Robert Rubin on Zakaria GPS
Today on Zakaria GPS we have Robert Rubin, Citibank and Wall Street megamoneymeister and Clinton’s Secretary of the Treasury.
Rubin is always one of the most impressive observers of the economy, and distinguished as one of the few Secty’s of treasury who presided over a Federal balanced budget. He articulates complexity well and also avoids the partisan nonsense that clouds these debates. For example he was complimentary of Paulson’s efforts
Main point was that we need to do more to address mortgages at home and bank level to stabilize things and that he wanted a *huge* stimulous package - probably not in the form of tax rebates because they don’t tend to hit economy fast enough and are often saved.
Rubin is Obama’s economic advisor (along with Volker, Buffett, Summers). Rubin was very complimentary of Obama’s style and intellect, pointing out that at the meetings Obama is always quick to divorce the campaign considerations from the economic solutions, and to listen to those who agree and disagree.
The bad news is that Rubin sounded like he was not willing to go back to Washington and take the position of Secretary of the Treasury again even though many (certainly I) would like to see him there again.
Newsweek’s Zakaria on the Economy
Fareed Zakaria, one of the best observers of the global landscape, suggests that if we curb some of our bad borrowing and spending habits we may emerge better and stronger from the current fiscal crisis:
If we wanted a bigger house, a better TV or a faster car, and we didn’t actually have the money to pay for it, no problem. We put it on a credit card, took out a massive mortgage and financed our fantasies. As the fantasies grew, so did household debt, from $680 billion in 1974 to $14 trillion today. The total has doubled in just the past seven years.
I’m not as optimistic as Zakaria that after the current crisis ends we’ll return to the what appeared to be a vibrant economy because of the other issue he discusses - failing to address the herd of elephants in our finanacial room - a 10 Trillion and growing budget deficit with an annual deficit that continues to skyrocket after the disasterous spending recklessness of *every administration* since Reagan with the possible exception of Bill Clinton (when we did not borrow nearly as much as we had been, I think largely thanks to the huge increasee in Tax revenues that came from the positive investment climate.)
My take is that our economy has been challenged for some time, with prosperity manufactured to some extent by simply pushing expenses forward to our kids. McCain’s call for a balanced budget in four years is admirable in this respect, and it is unfortunate that so few truly think that is realistic. It is actually realistic but would require massive cuts in military spending- the sacred cow of fake conservatives who are (correctly) willing to slash entitlements but (stupidly) think that military money is spent wisely (news alert fake conservatives - it is NOT spent wisely and this is *totally* well documented). Not only have we been living on debt as individuals, but we’ve been living on debt as a society. This is not sustainable for the long term, and we may be seeing the early signs of the massive challenge we’ll face if the world starts to lose faith in the US economy.
That won’t happen anytime soon, but unless we bring debt and spending into focus both individually and collectively it’s going to happen eventually. It’s easy to predict we won’t change our habits all that dramatically, but hopefully enough for a soft landing as we come down from our lofty heights as the world’s key economic and power player.
George Soros on Zakaria GPS
Hedge fund manager George Soros is one of the world’s richest and most successful market watchers (and market manipulators?). Zakaria reports that Soros’ recent plays have netted him over 2 billion. He’s very controversial for his political views though my take is that great business folks can easily separate their politics from their business decisions.
Consuming more than you produce:/ That game is over.
Houses as piggy bank, instead of savings. [BAM! We are seeing this obvious but profound observation coming up a lot]
Misconception: Markets will correct themselves. They won’t. We have reached the end of a bubble cycle started in the 1980s when massive global markets and deregulation frenzy began.
Mortgages as the “detonator” of the nuclear bomb that is the current global crisis. Stock market in capitulation phase that has followed credit problems.
Can’t predict future because it depends on decisions. He says he was wrong in 1998 to predict some sort of climax to the bubble.
“The cost will be greater, the damage will be greater”.
“You need a government that believes in government”
Paulson bailout plan as ill concieved - same kind of financial engineering that got us into the mess. Paulson as behind the curve “all the way” because he buys into market fundamentalism.
The authorities have lost control of the situation.
Soros recommends: Mobilize private capital to buy into distressed banks and lift minimum reserve requirements to free up lending.
Reduce number of foreclosures by renegotiations to sound mortgages that will not exceed 85% of house value. Loss to be absorbed by mortgage owners (banks?). Govt will then guarantee mortgages to 85% value, which would encourages renters to buy. Some losses, short recession.
Soros: I understand the flaws which allows me to profit, but as a citizen I want better regulation. Markets and Govts are flawed. Less regulation, better regulation.
Soros (like Gates and Buffett?) believes the anti-tax positions are false because supporting infrastructure with taxes is so critical to wealth formation.
Soros said he does have inordinate influence as a rich person on politics but , unlike many other rich folks, does not use it to improve his financial positions. He thinks market fundamentalism abets power abuses in politics.
China built assets while we built debts. Tremendous power shift. But America will remain a leader and could be *the* leader with some changes.
Sequoia’s Slide Show on the Economy
Sequoia’s Advice to startups has been the subject of speculation for the past few days, but now VentureBeat has posted the actual slide show from a recent major meeting where startups were told to prepare for some seriously bad economic stuff and a recession that could last for many, many years.
———————–
I was particularly glad to see the slide noting that people have been using home equity as a “piggy bank”.
My current take on the huge Government actions trying resurrect the prosperity economy is subject to change faster than you can say “The Dow’s Down 500″. However I would like to hear more talk about how the economy got too big for it’s britches and most of us, and certainly the country as a whole, have been living pretty large for no good reason, fueling both economic growth and personal living off of home equity that …. ain’t … here …. no …. more. We’ll need to work harder and get less for awhile, and perhaps forever as the rest of the world catches up to our levels of prosperity. Welcome to the new global economy.
Another factor I’m confident about is that the banks are going to act very opportunistically with the new sources of funding, though I’m not sure what form this will take. Assume, for example, that you run a totally solvent bank and have managed risk appropriately. Yet you know the feds are about to absorb disproportionate risks in order to get the macro economic juices flowing. Your best play is to lay low for awhile, waiting for potential free money, lower risks, and most importantly saving up the benefits of your solvency so you can scoop up smaller banks and deals as they become available. Although I assume there are some safeguards in place I think one of the Fed’s miscalculations right now is that the big bank players *want to play* when in fact the best of them *want to hang out and make a killing* as the insolvencies rip through the system and are removed at taxpayer expense. This behavior by solvent banks *also* increases uncertainties because nobody currently knows who is good to go and who will be dead later in the month. I *absolutely* agree with those calling for a massive increase in financial transparency throughout the banking sector - e.g. requiring banks to place much more itemized information about assets and liabilities online for all to see. This should be a condition of *doing business with the Federal Government*, which means every bank would be required to do it. The initial effect would probably be a massive shift in resources toward the healthier banks but this is where the Government, again with total transparency, could balance things out to avoid potential catastrophic failures.
Hello UK, and welcome to the bail out club…
I’m not seeing enough about the 500 billion pound UK Bailout (that’s $865 Billion US) on US Financial news.
That’s more than our USA bail out despite the fact that our economy dwarfs that of the UK. Probably a sign that here in the US we are in for massively more bail out spending before the financial bloodbath is over.
The scale of this measure suggests to me what the markets already seemed to know - the situation is worse than we’ve been told.
So, market activity remains jittery and unhappy even though we’ve now got a massive global bailout in progress with the global .5 rate cut combined with 700 billion here and 865 billion there and the large global rate cut. Gee whiz, pretty soon this could add up to real money.
I’m uncertain about this but I think the only remaining certainty is uncertainty, and that’s … for sure!
Brilliant Bailout Advice from Paul O’Neill: Let’s take it.
Former treasury secretary Paul O’Neill served from 2001-2002 when he resigned from the Bush Administration. O’Neill’s business acumen is almost legendary as he was the executive that led multinational Alcoa in a case study still used at Harvard Business School as an example of inspired corporate leadership.
O’Neill’s concerned about the economy though he’s correctly suggesting that the current issues pale when compared to the massive - some 43 trillion - in unfunded liabilities congress and the president have smilingly absorbed over the last few decades. O’Neill suggests that if we don’t get our financial house in order soon we are in for trouble that makes today’s problems look like a walk in the park.
O’Neill has offered what seems to me the most elegant solution by far to the current crisis. He suggests that the Government take two simple steps, the first of which is the same under the current bailout plan which is to value the toxic paper assets. His second step is to have the government guarantee the asset values rather than buy the assets themselves. This brilliancy *immediately* solves the two key problems in this crisis: first, it means the Government does NOT need to borrow 700,000,000,000 from … you and me. Second, it creates a market for the distressed assets because the Government value guarantee means that investment capital will flow to buy these formerly toxic assets because they have a floor value along with possible extra upside. In this scenario you’d see investors band together to buy books of real estate which the Govt would guarantee but the investors would have incentive to improve and resell at a profit. In that scenario, replayed throughout the economy, we’d see Government intervention and more importantly Government *obligation* limited, allowing the free market to work, money to flow, etc.
Why is O’Neill seeing what Paulson can’t see? Probably because Paulson, Bernanke, and congress are both mired in the type of thinking that got us into all this in the first place. Namely that the massive global economy can sustain dramatic levels of financial derivative manipulations and Government manipulation without a huge raft of unintended consequences.
-
-
Recent Comments
Tech5 from Dvorak- Should Nokia Buy Yahoo?Obama picks tech team. All seem like government hacks. RIAA gets the state of Tennessee to throw away $10 million on spying on its students. MacArthur Foundation says Intern socializing is a good thing. New Honda Supercar, funny-looking. Google pulls plug on the unknown "Lively." Analyst suggests that Nokia should be Yahoo.
- Intel Stock Goes Into the ToiletNow that Yahoo is gone under $10 Microsoft is not interested anymore. Apparently the company is not interested when it's a bargain. MSFT decides to do anti-virus for some unknown reason. Company also unable to promote Silverlight against Adobe Flash. HP story from yesterday actually explained. I run down all the stocks that are in the tank.
- USB 3.0 Finalized at 4.8 GbpsSun Microsystems to fire 6000. Crazy wording in FT. Jerry Yang quits. AOL kills Homestead. HO Says sales are heading up, not down like Intel thinks. USB 3. released (finalized) today. I highlight two stories about USB 3.0 showing how bad today's tech coverage has become.
- Should Nokia Buy Yahoo?
Please subscribe to the feed
