This morning there is a series of articles in the opinion section of the Wall Street Journal titled “What Should the Federal Reserve Do Next?”. It consists of several short pieces written by well known economists. I recommend that you read them.
I would especially recommend the opinion piece written by Allan Meltzer, a professor of economics at Carnegie Mellon University and the author of “A History of the Federal Reserve”. The following quote is, I believe, especially important for the monetary policy of the Federal Reserve…and for the fiscal policy of the federal government.
“In ‘A History of the Federal Reserve,’ I concluded that the principal mistakes the Fed has made have resulted from giving excessive attention to current events and forecasts of highly uncertain near-term developments. By focusing on the short-term, the Fed neglects the longer-term consequences of its actions. The transcripts of FOMC show that the members are paying little attention to medium- and longer-term consequences.” (http://professional.wsj.com/article/SB10001424052748704358904575477580959771188.html?mod=WSJ_Opinion_LEADTop&mg=reno-wsj.)
Unfortunately, we are in a short-term world. Everyone focuses on “current events and forecasts of highly uncertain near-term developments.” As a consequence, there is a tendency to over-react to situations and, in doing so, set the stage for further difficulties down-the-road.
The policy-cycle has gotten shorter and shorter. Richard Nixon believed that he lost the 1960 election to John Kennedy because the economy was not performing well. Thus, when Nixon became president he focused on making sure the economy would be expanding during the 1972 election. He froze wages and prices and took the United States off of gold in August 1971 because he believed it was necessary to contain the inflation begun in the Kennedy-Johnson years so that he, Nixon, could re-stimulate the economy so that he would be re-elected.
This four year cycle became the “thing” for Presidents. Slow down the economy immediately after getting elected so that the economy could be re-started in time to get re-elected.
In the 1992 election, “It’s the economy, stupid!” became the mantra of the Clinton campaign. And this approach appeared to be was in Clinton’s election.
But, then a funny thing happened: the cycle shortened. The mid-term elections became the thing. Whereas the Democrats controlled both houses of Congress when Clinton took office, the 1994 congressional elections turned the tide and resulted in the President facing a hostile legislature for the rest of his tenure. Focus was placed on mid-term elections as well as presidential elections.
Bush (43) experienced a similar turn-around in the 2006 election where the Democrats once-again established their control in Congress.
Now presidents must get re-elected, but also get “their” Congress re-elected.
Current economic policy making in the United States is on a very short string…not that it hasn’t been for a long time.
The problem this creates is that the economy is never allowed to fully adjust to the economic dislocations that appear over time. The efforts to re-stimulate the economy are over-whelmingly aimed at putting people back to work in the jobs and industries that existed before the previous recession. As a consequence, the economy never fully adjusts as it needs to.
Several things can happen. Human capital does not evolve as it should to meet the changes in technology taking place. The result is that unemployment rises, but even more important under employment rises. America now faces the problem that about one out of every four individuals of working age is either unemployed or underemployed. Income inequality is highest in sixty years.
The capacity utilization in the United States has dropped continuously since the 1960s and still rests substantially below the previous levels attained. It is expected that the near-term peak in this measure will be well below the previous peak. This, I contend, is a result of the government’s efforts to force resources back into “legacy” physical capital. (See my post http://seekingalpha.com/article/213163-jobs-and-skills-the-current-mismatch.)
Another area of major concern is the debt burden taken on by individuals, businesses, and governments. In the past fifty years, the federal government has created deficits and excessive monetary growth to combat unemployment and income inequality and sustain as much economic growth as it could. This has been the perfect environment for people to take on more and more debt…and that is exactly what they have done.
However, history shows over and over again that debt levels can eventually reach heights that are unsustainable. And, when this happens, the debt loads have to be worked off. The relevant question is, have we reached that stage where people must de-leverage and work with lower debt levels? If this is the case, working off current debt loads will not be easy.
It takes time for economies to re-adjust and re-structure. Debt loads have to be worked down. Labor must be re-trained. Legacy capital must be replaced with physical capital more attuned to the age. And, continued monetary and fiscal pressure only delays such adjustment and makes American commerce less competitive. (See “U. S. Falls in Ranks of World Economy,” http://professional.wsj.com/article/SB10001424052748704362404575480023901940654.html?mod=ITP_pageone_4&mg=reno-wsj.)
Furthermore, the existing panic in United States policy making, both monetary and fiscal, is creating a world exactly the opposite of what policy makers seem to be attempting to achieve. For example, the Fed’s low interest rate policy is subsidizing the largest financial institutions and creating a world where more and more of the banking assets in America will be controlled by the largest banks. Currently, the largest 25 domestic commercial banks control 67% of the assets of the banking system. Analysts believe that this will go to 75% or 80% in the next five years.
In addition, the ranks of the middle class are dwindling. The low interest rate policy of the Fed has encouraged big companies, big banks, and the wealthy to borrow but these borrowers are just sitting on the cash waiting to engage in an acquisition binge once the economy starts to pick up steam. The middle class? Well, the middle class, those that have paid their bills, who have stay married and worked hard throughout their lives and have saved: this middle class is facing the fact that they will earn next to nothing on their savings. (See “Falling Rates Aid Debtors, but Hurt Savers,” http://www.nytimes.com/2010/09/09/business/economy/09rates.html?_r=1&hp.)
United States policy makers, in an attempt to stay in office, have advocated monetary and fiscal policies aimed at putting people back to work and making it easy for these people to buy “things”, especially houses. They continue to follow such “populist” policies in order to get re-elected and maintain their power. Both parties are guilty. (See my “Wall Street Greed vs. Washington Greed,” http://seekingalpha.com/article/219804-wall-street-greed-vs-washington-greed.)
The speech given recently by President Obama offering $350 billion in new economic stimulus, even though some of this is aimed at “longer term” projects, appears to be an example of just another politician experiencing the panic that comes with an upcoming election.
Showing posts with label middle class. Show all posts
Showing posts with label middle class. Show all posts
Thursday, September 9, 2010
Thursday, January 28, 2010
Obama and Leadership
Where do I stand on the Obama Presidency?
I stand at about the same place I did last year at this time.
President Obama has put too many projects into his “top priority” list. After a year in office with not a whole lot to point to, he still insists that he will stay the course and continue to pursue the things he has been pursuing.
My experience in leadership cautions me that a leader cannot have too many top priorities. This is true if things are running pretty smoothly and it is especially true if one is in a turnaround situation.
To me, Obama’s job was to execute the turnaround of a pretty sick patient!
Leadership is to bring focus to a situation, identifying what is immediately important and what can be put off for awhile. Leadership is about communicating this focus to others so that they know what they are to concentrate on and they can get on board with the leader. Then the leader needs to bring sufficient resources to bear on the problem so that the goals and objectives of the organization can be met.
There will be diversions along the way. That is just the way the world is. Because the leader knows that she or he will face these other, unknown bumps along the road, having a disciplined agenda will allow the leader to take care of these “diversions” while still pursuing the major goals and objectives.
President Obama put too many projects on his “top priority” list. He did not focus. He had the “Audacity of Hope” driving him on. And, while that may be very appealing and good speech material, everything would have had to go “just right” for the president to achieve all the goals he set for himself.
Someone once was elected to office by focusing on the claim, “It’s the economy, stupid!”
But, this tunnel vision never seemed to be a part of the Obama persona.
Looking back one year, however, it is easy for us to now say, “It was the economy, stupid!”
Last year at this time we were tottering on the brink of another “Great Depression.” There was a lot of fear in the country. America’s biggest banks were on the edge, the economy was in the tank, and unemployment was growing. Foreclosures were rising as were bankruptcies. And, most of the rest of the world was in at least as bad shape as was the United States.
The Obama administration, along with Congress, produced a stimulus plan. There was the interjection of the government into the auto industry and one or two other efforts to head off problems. The Federal Reserve pursued “quantitative easing” keeping its target interest rate around zero.
Things did get better. Analysts are claiming that the “Great Recession” ended somewhere in the second half of 2009. But, unemployment still remains high. Foreclosures and bankruptcies are still taking place at near record rates. There remain over 550 banks on the problem bank list of the FDIC. And, the economy seems lethargic. Our consumer advocate, Elizabeth Warren, is raising concerns over the demise of the middle class. There is the criticism that the focus of the recovery was on Wall Street and not Main Street. Some prominent economists, Stiglitz, Krugman, and Roubini, are worried about a double-dip in the economy.
News about the President’s efforts on the economy were quickly displaced by trips around the world, about health care reform, about global warming, about energy policy and a myriad of other initiatives.
Of particular concern here was the Obama health care effort. I will just make three points here. First, President Obama turned the development of the legislation over to the Reid/Pelosi leadership in the Congress to craft the bill. Obama disappeared. Questions about where the president stood or what he was for received vague, disconnected answers because he was not leading the charge.
The story I heard for this tactic was that the health care bill presented by President Clinton failed because it was crafted in the White House and did not include sufficient Congressional participation in the process. Obama was not going to make this mistake. President Clinton, of course, denies this reason for the failure of the 1993 effort at health care reform.
Second, the emphasis that was placed on obtaining 60 votes in the Senate to pass the legislation put several self-seeking Senators in the driver’s seat. (Who says ‘moral bankruptcy’ is just centered in the Wall Street banks?) Rather than focusing on the health care bill itself, the nation was appalled by the behavior of a few of America’s elite holding everyone else hostage in order to get their special interests taken care of.
Third, the size of the effort was overwhelming. All people heard was universal coverage, coverage of pre-existing conditions, public option, and so forth and so on. The picture that came through to ordinary people was “huge plan” must be connected with “huge cost.” This was the way the government worked. All the efforts and machinations of the politicians to build a plan that would not cost the American people “one dime” just did not resonate with the public. Universal efforts were expensive and always cost more than expected. And, this would just add to the huge deficits predicted for the next ten years or so.
And, this was going on while the president spoke, always eloquently, about his other concerns.
Then, there was Iran, and Iraq, and Afghanistan, and the Christmas terrorist bomber, and Massachusetts (and Virginia and New Jersey) and other detours.
The consequence? Confusion, uncertainty, frustration, anger, you name it, on the part of the people. What are the priorities? Where does the president stand? What does the president want us to do? What are the rules? Who is in charge, Congress or the President? What is important?
And, the economy? I don’t know when I have seen a situation in which such uncertainty exists. First, the big banks are helped. (Yesterday we heard that the crucial thing was that the economy did not collapse, not how much money Goldman or the French or whoever got.) Then the big banks became the big bad guys. Now we need to re-regulate them. But, how are they going to be regulated? What about foreclosures? Can anything be done about them? And, then the small- and medium-sized banks aren’t lending. How can we get credit flowing again? And, so on and so on.
People and businesses can’t follow if they don’t know where their leaders are heading, what their main priorities are. People and businesses can’t plan if they don’t know what the rules and regulations are going to be. People and businesses can’t commit if they are plagued with uncertainty.
The State of the Union address last evening did not resolve any of these issues for me or lessen my concerns. To me the issue is leadership and the respect for a leader is earned. This is a question of the rubber hitting the road and no speech, no matter how eloquent it might be is going to change this fact. I am still waiting for the focus of intention and the focus of effort.
I stand at about the same place I did last year at this time.
President Obama has put too many projects into his “top priority” list. After a year in office with not a whole lot to point to, he still insists that he will stay the course and continue to pursue the things he has been pursuing.
My experience in leadership cautions me that a leader cannot have too many top priorities. This is true if things are running pretty smoothly and it is especially true if one is in a turnaround situation.
To me, Obama’s job was to execute the turnaround of a pretty sick patient!
Leadership is to bring focus to a situation, identifying what is immediately important and what can be put off for awhile. Leadership is about communicating this focus to others so that they know what they are to concentrate on and they can get on board with the leader. Then the leader needs to bring sufficient resources to bear on the problem so that the goals and objectives of the organization can be met.
There will be diversions along the way. That is just the way the world is. Because the leader knows that she or he will face these other, unknown bumps along the road, having a disciplined agenda will allow the leader to take care of these “diversions” while still pursuing the major goals and objectives.
President Obama put too many projects on his “top priority” list. He did not focus. He had the “Audacity of Hope” driving him on. And, while that may be very appealing and good speech material, everything would have had to go “just right” for the president to achieve all the goals he set for himself.
Someone once was elected to office by focusing on the claim, “It’s the economy, stupid!”
But, this tunnel vision never seemed to be a part of the Obama persona.
Looking back one year, however, it is easy for us to now say, “It was the economy, stupid!”
Last year at this time we were tottering on the brink of another “Great Depression.” There was a lot of fear in the country. America’s biggest banks were on the edge, the economy was in the tank, and unemployment was growing. Foreclosures were rising as were bankruptcies. And, most of the rest of the world was in at least as bad shape as was the United States.
The Obama administration, along with Congress, produced a stimulus plan. There was the interjection of the government into the auto industry and one or two other efforts to head off problems. The Federal Reserve pursued “quantitative easing” keeping its target interest rate around zero.
Things did get better. Analysts are claiming that the “Great Recession” ended somewhere in the second half of 2009. But, unemployment still remains high. Foreclosures and bankruptcies are still taking place at near record rates. There remain over 550 banks on the problem bank list of the FDIC. And, the economy seems lethargic. Our consumer advocate, Elizabeth Warren, is raising concerns over the demise of the middle class. There is the criticism that the focus of the recovery was on Wall Street and not Main Street. Some prominent economists, Stiglitz, Krugman, and Roubini, are worried about a double-dip in the economy.
News about the President’s efforts on the economy were quickly displaced by trips around the world, about health care reform, about global warming, about energy policy and a myriad of other initiatives.
Of particular concern here was the Obama health care effort. I will just make three points here. First, President Obama turned the development of the legislation over to the Reid/Pelosi leadership in the Congress to craft the bill. Obama disappeared. Questions about where the president stood or what he was for received vague, disconnected answers because he was not leading the charge.
The story I heard for this tactic was that the health care bill presented by President Clinton failed because it was crafted in the White House and did not include sufficient Congressional participation in the process. Obama was not going to make this mistake. President Clinton, of course, denies this reason for the failure of the 1993 effort at health care reform.
Second, the emphasis that was placed on obtaining 60 votes in the Senate to pass the legislation put several self-seeking Senators in the driver’s seat. (Who says ‘moral bankruptcy’ is just centered in the Wall Street banks?) Rather than focusing on the health care bill itself, the nation was appalled by the behavior of a few of America’s elite holding everyone else hostage in order to get their special interests taken care of.
Third, the size of the effort was overwhelming. All people heard was universal coverage, coverage of pre-existing conditions, public option, and so forth and so on. The picture that came through to ordinary people was “huge plan” must be connected with “huge cost.” This was the way the government worked. All the efforts and machinations of the politicians to build a plan that would not cost the American people “one dime” just did not resonate with the public. Universal efforts were expensive and always cost more than expected. And, this would just add to the huge deficits predicted for the next ten years or so.
And, this was going on while the president spoke, always eloquently, about his other concerns.
Then, there was Iran, and Iraq, and Afghanistan, and the Christmas terrorist bomber, and Massachusetts (and Virginia and New Jersey) and other detours.
The consequence? Confusion, uncertainty, frustration, anger, you name it, on the part of the people. What are the priorities? Where does the president stand? What does the president want us to do? What are the rules? Who is in charge, Congress or the President? What is important?
And, the economy? I don’t know when I have seen a situation in which such uncertainty exists. First, the big banks are helped. (Yesterday we heard that the crucial thing was that the economy did not collapse, not how much money Goldman or the French or whoever got.) Then the big banks became the big bad guys. Now we need to re-regulate them. But, how are they going to be regulated? What about foreclosures? Can anything be done about them? And, then the small- and medium-sized banks aren’t lending. How can we get credit flowing again? And, so on and so on.
People and businesses can’t follow if they don’t know where their leaders are heading, what their main priorities are. People and businesses can’t plan if they don’t know what the rules and regulations are going to be. People and businesses can’t commit if they are plagued with uncertainty.
The State of the Union address last evening did not resolve any of these issues for me or lessen my concerns. To me the issue is leadership and the respect for a leader is earned. This is a question of the rubber hitting the road and no speech, no matter how eloquent it might be is going to change this fact. I am still waiting for the focus of intention and the focus of effort.
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