3 Great Debates We Currently Face

Wrapped around the daily trials and tribulations of the markets and economy, and often lost in the forest for the trees, are three great debates that investors may want to tune their ears to. These debates – the future of Finance, the future Economic model that leads the world economy, and the future Socioeconomic model that drives America – frame the particulars within which economic, political, and investment decisions will be made. I submit them for your consideration.

Future of Finance

The first great debate raging is one between new finance versus the small banking model. Paul Krugman notes this in his current commentary when he states “…it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.”

Krugman’s protestations notwithstanding, if Secretary Geithner has his way the new finance model will ultimately win the day as the dysfunctional components of the new finance model are remedied (via the Risk Czar) and complex financial instruments live another day: this time with better supervision and, hopefully, fewer financial catastrophes.

Interestingly, Mohammed El-Erian apparently supports the Geithner view. As noted in his excellent book “When Markets Collide”, the PIMCO CEO reveals his thinking when he states that the one area in finance that he would recommend his daughter pursue is structured finance. Well, it seems hard to image a bright future for structured finance without a robust financial model. And that is something that you don’t’ get with the small banking model expressed by Meredith Whitney.

Tied to finance is the second great debate area – the future economic model.

Future Economic Model

With the demise of “cowboy capitalism” what will be the reigning economic model? Will it be the European socialist model? Some revised American model? Or will a hybrid model emerge out of the multi polar world, with America, Europe, and China sharing and influencing power? The answer to this question will likely not be clear for several years. Moreover, it will greatly influenced by how the future finance model evolves.

The third great debate is solely a US issue.

Future Socioeconomic Model

This great debate area can be summed up in the following phrase, “Never let a good crisis go to waste”. Here the debate is divided along US political lines with Republicans warning of the third wave expansion of government intrusion while Democrats insist that their hands (and motives) are clean and necessary given the economic mess left by the Republicans. The blame game always rules politics.

Note: I believe there is much to the argument being made by the Republicans. Power is a very strong force and human nature never changes, regardless of campaign rhetoric.

The chronological center point of this debate is the Great Depression. Advocates for greater government spending say the New Deal saved the country while opponents say that is false, that it took World War II, and not the New Deal, to lift the US out of its deep economic funk.* Then there is the subplot to this debate: with greater government intrusion comes greater government power. This is where things like infrastructure spending come into the picture. You don’t stop a road or a bridge in mid construction. Therefore, those that institute the spending will exercise political power for years to come.

Food For Thought

What I have articulated above is meant to be a listing of key issues that investors might want to better acquaint themselves with, and obviously not a comprehensive examination of the subjects noted. A little food for thought.

Have a good weekend.

*In this area, readers may want to acquaint themselves with the writings of Amity Shlaes as one who has been a good source for understanding the Republican argument.

Comments

[Repsonsible...:]

We've LOST over 650K every month the last 3 months , we NEED 150K New jobs every month JUST to keep up with New Young People coming into the job market . Durning the 70 and 80 s recessions we lost 300K jobs a couple different months but that was it, I was there I know . Almost No companies actually went out of business . And most of those job loses were temporay people went back to work at them again or got jobs that paid the same or even more .

Today Most of the jobs lost the last few years are GONE Forever , shipped overseas , or just eliminated . Thousands of small companies have gone out of business with more everyday. Most people finding a new job are taking pay cuts some drastic pay cuts . So don't buy this Washington line oh we'lll recover soon , better then ever !
It just aint going to happen , I have no crystal ball. just 45 years of observing , working and investing and surving the ups and downs of the past 4 decades. Theres no easy way out of this , looks like the Gov will try to inflate there way
out but the holes to Big to Fill this time. Germany tried unlimited currency inflation in the 1930s it ended in making the German Mark basically worthless, chaos then Hitler and World War II .
We took the deflation route it was rough for people but the Dollar stayed strong there was little chaos and at least most people kept most of what they had when the depression started , I wasnt there but my Grand father would tell us kids how things were then . I fear our current "print the money as fast as possible policy will Destroy the Dollar, China and Russia are already calling for a New World trading currency they can see the hand writing on the wall.
The Only advise I can give You is buy Gold , and things You need Now, soon the prices will go up, way up on everthing from food to cothes, gas perhaps even houses , rents will surely go up . One thing You can do is contact your Congressman Or Senator tell them to STOP the Treasury from printing Trillions of Dollars and Infalting the Currency.
Thanks for reading and good luck :)

Mar 29 05:00 PM

[rogersails:]

Given a choice of 2 options, which would you rather hear:
A. "I'm from the government, and I'm here to help you."
B "I'm from the bank, and I'm here to help you."
Hmmm.....times change.

Mar 29 09:23 PM

[anarchist:]

Comparing the present U.S. economy and that of the Weimar Republic after the Treaty of Versailles, June 1919, which placed responsibility for the war on Germany and included reparations to be paid in money and coal is a stretch. Another point, money printed can be sopped up by the Fed. and Treasury so no one really knows if the inflation scenario will pan out. The Fed has more options in an inflationary economy than deflationary so I really don't see hyper-inflation in the cards.

Mar 29 10:06 PM

[Paul in Texas:]

All I see is higher taxes, lose of pursuit of happiness and lose of freedom. I do not see a bright future for my children unless we reduce government intrusion in our lives and affairs.

Mar 29 11:18 PM

[Moon Kil Woong:]

What we all want to see is a stable financial system that doesn't require regular 10 year cycles of taxpayer bailouts so we can all go about our business of increasing productivity and improving our general quality of life.

I don't see government rewarding constant failure as a solution, nor do I see depending on companies not to be greedy as a solution either. The solution has been staring us in the face and has been implemented before. It is our own stupidity that keeps allowing elected officials deconstruct it in the name of bank interest and lobbyist money.

It's called Glass-Stegal, and proper regulation. It's about requiring collateral and proof of ability to when you write contracts be it mortgages or derivatives. It's about preventing fraud and punishing it. It's about letting good companies benefit off of the failure of bad companies. It's about sacking bad management, not rewarding bad companies, shareholders rights for transparency, and honest accounting.

In summation, it's about capitalism, rule of law, and the oversight necessary to insure its legitimacy. The rest is just political academia thinking up new words for taxpayer robbery, economic abuse, and fraudulent practices financial companies call off balance sheet accounting, creative financing, suspension of mark to market, etc.

Mar 30 02:26 AM

[Allan Frain:]

We must stop attributing the shortcomings [and abuse] of fractional reserve fiat, central banking, and government/bank incest as indication that capitalism is a flawed system.

Current policy is to preserve the flawed banking system and discard capitalism as a necessary step in recovery.

We are headed completely in the wrong direction.

Mar 30 12:46 PM