So much promise, so many risks. This is how 2009 is shaping up. While euphoria surrounding the Obama Administration's fiscal stimulus plans will drive the markets early in the year, I believe this rally will lose steam as massive deficit spending begins to shine a light on the greatest risk facing the US: debasement of the currency. The power we will be handing our creditors is stunning, and in an unstable and highly politicized environment it may well be wielded to the detriment of the US economy. Can you imagine the prospect of China and Japan balking at buying more dollar-denominated assets? While some might say "Well, it wouldn't be in their (US creditors') own self-interest to precipitate a massive decline in the dollar," depending on the political stakes at hand I wouldn't put it past them. This is a very unstable manner in which to run a country and an economy, where we've lost control of our balance sheet and, potentially, our political standing.
Michael Lewis and David Einhorn penned an insightful Op-Ed in yesterday's New York Times. In effect, they raise several reasons for why the financial crisis happened and what can be done to address the problems. Interestingly, many of their root causes (mis-aligned, short-term Wall Street incentives, rating agencies' conflicts of interest, regulators' personal self-interests, etc.) and prescriptives (consistent, well-communicated Treasury policies, creation of healthy institutions through Government takeovers, sale of healthy assets and the long-term workout of bad assets, long-term emphasis separate from stock market impacts, etc.) are in line with the thinking I've put forth on this blog over the past 18 months. One part of the article really got my back up. The Madoff meltdown and the existence of a whistleblower, Harry Markopolos, who had notified the SEC years before of his concerns is reminiscent of Einhorn's indictments of both Lehman Brothers and Allied Capital Corp (ALD). Like Markopolos, Einhorn spent years seeking to educate the SEC about the wide-ranging fraud taking place at ALD but to no avail.
This kind of regulatory breakdown is absolutely stunning, but not when one considers the mis-aligned motives of those doing the regulating. It is no different than the prevalence of short-termism on Wall Street, Corporate America and in our Government. While it is maddening, it only highlights the enormity of our task; to restructure the essence of how incentives are set in order to calibrate human nature with the good of society. This doesn't mean that what is good for you can't be good for society and vice versa. To the contrary, I believe we can balance self-interest with overall good. But when self-interest pays off in short-term ways, how are people going to act? You got it.
