be regained in that period of time. The world has begun to focus on the credibility of the people now seeking to become the leader of the United States. What kind of culture will these people create once they achieve the goal they are chasing?
Within this kind of environment, it is hard to imagine that the financial markets will settle down. There will be rallies here and there. There will be sell-offs here and there. Given that there is little or no credibility to be found these days in Washington, D. C. who can place a bet on what anyone says.
In the waning days of this administration…
this is what it all boils down to!
Wednesday, June 4, 2008
Economic and Financial Power and Leverage
In my post of Thursday, May 29, “Finance, Credit Cards, and the Fed: Three Comments” I made reference to “the loss of respect for the field of finance.” Given some of the comments I have received on this subject over the past week I want to follow up with what, I think, is crucial in understanding the role of finance in the world and how strong leadership in the field of finance is necessary if the goals and objectives of companies and governments are to be achieved. I am willing to accept the criticism that I am saying nothing new and that my comments are so fundamental that they can just be skimmed over before moving on to something more important. The problems that accompany an attitude like this are that they lead to ignoring these fundamentals and the “something more important” cannot really be attained if the fundamentals are ignored.
Finance is secondary to what companies and governments do, including financial companies. Strong financial leadership facilitates and allows companies and governments to focus on what they should be focusing on…the goals and objectives of the company or the government. Weak financial leadership ultimately can result in companies and governments losing their focus because they have to deal with financial dislocations…that is, they have to put out fires and engage in restructurings. Strong financial leadership should contribute to what it is that the company or government does best because a strong financial position enhances the power and leverage a company or government already has achieved. Weak financial leadership reduces and then often overcomes whatever position of strength a company or government has attained.
On a personal level, I have had the opportunity to lead several successful turnaround situations in the financial industry. In all cases I can say that weak financial leadership either caused the difficulty the company faced or exacerbated the results due to the other bad decisions that were being made in the organization. In order to turn these companies around it was necessary to get the financial affairs of the company “under control” so that the organization could “re-focus” on what it could do best. In terms of banking organizations, the re-focusing had to do with becoming a financial intermediary once again. That is, although the institutions were “financial” institutions, their major business was “intermediating” between borrowers and depositors. Re-establishing strong financial fundamentals allowed management to direct its focus to the things that made the banks competitive in their markets.
It is, of course, very easy for managements to lose focus when there seem to be incentives that can “add” to the performance of an organization by dabbling in extra-curricular financial adventures. But, should H & R Block really have been dealing in subprime mortgages? The argument had been given that H & R Block needed to offset the slowing down of it tax-preparation business, but what did it know of the subprime mortgage market? The incentives of making such a move seem so obvious to a management, however, and it is always hard to maintain one’s focus and discipline in the face of such incentives. One has to ask, in retrospect, why the management of H & R Block didn’t keep its focus and re-tool its business model. Where could H & R Block have built on what it did best rather than explore areas it had little or no knowledge of. Maybe, in the face of the competition coming from the Internet, an organization like H & R Block could not sustain the competitive advantage it once held. But, that is another problem. The difficulty that a firm faces is that once management moves away from its primary business it is very hard to reverse the momentum.
Another example pertains to the use of debt and the exorbitant reliance on leverage. For example, we are told over and over again that the only way to make any real money in many arbitrage opportunities where only small spreads exist is to massively leverage a position so as to magnify the returns on a deal. And, of course, the nature of the arbitrage cannot be revealed because if everyone knew about the deal, the spreads would go away. Well, massive arbitrage bets make the spreads go away and raise the question as to whether or not trading really produces, on average, positive returns over time. Also, one has to ask the question about whether or not situations of asymmetric information are really that plentiful in an environment where information is readily available and “super crunching” is becoming ubiquitous. To me, strong financial leadership can stand the glare of openness and transparency.
Governments can also exhibit weak financial leadership which can contribute to a nation’s loss of power within the world community and a lessening of its influence in international relationships. Financial markets can lose confidence in the administration of a country if that administration loses its fiscal discipline. This loss of confidence can result in a consequent decline in the value of a nation’s currency. A depreciating currency weakens the economic position of the country relative to the other countries it trades with. This position of weakness either reduces the other strengths a nation might possess in the world, or, it can exacerbate the problems being created in other areas due to poor government decisions. Strong financial leadership within the government of a country can contribute to the respect and influence a nation has in the world community. Strong financial leadership within a government enhances the other economic strengths that the nation possesses.
There are many other areas where financial leadership can have an influence on the power and leverage a company or government has relative to other companies or governments. Strong financial leadership does not allow financial issues to dominate those things that a company or government should be doing. Strong financial leadership can contribute to the position a company or government can achieve because it allows that company or government to relate to others from a position of strength, a position where the company or government can really do what it does best…and back it up. And, that is what a company or government should do…focus on what it can do best!
I believe that this sermon is especially necessary at this time because of the impending change in the leadership of the government of the United States. I believe that a new administration in Washington, D. C. must exhibit strong financial leadership based on sound fundamental financial practices. I believe in this for two reasons. First, it is important for the United States to re-establish itself as a world leader. Times have changed and although the United States never lost its position as the only superpower in the world, its relative position has changed in that several other nations have economically become much stronger. (See my post of Thursday, May 22, “The World Has Changed. When will America Realize It?”)
Secondly, other leaders within the United States tend to emulate the culture established by the President and his administration. If the government does not follow sound financial principals it sends signals out to the rest of the community that it is not necessary for those within the community to pursue sound financial principals either. In fact, if the government does not follow sound financial principals, it can be expected that incentives will change and it will become more beneficial, at least for a while, for the rest of the community to become less disciplined as well.
In the current campaign for the Presidency, both candidates are presenting programs that lack any appearance of fiscal or monetary discipline. The talk is about tax cuts, universal health coverage, and other programs that resonate with the electorate. This is not unexpected. As a historical example, Bill Clinton ran on such a platform in 1992. Fortunately, after became President, he had an advisor that argued that these programs would just have to wait until the government got its fiscal affairs under control and saw the value of the dollar strengthen. Fortunately, Bill Clinton listened to this advisor. The question is, does either of the candidates have such an advisor at the present time? And, if so, will that candidate listen to the advisor once he becomes the new President? In my view, financial discipline will have to be re-established at some time…the ultimate question is…when will it be done?
Finance is secondary to what companies and governments do, including financial companies. Strong financial leadership facilitates and allows companies and governments to focus on what they should be focusing on…the goals and objectives of the company or the government. Weak financial leadership ultimately can result in companies and governments losing their focus because they have to deal with financial dislocations…that is, they have to put out fires and engage in restructurings. Strong financial leadership should contribute to what it is that the company or government does best because a strong financial position enhances the power and leverage a company or government already has achieved. Weak financial leadership reduces and then often overcomes whatever position of strength a company or government has attained.
On a personal level, I have had the opportunity to lead several successful turnaround situations in the financial industry. In all cases I can say that weak financial leadership either caused the difficulty the company faced or exacerbated the results due to the other bad decisions that were being made in the organization. In order to turn these companies around it was necessary to get the financial affairs of the company “under control” so that the organization could “re-focus” on what it could do best. In terms of banking organizations, the re-focusing had to do with becoming a financial intermediary once again. That is, although the institutions were “financial” institutions, their major business was “intermediating” between borrowers and depositors. Re-establishing strong financial fundamentals allowed management to direct its focus to the things that made the banks competitive in their markets.
It is, of course, very easy for managements to lose focus when there seem to be incentives that can “add” to the performance of an organization by dabbling in extra-curricular financial adventures. But, should H & R Block really have been dealing in subprime mortgages? The argument had been given that H & R Block needed to offset the slowing down of it tax-preparation business, but what did it know of the subprime mortgage market? The incentives of making such a move seem so obvious to a management, however, and it is always hard to maintain one’s focus and discipline in the face of such incentives. One has to ask, in retrospect, why the management of H & R Block didn’t keep its focus and re-tool its business model. Where could H & R Block have built on what it did best rather than explore areas it had little or no knowledge of. Maybe, in the face of the competition coming from the Internet, an organization like H & R Block could not sustain the competitive advantage it once held. But, that is another problem. The difficulty that a firm faces is that once management moves away from its primary business it is very hard to reverse the momentum.
Another example pertains to the use of debt and the exorbitant reliance on leverage. For example, we are told over and over again that the only way to make any real money in many arbitrage opportunities where only small spreads exist is to massively leverage a position so as to magnify the returns on a deal. And, of course, the nature of the arbitrage cannot be revealed because if everyone knew about the deal, the spreads would go away. Well, massive arbitrage bets make the spreads go away and raise the question as to whether or not trading really produces, on average, positive returns over time. Also, one has to ask the question about whether or not situations of asymmetric information are really that plentiful in an environment where information is readily available and “super crunching” is becoming ubiquitous. To me, strong financial leadership can stand the glare of openness and transparency.
Governments can also exhibit weak financial leadership which can contribute to a nation’s loss of power within the world community and a lessening of its influence in international relationships. Financial markets can lose confidence in the administration of a country if that administration loses its fiscal discipline. This loss of confidence can result in a consequent decline in the value of a nation’s currency. A depreciating currency weakens the economic position of the country relative to the other countries it trades with. This position of weakness either reduces the other strengths a nation might possess in the world, or, it can exacerbate the problems being created in other areas due to poor government decisions. Strong financial leadership within the government of a country can contribute to the respect and influence a nation has in the world community. Strong financial leadership within a government enhances the other economic strengths that the nation possesses.
There are many other areas where financial leadership can have an influence on the power and leverage a company or government has relative to other companies or governments. Strong financial leadership does not allow financial issues to dominate those things that a company or government should be doing. Strong financial leadership can contribute to the position a company or government can achieve because it allows that company or government to relate to others from a position of strength, a position where the company or government can really do what it does best…and back it up. And, that is what a company or government should do…focus on what it can do best!
I believe that this sermon is especially necessary at this time because of the impending change in the leadership of the government of the United States. I believe that a new administration in Washington, D. C. must exhibit strong financial leadership based on sound fundamental financial practices. I believe in this for two reasons. First, it is important for the United States to re-establish itself as a world leader. Times have changed and although the United States never lost its position as the only superpower in the world, its relative position has changed in that several other nations have economically become much stronger. (See my post of Thursday, May 22, “The World Has Changed. When will America Realize It?”)
Secondly, other leaders within the United States tend to emulate the culture established by the President and his administration. If the government does not follow sound financial principals it sends signals out to the rest of the community that it is not necessary for those within the community to pursue sound financial principals either. In fact, if the government does not follow sound financial principals, it can be expected that incentives will change and it will become more beneficial, at least for a while, for the rest of the community to become less disciplined as well.
In the current campaign for the Presidency, both candidates are presenting programs that lack any appearance of fiscal or monetary discipline. The talk is about tax cuts, universal health coverage, and other programs that resonate with the electorate. This is not unexpected. As a historical example, Bill Clinton ran on such a platform in 1992. Fortunately, after became President, he had an advisor that argued that these programs would just have to wait until the government got its fiscal affairs under control and saw the value of the dollar strengthen. Fortunately, Bill Clinton listened to this advisor. The question is, does either of the candidates have such an advisor at the present time? And, if so, will that candidate listen to the advisor once he becomes the new President? In my view, financial discipline will have to be re-established at some time…the ultimate question is…when will it be done?
Thursday, May 1, 2008
Response to "Second Thoughts"
This post is in response to the request of “Second Thoughts” that was posted on April 30. Thank you (and others that have responded to my postings) for the thoughtful points that you made in your post.
With regard to the first point…“I'm not convinced that any of the "new" objectives actually conflict in the ordinary course of conducting policy. I have to add that caveat because, clearly, what has been happening is not "ordinary".” Clearly, the times are not “ordinary”. But, my point relates to what has transpired over the past seven and one half years which has brought us to the times that we are now a part of. The policies of the current administration have created a situation in which the goal of ‘saving’ the financial system is in conflict with our responsibilities of being a part of the world financial system. I have written on this in many of my earlier posts and will not go into them further at this point. The tensions created by this divergence of responsibilities have resulted in rapidly increasing commodity prices and a sharp decline in the value of the United States dollar. Providing more and more liquidity to the U. S. financial system has not been looked on favorably in world markets. Adding more and more responsibilities onto any one specific agency at this time only diverts the focus of the heads of the agency and muddies the water. My experience in managing organizations in crisis is that the leadership of the organization needs to bring on a tighter focus to their decisions rather than adding more and more responsibilities to their agenda. So, my point is that in these times that are not “ordinary” we need to keep focus as much as we can. However, the leadership void in Washington D. C. at the present time does not help us to achieve this goal. We need to try and avoid confusing institutional deficiencies with weak leadership.
In terms of the second point made, “The time is ripe to reconsider the structure of all these multiple agencies, with their different agendas, constituencies and leaders, to assure ourselves that our governmental infrastructure is in some sense "optimally" configured to address the world of finance we live in now.” I don’t disagree that the regulatory structure needs to be reconsidered and we are long overdue in aligning the structure with the modern world of money and finance. However, being a fallible human being among other fallible human beings, the idea of being able to create an “optimal” infrastructure or even approach something that might be considered “optimal” is to me the impossible dream. It is a goal to shoot for, but my experience with trying to construct ‘ideal’ systems is that we expect more from humans than they can possibly deliver. Thus, we need to have checks and balances within the system to protect against human error and incompatible human objectives. I am more comfortable giving different agencies different, clear responsibilities so that they can be held accountable for their piece of the pie than to center everything within one or two agencies where we don’t know what is happening and exactly who is responsible. My example of the latter case is FEMA.
That said let me respond to the author’s concern “that having disparate agencies (Treasury, Fed, SEC, Comptroller, etc.) responsible for the various aspects of monetary policy more broadly characterized has been a source of delay and inadequacy.” My feeling here is that having everything within one agency can cause ‘delay and inadequacy’ as much or more than having separated agencies with specific responsibilities.
Let me be more specific on this. In the current environment in Washington D. C. there seems to be a void of leadership…at the Treasury, the Fed, the SEC, the Comptroller…and so on, and so on! I see little or no leadership at the Fed. Paulson tried to carry the ball on the discussion about regulation, but he seems to be ‘out-in-front’ with no one following him. And so on, and so on. There seems to be very little interagency coordination or discussion. Something comes from here and something comes from there…and we are confused and uncertain.
An alternative example…and, I am not promoting one political party over another, for my experience with both the Reagan administration and the Bush 41 administration was much more like what I am going to reference than Bush 43. Read the book by Robert Rubin, “In An Uncertain World”. He writes about crisis after crisis in which the different agencies within the government got together, talked with one another, and worked together. It can be done…effectively…and relatively efficiently. But, I would argue, that was because they had very talented people, one being Tim Geithner who is now the President and Chief Executive Officer of the Federal Reserve Bank of New York, different agencies with strong, independent leadership, who saw the need to work together to resolve problems. If the power is all centered in just one agency you do not get this kind of dynamic.
I hope that this response helps “Second Thoughts” understand where I am coming from. Since no one is the fount of all wisdom, I am open to the possibility that I am not correct on every point I try to make. However, I hope that the dialogue will continue because in discussion we all learn and maybe we can all do a little better with the additional insight.
With regard to the first point…“I'm not convinced that any of the "new" objectives actually conflict in the ordinary course of conducting policy. I have to add that caveat because, clearly, what has been happening is not "ordinary".” Clearly, the times are not “ordinary”. But, my point relates to what has transpired over the past seven and one half years which has brought us to the times that we are now a part of. The policies of the current administration have created a situation in which the goal of ‘saving’ the financial system is in conflict with our responsibilities of being a part of the world financial system. I have written on this in many of my earlier posts and will not go into them further at this point. The tensions created by this divergence of responsibilities have resulted in rapidly increasing commodity prices and a sharp decline in the value of the United States dollar. Providing more and more liquidity to the U. S. financial system has not been looked on favorably in world markets. Adding more and more responsibilities onto any one specific agency at this time only diverts the focus of the heads of the agency and muddies the water. My experience in managing organizations in crisis is that the leadership of the organization needs to bring on a tighter focus to their decisions rather than adding more and more responsibilities to their agenda. So, my point is that in these times that are not “ordinary” we need to keep focus as much as we can. However, the leadership void in Washington D. C. at the present time does not help us to achieve this goal. We need to try and avoid confusing institutional deficiencies with weak leadership.
In terms of the second point made, “The time is ripe to reconsider the structure of all these multiple agencies, with their different agendas, constituencies and leaders, to assure ourselves that our governmental infrastructure is in some sense "optimally" configured to address the world of finance we live in now.” I don’t disagree that the regulatory structure needs to be reconsidered and we are long overdue in aligning the structure with the modern world of money and finance. However, being a fallible human being among other fallible human beings, the idea of being able to create an “optimal” infrastructure or even approach something that might be considered “optimal” is to me the impossible dream. It is a goal to shoot for, but my experience with trying to construct ‘ideal’ systems is that we expect more from humans than they can possibly deliver. Thus, we need to have checks and balances within the system to protect against human error and incompatible human objectives. I am more comfortable giving different agencies different, clear responsibilities so that they can be held accountable for their piece of the pie than to center everything within one or two agencies where we don’t know what is happening and exactly who is responsible. My example of the latter case is FEMA.
That said let me respond to the author’s concern “that having disparate agencies (Treasury, Fed, SEC, Comptroller, etc.) responsible for the various aspects of monetary policy more broadly characterized has been a source of delay and inadequacy.” My feeling here is that having everything within one agency can cause ‘delay and inadequacy’ as much or more than having separated agencies with specific responsibilities.
Let me be more specific on this. In the current environment in Washington D. C. there seems to be a void of leadership…at the Treasury, the Fed, the SEC, the Comptroller…and so on, and so on! I see little or no leadership at the Fed. Paulson tried to carry the ball on the discussion about regulation, but he seems to be ‘out-in-front’ with no one following him. And so on, and so on. There seems to be very little interagency coordination or discussion. Something comes from here and something comes from there…and we are confused and uncertain.
An alternative example…and, I am not promoting one political party over another, for my experience with both the Reagan administration and the Bush 41 administration was much more like what I am going to reference than Bush 43. Read the book by Robert Rubin, “In An Uncertain World”. He writes about crisis after crisis in which the different agencies within the government got together, talked with one another, and worked together. It can be done…effectively…and relatively efficiently. But, I would argue, that was because they had very talented people, one being Tim Geithner who is now the President and Chief Executive Officer of the Federal Reserve Bank of New York, different agencies with strong, independent leadership, who saw the need to work together to resolve problems. If the power is all centered in just one agency you do not get this kind of dynamic.
I hope that this response helps “Second Thoughts” understand where I am coming from. Since no one is the fount of all wisdom, I am open to the possibility that I am not correct on every point I try to make. However, I hope that the dialogue will continue because in discussion we all learn and maybe we can all do a little better with the additional insight.
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