It's Time For Economists To Make Way For Pragmatists

I think it is high time that the pragmatists rule and the economists step aside. Now, certainly some economists are pragmatists, though they appear to be few and far between.

Self-interested commentators abound, particularly among Wall Street and hedge fund denizens, who are itching for the Federal Reserve and Congress to bail them out (or to provide the means by which they can make the U.S. taxpayer, kind of like those opportunists around the S&L bailout two decades ago). And all too many economists are making the same pronouncements, encouraging the continued reduction in short-term rates to "unlock" the credit markets.

Further, we continue to witness a U.S. citizenry that has little tolerance for pain, U.S. legislators who have little tolerance for declines in their popularity ratings, and an Executive branch that refuses to make the hard, long-term decisions that may be unpopular but would get the U.S. on the road to fiscal prudence. It is a sickening game to be watching from the sidelines and one which I am sure my fellow pragmatists can relate to.

If unlocking the credit markets were the only thing we had to worry about. There is plenty of liquidity out there; it is only that few are willing to part with it while market conditions are so uncertain. When can we expect to see the last of the portfolio write-downs (CDOs, CBOs, leveraged loans and loan commitments, residential and commercial real estate loans, and so on) held by our banks, investment banks and insurance companies? It was once $100 billion, then $200 billion, now $400-$600 billion. Let's call it a trillion. And the problem is that as these losses are announced quarter after quarter, it casts a pall over the entire market, delaying the healing process.

I guarantee you that more (sustainable) fortunes are made in times like these than in boom times, as it takes a certain inner strength and steely resolve to wait until maximum pain is being experienced and then to swoop in and pick up the assets at fire-sale prices. But we're not there yet. Many, if not most economists see a pick-up in the second half of 2008; I'll wager that 2009 is even worse than 2008 for the overall market. But again, I'm not an economist. Please pay no attention to me.

One economist who was vilified and then vindicated is Jan Hatzius, the gentleman from Goldman Sachs (GS) who was so rudely taken to task by the twin geniuses, Messrs. Ben Stein and Charles Gasparino. Talking the book? Lacking independent thought? Yeah, right. The only problem with Mr. Hatzius' prognostications is that as negative as they were, they likely weren't negative enough. It is kind of like Nassim Taleb's discussion of black swans. People have a hard time thinking beyond their own experience, beyond their own frame of reference. Who could have predicted the credit bubble would pop as it has and with all the related repercussions? Precious few in the final analysis. And those that did made fortunes off their insight. And more great fortunes will be made in the next few years.

So what to do about today's climate? If I'm Mr. Bernanke I'm turning a deaf ear to all those looking for a bailout and to stop dropping short-term rates. Get some credibility. Defend the dollar. Lowering rates won't help anybody right now except for banks, who won't use the subsidy for credit creation but to slowly rebuild their balance sheets; they will hold term Treasuries and fund short, exactly as they did in the late 1980s/early 1990s. But if the Federal Reserve pursues such a path they'll further damage the dollar, further tarnish the U.S.'s reputation as a financial policy leader, fuel the rise of structural inflation and damage our growth prospects for the future.

But this is just a blip when it comes ot the larger policy issues at hand. That commodities inflation is a megatrend that shows no signs of abating for decades. China and India want their turn to enjoy the lifestyle and the growth we in the U.S. and Western Europe have been experiencing for a century. And they won't be stopped. And this places a huge burden on our supplies of clean water and energy, which have huge environmental implications that are hitting us today and will do so at an increasing rate over the next century.

That U.S. equities are at risk if we don't continue to innovate which means changing our backwards and damaging immigration policies. We are keeping out those whom we most need, the best and brightest that the world has to offer that want to make a home in the U.S. And then there are the mother of all entitlement programs, Social Security and Medicare, which no politician with any brains will take a legitimate crack at solving, preferring to punt the issue to the next generation and the next. Because once you've made it to Congress or the White House you kind of don't want to leave, right? Who cares that without major structural changes the U.S. will cement its role as debtor to the world with little chance of digging ourselves out? Certainly not those of capped teeth, slick talk and fancy Washington addresses.

We've got to get tough and we've got to work together. Everyone needs to sacrifice. This is how the Allies won World War II and this is what we'll need to beat the most insidious of opponents - complacency.

Comments

[bluesmoke:]

Good article. It's a shame our "leaders" won't make the hard choices the country needs so desperately. And the press does nothing to educate or advance this cause. My feeling is, the USA gave the rich the opportunities to become wealthy. In times of need they should be more than willing to give something back.

2008 Mar 05 08:33 AM

[keneaise:]

Excellent commentary and a breath of fresh air. Our political system, particularly in an election year, mitigates against making the kind of hard choices that our economy needs. The "right" choice is not of as much concern as the "popular with the constituency" choice. I no longer have any confidence that our legislators have the will to make the right choices. There is no pain-free solution. The erosion of the dollar and of our nations wealth is a disgrace. We need fewer economists and more people with common sense.

2008 Mar 05 09:17 AM

[liorio1:]

Hey, why don't you run for office? First level-headed thinking I've come across in a while! Too many talking heads, not enough knowledge or real vision to change things for the better. Most importantly, the iron constitution to make real reforms, popular or not, that is what is needed right now. Let history be the judge later.

2008 Mar 05 09:26 AM

[Ex15:26:]

He's not electable. He suggests that to solve things we might have to work hard and endure some tough times and that doesn't attract voters.

Attracting voters is easy.
1) Say that you'll isolate our coutry and bring our troops back without any thought for the danger we put ourselves in or the world
2) Promise that you'll take from the rich and give to the poor (that don't pay any taxes anyway) - the poor always like this, it gives them excuses for not trying and blaming the "Man", and it's easier than working hard and believing in yourself.
3) Promise more entitlements that don't work in Europe and the rest of the world....er - healthcare. If it is so great, why do all of the people living in these countries come here for cutting edge health care? Why do they all have private insurance that pays for private care over and above the broken and poorly run health care they have.....
4) Have a bunch of slogans that sound good and don't mean anything. Hope & Change are neat sounding, but try something like, Discipline, Saving, Work Hard - and you'll be like our friend, Roger - unelectable.

2008 Mar 05 10:53 AM

[Bhakta:]

Excellent article. I agree, protect the USD and let the greedy, mismanaged banks and insurers eat the mess they made.

2008 Mar 05 11:57 AM

[User 48501:]

YES,YES!!!!!!!!!!!!!!!...

2008 Mar 05 12:33 PM

[locke:]

I'm not sure what he is advocating. Higher fed funds rates? I would prefer employment to strong currency, only because if I lose my job, I lose my medical insurance, and I go bankrupt (because of a pre-existing condition).

If our society actually provided health care to the unemployed, then perhaps stronger currency could be the priority. As it stands, lack of employment can mean bankruptcy or death for people who are uninsurable with our "free market" health care system, so keeping people employed should be the #1 priority, inflation or not.

2008 Mar 05 06:31 PM

[Piyush:]

I agree with most of what he has to say here. Banks/Lending institutions are hoarding cash to rebuild the Balance Sheets instead of lending. Like the author, I am no economist and not even a Front End'er in banking but I like to learn. That aside, I have been shouting from roof tops (given the buildings I have access to are only few stories tall) that the liquidity/credit crunch would have been much easier to handle, had the Fed only lowered rates somewhat, ignored the street and forced via NY Fed the banks to loan at the discount window, expanded ofcourse in terms of collateral & time (90 days, ABS & other sound paper) while removing the penalty rates. This would have provided ample liquidity to banks for lending, with no penalty and a breathing room/time long enough for continuing to lend rather than spasming. Other simultaneous actions like T-Auctions would help as well.
Now we are in a place where, savers like me are penalized while my debt (student loan only) keeps rates constant with no recourse but to vent on sites like this. Helicopter Ben even wrote about this kind of scenario in his thesis & papers - buying growth by printing paper money but wreaking havoc in the inflation equation but is making the mistakes he so eloquently derided.
The weak dollar is all dandy unless you take stock of the industrial/manufacturi... strength of this country - depleted over last 16 years through lopsided free trade agreements like NAFTA. They need to be fixed via some semblence of renegotiation - reneging/repealing wont do it. SO given lack of past investment in industry, imports are not going to grow dramatically - US has nothing to import!! Chinese are hell bent to keep Renimbi pegged and will do so for the short term, further killing exportability of competing goods if they ever get manufactured here.
This effect can be seen in the Yield curve as well - the 2 yr yield is lower than the 3 & 6 mo. yields - inflation expectations in short terms are much lower - again 2 reasons China & flight to safety.
I think no more rate cuts would only work now (i would love rate hike but that would cause panic in a jittery market) with still opportunity to work the discount window & T-Auctions. Let the Fed be the JP Morgan of this day & age and be unafraid to take action.
On the other hand, let the writedowns flow through - do not intervene in markets and soil opportunities for investment!!
Well I have ranted enough for today.
Can reach me at [e-mail] if you think i have structural mistakes in my argument!
Ciao..

2008 Mar 06 11:35 AM

[Jason Rines...:]

We definately think alike and this to me was predicted many months ago. But I am no economist, I am just a dumb CEO whom a year ago switch market segment focus of my company to recession-proof ones. I have a dozen people and no economist, except myself. You can't tell me that the people at the top with dozens of the brightest analysts on earth couldn't see this coming.

But they got much richer and fleeced America in the process. I blame the American consume as well, ever hear of Googling a personal financial plan?

Yes, it will take Pragmatists and it will take true Patiots to purge our nation of turds but don't expect this anytime soon. The average American on the street has just started feeling the pain.

2008 Mar 07 12:11 PM