Obama's Misguided Policies and the Effects on the Economy

* It seems as if my writings these days have taken a shift towards the political agenda, and how that agenda is shaping outcomes in the financial markets. My main concern has to do with the way in which our government is diverting our nation’s resources to a failed housing market. Instead of letting housing prices fall to anequilibrium level, without the benefit of a prolonged foreclosure process, or outsized programs to support the financing markets for housing. Whether it is the Fed’s purchase of $1.4 trillion of housing debt, or the continuation of tax incentives for American’s to own homes, we will never move past this liquidation phase if instead we turn it into a Chinese water torture. 


On our way to the housing bubble which peaked in the middle of the preceding decade, Wall Street, which I am a part of, became a more significant share of the US GDP. With the wind at its back, the money earned in the businesses which supported housing, including Wall Street, drew much of our nation’s capital and human talent. The markets for human and monetary capital were efficient and this is where the brightest minds and money went to.


Since housing’s glory days ended, the administration has been wrongly trying to prop up the only thing they know, the housing market which drove the economy over the past 10 years. This is wrong! Part of the vitality of our capitalist system is that it is supposed to allow failing enterprises to fail, which in turn create capacity, both in terms of the financial and human capital for other industries to absorb. While the government is trying to soften the blow to housing, and the nation’s wealth, they are keeping capital from figuring out where it is supposed to go to. I understand the government’s protection of housing, and the nations wealth effect, which it is a significant component of. But the decisions to breathe life into housing is a major mis-allocation of our nation’s wealth. What is worse, is that the nation will endure a decade of pain while housing dies a slow death. On the other hand, a quick tsunami, from which we will have lots of time to rebuild, would have bottomed. While no one likes to preside over a tsunami, it would have been far better for our country to let housing drop another 30%, and work through the painful process of dislocation which such an event would have caused. The government would have to have taken over most banks, and done something to prevent millions of people from getting thrown out of their homes all at once; this could have been accomplished by forcing banks to rent, at low payments, to former homeowners, without kicking them out. Of course, the government would have owned both Citi and BofA, so it would have been relatively easy to implement. 


Let me move this conversation forward by suggesting that the dramatic increase in unemployment ties into the government’s diversion of capital towards housing. What if the Fed purchased $1.4 trillion of stocks and bonds of technology companies, instead of housing bonds? Don’t you think that new jobs would spring up as a result? I realize on the one hand, you want market forces to determine where capital goes, and I am pretty sure that the government would NOT know how to invest $1.4 trillion in something pro-active as technology. But the point is that there is an inordinate amount of capital, and the human talent which follows that capital, should be diverted to something other than housing. Instead, the malaise which seems to be plaguing this country will likely get worse as the government leads us down this dead-end path. 


When I step back and look at the global landscape, a comment by John Hussman, on his website, appears all too prophetic:


“U.S. workers have a substantially larger stock of productive capital per worker, as well as generally higher levels of educational attainment, which is a form of human capital. This relative abundance of physical and educational capital has been a driver of U.S. prosperity for generations. Neither advantage in capital, however, is intrinsic to American workers, and it will be impossible to prevent a long-term convergence of U.S. wages toward those of developing countries unless the U.S. efficiently allocates its resources to productive investment and educational quality. This is where our policy makers are failing us.” (end of comment)


When I look back at the events which took us out of the Great Depression of the 1930′s, it was the war effort, and the devastation of the manufacturing capabilities of Europe, which allowed the US to rise to the top, and lead the world on a 20 year expansion. While it should not be surprising, research and development done during the war effort, resulted in the creation of many inventions which spawned new businesses. What is going to propel the US back to a level of greatness in this environment? I would bet good money, that the misguided policies of our government are not the answer. While I conjure up reasons why I am not optimistic about our prospects, I do not see our government doing anything which causes me optimism. The government should be leading us out of our economic malaise, not putting us into it. The government’s policies towards housing is like buying hi tech stocks in 2000, at the top. The government’s misguided policies towards housing, and the indebtedness these policies engenders, will only ensure that we will not direct our nations wealth towards more productive endeavors. In the meantime, our debts are growing, with little prospects of coming under control.


Unless the government can conceive of activities which allows our millions of unemployed to earn wages commensurate with what they are used to, it is only a matter of time until our wages converge with those of our international trading partners. The average annual salary in China is less than $3,000. Even if those wages double, as they are on course to do in 5 years time, this is well below the $36,000 average personal income in the US.


As I suggested earlier this week, the government should start off by lowering the minimum wage, and also force people receiving extended unemployment benefits to take any job, even in support of cleaning highways, or whatever. Of major concern to me is a trend towards a lower standard of living. This will be our fate if the government does not direct its policies towards growing new businesses which will have the capacity to pay our workers wages consistent with what they have earned over the last 10 years.


Before I leave off for the week, I want to share with you a letter from a benevolent employer, who was faced with having to let go of part of his work-force:


“Dear Employees:


As the CEO of this organization, I have resigned myself to the fact that Barrack Obama is our President and that our taxes and government fees will increase in a BIG way.


To compensate for these increases, our prices would have to increase by about 10%. But since we cannot increase our prices right now due to the dismal state of the economy, we will have to lay off sixty of our employees instead.


This has really been bothering me since I believe we are family here and I didn’t know how to choose who would have to go.


So, this is what I did. I walked through our parking lots and found sixty ‘Obama’ bumper stickers on our employee’s cars and have decided these folks will be the ones to let go.  I can’t think of a more fair way to approach this problem.  They voted for change…… I gave it to them.


I will see the rest of you at the annual company picnic.


THE BOSS” (end of letter)