We need a rhetoric for patience, an easy slogan to signify it, and then an in depth discussion of what it means. Yesterday, I indulged my post-election blues with reading and viewing, some serendipitous, some I actively searched for, that has me with at least a framing of what this discussion should be about. Below, I will embed several of these references and give a brief discussion of them to show how they should fit into the larger conversation. Oh, on the slogan, that's simple - Invest in America. If I were a politician now, instead of moping I'd begin with a campaign where that slogan became the unifying them.
Let's begin with this interview Charlie Rose had with Felix Rohatyn about 18 months ago, mainly to promote his book, Bold Endeavors. (And here is an interview Rohatyn had with Deborah Solomon, where some of the same points come up.)
There are many interesting points in this discussion. I want to zero in on just a few of these. One is a rhetorical issue. Now in discussing government spending, there is really no distinction made between investment spending, which Rohatyn argues we need more of, and consumption spending, which may very well need to be cut. Another is a leadership issue. Really big capital investment projects - the Erie Canal, for example - require leadership and vision to enact. Apart from Rohatyn, who is outside the political sphere, there doesn't seem to be an ongoing discussion of the type of investment he is talking about. That leadership needs to emerge. All the political rhetoric now is about doing what the American people want. So a grass roots effort centered around Invest in America could pay dividends. Third, there is the question of how to finance this investment. Rohatyn has the concept of a National Infrastructure Bank, whose job it would be to match funds with worthy projects, try to eliminate or dramatically reduce pork barrel projects, how it does this I don't understand so I will read his book, and keep an ample ongoing flow of funds into this sort of investment. Bringing this issue back into a world where I know more of the detail, my Campus, there is a great temptation to defer this sort of spending in lieu of other spending that seems sexier and will produce more immediate results. So we have a huge deferred maintenance burden. I think that translates quite well on the national level. So there is a need to take these investment decisions outside the realm of the other spending that Congress appropriates. That seems to me a huge issue.
Let me turn next to this book review by Malcolm Gladwell of Steven Rattner's book about the bailout of the auto companies.
Gladwell makes an argument in defense of the GM CEO who got ousted, Rick Wagoner. In so doing, Gladwell makes several arguments some of which parallel Rohatyn. First, if you have a troubled entity, for Rohatyn that was NYC in the early 1970s, for Wagoner that was GM at the close of the 1990s, then you need to enlist all parties who are stakeholders and get them jointly to make concessions in order to help ensure viability of the entity. Wagoner apparently was able to negotiate with the UAW for wage concessions and get retirees of GM to agree to modifications on their pensions. Second you really need to improve both productivity and quality of the product. But that takes investment. It doesn't happen overnight. Gladwell argues that when the auto company CEOs came to Congress in 2008, GM had turned the corner on these issues and was really a top flight competitor at that point. Penetration in China is the main evidence he gives to prove the point. Third, balance sheets don't tell the whole story. Rohatyn talks about this too. Balance sheets give too narrow a focus of value. Financial engineers, like Rattner, focus narrowly on the balance sheet. So they may get things wrong as a result. Senator Shelby of Alabama comes off very poorly in Gladwell's piece, because he doesn't seem to understand this point at all, though to be fair to Shelby, until reading Gladwell's piece I didn't understand that GM was producing good product now and had an optimistic future if it could get the financing. I was still thinking of it as that 1990s company.
I want to talk about one more interview. This from Charlie Rose a couple of nights ago with Richard Berner of Morgan Stanley and Nobel prize winner Joseph Stiglitz. (Sorry, they didn't supply embed code for this segment.) The focus was the Fed's new policy of buying up some longer term Government debt in an effort to stimulate the economy by lowering long term interest rates. They do overlap with the other pieces somewhat on the Invest in America themes. But they have some other stuff too that is highly relevant. They cast the issue in an international context, where the Fed policy will be seen as weakening the dollar and perceived as a generally unfriendly act by export oriented nations unless it is also accompanied by substantial fiscal stimulus. So this could ignite a trade war and indeed fundamentally alter the global monetary system unless other steps are taken, steps that seem quite unlikely in the current political environment. Then there was a rather sobering discussion of the mortgage default issue that will likely remain with us for some time and act as substantial damper on economic growth over the next couple of years. I want to talk about that as I understand it.
Many people who have not made mortgage payments for a year or more are still in their homes. Those loans are in the "toxic" category. The home values are no longer anywhere near where they were in 2006 or so. There are two fundamental issues here, one that will command all our attention but I believe is not as important. The other is the key issue, but we're not talking about it very much. The first is who will take the capital loss - the banks or tax payers. I said this issue is less important but it is blocking the discussion of the other issue, which is why it remains fundamental. The more important issue is this. If the home were "correctly" valued in the current market and refinanced, should their current occupants remain in them? The answer is probably yes if they could readily make payment on the new loans and no otherwise. So the process that would be desirable is to first renegotiate the loans, offer them to current occupants to see if they agree to those terms and only foreclose when that outcome doesn't occur. But we're not getting that. Instead we're getting this backlash about the paperwork, which is not really helping because it too is blocking a sensible resolution of the issue.
Now let's be blunt here about what is actually going on with the current process. The banks are clearly trying to pass the capital losses to the tax payers. Having done so, then foreclosure and resale of the properties is income for them. But that process won't necessarily get to anything like a correct value, because the banks won't want to hold foreclosed homes on their balance sheets. Buyers of such homes will be there shopping for bargains. This issue too needs a lot more discussion. Instead we are getting venting only and no progress.
In order to get to Invest in America, I believe we'll have to relive the past - quite a bit. There will be some self-flagellation in that, so it won't be fun. But having gone through the exercise we'll start to believe that progress is possible. Now it seems only destruction will be the outcome.
Invest in America.