Government Guaranteed Depression?

After an historic election and inauguration, president-elect Obama will enter office with a huge list of challenges. These challenges – from a contracting economy to looming energy supply shortfalls – will undoubtedly restrict his agenda.

Let’s hope Obama recognizes the need for incentives, profits, and capital investments in the economy. The economy cannot be taxed and regulated without potentially severe consequences. Former Fed Chairman Paul Volcker (and the last Fed chairman to provide adult supervision for the banking community) is an Obama adviser. So Obama should be apprised of the consequences of Carter-era deficit spending and money printing.

At the very least, Obama must act as a check on the potential for a Democrat-dominated Congress to turn a recession into a depression.

For example, some in Congress are floating a proposal to steal your 401(k), sell the proceeds, and invest in “government-guaranteed” retirement accounts. The only thing this Marxist idea would guarantee is a depression. Call or write your congressman if you feel that your 401(k) is in danger. We shouldn’t allow them to steal more from prudent savers than they already have.

Keep in mind that presidencies rarely resemble campaigns. President Bush campaigned on limited government and a humble foreign policy, and we got the opposite. To top it off, we had the illusion of real growth, with credit and housing bubbles that led to the greatest misallocation of resources in history.

The free market has been falsely accused for this financial crisis. But the free market didn’t get us here; a combination of government spending and crony capitalism did. Much ink is wasted on how we need to re-regulate Wall Street, but the fact is that the problem would never have grown so large without agency conflicts and a banking system built upon on a foundation of paper money.

The agency conflict on Wall Street is the mentality of “heads I win, tails you lose. ” CEOs, traders, and mortgage-backed security factories were paid more for taking more risk. So it shouldn’t surprise us that they overdosed on leverage to magnify returns, without considering risk.

Performance pay should be based on creating long-term shareholder value, not on meeting next quarter’s earnings estimate. A good place to start would be bonuses in the form of restricted stock that does not vest for 10 years. I doubt Lehman would have blown up if employees were paid modest salaries with the potential for sizeable ownership stakes in the future.

If every employee were paid partially in restricted stock of his or her company, even a small amount, most agency conflicts would be eliminated.

Much of our current mess resulted from totally complacent, incompetent boards of directors. Carl Icahn has good ideas for how this can be addressed without excessive regulation. Icahn explains how most corporate boards behave like government bureaucrats in this post. In my view, we need an economy in which everyone acts like owners, rather than CEO pillagers or union extortionists. For example, look at how decades of management and union looting brought General Motors to its state of current crisis.

A banking system built upon on a foundation of paper money also contributed to this crisis. The Treasury and Fed allowed institutions to grow “too big to fail. ” Without taxpayer subsidies (i. e. , Fannie and Freddie – two of the worst crony capitalist institutions in history) and the subsidy of Fed rate cuts, housing prices would have kept growing in step with household income. Instead, house prices went to the moon. Precious capital was thrown into a black hole when mortgage-underwriting discipline went out the window and homebuyers deluded themselves with bubble psychology.

As Albert Einstein noted in the quote above, our problems “cannot be solved by the same level of thinking that created them. ” If the federal government proposes “solutions” to this crisis with the same type of thinking that got us here, we could be in for a very long period of economic pain. America’s status as a destination for foreign capital is at stake.

If the new government fails to act wisely and understand how we got here, the only “government guarantee” we’ll have is depression.


Dan Amoss

For Markets and Money

Dan Amoss
Dan Amoss, CFA is managing editor for Strategic Investment and a contributing editor for Whiskey & Gunpowder. Dan joined Agora Financial from Investment Counselors of Maryland, investment advisor for one of the top small-cap value mutual funds over the past 15 years.

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4 Comments on "Government Guaranteed Depression?"

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The risks of the government causing further economic damage is growing and history it not on their side. No matter what they do, somenoe will be unhappy about it. We need what Bush promised, smaller government and maybe Obama will end up delivering the exact opposite of what he promised.

ralph hill
*”government-guaranteed” retirement accounts. The only thing this Marxist idea would guarantee is a depression.* But, we already have a government guaranteed retirement called ‘social security’, and that had nothing to do with Marxism, rather it’s a ponzi scheme. That people still “vote their pocketbook” and still vote for the best window dressing just encourages the scoundrels. “we could be in for a very long period of economic pain…” well, i’ve been there for years. although, i haven’t figured out why my social climbing ex-friends haven’t been around lately, to abuse me and show off their new expensive cloths and fancy… Read more »
Jon Bain

Does one deflate a bubble, by pumping it full of more hot air?

Coffee Addict
The buy back of the garbage debt was always “unaffordable”. It is significant (to the market) that Nancy Pelosi used this term in a related context a few days ago. I don’t know whether the US Government will allow GM to fail. It should because that would allow a buyer to pick up unencumbered pieces (including product line badges) from the Receiver. A lame duck Administration and Congress has nothing to loose on this and the market knows it! Either way, production capacity will be reduced (or mothballed) 50% with the same resulting job losses. Now for the Aussie resource… Read more »
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