Tuesday, October 18, 2011

A Jerry Maguire Moment

Pimco bond gurus (El-Erian and Gross) have a lot of good ideas about the direction of US economic policy might take as outlined in five points in the New York Times’ Caucus blog:

“The first is housing, staggered by fallen prices, foreclosures and “underwater” mortgages that exceed the value of the homes they financed.

One critical step, Mr. El-Erian said, is for government to ease refinancing rules for homeowners who remain current on their payments but do not meet borrowing criteria. (Mr. Gross observed that these lower-interest-rate refinancings would cost Pimco money on its mortgage investments.)

The second is the labor market, which has steered too many workers toward the housing, retail and leisure sectors, which will not fully recover anytime soon. To create new and better jobs, the government needs a renewed focus on improving math, science and engineering education, as well as job retraining programs to make workers more competitive.

While waiting for education investments to pay off, however, Mr. Gross says the government should finance immediate job creation to shore up the third structural weakness: America’s fraying infrastructure. Updating roads, bridges and airports would provide an engine for reducing unemployment faster.

“You’ve got to create a demand for labor,” Mr. Gross said. “The private sector is not going to do it.” Even if the government must do it directly, he said, “Putting a shovel in the hands of somebody can be productive.”

The fourth weakness lies in lending. Banks, still smarting from the loan losses that resulted from the financial crisis, want to lend to big companies that don’t need money, but not to small businesses that do.

“Credit pipes are clogged,” Mr. El-Erian said. One way to unclog them is a program of public-private partnerships, like the Infrastructure Bank that the Obama administration has proposed.

On the fifth problem, the government’s questionable long-term solvency, the Pimco executives say Republicans and Democrats are both right. Spending on Medicare, Medicaidand Social Security entitlements must be curbed, and taxes must go up — on the affluent and perhaps the middle class, too.

Given the scale of the problem, Mr. Gross says the tax increases proposed in the “grand bargain” that Mr. Obama and Speaker John A. Boehner sought earlier this summer were too small. Instead of $1 in tax hikes for every $3 in spending cuts, he wondered, “How about one-to-one?””

Like a Jerry Maguire I came up with a list of ideas (on the same topics):

The underlying assumption is that the US 'base' has been hit harder by the Super Recession than anyone would like to admit. The US consumer base must be helped by a mix of measures and steps. These steps are the key to the economic recovery.

Big banks received a multi-trillion dollar flood of (necessary) capital to save the financial system; Main Street has yet to see tangible benefits from the flood of capital into the system.

1. US Infrastructure
Strategically important infrastructure is, among other things, food, housing, health, education, energy, transportation and communication systems that supports the healing and long term health of the damaged US household (addressing the hierarchy of needs).

The best way to reverse the decline is to start the bottom of the pyramid, preferably at the household level. Get the US consumer back on his/her feet. The household, the consumer IS the US demand driver.

The mantra is 'nurture the household, nurture the nation'. This is where successful corporate and government strategies should be the same.

Big, hasty and haphazard top-down macro investments, like a flood, are much of the time wasteful and often times become corrupted with corporate cronyism. Like floodwaters the investment runs off quickly and money goes to waste. Big banks got a multi-trillion dollar infusion. Main street has yet to receive a corresponding dividend.

'Trickle down' does not trickle unless there is ground-up demand. Methodical steps must be taken first to water the grass and re-grow the base.

As Pimco suggested above, perhaps rewriting home mortgages on a massive scale that passes along lower interest rates to the US consumer (requiring loan writedowns by big banks mentioned in item 3 below) could encourage consumer cash to flow into the economy and allow the base to begin to contribute to a recovery.

2. Government Solvency
Government spending and administration requires more discipline and feasibility analysis. What spending provides a measurable marginal return? What spending adds both quantitative and qualitative (and sometimes intangible) value? The current moment of political stalemate and partisan paralysis provides an opportunity to reflect on how effectively and how much money is being spent by the government. US spending requires financial discipline. Spending or 'investment' needs to be thoughtful, methodical, transparent and accountable not politicized, hasty, wasteful, reactive or haphazard. That is, it needs to be smart.

3. Bank Lending
Bond vigilantes may or may not want to hear this (depending on their book) but we need to cleanse the banking system of consumer and commercial bad debt once and for all. The hit must be taken and resulting (even large) bank and institutional failures dealt with. When the markets clear they will recover balance and, at a reduced and more manageable basis, be positioned for long term, organic growth.

Without catharsis markets will continue to founder on the fear of bad (euro-like) debt that lies hidden on balance sheets (in markets that continue to be driven by uncertainty, a lack of transparency and incomplete information).

Darkness and uncertainty may be profit centers for high frequency traders but are not desirable for a US system that needs to be righted.

Going forward we need to make a clear distinction between safe, consumer-centric banks and excessively speculative institutions. Then informed consumers can choose where to put their money.

The Consumer Financial Protection Bureau’s efforts and FDIC’s ‘Living Will’ mechanism (if public) will provide necessary, digestible transparency about the practices, balance sheet and riskiness of our financial institutions.

4. Labor Market
We need to line up the labor market and educational infrastructure to jointly and directly address near and long term strategically important demand-side sectors (more than just the much needed repairs to roads and bridges). Education must be informed by labor market data and is about training the workforce to get and to stay ahead of the ever increasing rate of change in the labor market. We long ago left the 20th century Henry Ford economy for a Steve Jobs economic model (we have yet to fully comprehend) in the 21st.

‘Near and long term demand sectors’ might be, for example, the development of ‘smarter’ food, housing, health, education, energy, transportation and communication systems. The tech sector already has incredible and unstoppable momentum towards such disruptive efficiency and systemic change. Disruptive change continues to seep into public sector's systems.

It will take a national strategy, extensive project analyses and extreme patience to tame, turn and reverse the job destruction trends technology and efficiency bring and that we are so fearful of. Success requires iconoclastic thinking. Success requires a 10-50 year plan.

5. Housing
Last, housing values must adjust to long term, sustainable income levels (that will result in greater affordability as assets and loans get written down to under-writable levels). Post catharsis, let housing establish policy-neutral market equilibrium. Don’t prop up the housing (or any) industry artificially.

Encourage and support demand-driven innovation in housing. Housing follows and supports employment, demography and evolving communities.

For example:

Housing that meets the requirements of a more ‘mobile America’.
Housing that meets the requirements of an aging boomer America.
Housing that meets the requirements of a connected America.

Abandoning (soviet-style) supply-driven, credit-fueled, bubble-dependent and exploitative housing (and other) industrial growth models for grassroots, consumer-friendly, thrift-promoting household initiatives is disruptive to the system at first but will create more stable, sustainable, and organic consumer-led growth in the long run.