America Needs a Turnaround Plan

Obama’s mantra of change, since adopted also by McCain, is not enough for me. We need more than change. We need a full-blown turnaround plan and a leader capable of executing it.  I’ve moved beyond the "splurge" because like it or not, we are going to get some legislation out of Washington that allows the government to purchase and/or backstop the “crap assets” that are clogging up the arteries of the financial system. My head is around what’s next.

Yesterday, I was visited by a reporter named Nathan Lipson from The Marker, an online financial publication owned by Haaretz, the WSJ of Israel. (As an aside, I was somewhat involved in the creation of The Marker about ten years ago, but that’s another story.) Yesterday we sat in our conference room at Union Square Ventures and Nathan turned his phone to record and started asking me some hard questions. Questions that I had not prepared to be asked and that frankly I am not qualified to answer. But that didn’t stop him and it didn’t stop me either. These are unusual times and I’ve got opinions to share.

He asked me where America was going to get the $700bn needed for the splurge. I reminded him that the legislation (at least last I looked) only authorized $350bn upfront and only $250bn of that would be funded initially. I pointed out to Nathan that if we up and left Iraq this month and walked away from all of our financial commitments to Iraq and its security, we’d save $250bn over the next two years. We could use that money buying the crap assets, holding them through the downturn, and then flip them when things get better, hopefully for a profit. That’s a hell of a lot better than spending $250bn providing a police force for Iraq while they assemble an oil-funded surplus for their own account, not ours.

Nathan also wanted to know if the US needed loans from foreign governments to finance the splurge and our ongoing budget deficits. And he wondered if America’s government was still AAA credit. I’ve been wondering that myself. But it was eye opening to be asked that from a journalist from one of America’s strongest allies. If the Israelis are wondering if our country’s credit is any good, what are the Chinese and the Sultans thinking?

I pointed out to Nathan that America still has the largest economy in the world, that more money flows through our homes, banks, and businesses than anywhere else. And that our government, unlike a business, can raise revenues instantly by increasing taxes. Nathan asked if raising taxes at a time like this would be possible. I answered that it’s like Mike Bloomberg raising real estate taxes 7% to close the budget gap in NYC next year. You have to bite the bullet and do it. You have to tax the people who have the most vested in your government and the most ability to pay. That’s why we have no choice but to repeal the Bush tax cuts and take our rates back to where they were under Clinton (when the economy was doing just fine by the way). That move alone will plug a sizeable chunk of our federal budget deficit.

Leaving Iraq and getting rid of the Bush tax cuts are not the only things we need to do to fix the financial mess we are in, but they are the obvious first two things we need to do. When you are doing a turnaround, you need some early wins and those are low hanging fruit that must be grabbed quickly.

My friend Bryce posted this thought to VC Tips yesterday:

Tough times call for tough calls

That’s what turnarounds are all about. You must make the tough calls.

Thursday night Gwen Ifill asked both Joe Biden and Sarah Palin the same question that Jim Lehrer asked Obama and McCain, “How will the splurge affect your spending plans?” (Gwen didn’t use the word splurge unfortunately)

That is a good question. Sarah Palin dodged the question not once, but twice, and the only financial plan she could muster was tax and spending cuts - which is the only financial plan John McCain can muster as well. I can assure you that the governments, institutions, and individuals who have loaned America trillions of dollars are not going to buy a financial plan that starts with bringing in less revenue and promises to spend less. That’s the plan that every Republican president has laid out since Reagan. And with the exception of George Bush senior’s decision to increase taxes late in his presidency, the whole lot of them have simply led America down a path of budget deficits, increasing indebtedness to foreign governments and institutions, and to this day of reckoning that we are now facing.

Joe Biden’s response was better, but not good enough. I understand that Obama, McCain, Biden, and Palin are all trying to win an election and a tough, honest, turnaround plan probably is political suicide. But at least Biden was honest enough to admit that a lot of the things he and Obama want to do will have to wait or be scrapped entirely.

When you are doing a turnaround, the number one thing you need to do is get everyone’s confidence back. You need to get the employees’ confidence back, you need to get your customers’ confidence back, and you need to get your shareholders’ and your lenders’ confidence back. You have to be honest about the mess you are in and be credible about what it’s going to take to get out of it.

The mess we are in right now in America is that we are spending too much and not taxing enough. We are an unprofitable business with a balance sheet that is starting to worry our creditors and investors. If you could short America, the sharks in the market would be all over that trade. We are not much better than Lehman, Bear, Merrill, Wachovia, and Wamu.

We have global ambitions that we cannot afford but we still pretend we can. We have tax revenues that do not cover our spending. And we don’t have the will to cut our spending. And in many cases, we cannot afford to cut our spending. We should not cut our spending on infrastructure, we should increase it. We should not cut our spending on finding cleaner and smarter forms of energy, we should increase it. We should not cut our spending on education, we should increase it. We should not live with the terrible health care system we currently have, we should fix it. And we continue to spend money on things like tax breaks for oil companies and subsidies for farmers that mystify me and most Americans.  And we spend a lot of money fighting vices like drugs, prostitution, and gambling when we should simply legalize them, tax them, and regulate them and turn them into a profit center.

There are those who say you can’t cut spending and raise taxes in a recession - that doing that will lead to a depression like we had in the 1930s. I don’t think so. I think the global economy is in an expansionary period driven by expanding wealth in the developing world and the power of technology to drive commerce and communication. And our problem is we are stuck in the last century, fighting the last war when it’s long over. We need to get our house in order, play in this global economy with a stable and sustainable business model. And we don’t have that now. And we must get it in place soon.

I don’t know squat about government and I’d be a terrible politician. I am not suggesting I could build the turnaround plan or execute it. But I am saying that is what we need. We need way more than change. We need our leaders to make some very hard and unpopular decisions that will get us to a place where we are once again in control of our own destiny. Because right now we are not in control of our destiny. And that’s frightening to me and most Americans.

Comments

[techy:]

i am looking for some answers, i hope some one can analyse below and tell me if it is feasible or not?
---------------------
i have been reading everywhere that now we are heading towards a great depression and not much can be done to make the pain less.

by great depressions, people are predicting that unemployment(official) will shoot up as much as 10-20%.

housing will fall another 30%(panic sales and foreclosures) and will stay there for 4-5 years.

businesses are going to now start laying off preparing for a long recession and consumers are already maxed out and scared hence they will pull back sharply, sending the consumption on a cliff dive.

stock market will go down further 10-20%, destroying wealth and bringing more angst to consumers.

but i feel that if the government wanted it can definitely lessen the pain by doing the below:

1. backstop housing by buying and removing from market all default/foreclosure property(will the current bailout plan do it?)

2. FED interest rate lowered to 0.5%, and mortgage interest lowered to 5%(fannie and freddie are gov entities and can loan money infinitely)
3.more benefits given to home buyers to help housing(how about increasing the short term tax break from 7500 to 25000, which can also be financed from IRA or 401k with no penalty)
3.stimulus checks every three months to help consumer income
4.Faciliate interbank lending by being the middle man(use the trust of the government).
5. Massive infrastructure projects to support job.

in other words...fight deflation and debt with inflation to stave off the sharp pain.

i think these are doable....but will they do it?

people may ask where will they get the money for all this, if i am not wrong government can still borrow at less than 5%, and if FED rate is lowered and we go into recession people will be happy to loan the government at less than 4%.

since price of food and energy is going down, there is no more worry that more money into the system will cause inflation.
right now money is getting destroyed faster than FED can inject money into the system

2008 Oct 05 12:02 PM

[lorddarley:]

Raising tax rates will not necessarily raise tax collections, which are at an all-time high. Entitlements have to be cut.

Which politician has the nerve to tell voters:

1./ the sacred cow of Medicare must require larger co-pays from the middle class. No one has paid enough into the system to justify 2-3 decades of transplants, implants, and obscene waste to prolong a the final months of life.

2/ tort recovery for medical malpractice must be eliminated, and replaced by an arbitrated system without recourse to the courts. Getting the lawyers out guaranties a less safe (but more affordable) system. It will still be better than any other country's system.

3/ candidates must be taxed on political contributions in excess of federal limits, and the excess in political warchests must be refunded after applicable elections. Elected office should not be big business. That leads to a corrupt decision-making process that is at the heart of our problems.

4/ elected service should not be credited towards federal or state pensions. (See # 3.) Elected office should not be a career.

Hell, I (and you) have got a long list of "untouchables."

The right president would get us started on a path of announcing a program of fiscal and political reform that would convince the world (and our citizens) that we can be the masters of our destiny.

We won't do that, of course, so the world's marketplaces will decide instead. That won't be pretty.

LordDarley




2./

2008 Oct 05 12:27 PM

[Mafeking:]

Fred, good that you want to repeal the tax cuts. But it is not necessary. There is good news. The tax forms have already a provision to enable people to volunteer additional tax to the Federal government.

I look forward to you announcing in SA come April 09 that you have contributed extra tax - but please don't speak for me. I do want the government effectively wasting my money. We have seen only to clearly how addtional legislation and coercion (Barney Frank and Fannie Mae etc.) have screwed things up.

I have put a note in my calendar next May to enquire whether you have volunteered more tax than required.

2008 Oct 05 12:30 PM

[otbricki:]

There is a kernel of wisdom in this article - the US cannot afford continual massive deficit spending. Tax revenues must match government spending so the public sector is not a massive competitor for credit. The Clinton administration managed to do it, and the result was a the longest continuous period of economic growth in US history.

Also - those who think that increasing tax rates won't increase revenues are smoking crack. There are any number of studies that show that the Reagan tax cuts DECREASED overall tax revenue, and the increase in tax revenues during the Bush years is due to higher effective tax rates on the middle class due to inflationary bracket creep and increased rates on corporations.

2008 Oct 05 01:07 PM

[Tricky:]

We must also have a hard look at social agenda items that support a worthy cause (affordable homes) through wasteful means (FNMA purchasing garbage mortgages).

2008 Oct 05 01:14 PM

[SA Guest:]

With all do respect to the author - I'm struggling to find any value added in the content of your article beyond its title - I think most realize that a turnaround plan is needed and that sadly the two candidates and their seconds aren't up to the job. They all talk in generalities and speak out of both sides of their mouths.

2008 Oct 05 01:19 PM

[buyitcheaper:]

Fred is your middle name "Hoover"? To suggest raising taxes going into a recession, that's back of the classroom kind of thinking.

Longer term, a phased expiration AFTER the fed begins to raise rates because our economy is recovering is a good thing. But structurally, we must freeze military and discretionary spending immediately as in zero, no increase for five years.

Use this "crisis" to restructure Social Security (minimum age to draw ANY benefits, make it 72 for those born after 1960.) Same deal with Medicare, eliminate the idiotic free drug benefit or at least severely means test it.

But as your first act of raising taxes as we spiral downward, will only take this economy into a nose dive.

2008 Oct 05 01:21 PM

[whidbey:]

You are not a politician or a writer, not to mention an economist. Your central point is "change" via hard decisions? Did it ever occur to you that hard decisions usually result in poor decisions. Try truthfulness, denial and commitment that lasts for a term of years so that the policy dust settles. If we can get government back to its basic functions the rest will straiten itself out via bankruptcies, buy-outs and a vastly more simple life. No appeal I know.

2008 Oct 05 01:27 PM

[Obama is Bu...:]

Oh come on editors of Seeking Alpha -- this website is getting to be as ridiculous as the Yahoo messenger boards. Get this author off your site or plan on having your audience demographic shift from intelligent investment commentary to trash partisan nonsense.

If this "author" doesn't like George Bush -- good for him. Let him go babble his political propoganda on a website dedicated to politics.

I am absolutely fed up with the STUPIDITY that passes for political debate in this country. I see very little difference between McCain and Obama -- neither of them is really qualified to be president. George Bush is President, whether anyone wants to admit it or not, because he was perceived as the lesser of two evils (both times). I don't think anyone ever thought he was a mental giant, or even qualified, when he was elected.

Once again, the citizens of the United States are being asked to choose between two unqualified candidates. And if that wasn't insulting enough, we have to deal with these partisan hacks who are themselves so confused that they cannot differentiate between their partisan political views and actual economics.

There are no, zero, zilch, economists who think raising taxes is good for the economy. Not one. Shifting economic resources from the private sector to the public sector is ALWAYS a bad thing economically speaking. Big government always results in a lower standard of living -- ask Cuba, France or the former Soviet Union. The part of of China that is growing like wildfire is the part that has been relatively freed from government meddling.

This isn't an economics question. The economic community figured all this out years ago.

If Mr Wilson thinks taxes are unfair from a political viewpoint -- he is entitled to his opinion ON SOME OTHER SITE.

2008 Oct 05 01:36 PM

[Shiv Kapoor:]

Yes sir, I agree. The rescue package is a first step. After this several changes which will shake the fabric of society need to evolve; without this there is no long term solution.
For the people (a) Savings needs to rise (b) Funding consumption through debt needs to fall. For the government fiscal austerity is a must.

2008 Oct 05 01:51 PM

[Dame Daxx:]

The USA needs to look at the Spending side of its account.

Like, Medicare is the Largest Purchaser of Prescription Drugs in the World. But it is not allowed to Negotiate Prices with the Drug Companies. What the Heck is up with That?

2008 Oct 05 02:00 PM

[Kath H.:]

A turnaround plan will not work. What is needed is a fundamental change in the U. S. economy. Currently it is based on cheap labor through population growth and putting off payment to the future, i.e. high debt. Look at the historical marginal income tax rate:

www.truthandpolitics.o...

There was infrastucture and education funding fifty years ago. The Baby Boom generation slobbered at this trough and then grew up to cut their tax payments massively. We have had a stampede of the Greedheads for decades. It cannot continue.

2008 Oct 05 02:01 PM

[bearfund:]

If you want a real turnaround plan, how about starting with the elimination of all entitlement spending and set-asides. Combine that with elimination of income and payroll taxes, repudiation of existing debt, and closure of the Federal Reserve Bank, and add immediate transition from paper money to circulating gold and silver as coin of the realm. That's a real turnaround plan. Everything else is lies, gimmicks, and stalling for time.

2008 Oct 05 02:55 PM

[moonbat1775:]

gramps2, I like what you say.

Why is our financial system UNSTABLE? I can't believe it is lack of regulation. As long as a financial system is honest, it should be stable. But ours isn't, hence it is DISHONEST. Ludvig von Mises, F.A. Hayek, and Murray N. Rothbard traced the boom-bust cycle to the government backed fractional reserve banking cartel. Does "government backed cartel" sound like the free market?

The solution is to remove government privilege for bankers and any other business for that matter.

2008 Oct 05 02:59 PM

[SA Guest:]

I have to agree with "Gramps2" - I've spent some time today at www.rgemonitor.com - free registration - and some very good quality discourse in the RGE Content: Weekly Roundup.

2008 Oct 05 03:30 PM

[The Realist:]

This article is trash. It is just Obama talking points, what a joke.

Yes, raising taxes on those making over $250k is going to get the revenues rolling. And those super rich guys making $250k a year are going to keep hiring the middle class people who need help. So your economic analysis is that taking money from someone will not effect his spending at all, it has no consequences.

This article is a joke talking about our "terrible health care system." What world do you live in? We have by far the best health care system in the world. What proof do you have for this statement? Have you blown out your knee in Canada and had to wait a year to have it scoped? Did you wait twelve months for an abortion in the UK? All those health care systems are crap. For the benefit of 5% of the population that does not work and is poor the rest of the population has to give up their benefits. In your world a health care system that covers everyone in a crappy way is better than one that covers everyone who works hard with excellent care. Well I work for my living, I am not giving up my quality health care so that poor people can have better care. Let them work harder.

2008 Oct 05 03:38 PM

[sheople:]

Well, with jobs falling, wages anemic, all costs rising; yep, I agree we ought to raise taxes. We also need to start another war to stimulate the economy and pass out economic stimulus......oh......... about every two weeks ought to do it. Also, our fascist government needs to take over ALL of the private sector, not just the financials. Heck Ford can change it's name to Governmental Ford. That's got a nice ring to it. Lets's completely socialize. We don't use our constitution anyway.

2008 Oct 05 03:55 PM

[User 265729:]

LOL!

I've gotta admit, I've never seen so many suits groping around the dark in my life! The rats abandoning ship...

Remember....

When it goes down, it will be like a long earthquake, not a hurricane. It may start in Asia, Europe, or here in the United States, but there will be a lot of shell-shocked people walking around wondering what just hit them and what they are going to do.

The most disturbing aspect of all of this is the absolute state of denial that most people are in -- little or no preparation for the consequences.

Clearly, there are many people who are still in La-La land based on the media bubbles that Madison Avenue builds for everything from Hanna Montana, to that home you bought for $60,000.00 is now worth $460,000 just 10 years later. Manufactured demand and value, that isn't there... But everyone was so willing to believe...

This is the fatal car wreck at the intersection of Wall Street and Madison Avenue.

2008 Oct 05 03:56 PM

[moonbat1775:]

sheople,

You have nailed it. What need is there for liberty when our leaders know it all? We have arrived!

2008 Oct 05 04:21 PM

[SA Guest:]

Off topic but maybe good info for this coming week: retrieved from rgemonitor.com

NEW YORK , September 30, 2008 -- The New York Stock Exchange will implement new circuit-breaker collar trigger levels for fourth-quarter 2008 effective Wednesday, October 1, 2008.

Circuit-breaker points represent the thresholds at which trading is halted marketwide for single-day declines in the Dow Jones Industrial Average (DJIA). Circuit-breaker levels are set quarterly as 10, 20 and 30-percent of the DJIA average closing values of the previous month, rounded to the nearest 50 points.

In fourth-quarter 2008, the 10, 20 and 30-percent decline levels, respectively, in the DJIA will be as follows:

Level 1 Halt
A 1,100-point drop in the DJIA before 2 p.m. will halt trading for one hour; for 30 minutes if between 2 p.m. and 2:30 p.m.; and have no effect if at 2:30 p.m. or later unless there is a level 2 halt.

Level 2 Halt
A 2,200-point drop in the DJIA before 1:00 p.m. will halt trading for two hours; for one hour if between 1:00 p.m. and 2:00 p.m.; and for the remainder of the day if at 2:00 p.m. or later.

Level 3 Halt
A 3,350-point drop will halt trading for the remainder of the day regardless of when the decline occurs.

Background:
Circuit-breakers are calculated quarterly. The percentage levels were first implemented in April 1998 and are adjusted on the first trading day of each quarter. In 2008, those dates are Jan. 2, April 1, July 1 and Oct. 1.

Contact: Mirtha Medina
Phone: [phone]
Email: [e-mail]

www.nyse.com/press/122...

2008 Oct 05 05:43 PM

[E.D. Hart:]

Its not a question of "if" taxes will be raised its "when" and by "how much"?

Raising Americas debt in 7/12 years from some 5 trillion to some 9 trillion as the Bush Administration has done will require raising taxes.

Period.

Get used to it. It may be in two or three years, or four years, but it is a forgone conclusion.

Can anyone seriously argue against this?

It has nothing to do with fairness either, it is simple math, and economics.

Eventually the costs of not taxing (much higher interest rates, and a continually declining dollar) will exceed the costs of taxing, and politicians will punt.

Do we have the courage to elect politicians to tell us the truth, or do we need Reaganesque talking points designed to make us feel better about our shining city on the hill?

Morning in America or ten minutes to midnite?

When the lights go out on the hill, we will have wished we paid more taxes.

Its not defeatist to admit reality.

2008 Oct 05 05:43 PM

[E.D. Hart:]

Also, you don't have to be a Democrat to Vote Obama as the lesser of two evils, you just have to ask--"will more of the same neoconservative policies be good for our country or bad?" I wish we had a true conservative to vote for that could actually win--A Ron Paul that could win.

2008 Oct 05 05:58 PM

[Ray Lopez:]

I have a theory about the bailout crisis: it's routine--a routine credit contraction caused by overexpansion. I would welcome a comment from the readers of this blog.

Here's how to prove this yourself: Google "The Curve in the Road by John Mauldin". Look at the two graphs for LIBOR over the last year and for commercial paper outstanding since 1990. Two things stand out: LIBOR also spiked in Dec 07 and from Mar-May 08--to 2% from 1%. This past 30 days it spiked from 1% to 3.5%. To me, it doesn't seem unprecedented. I've heard that in the early 1970s a similar spike occurred (can anybody confirm this?). Second, and most damaging: the reduction in commercial paper is not historically abnormal now. From 2000 to 2003, commercial paper dropped 19% (look at the graph: 1600 to 1300). From 2006 to 2008 (today's crisis) commercial paper outstanding dropped 25% (2200 to 1650). Severe yes, but, again, not totally unprecedented.

Can we therefore say that this credit crisis is a 'routine' (albeit severe) response to the credit expansion we've had over the last five years or so? If so, then why did Bernanke and Paulson panic? Could it be that as middle-aged men who have never witnessed a severe credit contraction (such as happened in the early 1970s and early 1980s), they overreacted? Of course, more cynical and sinister theories are possible, but this is the benign theory: they were simply over their heads in responding to a relatively normal credit contraction. And we taxpayers have to pay, as well as setting an extremely damaging precedent for the USA.

One final note: you can argue that "but for" the government intervention, the contraction in commercial paper would have been much more severe, which therefore justifies the intervention. But this is complete speculation. In fact, you can argue that $700 B is not enough to prevent further contraction, and therefore this argument is circular.

2008 Oct 05 06:24 PM

[Diane Ritter:]

How about repealing the bail out bill? or amending it to remedy some of its more striking defects? We've got a choice between Tweedledum and Tweedledee for President, but we can use this campaign to make a BIG
change in Congress. Seems like it is about time for a REAL grass-roots campaign. If you don't know if your Congressman voted yes or no, FIND OUT, here's a link that you can use if you want, housingdoom.com/2008/1.../. But if he voted for it, don't be content to "just vote NO in November", take a minute and find out who is running against him, and send him a check for a few bucks. Money is the life-blood of politics. And write across it in big letters "Repeal the Bail Out Bill", so he'll know exactly where his new found support is coming from.

2008 Oct 05 06:34 PM