Who Should We Trust?

by: Jeff Miller

There is an argument making the rounds.  The first incarnation was in opposition to the Paulson Plan.  It has morphed into a question about whether the plan  -- and other measures -- will work.

We did not take an advocacy position on the bailout -- er --rescue plan.  We have opinions about public policy, but that is not our job here.  We tried, both here and in the series of RealMoney articles, to inform investors about the progress and prospects of the legislation.  The market had already rendered a verdict on the need for some action.

We now have an interesting situation where those who were the biggest opponents of the plan are asserting that it will not work.  That probably is consistent logic.  The challenge for investors is to figure out whether the Plan will get to the key causes of the problems.  This is yet another agenda topic.


Whom Should We Trust?

There is a specious argument making the rounds.  It goes something like this:

Why should we trust the same people who got us into this to lead us out?

It is one of those arguments that convinces the masses, but has little weight.  Let us see why.

Inappropriate Grouping

The popular argument suggests that we should not trust Wall Street, the Fed, the Treasury, or anyone else in government.  They all did something wrong.

Consider this example.  (We strongly suggest that readers use common sense in known situations to think about how they interpret market information).

You have a plumbing problem.  You call in a plumber who makes a major error.  The valve he installs makes the situation worse.  What should you do?

Would you call in a non-plumber?  An auto mechanic?  Your neighbor?  A surgeon?

Of course not.  You would try to find a better plumber.  So why do market participants think that all economists, all government officials, and all corporate CEO's are complete bozos?

It is simplistic thinking.  The problems of many now in power -- both in government and companies -- were inherited.  The challenge is one of finding good economists, good government leadership, and good CEO's.  Where else should one turn for expertise?

Inappropriate Second-Guessing

The popular argument suggests that prior attempts at incremental solutions were wrong.  Let us consider this.

Suppose that you are diagnosed with cancer.  Your oncologist, before recommending major surgery that will have a permanent effect, recommends a chemo or radiation approach.  If it works, terrific.  If not, a stronger treatment will be needed.  A different oncologist might have recommended immediate surgery.

Let us further suppose that the incremental treatment does not work.  Would you dump your doctor?  Would you look to someone outside of oncology to take the next step?

In real life, experts often recommend an incremental solution.  When it works, it does not get any publicity.  Only when it fails do we second-guess the original plan.

This describes many of the moves made so far by the Fed.

What Now?

Figuring out what is wrong is easier than determining what is right.  Two conclusions stand out:

  1. The general dismissal of government efforts is overstated, since people are using a brush that is too broad.
  2. The winning investors will be those that can evaluate the specific features of the plan, determining whether it can get to the root causes.

We will have more to say on these prospects as specific proposals develop.