Now We Know - Maybe

Legislate Then Investigate The commission investigating the causes of the "worst economic crisis since the Great Depression" has issued its report and - big surprise - the group split along partisan lines. Democrats issued a majority report, while Republicans offered their own take on who and what was to blame for the Great Recession; the recession that is technically over, but still seems to hang around like a relative who just doesn't know when to leave once the Thanksgiving dinner is over. One of the better bits of analysis of the huge report is from former Bush speechwriter David Frum. Frum writes: "The report...argues that everything that people needed to know was there to be known. The crisis was not a 'hurricane': It was more like a housefire in a home where people routinely smoked in bed." And there's this: "Americans withdrew $2.0 trillion in home equity between 2000 and 2007. At a time of stagnating incomes for most Americans, the housing boom financed the appearance of economic progress – one reason government was so reluctant to act. Minus the housing bubble, I doubt very much that President Bush would have been re-elected in 2004." If you really want to get into this analysis, here are some terrific charts that help to break up the hard facts into somewhat understandable chunks. One of the striking conclusions you reach in reviewing this new report and in reading the mountain of writing that has been produced in books and articles is that many of the so called Titans of Wall Street had, at best, a weak grasp on the facts of the situation facing the economy, not to mention detailed knowledge of what was happening in their own institutions. One juicy headline from the Commission's work is the admission by Federal Reserve Chairman Ben Bernanke, an academic scholar of the Great Depression by the way, that 12 of the 13 major Wall Street financial firms were at the very brink of failure late in 2008. Unfortunately the work of the Commission, tainted by the lack of political consensus, is likely to take us no where in particular. The hopes that a rational, coherent explanation of what cause the economic collapse would lead to a careful reassessment of whether more regulation is needed, whether the biggest of the big banks are too big, etc. just hasn't happened. In fact, unlike the justly celebrated Pecora Commission in the early 1930's that lead to the creation of the Securities and Exchange Commission and the passage of banking regulation that, seems to me, served us pretty well for the rest of the century, Congress legislated before the Commission reported. Hope they got it right. Here is some sobering news for the week just ending, the week that saw the Dow top 12,000 and in which it was reported that a Wall Street hedge fund manager personally made $5 billion in profits last year, "Our financial system is really not very different today in 2011 than it was in the run up to this crisis." That quote comes from one of the commission members, Byron Georgiou, who spent the last year trying to understand why we came so close to complete economic disaster; a disaster that has done so much short- and long-term damage to so many people. Here's hoping we aren't setting ourselves up for an even more devastating Round Two.

Is 2010 Really 1938?

Getting an Economic Consensus There are no perfect historical parallels. Nothing is ever precisely like it was in another time. At best, history can help illuminate the present and should, if we're paying attention, help us avoid making the same mistakes over and over again. Take 1938, for example. But, alas we are Americans. We can't get agreement on how to crown a national college football champion, how can we possibly get consensus on what to do with the economy? President Obama went to Cleveland this week to roll out a plan for more stimulus spending on infrastructure and small buisness tax cuts as a way to get people back to work. He was greeted by reactions ranging from ridicule to yawning. Meanwhile, House Speaker-in-Waiting John Boehner, developing economic policy while he measures the drapes, started dropping hints about what a Republican Congress would do with spending (cut it, including unspent stimulus dollars), the economy (grow it) and taxes (leave the Bush cuts in place). All the while leaving room for a few well placed subpoenas. These two versions of economic policy couldn't be more at odds. It does sound a good deal like 1937 and 1938. As Franklin Roosevelt's Democrats faced the mid-terms in his sixth year in office, the Great Depression was in its eighth year. Wall Street was restive. Labor unions were sitting down on the job. Democrats were frantic and the president's counselors were divided. Should FDR double down on spending and fiscal policy aimed at reducing unemployment or should the administration send a message to the markets and business that it was determined to get a ballooning budget under control? Confronted with what historian David Kennedy has described as, "repeated budget deficits, escalating regulatory burdens, threats of higher taxes, mounting labor costs, and, most important, persistent anxiety about what further provocations to business the New Deal had in store," business confidence was sapped. "Capital," Kennedy said, "was hibernating." Sounds familiar, eh? At a pivotal Cabinet meeting late in 1937, FDR fumed about his advisers constantly telling him about the sorry state of the economy, but "nobody suggests what I should do." His economic and political advisers eventually won the debate. The president's Treasury Secretary, Henry Morgenthau, a balanced budget advocate, put it succinctly. "What business wants to know is: Are we headed toward state Socialism or are we going to continue on a capitalistic basis?" FDR's chief political lieutenant, Jim Farley, chimed in. "That's what they want to know," that the administration would reduce spending and balance the budget to reassure business and the markets. "All right, Jim; I will turn on the old record," Roosevelt responded. A new fiscal policy aimed at reducing spending and balancing the budget was ordered. The New York Times' Paul Krugman argues that FDR's decision brought on the "Roosevelt Recession" of 1938, caused unemployment to top out at 20% and contributed to stunning Democratic losses - six Senate seats and 71 seats in the House - in the 1938 mid-terms. What's more, Krugman asserts - and he's critical of Obama from the left for being too timid with his stimulus efforts - the public in the late 1930's took exactly the wrong lesson from FDR's shift in policy. Americans became convinced that stimulus spending and job creation efforts hadn't worked and wouldn't work. That debate, check the morning paper, still rages. I keep thinking there must be some middle ground somewhere in the current debate, but I've been wrong before. Couldn't we get something approaching national consensus around two or three major issues? One, Wall Street and investment banking excesses must be brought under control. Does anyone really think that what happened in the run up to the financial collapse shouldn't be avoided in the future if at all possible? Regulating greed and excess is not a partisan issue. Two, spending on well-conceived public works (OK, infrastructure) is both a good long-term investment and good short-term job stabilizer and, one hopes, job creator. The non-partisan Congressional Budget Office said recently that the stimulus has - big surprise - increased the deficit and reduced unemployment. And, three, the deficit needs to come down, but maybe in a planned, systematic way. Maybe the timing on the expiration of those Bush-era tax cuts is really not very conducive to getting capital out of hibernation. Perhaps a compromise is in order? Someone, the president or John Boehner or the ghost of Henry Morgenthau needs to find a way to knit all the pieces together into a 2010 whole cloth of economic growth, job creation and fiscal sanity. Not holding your breath? I understand. There is a poem entitled "Nineteen-Thirty-Eight" by Andrea Hollander Budy. It's about a young woman who lies about not graduating from high school in 1938: yanked out when her father lost his job. Now it was her turn to make herself useful, he told her. Nineteen-Thirty-Eight was not a particularly good year and not one to repeat. That much history tells us very clearly.

Hoarding Cash

So Much Cash, So Little Investment You don't have to read the Wall Street Journal every day to know that the economy is barely struggling out of the Great Recession. Unemployment bumps along at just under 10 percent and some in the Congress debate whether extending benefits to the job seekers might actually encourage the out of work to stay on the sofa. In Idaho, the governor tells state employees that they best keep their expectations in check. Better times aren't around the corner anytime soon. Yet, somebody is making out in this rotten economy. The federal pay czar - yes, we have one - recently called the $2 billion the biggest of the big banks paid in bonuses in late 2008 and 2009 "ill-advised," but all he could do was hold a news conference and point that out. Reforming big bank incentives seems not to be in the cards. These same banks, most recipients of TARP funds we all provided, are still reluctant to lend significant money, but they seem to have no reluctance to make money, stack it up in the vault and hand it out in multi-million dollar bonuses. Meantime, its estimated that Fortune 500 companies are sitting on something north of $1.8 trillion in cash. As Bruce Stokes pointed out recently in a piece for the National Journal, only corporate America has the financial wherewithal to get the fragile economy moving, yet the money seems to be going under the mattress and into obscene bonuses rather than into jobs, R&D and acquisitions. Stokes suggests taxing excess corporate cash. I'll not hold my breath on that idea, but there is ample evidence the cash hoarding is hurting the recovery. Economic analysts Yves Smith and Rob Parenteau contend part of the reason for the corporate cash accumulation is the short-term nature of corporate thinking. CEO's and their boards have become obsessed with quarterly earnings reports and the fact that Wall Street analysts and big investors reward or punish those who hit or miss those every three month targets. "To show short-term profits," Smith and Parenteau wrote recently in a New York Times piece, "they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on." My thoughtful Montana friend, Pat Williams, the former Congressman who now teaches at the University of Montana, had a great piece last week that got me thinking about what only business can do in tough times like these. Pat, recalling a tough 1950's economic downturn when he was just a kid, remembered that his mother and dad actually made the decision to invest into a down economy on the main street of Butte, Montana. In a piece that appeared in a number of Montana papers, Pat wrote: "I remember Dad telling our customers and insisting to his fellow small business friends along Park Street, 'Now is the right time.' His logic was that building contractors needed work, Butte’s people wanted jobs, the appearance of downtown was important, and, he insisted, interest rates were only going up. He firmly believed that one invested in one’s self by investing in your customers and your city." It may be the toughest thing to do in a tough economy to make an investment decision. The safe path is to keep the cash in the bank, avoid risk and ride it out. History rewards the successful risk taker, but then again why risk it? The economy needs a positive jolt. It's time to start investing for the long-term. Its time for a glass half full attitude. Henry Ford, Bill Gates and Hewlett and Packard did not built empires by not investing in their customers and cities. When Pat Williams' folks invested in the remodel of their Butte restaurant back in the 1950's a curious thing happened. "Following the completion of that new, expensive store front," Williams wrote, "we had a significant increase in customers saying thanks by enjoying a steak dinner, buying a box of candy, or simply throwing a dime on the counter for an extra cup of coffee." Funny thing how the economy responds to the notion that things really can get better. Maybe it really is less about economic theory and more about human nature. It is time to take some measured risk. Goodness knows, there is a lot of room on the upside.

Back to the Future

Is it Time to Bring Back Glass-Steagall? Carter Glass (left) developed an impressive resume during his nearly 50 years in public life - Congressman, Secretary of the Treasury under Woodrow Wilson, architect of the Federal Reserve System and U.S. Senator. If he's remembered at all more than 60 years after his death it for the financial services regulation he authored - the Glass-Steagall Act - and pushed through the Senate in 1933. A key provision of Glass-Steagall regulated for the first time the speculative activities of banks and mandated the eventual separation of commercial banking from investment banking. Bankers would have to chose under Glass' legislation to accept deposits and make loans - commercial banking - or invest and trade in securities and other instruments - investment banking. There is general agreement that the legislation stablized banking in the 1930's and provided a solid platform on which to build a strong and sustainable system for the rest of the 20th Century. Wall Street was never satisfied, however, and after years of lobbying to end the separation and "reform" and modernize banking for the 21st Century, Congress repealed provisions of Glass-Steagall in 1999. President Bill Clinton signed the legislation. The final Senate vote was a lopsided 90-8. Still, there were some voices back in 1999 expressing concern about doing away with the Depression-era legislation. When you go back and read the comments of North Dakota Senator Byron Dorgan, one of the no votes, you almost feel he had a crystal ball allowing a look into the future. ''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that which is true in the 1930's is true in 2010. ''I wasn't around during the 1930's or the debate over Glass-Steagall," Dorgan went on, "but I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.'' The late Sen. Paul Wellstone of Minnesota called Glass-Steagall a "stabilizer" during the Great Depression "designed to keep a similar tragedy from recurring." The fears were discounted by the proponents who, after all, had the votes. Then-Sen. Bob Kerrey of Nebraska said: ''The concerns that we will have a meltdown like 1929 are dramatically overblown." Now, in the wake of the greatest financial crisis since 1929, a host of people think the repeal was a bad idea and even some who originally supported it, like Arizona's John McCain, are supporting a return of Glass-Steagall. Even an ex-Merrill Lynch executive said he regretted supporting repeal. The great financial meltdown of 2008 had roots deep in the fertile soil of a wild and unsustainable real estate market, unregulated and unintelligible exotic investment tools and regulators at the federal level who were too often asleep at the switch. Someday we may know the full story that is still unfolding thanks primarily to good reporting and post-disaster analysis. One could make the argument, and more and more are making it, that the great collapse really began when Washington wiped from the books a Depression-era law written by the long forgotten senator from Virginia - Carter Glass.

Eighty Years Ago Today

"Black Tuesday" Marked Slide Into Great Depression There is some modestly good economic news this morning in contrast to this day 80 years ago when crowds gathered on Wall Street in New York sensing the economic worst had happened. Third quarter GNP growth was at a healthy 3.5% indicating to some that the recession is definitely over and, according to the Washington Post, the stimulus efforts are having the desired impact. Predicting the economy is, however, somewhat akin to predicting post-season baseball performance. I figured Phillies' lefthander Cliff Lee would pitch a strong World Series opener last night, but hardly expected him to dominate the fearsome Yankee line-up. On a cold, rainy night in the Bronx, Cliff Lee was simply splendid and his one nine inning performance may - no firm prediction - have reset the Series. So, in case you are tempted to assume an attitude of irrational exuberance over the apparently improving economic numbers, consider the following quote from the very smart financier Bernard Baruch. By 1900, at age 30, Baruch had a sterling Wall Street reputation and a million bucks - a lot of money back in the day. Two weeks after "Black Tuesday" in 1929, Baruch consoled his friend Winston Churchill with an encouraging note. The future British Prime Minister had taken a bath in the market meltdown and Baruch, counselor to presidents and prime ministers, wrote in a cablegram to Churchill: "Financial storm definitely passed." That was November 15, 1929. So much for predictions. The Great Depression would last another decade. My fearless prediction: recovery to continue, slow and steady, but don't bet on it.

A Long, Slow Recovery

Idaho Struggles to Regain Economic Footing Years ago when Idaho's economy was built around timber, mining and agriculture, the state tended to come late to a recession and leave early. No more apparently. At the annual Idaho housing conference, organized by the Idaho Housing and Finance Association, the state's top economist, Mike Ferguson, predicted an agonizingly slow recovery in Idaho. Ferguson opining that it could be a year from now before the Idaho economy really starts to feel like it is growing even modestly. Other participants in a panel on issues and trends in Idaho - Bob Uhlenkott and Randy Schroll of the Idaho departments of Labor and Commerce, respectively, and health insurance industry watcher Elwood Cleaver - generally agreed. Slow recovery is the expectation and unemployment could go higher. Idaho's current unemployment rates slumps at 8.9%. Brad Carlson at the Idaho Business Review has another estimate of the not exactly gloomy, but still very measured outlook. Ferguson, the long-time state economist, made a telling point when he said that Idaho's economy has suffered more than might once have been the case during the current downturn thanks to Micron downsizing in the high tech sector, Albertson's (now Supervalu) headquarters departure from Boise and the demise of the much touted, but now bankrupt resort at Tamarack. The increased diversification of the Idaho economy since the 1970's has been a good thing, but at the cost perhaps of having the state's economy behave more like the rest of the nation when a slide begins. Always looking for a silver lining, I would note one minor growth area in the Idaho economy. The No. 1 Idaho wolf tag has sold to a North Carolina bidder for $8,000. I wonder, does that qualify as foreign investment?