Monday, July 30, 2007

President Bush's Economic Team Responds To Credit Concerns

"I have every confidence that there will be a revival of activity (economic) in the spring, and that during this coming year the country will make steady progress."
- Andrew W. Mellon, U.S. Secretary of the Treasury, December 31, 1929

"I believe what what we are seeing is a strong global economy. This is the strongest global economy I've seen in thirty two years. I think this is being driven by strong growth outside of the U.S.....I would say there is less risk in the markets today than there was a few months ago."
- Hank Paulson, U.S. Secretary of the Treasury, July 27, 2007

I'm not typically a big fan of today's financial TV journalism but there are always some moments worth capturing. Dylan Ratigan does a fine job of interviewing the Bush economic team. (Unfortunately the interview is better than the canned responses.) The video comes in pieces and can we watched here. They are titled White House Summit, White House Summit 2 and White House Summit 3 and total about 25 minutes.

What really drew my attention was not the interview or even the content but that the entire economic team has decided through some moment of coincidence to agree to an interview for the first time in nearly eight years. Now, the comment was captured on TV that this interview could not have been calculated because no one knew the market would be down when this interview was booked. Au contraire.

I saw credit markets had a chance of seizing up a few months ago. I don't know how many times I can put "risk", "liquidity" or "credit" in my posts over the last few months. My post on July 10th stated,
"From what I model, we are at a very heightened risk of a credit crunch developing in many economies over the coming months. Actually, I expect there is a reasonable probability for some bizarre events to come to pass in the credit markets as I intimated last year." If I can see it I guarantee you that smart money on Wall Street saw it as well. And, I guarantee you Paulson has been alerted.

What's my point with the rehash? Politicians make themselves available for interview when they have an agenda. This interview wasn't done just because CNBC got lucky or Paulson woke up one day and decided to give a freebie. That's not a bad thing. We want politicians to have an agenda. That is why we hire them as stewards of our national interests.

Frontline, which I generally consider to be consistently excellent TV journalism, ran a show some time ago on the attempt by politicians to control information flow. Hank Paulson used to run Goldman Sachs and I am quite confident he has received calls from his former associates and others in the financial community voicing serious macro concerns and hence the unprecedented show of unity and calm in this interview. The agenda for this interview was surely to impart confidence. The Fed knew there was a bubble in 1929 and I can assure you they know there is a bubble now. What they likely don't know is exactly how to resolve it. Personally, I believe the best they can hope for is that corporate profits remain robust thus adding some stability to asset prices for a period of years as imbalances are worked off. By the way, there is no precedence I am aware of that successfully accomplishing this. That's effectively what the Soviet Union attempted to do. In other words, it may work for a while but in the end unless one is able to control information and markets indefinitely, that will always fail. The inability to ultimately control information was a key reason the Soviet Union failed in my estimation.

I'm sure the Bush economic advisors are all fine men.
But, the question is whether we want government to be transparent and share potentially bad news so that we can make informed decisions as individuals and as a society. Not just about this issue but about all issues. We are demanding more transparency from public companies, isn't it a natural extension to require more transparency from government?

I'm dubious of many replies in this interview because there is clearly some dancing around Dylan's questions with "Newspeak". (Okay, I'm back on George Orwell again.) That tells me they are very concerned. So, is the government's role in a free society to promote confidence or be transparent when they may be mutually exclusive? Understanding that transparency may cause volatility or create a self-fulfilling prophecy or paradox of thrift as I wrote about last year. Or, that attempts at building confidence may ultimately lead to citizens losing significant personal wealth. Of course the more fundamental issue might even be that politicians don't understand the depth of what is going on. I'm quite confident they likely believe this is a point in time issue that can be contained and it is not. That if they can convey confidence to financial markets, there is a chance the storm may pass. It won't because I doubt they understand the depths of or the source of the issues markets now face. Of course, it's an old axiom but those at the top are always the last to understand something significant has changed. That's why Wall Street is always wrong eventually.

By the way, GDP numbers looked great on the surface. In fact, they were far from great. Oh, and Secretary Paulson's remarks about the strongest global economy in thirty two years....Well, might we ask what happened about thirty two years ago when that burst of global growth ended? How about the Nasdaq fell about 70%, the S&P about 50% and we had the worst recession since the Great Depression. In fact, many called it a depression.

posted by TimingLogic at 11:22 AM

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