Archives for August 2011

Now, can we get to the real problem?

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For most of 2011, national lawmakers in Washington, DC have invested what seems to have been the vast majority of their time, and our attention, on the need to get the debt ceiling raised and the nation’s revenues and expenses aligned.  Meanwhile, the economy flounders because business executives in the United States, and increasingly globally, have little or no confidence in the direction or stability of the legal and economic arena.  Uncertainty like that makes strategic investing in jobs and in job-creating expansion risky and seemingly unwise. The debt ceiling crisis is a symptom of a much more difficult problem, the mismatch between overspending and too little revenue.

Political rhetoric out of Washington, DC is simply lip service meant to placate the itching ears of the electorate. Politicians have devolved into re-election machines focused on the next election cycle as soon as the last one is over. Most members of the U.S. House and Senate simply have no experience or education that would allow them to create effective policy for most of the topics they must address. So, with no basis for for developing, debating, and implementing effective solutions to the problems the nation needs them to address, elected and appointed decision makers in Washington seem inclined to simply parrot back the words the electorate and self-serving advisors and lobbyists beg them to say.

A full 25% of elected members of the U.S. House of Representatives and Senate have no work experience outside of elected office. They get elected and re-elected because that is what they know how to do. Another 25% are attorneys, but most of them know nothing about job creation and getting the economy moving, other than the potential knowledge and experience of legal matters related to employment and business expansion.

Creating jobs and growing the economy requires one element missing from the U.S economy today; that missing link is the willingness to risk. The uncertainty created by the Washington bureaucratic machine is a consequence of a leadership void and the absence of a rudder and a keel for the ship of state and the barge of business. Until people in positions of leadership take the risk associated with actually leading, investors and business executives will continue to hoard cash and pursue hard assets rather than doing the dance they have all learned called entrepreneurship, innovation, and business and economic growth. Attempts at economic recovery may continue to prove comparatively fruitless in an environment lacking leadership and brimming over with uncertainty.

Written August 3, 2011 on the road to Halong Bay from Hanoi, Vietnam

“Baby on Board” – Dealing with Reality

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In the July 18, 2011 issue of Time, Joel Stein reflected on air travel with children and other sometimes-awkward realities. Mr. Stein suggested that airlines offer a section at the rear of coach for passengers traveling with young children. On a flight to Tokyo today, a passenger reminded me of the article; Mr. Stein recognized the realities of air travel for those of us who do not travel with children of our own, but frequently travel with
passengers who travel with their children, and the realities of those parents who travel with their children. Sometimes, passengers who travel without their children simply act like children. Sometimes, a reality check is healthy, but we do not always see consensus on what reality is.

Somehow, the debate on whether to raise the debt ceiling in the U.S. and, if so, by how much has devolved into politics. It is no longer about differences between political parties because, and the reality is, consensus within the two dominant parties in Washington, DC is, at best, poorly
defined and, more likely, hard to find at all. Pundits want to make the debate a Republican versus Democrat battle, but strong disagreement on a way forward seems just as present with each party as across party lines.

Blog postings by colleagues of mine point out how many times the U.S. Congress raised the debt ceiling during presidential administrations dating back to Ronald Reagan, as if a history of doing anything is a compelling argument for continuing to do something. With that kind of thinking, as the current television commercial suggests, people would still think the world is flat (actually it says that without innovation the world would be flat – preposterous since it never was flat – but that is a topic for another day).

The national debt of the United States has never been higher and has never been a larger percentage of the nation’s Gross Domestic Product. Some people believe that the United States needs to take steps to control it’s national debt before the United States faces a debt crisis like Greece and other European nations. I suspect in a de-politicized arena most representatives elected to national office in the United States might actually
agree that growth in the nation’s national debt cannot continue indefinitely, but we would find, and are observing, strong disagreement on how and when to resolve a potential debt crisis. Whether our representatives like it or not, they campaigned long and hard to be in the position in which they find themselves. Perhaps next time they will be careful what they ask for or, perhaps, we simply have the wrong people, collectively, in office.

When I am flying, I must accept certain realities that are not necessarily included in the terms and conditions listed on the ticket. Reality 1: I am not in a position to charter my own plane and, as a consequence, I must accept that I am going to be on an airplane with other passengers. Reality 2: Sometimes my fellow passengers include children, and people who behave like children, and that is included in the price of admission. Reality 3: Sometimes when I am fortunate to sit in the big seats in the front of the plane, my fellow fortunates will include passengers with small children; that is not my opportunity to revert to childlike behavior myself. Reality 4: The parent of an unhappy child is not any more thrilled to be traveling with an unhappy child than I am and they have the added discomfort of having fellow passengers look at them as if there was something they should be doing to control the child.

Looking at our elected representatives and their plethora of appointees, the electorate might find it refreshing to hear non-spun explanations of reality from politicians. Reality  A: Non-spun, politically neutral explanations of anything are unlikely from anybody elected to public office in a nation’s capital. If the first responsibility of a leader is to define reality, as asserted by Max DePree, then if those we elect to leadership positions somehow refuse to define reality and to communicate a compelling vision for a new reality, the electorate in the United States may need to face Reality B.

Reality B: Those who serve in elected office are not inherently leaders.

Reality C: Not all people in elected office are public servants.

Reality D: If e want people in elected office to lead us, we may need to elect leaders.

Reality E: the leadership vacuum crosses party lines; the party only helps clarify the possible vision.

It seems increasingly clear, facilitated by a potential crisis on the horizon, that the time is ripe for a leader to emerge. Will one?

“Wall Street, whose excesses caused this mess” – Really?

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In the June 27, 2011 print U. S. edition of Time, Joe Klein, in the context of suggesting that Republicans are against regulating Wall Street, made the statement in quotes in the title. Did it really?

Wall Street is not a club of innocents. On the other hand, the strongest case that Wall Street caused the current economic downturn is that analysts in Wall Street exercised their contractual right, and their obligation to investors and, probably, the SEC to return mortgages to originating lenders that appeared under-collatealized. That action did squeeze lenders into liquidity crises and cause the houses of cards to collapse. Why is nobody willing to probe beyond Wall Street. Do reporters like Mr. Klein simply stop at the first and easiest answer?

Mr. Klein cites presidential candidate Mitt Romney as suggesting that President Obama caused home values to collapse. Really? What caused home values, or prices, to rise to, unrealistically high levels in some markets, in the first place?

Some time ago, home ownership became part of the so-called American dream. Fulfilling that part of the dream seems to have always been dependent on where one lives in the country. Home prices naturally vary based on supply and demand.

Durning the Clinton Administration, a decision was made to make home ownership more feasible by loosening credit, by making qualifying for a mortgage easier. With more people able to enter the home-buying market, home prices rose, at least in some areas and neighborhoods in the United States. Concurrently, with fewer restrictions placed on lenders, prospective buyers discovered that they qualified for larger mortgages, even “jumbo” mortgages. Some buyers, wanting to capitalize on rising home prices, accepted mortgages with low “teaser” rates in anticipation of
selling or refinancing before the ultimate mortgage payments became due. Some home buyers accepted mortgages for more than the appraised value of the house. In addition, some appraisers seemed willing to appraise the home for more than the then-current value. With low or no down payments required, an apparently large number of homes were over-valued and under-collateralized.

In order to increase the pool of money available to fund mortgages, Wall Street received encouragement from Washington to create securities,
collateralized debt obligations, to provide mortgage lenders with a source of fresh capital with which to make more mortgages. These new securities allowed Wall Street to return individual mortgages to the original issuer for specific reasons, including insufficient collateral. These returned mortgages required cash compensation to Wall Street.

In 2007, Wall Street began taking a closer look at the mortgages it was buying, and began returning some, but not all, to the mortgage lenders. Soon, some mortgage lenders began facing a cash and credit squeeze. The squeeze prevented the issuing of new mortgages by an increasing number of lenders. With credit tightening, the number of eligible home buyers reduced. With fewer buyers, the prices of homes dropped and the construction industry entered a tailspin.

The credit crunch was detrimental to other sectors of the economy. Financial institutions that have no funding for mortgages also have no money for commercial credit lines and other purposes. The economy in the United States and other economies tied closely to it entered a downturn, the result of greed by some, and not just Wall Street, the decision by Washington to not regulate these new debt instruments, and a well-intended, even if politically motivated, desire to stimulate home ownership and the pursuit of the American dream.

Wall Street played a part, to be sure, but Wall Street had plenty of help from lenders, appraisers, real estate agents, and home buyers, all anxious to make an easy windfall courtesy of loose credit and artificially-rising home prices. People all over the country made artificial commissions or artificial profits. Some simply got caught when the house of cards collapsed. Mr. Klein and others find it so much easier to blame Wall Street than to blame everybody else who bought into the “greed is good” mentality.