November 7, 2008 - With apologies to staunch Republicans and to Emmerson, the cartoonist for my local paper, here is his cartoon on the morning after the election.One has to retain a sense of humor, despite these adverse times, and so I was also quietly amused by the following reference in the satirical newspaper "Onion".
"Black Man Given Nation's Worst Job - African-American man Barack Obama, 47, was given the least desirable job in the entire country .... As part of his duties, the black man will have to spend four to eight years cleaning up the messes other people left behind."
The End of the Golden Summer
On a more serious note here are some personal thoughts about the financial crisis, which I believe is not likely to markedly improve in the next 12 months and may get worse before it gets better.
I am a "baby boomer" and feel I must share the overall blame for the financial crisis, along with everyone else in the "baby boomer" generation. As a generation we have been too focussed on consumption and instead should have had a more balanced view, with a greater thought for future pressures.
My parents were born before the Russian Revolution, lived through World War I, the 1920's General Strike in England, the Great Depression, and World War II. My father had to leave school at age 15 and later fought overseas for six years, where he was unable to prevent my mother being bombed in London.
Thus most of their life was spent facing adversity, but they did it cheerfully as they were looking to to make the world a better place for their children. They were unable to even start saving until after World War II, when they were already in their late 30's. As evidence of their attitude, I even remember my mother saying shortly before she died, that she "had always considered herself as part of the lucky generation".
In contrast, until now baby boomers have not had to face adversity as a generation. Rather than "adversity", "consumption" has increasingly been the magic word since 1950.
Most Western democracies have been influenced by United States consumption via TV and films and thus, by following the leader, their economies have also had a consumption bias.
Great technological advances have been made since world War II, but the Western democracies have been a little too biased towards consumption. For short terms that did not matter, but the imbalance has continually grown until consumption is now at an unsustainable level.
Other Western economies, which are all less economically powerful than the United States, have gradually fallen by the wayside. They have been forced to react to domestic pressures from excess consumption in their own economies and take drastic structural actions at varying times, such as introducing VAT taxes.
The United States has avoided restructuring until now, due to its dominant economic power and, more recently, its ability to borrow from overseas to continue to fund its consumption.
Since before 1900 the United States has regarded itself as the bastion of Capitalism. Ironically, I feel it is a feature in the American economy which is closer to Socialism, which has now acted as the straw that broke the camel's back and so has brought the country to its economic knees.
That Socialistic feature being "affordable housing" encouraged with the best of motives, but in the wrong manner. Housing has been financed on loans based on interest rates that were set too low, for too long, by the Federal Reserve Bank. Many loans are non-recourse, and funded by unlimited, Government backed, mortgage finance.
That combination has led to a housing bubble, with an abdication of risk responsibility by home owners, home builders, developers, financiers, and banks.
With the bursting of the bubble, the crisis has struck hard and we are seeing huge job losses, corporate failures, and tremendous sums of cash thrown at many problems. Now there are calls for more cash for the auto industry, for more stimulus packages, but still with little apparent discussion about long term restructuring.
Thus, as a lone voice, here are some personal thoughts on restructuring. In my mind long term restructuring is now more important than the current crisis, which will run its course no matter what action is taken.
Somewhat ironically, the crisis now provides an opportunity when the whole population is listening and waiting for its leadership to speak. It is therefore timely to gain bi-partisan acceptance for some long term restructuring of the United States economy.
A Five Point Plan
Thus, rather than commenting on the short term measures, where most people are looking, here is a five point long term plan that should be incorporated into a stimulus package.
The points are major. They are aimed avoiding a repeat of the current problems and getting a better balance in the United States economy for future generations.
A Five Point Plan
Point 1 The US Government should announce that from January 1, 2010 Fannie and Freddie will no longer provide government backed mortgage finance, with their existing portfolios being run off over time.
Reason - There is no long term economic reason for government to provide this funding. Under Capitalism the market will find a way to service this market. Traditional banks and other lenders will assess the risks, then increase their home mortgage lending. They will charge sufficient for the risk. Non-recourse loans will tend to disappear. The market will become much more fragmented and less risky.
Point 2 The Government should institute an energy levy of say, $20 per barrel of oil, both locally produced and imported, and an equivalent tax calculation for natural gas.
Reason - To provide funding for energy research and investment, and to encourage the population to use more efficient use of energy, whether for heating, or for more fuel efficient means of transport, cars, planes, buses, trains, or feet. Adding $20 to the current $60 per barrel, this would still be some $65 less than the peak price of $147 reached earlier this year. While that peak is still fresh in consumer's minds now is the ideal time to reinforce it.
Point 3 The Government should institute a 10% sales tax across the board on everything except financial transactions as many countries have with VAT or similar taxes. The VAT should be made overall fiscally neutral, by increasing benefits or lowering taxes for "95%" of the population.
Reason - The tax would help discourage wasteful consumption. Net savers would benefit and lavish spenders would be penalised. Such a tax is much simpler and more equitable if it applies to everything. In addition, much of the underground economy and illegal immigrants would be unable to avoid paying such a tax. Also, foreign tourists who visit the country would start paying a federal tax for the transport and other systems they use. Thus the tax would generate new sources of revenue.
Point 4 The auto industry and any other distressed industries should be encouraged by government to adopt the same strategy as was proposed at one stage for distressed banks i.e. each be divided into good bank/bad bank, or here into good auto company/bad auto company.
Reason - Parts of GM, Ford, and Chrysler must be profitable. If so, these would be put into the "good auto" companies and continue to trade. Being profitable, they would attract investors and allow new car buyers to have appropriate new vehicle warranties. The "bad auto" companies would be run as liquidations until their operations were completely closed down. The process has to be seen to be fair to other car manufacturers.
Point 5 - The Government should commence a "United States Sovereign Fund" for investments and to help provide for future welfare requirements for the ageing population. In the meantime, the fund would invest nationally and internationally, on commercial terms, in bonds, equities, and major infrastructure requirements, for example in nuclear power plants.
Reason - Welfare costs will need to be met for many people in the future. Funds released from the run down of Fannie and Freddie should be used as part of the fund, as would TARP assets, and other assets such as the AIG stake. It would also manage the energy tax receipts from Point 1.
Conclusion
I do not envy Barack Obama his task. Today I watched his first press conference since the election result and did feel he handled it well.
Given the various components of the crisis, including; jobs, credit, equities, autos, wars, and the huge budget deficit he has little room to move, and few assets to offer.
As he is a student of history, he may well do to repeat the words of Sir Winston Churchill in Britain's darkest hours of World War II; "All I can offer you is blood, tears, toil, and sweat".
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