Friday, February 5, 2010

Time Out

We all hear the negatives about our country everyday in the press and from our critics, politicians and protesters. Economic inequality, crime, costly wars, discrimination and intolerance, lack of qualified honest political leaders, rapacious capitalists who manipulate and distort our free market economy, too much debt at all levels of society, housing crisis, damage to the environment, poverty, safety of our food supply, homelessness, lack of affordable health care for all, deficient education system below college level, infrastructure in dire need of repair, poor mass transportation, partisan politics and distrust of government and institutions.

In these economically troubled times, while taking all of our many flaws as a given which needs to be remedied , let's take a moment to recount our assets and consider our economic future in the world light of these assets.

Our assets,in no particular order:

Large agriculturally rich and fertile land,

Vast natural resources,

Fresh water in abundance,

Large, diverse, growing population; appropriate for the size of our land mass,

Greatest number of world class universities and colleges,

Free and open democratic process which is relatively corruption free,

Freedom and equality for women and minorities,

Relatively tolerant and expansive attitude towards legal immigration

Economy created and sustained by innovative, entrepreneurial and hard working citizens who have an optimistic belief in our future,

Leadership and innovation in scientific and technology research and development,

Open and relatively transparent bond and equities markets,

Vast and deep capital markets,

US Treasuries still considered world's safe haven,

Dollar as world's reserve currency,

Strong military under unquestioned civilian control,

Common language,

Absence of sectarian strife,

Comparatively high standard of living, even for the poorest among us,

Absence of real hunger,

First class health care system for the vast majority,

Vibrant commitment to the arts and culture, along with a dynamic entertainment industry,and

Importantly, the rule of law which underpins our freedoms, including the freedoms embodied in our Constitution, protected by an independent judiciary and effective law enforcement.

Let's compare our assets to other major nations of the world at this time in history. I was going to do a whole matrix-like chart, but it takes too much time and would be at least somewhat controversial. I think you all can "do the math in your head" to see how we compare.

Again in no particular order :

1. China

2. India

3. Germany

4. Japan

5. France

6. England/UK

7. Brazil

8. Canada

9. Australia

10. Nigeria

11. Iran

12. Middle East

13. Scandinavia

14. Russia

15. Italy

16. Spain

17. South Africa

18. Mexico

19. Venezuela

20. Indonesia

21. Southeast Asia

22. Turkey

23. Israel

Our resources are within our borders, unlike Ancient Rome and Imperial England, and therefore we are not dependent on others (even oil if we really had to). I'm sure I left out many other assets, so let me know.

Our country has many strengths and virtues which will get us through these difficult economic times and beyond. It's good to take time and remember that every once in a while.


Wednesday, February 3, 2010

Krugman and Me

I was pleased to read Paul Krugman's January 31, 2010 Op Ed piece in the NYT on lessons learned from Canadian Banks. He explored the reasons why Canadian Banks have held up well in this crisis . I don't usually agree with Paul, so I was very surprised about what he said in that article.

First, he dispelled the notion that our financial crisis was caused by low interest rates. Canada's rates were low as well.

Second , contrary to Paul Volcker's view about size and scope of US financial institutions, the problem was not that our banks were "too big to fail". He noted that essentially there are only 5 banks in Canada and they are all too big to fail. I hope he remembers these points when he starts bashing Big Banks again.

No, he stated the problem was rooted in lax regulation of mortgage lending and noted that Canada had "sharply restricted subprime type lending".

The list is growing-- Bernanke, Blair and now Krugman all agree that subprime lending, which was not done by Big Banks, was the trigger that set off the financial crisis which lead to the Great Recession.

The question now turns to why subprime lending in this country was not (to borrow a phrase from Krugman's description of the Canadian experience) " sharply restricted"?

One clue comes from what I heard Tina Brown say on Morning Joe today. She observed how the politicians had done such a wonderful job of deflecting the economic crisis from them to the Big Banks. Wow, Tina Brown said that?

Yes , it was the government that allowed this crisis to occur and it wasn't because Big Banks pushed subprime lending. There were other politically powerful interest groups beyond Wall St. who promoted subprime lending and fought against restricting it as the Canadians did.

It was the "American dream" that everyone should own a home, even if your credit was not good enough to get a properly underwritten loan. In Canada home loan borrowers must put down at least 20%. Some of our unregulated "fly by night" mortgage lenders not only didn't require anything down, but often offered loans in excess of the purchase price. Also, I'm sure Canadian banks didn't allow "liar loans" or loans to people with no incomes, no jobs and no assets.

So what we really need is more regulation and enforcement of rules governing the riskiest thing banks do --- make loans.

As a finance attorney I know that once the money goes out the door to the borrower the biggest risk the lender has is getting its money back. That's where our regulatory efforts need to be focused. Unfortunately, as another guest on Morning Joe said this morning--- that will mean it will be harder to get loans and that won't be so great for the economy.

However to paraphrase Aristotle--All things in moderation.