Letter to Secretary Paulson and Chairman Bernanke

Mr. Henry Paulson

Secretary of the Treasury

1500 Pennsylvania Avenue, N.W.

Washington, D.C. 20220

 

Chairman Ben Bernanke

Chairman

Board of Governors of the Federal Reserve System

Washington, D.C. 20551

 

Dear Secretary Paulson and Chairman Bernanke:

 

Over the years, I have been very conservative in my financial decision-making.  I assiduously avoided incurring debt that I could not repay.  (In fact, I pay off all amounts on credit cards at the end of each month, since the interest rate always exceeds the return on money).  I refused to become involved in the speculative folly of the equity bubble of the late 1990’s.  I also did not put myself in harms way by over-leveraging myself in real estate in recent years.  My approach meant that, in the early stages of these boom-bust cycles I did not participate in the fun.  However, I also avoided the pain and suffering of those caught holding the bag.  At least I thought I avoided the consequences.  Recent events suggest otherwise.

 

Please understand, I do not like seeing people hurt.  But I also do not believe that the solution should unfairly tax those who, because of luck or foresight, managed to avoid the debacle; or those who, because of determination and fortitude, actually managed to navigate through the same minefield. Furthermore, any solution should not allow the possibility that aid recipients end up better positioned than those who did not put themselves in harms way, or those who managed to struggle through on their own.

            

Sincerely,

 

Fool Me Once, Shame On You; Fool Me Twice…

Most of those who ask my opinion on the maelstrom in the capital markets know that I believe (rather too strongly) that the prior Chairman of the Federal Reserve bears a significant part of the responsibility for the financial distress many are now encountering.  I won’t repeat the litany of errors here.  But I do have a new mistake to add to the list…Behavioral Economics.  A more popular description is the “Greenspan Put”.

Over the years, we were treated to Greenspan Alchemy in any number of variations.  There was, however, always a similar plot.  Something good would happen in the economy.  Something too good.  The stock market would appreciate in an unprecedented fashion.  Housing prices would soar, spurring record construction.  Everyone could get a mortgage, irrespective of financial condition or income.  Commodity prices exploded.  In sophisticated jargon, we experienced bubbles.  One after the other.  Even Bazooka Joe couldn’t have made the Final Four.  In each instance, this financial wizard would demur if called upon to intercede at an early stage.  In his own mind, it was not this bartender’s responsibility to take away the punchbowl.  In fact, he did not want to stop refilling everyone’s cup.  According to the Chairman, the Fed was not positioned to anticipate bubbles, nor was it positioned to prevent or moderate them (even if easy credit was at the heart of the problem).  However, the Central Bank would be happy to provide the Alka Seltzer for the guaranteed hangover.

Over the years, we were taught, collectively, that financial exagerration was, at worst, an inconvenience and, at best, a “buying opportunity”.  Time and again, like a perfect Pavlovian experiment, we were taught to wag our tongues and tails when in pain.  The “Greenspan Put” was the perfect Milkbone Dog Biscuit.

Unfortunately, it was a bad lesson.  And a lesson learned that may be responsible for this mess.  Leaks in the Sub-Prime balloon started showing up several years ago.  In the early stages, it prompted little concern at any level.  Most importantly, financial institutions saw no reason to react.  As the problems grew, the same behavior continued.  In fact, I would not be surprised if the first few bumps were not viewed as buying opportunities.  As things progressed, problems grew.  But, hey, the Fed was there and they would get aggressive.  Almost nothing was done to prepare for the coming tsunami.  Assets were not sold, debt and leverage was not reduced, duration was not shed.  The system’s response function was broken.  It was a perfect Pavlovian response.  Most of us did what we were taught to…Ignore reality.  We are drowning in it now.

Hopefully it is not too late and we learn our lesson.  Maybe Ben Franklin put it best…”An ounce of prevention is worth a pound of cure.”

Commentary on Deflation

In 2002, the Federal Reserve published an analysis of the deflationary spiral in Japan. The attached link is a commentary on that piece.

Deflation

Demographics and the Election

There is not a day that passes without a vast analysis of the relative merits of a Clinton or Obama Presidency.  One claims to have more experience.  Another claims to be the voice of change.  Both think they are qualified to answer the telephone at 3 A.M. (or any other time of day).  With votes in short supply, each candidate is claiming to be the person best positioned to win the general election.

Is there any other factor that may favor one of these candidates?  I believe so.  Age.  I am referring to the age of the voting pool, not the age of the candidates (who, by Constitutional mandate, at the very least are nearing middle age).  Although it has dropped under the radar screen, the Senator from Illinois has garnered enormous support from young voters.  If this pattern holds, and there is no reason to suppose it won’t, demographics suggest that the elapse of time makes Senator Obama ever more formidable.

Why?  As of 2006, the US Census Bureau estimated that there were 21.3 million people between the ages of 15 and 19.  Using 2004 and 2005 data, this extrapolates to 22 million people in this age group now.  Therefore, there are roughly 4.4 million 17 year olds.  By the time of the general election, eight months hence, almost 3 million new voters will be eligible to vote (my own daughter being one of them).  If the primaries are any indication, Senator Obama will have a lot more support come election time.

Just one observer’s thoughts.