The USA Economic Policy Remedial Tactics in 2009 and 2010 – My Advise

Feb 10, 2009 - Three Days Before my 47th Birth-Day

The USA Economic Policy Remedial Tactics in 2009 and 2010 – My Advise

Forecasters are many. Realistic and effective economic and policy solutions providers, very few.

There is no place where that gap more apparent than in the public sector today and the current economic malaise we face at the moment. And, at no time has the situation been more critical for America.

In view of the fact that the American GDP is on a rapid downward spiral, and in view of the fact that US government expenditure is 1/5 or ¼ of the GDP equation (depending on your school of thoughts for the components), there is no doubt that intervention from the US Government to pick up the extreme slack in the nearly 4/5 of the economy is more paramount than ever.

The question is how? Let us examine the key components of the GDP, the Macro view. These components are comprised of consumer spending, nearly 70% of the GDP, followed by business spending and capital expenditures (Capex). On the consumer side of the equation, as the home equity lines of credit dry up and as consumers feel less secure about their jobs and rapidly run out of their credit lines as means of augmenting short falls in their income; and as businesses retrench in hiring and more importantly, investments in infrastructure and capital expenditure, the short fall in the overall size of the GDP to maintain the American economy’s size, daily pace, and status quo, requires the government component of the GDP to take up the slack. It is that simple. A Zero Sum Game.

The question before us is whether or not the government should finance our bad habits of building unsupported leverage or to support the economy while allowing the market forces to de-leverage the system without having it fall apart.

The Micro view, in my view, is as follows. The American economy is highly leveraged in literally every segment and in nearly all asset classes. For the government to step in and artificially save various segments ( in a sense constituting an industrial policy) where the market fundamentals do not support such support activity would be equal to a band-aid fix in favor of feeling the pain and seeing the bruise at a later time. We cannot afford to do so. It is now America’s opportunity to once and for all deleverage its economy and system, and to fundamentally rebuild our injured economy once and for all.

I will therefore put forth the following tactical moves and approaches:

Deleverage, Deleverage, and Deleverage the system. Price-to-Market

There are those who think pricing-to-market is merely a spin-off of the bad assets so that the new custodians (The bad/toxic asset holders) can fix prices to gain a certain premium on less than desirable assets without losing their shirt. Should the US Government choose to support this initiative, we will doll out billions of Dollars and yet inadvertently keep the leverage in the financial system in place despite market forces and the supply and demand dynamics. That model is no different than having a cartel.

Here is the correct way to approach it. Spin off and separate all bad bank assets in to a central entity for managing these assets. Price these assets based on supply-demand dynamics and realities of various localities without care about national trends and general market dynamics in those asset classes.

Allow that separate entity to liquidate these assets based on pricing-to-market dynamics and approach with no regard for national trends or cross market alignment. Next, ensure that the US Government, for its investment in the bad bank assets, is indeed treated as a sovereign investor in these banks with significant and proportional equity position in these entities ensuring that the tax payer’s money invested in these entities is indeed paid back with a healthy rate-of-return.

Then, with active over sight over these Government financed entities (notice that I mentioned oversight and not control or additional regulation – just as any major investor would seek to do. i.e. Warren Buffet, as an independent investor, is on the board of many of his holding companies); the US Government will exercise its position, as a major stakeholder, toward assuring proper direction and environment for financial recovery and blossoming of these baking entities. The same should hold for other non-banking entities (i.e. the funding for the automotive market segment) so that the notion of industrial policy takes a back seat to the notion of a Sovereign Investor (The United States Government) watching after its large equity stake. Board members for these entities will be selected by the Treasury Secretary and approved by the President of the United States.

The toxic assets will then be priced to market. When you have nearly 24 month worth of real-estate supply on the market, if you price fix rather than liquidate toxic / sub-prime / CDO assets at a reasonable market price (driven somewhat by national but largely by local supply and demand curves), you continue to keep leverage in the system. In doing so, the government suffers (it is financing the leverage with tax payers money and not gaining up-ward economic traction. And, in many cases, via HUD, the government must come back and finance these over-leveraged assets to stimulated lending). Under that paradigm, consumers suffer because they either cannot afford to buy these assets or re-gain leverage only at a lower level by purchasing these assets. The financers of these classes of asset-backed-securities also suffer in that their note is not collateralized and securitized as they wish it to be. They are, rather, under water but better that last’s year’s scenario of being sunk.

I would also to begin to seriously consider the value of derivative products in de-risking our economy. How well a product that is tied to a very sick underlying asset could possibly be hedging your risk in that underlying asset. Folks, it is time we took the second derivative of every computation in this space. The old fashion “Calculus” is in.

So do not beat around the bush. Do not fool yourself, again. Deleverage the system. Now, that was the deleveraging component of my argument and way forward.

On to the Stimulus Strategy Side.

Stimulation, Round 1. Let’s face it. A $600 tax return for a consumer that is leverage at 2-5x income (and in some cases simply has no income) is not a stimulus. It is not even help. It’s no different than your Grandma stepping up with a few extra buck from under her mattress to help you feed the grand-kids and get by for a couple of weeks or may be the month.

Alternatively, a cut in payroll taxes and elimination of FICA match for a year will really have a real impact. Firstly, it encourages hiring and or lowers the cost of keeping employees on-board longer. Secondly, it gives the wage earner (i.e. the employees, the 70% of GDP engine, and the economically desperate American citizens) more money in their pocket on weekly basis.

Another effective tactic would be subsidizing the healthcare costs of businesses with annual revenues of less than $500m to the tune of 50% for one year. That will give another cost structure break to these small and medium size employers enabling them to consider keeping direct costs (payroll) constant for longer. In addition to the revenue number ($500m or below) as a litmus test, the other caveat for qualifying for the healthcare subsidy should be that for every employee that is laid-off by these employers, the employer loses the healthcare subsidy benefit for two employees. Subsequently, the laid-off employee will get full Cobra subsidy toward their healthcare coverage for 26 weeks.

I want to be very clear on another front being talked about. No subsidy of consumers’ mortgage payments should be considered as that will be counterproductive toward deleveraging the system. Let the market forces prevail. Government could provide those who can prove they have lost their homes with housing vouchers for a period of 26 weeks as long as the beneficiary is proving to be seeking a job on active basis or as long as the beneficiary provides their time on free or low cost basis to the government for national infrastructure development / enhancement projects.

Stimulation, Round 2. Ensure that America’s broadband, Internet, Geo-Spatial, Mobile Wireless and back-up Satellite Communication Backbone is the most advanced, high-speed and reliable in the world. This should be Obama’s Marshall Plan. Spend $200-$300 billion Dollars in this space.

That’s merely 2x-3x what we have spent in Iraq in the last 2-3 years. This is our Country.
Internationally, ensure allocation of needed, and must have funding, for securing and stabilizing the “hot-zone of interest” in various theaters of operation around the world such Iraq, Africa and Afghanistan. But, also ensure that these operations are run by American contractors or friend of America who use American human, supply and facility resources to run these support operations. Task TRANSCOMM, CENTCOMM AND the DLA with assuring adherence to this.

This is not imperialism but a well justified action by the virtue of the fact that the pre-dominant military resource dedication and deployment resources come from America.

On another front, I must say that America’s roads and bridges are fine or at least very good. We should, however, focus on cutting entitlement costs. Why should a country that has the best healthcare system and resources in the world also have the highest costs for delivering those services? Economics 101 tells us that with experience, the cost curve lowers. Why, then, is that an exception in the free economics hub of the world, America? Shouldn’t we implement health information technologies (HIT) to wring out costs and yet improve the quality and innovations in clinical delivery by an order of magnitude? Come on folks. The rail system appears to be more efficient!

So, do not fool yourself and your way out of this. Fix things fundamentally right and as delineated above. And, in the world theater, become an engaging internationalist. It is simply good economics. Just reflect on the last 8 years.

In closing, we not only seem to be failing miserably in the commercial enterprise market segment (banking, healthcare, education, telecomm infrastructure, real estate and retail) activities, approaches and solutions but also failing, terribly short, on government services, oversight and execution on behalf of our Citizens by our guardians and representatives.

As a person with Senior and C-Level Strategy and commercial Business Development experience in the high-tech, logistics and services realm within the last decade who has also served within the Representative structure of our Federal Government (I were a Policy and Economic Advisor to the US Senator John F. Kerry in the 104th Congress), I have a unique view in to the health of the American economy, business-state and our current policy situation and economic malaise.

So while the pundits proliferate, out and over-speak all of us, resonate and shout from all delivery vehicles (papers, the Web and Podcasts), herewith, l attempted to provide a calm, yet harsh assessment of the reality and what needs to be done from my perspective.

Kevin Curtis
kevinrcurtis@yahoo.com
krcurtis1@yahoo.com
'571.439.6577'