Ideology, Politics and the Investor

Once again we deviate from our scheduled agenda to consider something of immediate significance.

We continue to see a prevailing viewpoint that has a certain pattern:

1. The pundit expected government to be powerless to deal with economic challenges.
2. The pundit is surprised at a massive reaction by the Fed, using many tools that no one contemplated a year ago.
3. The pundit is surprised by aggressive action by the President and the Congress.
4. Mistaken in predicting the government response, the pundit now turns to criticizing everything. It will all turn out badly.

It is a simple case of confusing ideology, politics, and investing. Here is a simple fact to consider. It is a fact, not a matter of speculation.

Those in power in government are continually working to prevent further economic distress, using whatever means available.

Anyone who does not get this fact is out of the loop. This fact has been true for government officials of both parties. They are not going to stand idly by and watch a further economic collapse.

Some investors are using a foolish litmus test. They ask whether a pundit had some sort of prediction related to the economic crisis. It does not matter whether the prediction was many years too soon. It does not matter whether the causal mechanism was completely wrong. Anyone who "called the collapse" is a genius.

It is now a new game, and it is called looking forward. The time frame is significant. Even long-term investors should be looking a year or so ahead, and preparing to adjust.

The Reality

Anyone with real policy responsibility is actively trying to address economic problems. The main purpose is helping actual people, not propping up markets, although the market effect is relevant.

When analyzing public policy, it is important to see the perceived public interest. Support for a "bailout" is not simply the direct help to the companies involved. If there was no impact on the general welfare, there would be no support. This was true of TARP, the Fed policies, and the Stimulus plan, and the help to auto companies. None of us may like the specifics of the plans. That is the nature of compromise. The key is to look at the aggregate effect.

A Conservative Viewpoint

Bob McTeer is a conservative Republican who writes for a free-market think tank. Anyone who is "more radical" than this has, by definition, an extremist position.

Concerning the stimulus, McTeer writes as follows:

But my main message here is that critics of the stimulus bill don't serve their side of the debate well by judging it against unreasonable standards. I've heard some politicians say before actual working cameras that the stimulus package must be judged a failure because unemployment has risen further since it was enacted. Some have expressly ridiculed the counter-factual argument regarding what might have been.

Such politicians and pundits are making it harder for me to stay on their side by insulting my intelligence and the intelligence of the American people. Their case would be stronger if they stuck to legitimate arguments, and they wouldn't look so foolish.

McTeer also writes wisely on the subject that we should just let everything fail in the name of Creative Destruction. After some interesting anecdotes that people can really understand, he concludes as follows:

Destruction resulting from a Tsunami, or its financial or economic equivalent, isn't necessarily creative, and its victims aren't necessarily dumb.

Bank failures in reasonably normal times might reasonably be blamed on management. But massive bank failures resulting from a financial tsunami are another matter.

More people should read his work -- the efforts of an expert with hands-on experience with a free-market perspective.

Conclusion

The positive market reaction is coming a bit quicker than we expected. The fiscal and monetary policies have a delayed impact. We will see much more of it next quarter.

There will be some future issues related to withdrawing monetary stimulus and addressing debt. The prevailing public policy viewpoint is that debt is best addressed by increasing income, wealth, and GDP. Excessive leverage cannot be resolved by ending normal lending, something that happened last October. We need to restore a normal economy, stabilizing housing, employment, incomes, and GDP. The percentage debt reduction will follow.

For anyone with a normal time horizon, it is wise to play for the immediate effect. At some future point we can consider the questions of leverage.

For investors stuck in a political or ideological position, they have already missed a good move which has more to come. It is better to be a political agnostic, divorcing one's viewpoints as a citizen from one's investment decisions.

Comments

[Lg71050]

I'm not a conservative Republican. Quite the contrary. But I do wish there were more conservative Republicans like McTeer out there than the irresponsible hucksters who seem to dominate the landscape and get all the media attention.

2009 Jul 23 09:23 AM

[John Lounsbury]

Jeff - - -

This is a very good discussion. I view a major problem to be the behavior of elected politicians being dependent on whether they are the majority or minority party. I attribute your thesis, "Those in power in government are continually working to prevent further economic distress, using whatever means available.", only to most of those in the majority party. A sizable number of those in the minority party have such a goal only in a secondary manner. They are too involved in (1) promoting ideological principles in an attempt to (2) regain majority party status. Right now the minority party is Republican; for twelve years prior to 2007 it was the Democrats.

When in power, Republicans were quoted as saying things like "deficits don't matter". When in power Democrats were quoted as saying things like "everyone deserves the American dream of home ownership". (To be honest, some Democrats have probably expressed lack of suitable concern about deficits and some Republicans have over-promoted home ownership. But I ask you to consider the preponderance of evidence.)

I see several problems with the assumption of high motive for government actions, Among these:

* I don't have confidence in the competence of elected representatives to understand the details of the problems they attempt to address.
* I feel that power concentrated in lobbyists overly influences attempted solutions with poor public visibilty and awareness.
* Ideology tends to trump "idea-ology" in government.
* Actions are too often taken because they represent the "possible" rather than the "needed" or "effective".

As I have mentioned before, I am a great McTeer fan. He avoids many of the problems mentioned above in his discussions, and that is probably why he doesn't have the influence that he deserves.

Jeff, I think you are courageous to keep pushing forward these discussion points, because many do not want to face the fact that being a prisoner of ideology is just as bad (or worse) than being unprincipled. Both are serious defects.

2009 Jul 23 11:40 AM

[CautiousInvestor]

Interesting comments Jeff but I think you are overlooking the reservations held by many pundits.

With respect to monetary policy, Bernanke is fixated on deflation and believes through various monetary policies he can alter our price expectations and induce spending. The simple truth is that household incomes, balance sheets and preferences are combining to reduce spending both out of necessity and choice. Other than housing speculators, consumers are not waiting with baited breath to catch a bottom in the price of shoes; nor will they rush out when the price of shoes are poised to go up. Bernanke is trying to fix a problem that does not exist.

Knowing this and that government spending, under the guise of carefully thought out measures of stimulus and investment, typically does not produce resullts beyond bulging deficits and mounting debt, a growing number of citizens are already arguing for forsaking thought of a second round of stimulus just as frustration with the pace and perceived lack of results of the first tranche heightens. Despite calculated output gaps, there is a gut feeling that fiscal stimulus does not work and it simply provides cover and justification for what congress really likes to do: spend money and redistribute income.

And gut feelings are supported be economists including Eugene Fama. "Even when there are lots of idle workers, government bailouts and stimulus plans are not likely to add to employment. The reason is that bailouts and stimulus plans must be financed. The additional government debt means that existing current resources just move from one use to another, from private investment to government investment or from investment to consumption, with no effect on total current resources in the system or on total employment. And stimulus plans only enhance future incomes when they move current resources from less productive private uses to more productive government uses - a daunting challenge, to say the least."

In the meantime, I will take your advice and ride the trend while preparing for its end.

2009 Jul 23 12:22 PM

[Swashbuckler]

"Those in power in government are continually working to prevent further economic distress, using whatever means available." I believe that most people generally agree with that. The question is whether the government's choices for dealing with that distress are appropriate. I believe that question will remain open for a minimum of several more months.

2009 Jul 23 04:22 PM