Catching Up on the News

It's been a while since I've blogged. I always lament when I have such gaps in posting, but they are the sad inevitable reality of having to work. There are a couple of important topics I would like to discuss. First, there seems to be further bad news for America's already crippled financial sector. And second, I want to talk about (what else) the Presidential campaign.

We'll start with the bad news, and then get to the ridiculous.

It appears that the Sovereign Wealth funds might not end up bailing Citi out of its financial mess after all. Like all investors, the Arab sheiks managing billions in oil wealth, want to make sure their investment is sound, and that in addition to the money they invest, there is enough working capital otherwise to ensure the solvency of the bank. Right now, they are having doubts. If I were them, I'd have my doubts too. In the last year, Citigroup's stock has lost more than half of its value. This is better than the poster child of Subprime Mortgages, Countrywide Financial, which has lost more than 80% of its value. But Citigroup is a much larger, more diversified company, with assets that extend into virtually every sector of the financial markets.

For this reason, Citigroup is a rather scary bellwether for the financial markets in general, and especially for banks. One of these days, America is going to realize that a lack of fiscal discipline cannot be remedied by printing more money. But I don't think we are there yet. I think we are going to need a few years of significant inflation--if not hyperinflation--to regain the age-old wisdom that you cannot spend your way to prosperity. It might take 4 years of President Obama to remember that you also cannot tax your way to prosperity either, but I hope not. Indeed, there is only one path to prosperity, and it is dug with work and paved with thrift. This is a lesson we all must re-learn from time to time, both individually and collectively.

Those of us who have recently learned such lessons individually should be sounding the collective alarm to make sure the government doesn't make the same mistake.

So that brings us back to Citigroup. What happens if the Sovereign Wealth funds don't bail the banking giant out? Well, there are a few things that we can be certain of, they likely won't be allowed to file for bankruptcy. Congress might jump in, or perhaps the Fed will keep loosening monetary policy (the kind of monetary policy that created the bubble to begin with), but America's largest financial conglomerate will not be allowed to go belly up.

Some might find solace in that fact--I do not. I have this vision of a fat man drowning cold water in the Atlantic ocean and a late stage cancer patient jumping in to save him. The outcome is apparent: both of them end up drowning. The more our ailing government tries to bail out ailing companies, the more ailing our government becomes--and the macroeconomy along with it.

Citigroup needs to learn a lesson from its mistakes--so do Countrywide and others. They should be allowed to go bust. And their high-paid executives should have to sit through every bankruptcy proceeding imaginable. So should their now-retired high paid executives. But good luck finding Angelo Mozilo--he flew the coop when things started turning South. It reminds me of the story of Calvin Coolidge's wife, who was asked why her husband was not going to run for another term in the White House in 1932 and answered "Papa smells a recession." The rest is history. So is Countrywide. Citigroup might be too--and if the private sector won't bail them out, then they should be history. The market is like the mirror--he is a cruel friend. He tells you when you are fat, even if you don't believe it. But bloated corporate bureaucracies don't like mirrors anymore than bloated government bureaucracies do. Though it seems they like clear glass even less. The problems we are facing today could have been solved a long time ago with more transparency and less rose in the color of our glass.

Well, I can't think of a better transition to discussing the Obama campaign than rose-colored glasses, so let's move on. The hype just keeps getting bigger and better. The American people, desperate for leadership and inspiration, have projected a million feelings, dispositions, and opinions onto Barack Obama. The benefit of not making any substantive policy statements is he hasn't had the chance to offend many people yet. Unless, of course you are talking about trade.

My biggest objection to both Democratic candidates at this stage in the campaign is their calls for renegotiating NAFTA and other important foreign trade agreements. Even if you ignore the economics of trade (which is hard to do considering the compelling case for more trade in any circumstance, with anybody, anytime--it is always on the whole beneficial to both sides), the diplomatic nightmare that would ensue from such a policy is disconcerting enough. In spite of the recent row over whether Obama was talking to the Canadians or not--and what their opinion is, we should be concerned about the repercussions of abandoning our trading partners--and more importantly our treaty partners.

Does anybody else remember a few years ago when George W. Bush announced we would be withdrawing from the ABM Treaty with the Soviet Union since in fact there was no longer a Soviet Union? Well the Left wing threw a fit. The move was considered a damage to America's credibility and reliability in its international treaties. Apparently achieving a protectionist economic agenda for the purpose of winning the votes of displaced workers is a viable reason to destroy our international credibility, however, since both Mr. Obama and Mrs. Clinton have advocated withdrawl from NAFTA and other important trade agreements.

I shall draw this to a close, but let us not forget the lessons of history. The last major movement toward economic closure was the period between World War I and World War II. Trading partners rarely go to war with one another. With our military strapped, our national morale and attitude toward war at a relative low point, it doesn't seem like the time to start inviting the kind of foreign aggression that can ensue during periods of economic closure.