Jim Welsh concurs, noting that the primary focus of any federal government program should be to spend money on projects that will have the greatest multiplier effect. In the second quarter of 2008, the government spent more than $100 billion on rebate checks for individuals. Best estimates were that consumers spent only 20 cents of each $1 distributed, meaning the economy didn’t get much of a boost. Spending on infrastructure projects, such as bridge and road repair, has historically generated more than $1 of economic activity for each $1 spent. I’m sure economists will be able to provide the Obama administration specific spending ideas that have the greatest multiplier effect.
Portfolio manager Carl Haefling suggests the Fed and Treasury “allow anyone in the nation who has a mortgage that is current to refinance the mortgage without fees at 4.5 percent for 30 years. This would be equal to a tax cut for large numbers of people. It could help stabilize the housing market and prevent more inventory being created. It would be offered one time only and available only for a designated period of time. (As long as we are considering government-guaranteed loans, we could also extend the low-interest-rate offer to well-qualified car buyers. That, or providing a $2,000 new car purchase tax credit would also add some activity to a weak section of the economy.)
Richard Lang, executive director of the Virtual Country Foundation, suggests that the United States “fund four years of public college education for every student in high school with at least a B average. This was calculated a few years ago at $35 billion. That sounded like too much money back then, but it seems like nothing now. It will provide a motivator for students to achieve reasonable academic goals, and the economic benefit will be felt immediately by every family with one or more children approaching college age.”
On a strictly fiscal basis, Bob Agdern, retired counsel for BP Amoco, notes this key lesson from history: We should pay heed to the sheer number of empires that became overstretched militarily and then sunk under their own weight. We need a military and intelligence system structured for the next century, not the last one. And just as important, we need to be able to size these endeavors at a level we can afford. We can’t continue to subsidize the entire free world by acting as the globe’s policeman.
Several people, including Greenspan’s Bubbles contributor Fred Sheehan, suggested disbanding the Federal Reserve entirely. Like unilateral nuclear disarmament, I somehow doubt that is likely to happen. And Seth Daniels, research analyst, wrote: “I find it interesting that not a single person advocated a laissez-faire recommendation.”
Quite a few people had some interesting suggestions for the Fed.
David Merkel, chief economist of Finacorp Securities, who writes the Aleph Blog, notes that sometimes we have to take our medicine: “Alan Greenspan’s unwillingness to allow for moderately stiff recessions led to an unsustainable buildup in the debt-to-GDP ratio.” While we can smooth out the peaks and valleys of the business cycle, trying to eliminate it totally is a fool’s errand.
Peter Boockvar, market strategist at Miller Tabak, goes even further, suggesting a more European Central Bank type model: “Change the responsibilities of the Fed to solely that of price stability. Eliminate the mandate of maximum employment, as the two conflict. The optimum environment for economic growth should be on the fiscal and regulatory front. The marketplace should set the proper level of interest rates. A stable currency and thus price stability are in the direct purview of monetary policy. It was unstable monetary policy—the shifting of the fed funds rate to manipulate economic activity—that created the basis for the boom/bust economy, without which bubbles would be dramatically less likely.”
Gene Salomon is a music attorney and partner at Gang, Tyre, Ramer & Brown in Beverly Hills, whose clients include Neil Diamond, Pink, and Radiohead. Gene notes, “It has become common wisdom that we need a more robust regulatory scheme in the United States, and I agree. What is often overlooked in the discussion is the need to rebuild the regulatory agency manpower we used to have. Since the 1980s under Reagan, we have eliminated the professional civil servants necessary for regulation to work. Outsourcing has run amok and is ineffective and inefficient. Recruit and hire the best people (even if you have to pay more for them) as quickly as you can.”
Last, Paul Brodsky and Lee Quaintance, who run asset management firm QB Partners, made the following bold suggestion: Make sound money the nation’s highest economic priority. If U.S. dollars were to be thought of globally as a reasonable store of wealth—not just relative to other currencies but over generations—then global economies would function far better and most if not all of the financial excesses we’ve been experiencing would go away. How to do that? Convert to the gold standard. (They admit that “our best ideas don’t seem feasible at the moment.”)
Joe Moglia, chairman of TD Ameritrade, has an idea that is less about what the president should do than how he—along with Tim Geithner and Ben Bernanke—should approach their jobs. Joe’s big complaint has to do with communication.
This is the first time we’ve had to handle this situation, and it’s incredibly complex and difficult. While it takes great minds to devise a solution, when it’s time to explain it to the typical family, it needs to be kept reasonably simple and clear. If a football coach has a brilliant game plan on the blackboard but cannot simplify it so it is crystal clear to the players, that plan will not get executed properly. The probability for failure increases.
Our president—as articulate as he is—is allowing his team to sound like philosophers and researchers when they explain what is going on in the marketplace and what the business plan is to fix it. He needs to speak to this country in a way people can understand. It will foster confidence that the fate of the nation is in good hands.
Vince Farrell of the Soleil Group offers this related suggestion: “Monthly (or quarterly) White House dinners. Take a page from New York City Mayor Michael Bloomberg and have regular dinners with people from different industries and walks of life. Include finance types at every dinner, along with academics and social workers, industrialists and health care workers. Everyone has to sing for their supper in two minutes or less with the most important issue on their minds.”
Good suggestions, all. I hope someone in the White House pays attention.
Notes
Chapter 1: A Brief History of Bailouts
1 Daniel Gross, Pop! Why Bubbles Are Great for the Economy (New York: Harper-Collins, 2007).
Chapter 2: The Creation of the Federal Reserve, and Its Role in Creating Our Bailout Nation
1 Casimir Frank Gierut, Taxpayers’ Message to Congress: Repeal the Federal Reserve Banks; Pandora’s Box of Criminal Acts (Bunker Hill, IL: National Committee to Repeal the Federal Reserve Act, 1983), 31. (The Federal Reserve Act was passed in 1913 on a Sunday two days before Christmas when most of Congress was on vacation. Wilson’s comments regarding the bill he signed into law were made years later.)
2 Steve Matthews, “The Improviser,” Bloomberg Markets, June 2008, www.bloomberg.com/news/marketsmag/mm_0608_story2.html.
3 The Economic Club of New York, 395th Meeting, New York City, April 8, 2008, http://econclubny.org/files/Transcript _Volcker_April _2008.pdf.
4 “Jefferson’s Opinion on the Constitutionality of a National Bank,” 1791, The Avalon Project at Yale Law School, www.yale.edu/lawweb/avalon/amerdoc/bank-tj.htm.
5 Virtual Tour of Historic Philadelphia, “Second Bank of the United States/ Portrait Gallery: Biddle vs. Jackson,” www.ushistory.org/tour/tour _2bank htm
6 Roger T. Johnson, “Historical Beginnings . . . the Federal Reserve,” Federal Reserve Bank of Boston, December 1999, www.bos.frb.org/about/pubs/begin.pdf.
7 Stephen Mihm, A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States (Cambridge, MA: Harvard University Press, 2007).
8 Ibid., 6.
9 Johnson, “Historical Beginnings.”
10 Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the
Market’s Perfect Storm (Hoboken, NJ: John Wiley & Sons, 2007), 7.
11 G. Edward Griffin, The Creature from Jekyll Island, 4th ed. (Westlake Village, CA: American Media, 2002).
Chapter 3: Pre-Bailout Nation (1860-1942)
1 Robert J. Shiller, “A Government Hand in the Economy Is as Old as the Republic,” Washington Post, September 28, 2008, B01, www.washingtonpost.com/wp-dyn/content/article/2008/09/26/AR2008092602838. html
2 Daniel Gross, Pop! Why Bubbles Are Great for the Economy (New York: Harper-Collins, 2007), 29. (Morse was a reluctant entrepreneur who believed the telegraph was too important a public utility to be left to the private sector. He “repeatedly begged Congress to take control of the telegraph, and make the extension of lines a national project.”)
3 Jonathan Alter, The Defining Moment: FDR’s Hundred Days and the Triumph of Hope (New York: Simon & Schuster, 2006), 341.
4 Harriss, C. L., History and Policies of the Home Owner’s Loan Corporation (Detroit: National Bureau of Economic Research, 1951), www.nber.org/books/harr51-1.
5 “Profitable HOLC,” Time, April 22, 1946, www.time.com/time/magazine/article/0,9171,792832,00.html.
6 Alex J. Pollock, “A 1930s Loan Rescue Lesson,” Washington Post, March 14, 2008, A17, www.washingtonpost.com/wp-dyn/content/article/2008/03/13/AR2008031303174.html.
7 Harriss, History and Policies.
8 Ibid.
9 Alan S. Blinder, “From the New Deal, a Way Out of a Mess,” New York Times, February 24, 2008, www.nytimes.com/2008/02/24/business/24view.html.
10 Harriss, History and Policies.
11 James Butkiewicz, “Reconstruction Finance Corporation,” in EH.Net Encyclopedia , ed. Robert Whaples, July 20, 2002, http://eh.net/encyclopedia/article/butkiewicz.finance.corp.reconstruction.
12 Wigmore, Barrie A., “The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929-1933,” Contributions in Economics and Economic History, no. 58 (Westport, CT: Greenwood Publishing Group, 1985), 540.
Chapter 4: Industrial-Era Bailouts (1971-1995)
1 The company placed the blame for these losses and its subsequent difficulties on military contracts arranged under the Total Package Procurement (TPP) procedure instituted by former Defense Secretary Robert McNamara, a system “designed to end overrun claims by setting a strict ceiling on the final cost of any project.”
2 The TPP was a fixed contract purchasing program instituted by the Defense Department where defense contractors would bid for military programs based on their expected development and production costs and the government would pay only up to the contract ceiling. The losses involved in any contract would thus be shouldered by the contractor with the government liable only to the ceiling price.
3 Nick Barisheff, “August 15, 1971: Inflation Unleashed,” Financial Sense University, May 11, 2006, www.financialsense.com/fsu/editorials/bms/2006/0511.html.
4 “The Biggest Bankruptcy Ever,” Time, July 6, 1970, www.time.com/time/magazine/article/0,9171,878372,00.html.
5 “The Penn Central Reorganization Revisited—Again,” News and Insights, DLA Piper, January 14, 2008, www.dlapiper.com/penn _central _reorganization/
6 “Chrysler’s Crisis Bailout,” Time, August 20, 1979, www.time.com/time/magazine/article/0,9171,947356,00.html.
7 Jimmy Carter, “Chrysler Corporation Loan Guarantee Act of 1979: Remarks on Signing H.R. 5860 into Law,” January 7, 1980, www.presidency.ucsb.edu/ws/index.php?pid=32978.
Chapter 5: Stock Market Bailouts (1987-1995)
1 Nell Henderson, “Backstopping the Economy Too Well?” Washington Post, June 30, 2005, D01, www.washingtonpost.com/wp-dyn/content/article/2005/06/29/AR2005062902841.html.
2 Robert T. Parry, “The October ’87 Crash Ten Years Later,” Federal Reserve Bank San Francisco Economic Letter 97-32, October 31, 1997, www.frbsf.org/econrsrch/wklyltr/e19-32.html.
3 Brett D. Fromson, “Plunge Protection Team,” Washington Post, February 23, 1997, H01, www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm.
4 Zachary Roth, “Report Shows White House Engineered U.S. Attorney Firings,” October 1, 2008, http://tpmmuckraker.talkingpointsmemo.com/2008/10/report_shows_white_house_engineered.php.
5 Lynn Thomasson and Eric Martin Bloomberg, “S&P 500 Index Drop Leaves 64 Industries with Losses,” November 21, 2008, www.bloomberg.com/apps/news?pid=20601213&sid=am1FNznC.tNE&.
6 Carl E. Walsh, “What Caused the 1990-1991 Recession?” Economic Review , no. 2, Federal Reserve Bank of San Francisco, 1993, www.frbsf.org/publications/economics/review/1993/93-2 _34-48.pdf
7 Louis Uchitelle, “Greenspan’s Authority Curtailed on Interest Rates, Officials Say,” New York Times, April 8, 1991, http://query.nytimes.com/gst/fullpage.html?res=9D0CE0D8113DF93BA35757C0A967958260
8 Paul R. Krugman, “Did the Federal Reserve Cause the Recession?” U.S. News & World Report 110, no. 12, April 1, 1991, 54, www.pkarchive.org/economy/FedRecession1991.html.
9 Federal Reserve Bank of New York, “Historical Changes of the Target Federal Funds and Discount Rates, 1971 to Present,” www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html.
Chapter 6: The Irrational Exuberance Era (1996-1999)
1 Alan Greenspan, Remarks at the Annual Dinner and Francis Boyer Lecture of the American Enterprise Institute for Public Policy Research, Washington, D.C., December 5, 1996, aka the “Irrational Exuberance Speech”; www.federalreserve.gov/boarddocs/speeches/1996/19961205.html.
2 Ibid.
3 Daniel Gross, “Wall Street Throws a Tantrum,” Newsweek, February 11, 2008, www.newsweek.com/id/107571; Gillian Tett, “Markets Throw One Tantrum after Another,” Financial Times, October 10, 2008, http://us.ft.com/ftgateway/superpage.ft?news _id=fto101020081422295531; “Carry On Screaming,” Economist, October 9, 2008, www.economist.com/finance/displaystory.cfm?story_id=12381895.
4 Alan Greenspan, “Risk and Uncertainty in Monetary Policy,” Remarks at the Meetings of the American Economic Association, San Diego, California, January 3, 2004, www.federalreserve.gov/boarddocs/speeches/2004/20040103/default.htm.
5 Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds, published in 1841; Edwin Lefèvre, Reminiscences of a Stock Operator, published in 1922-1923; and John Kenneth Galbraith, The Great Crash, 1929, published in 1955, are examples.
6 Federal Reserve Press Release, November 17, 1998, www.federalreserve.gov/boarddocs/press/general/1998/19981117/.
7 “The Committee to Save the World: The Inside Story on How the Three Marketeers Have Prevented a Global Economic Meltdown—So Far,” Time, February 15, 1999, www.time.com/time/covers/0,16641,19990215,00.html.
Chapter 7: The Tech Wreck (2000-2003)
1 Minutes of the Federal Open Market Committee meeting of August 20, 1996 (transcript).
2 Alan Greenspan, “Question: Is There a New Economy?” remarks at the Haas Annual Business Faculty Research Dialogue, University of California, Berkeley, California, September 4, 1998.
3 The full list of imploded mortgage lenders can be found at The Mortgage Lender Implode-O-Meter, http://ml-implode.com/index.html#lists.
Chapter 8: The Backwards, Rate-Driven Economy
1 Floyd Norris, “Dow Conquers 5,000 Mark, Riding Surge of Confidence,” New York Times, November 22, 1995, http://query.nytimes.com/gst/fullpage.html?res=9F07E1DB1339F931A15752C1A963958260
2 Ben S. Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” remarks before the National Economists Club, Washington, D.C., November 21, 2002, www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm.
3 Asha Bangalore, “Housing Market—Another Information Tidbit,” Northern Trust Company, May 23, 2005, www.northerntrust.com/library/econ _research/daily/us/dd052305.pdf
4 Christopher D. Carroll, Misuzu Otsuka, and Jiri Slacalek, “How Large Is the Housing Wealth Effect? A New Approach,” NBER Working Paper W12746, December 2006, http://papers.ssrn.com/sol3/papers.cfm?abstract_id =949756.
5 Alan Abelson, “Hold the Bubbly,” Barron’s, January 2, 2006, http://online.barrons.com/article/SB113598787824035213.html
Chapter 9: The Mad Scramble for Yield
1 Jesse Eisinger, Portfolio, September 2007, www.portfolio.com/news-markets/national-news/portfolio/2007/08/13/Moody-Ratings-Fiasco.
2 Aaron Lucchetti and Serena Ng, “How Rating Firms’ Calls Fueled Subprime Mess,” Wall Street Journal, August 15, 2007, http://online.wsj.com/article/SB118714461352698015.html
3 Aaron Lucchetti, “As Housing Boomed, Moody’s Opened Up,” Wall Street Journal , April 11, 2008, http://online.wsj.com/article/SB120787287341306591html .
4 Elliot Blair Smith, “Bringing Down Wall Street as Ratings Let Loose Sub-prime Scourge, Part I,” Bloomberg, September 24, 2008, www.bloombergcom/apps/news?pid=20601109&sid=ah839IWTLP9s&#.
5 Niall Ferguson, “Wall Street Lays Another Egg,” Vanity Fair, December 2008, www.vanityfair.com/politics/features/2008/12/banks200812.
6 Ibid.
7 Ibid.
8 Ibid.
9 Ibid.
Chapter 10: The Machinery of Subprime
1 Anthony Ha, “Minorities Hit Hard by Foreclosure Crunch,” Hollister (CA) Free Lance, May 3, 2007, http://hollisterfreelance.com/news/contentview.asp?c=213141.
2 Mara Der Hovanesian, “Nightmare Mortgages,” BusinessWeek, September 11, 2006, www.businessweek.com/magazine/content/06 _37/b4000001.htm
3 Sarah Max, “Appraisal Fraud: Your Home at Risk; Appraisers Say They’re Being Pressured by Lenders to Inflate Their Estimates of Home Values,” CNNMoney, June 2, 2005, http://money.cnn.com/2005/05/23/real_estate/financing/appraisalfraud/index.htm.
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