State of the Union Jitters

Tonight will be President Obama’s first State of the Union address since taking office. It couldn’t come at more challenging times.

The backdrop has to appreciated: (1) a sluggish economy and shaky stock market – many think this is the “Eye of the Storm” not the beginning of a recovery; and (2) government spending that is producing mountains of debt; (3) weak consumer confidence; and (4) a popular voting base that just sent a shock wave to Washington last week from of all places: Massachusetts!

The President will propose a new focus on jobs, help for small business in the form of new tax breaks, and a freeze on Federal Budget spending.

Let’s address the latter. To quell concerns about the staggering federal deficits – and notice that I did not say “solve” the deficits, because you simply can’t in the short run – the President will propose limits on discretionary spending…that’s spending other than for military, veterans, homeland security, international affairs, Social Security, and Medicare and Medicaid.

Although a laudable step to control spending, there are several problems with this strategy: (1) it only affects 17% of the Budget; (2) it doesn’t cut discretionary spending, it just limits increases; and, most importantly (3) the savings will be more than offset by planned increases in help for middle class families for child care, education, elder care, and other programs.

The upshot is simple: the promise that the Government can fix the problems of a huge, complex, free enterprise economy is simply impossible. What it takes is all players pulling on the rope: consumers, businesses, and foreign participants. What the government needs to do is provide good rules and regulations and let the players play the game – not the referees.

Lots of Talk…But Little has Changed - January 6, 2010

A slow start in the stock markets so far this year is not surprising. One reason is a looming question: After governments around the world saved the global financial system from collapse in 2009, can the markets and investors stand on their own in 2010?

The reason this is such a critical question is that while so much has changed over the past year, so much has not. On the heels of the most harrowing financial market ride since the Great Depression, the key players – politicians, investors, regulators, and Wall Street executives – all agreed on one thing: this won’t happen again. All vowed reforms and changed behavior.

Some changes have been made…on the compensation front, simplifying some products, and increasing surveillance…but it is striking how little Wall Street behavior has changed. We have identified, debated, and agreed upon the big systemic issues, but we’ve done very little to protect the integrity of the future global financial system.

Here’s a case in point…a story that got little media attention in the past few weeks. YRC – a $9 billion trucking company best known for its yellow and Roadway-branded big tractor trailers, with 55,000 employees – nearly went out of business recently because a New York based hedge fund held credit default swaps on the company that would be more valuable to the hedge fund if the trucking company went bust than if it survived. It survived only after the Teamsters threatened a Park Avenue protest and the Pennsylvania state Treasurer whose pension fund is an investor in the hedge fund intervened.

If products like credit default swaps are not seriously regulated or eliminated and other reforms enacted to tighten up irresponsible Wall Street practices, the little economic optimism with which we enter 2010 will be short lived.