Seriously, a "Fiscal Responsibly Summit"?

This week, the White House hosted a Fiscal Responsibility Summit. About a week ago, the administration signed the Stimulus Bill which was the personal finance equivalent of a consumer maxing out their credit card to pay for plastic surgery. Now, having spent almost a trillion dollars, the administration aims for fiscal responsibility? This is the equivalent of that same consumer who blew out their credit cards now looking to cut coupons of save a few bucks.

According to Mr. Obama, "We're not going to be able to fall back into the same old habits. The casual dishonesty of hiding irresponsible spending with clever accounting tricks, the costly overruns, the fraud and abuse, the endless excuses." This comment comes after signing of the $787 billion stimulus bill, the $275 billion mortgage bailout proposal, discussions over how to spend the second phase of the TARP money and concerns over providing more money to failing U.S. automakers. Clearly, the administration believes that government spending will lift the economy out of its current decline. It remains to be seen whether or not this government can spend responsibly.

Uncertainty and Banking Much Like Oil and Water

Uncertainty and banking are a lot like oil and water; they just don't mix together very well. People expect their money in banks to be safe. However the Obama administration's recent ambiguity regarding the future of private-sector banking has caused many to question the viability of the current U.S. banking system.

Much of this week the markets have been free falling on the fear the current administration might consider nationalizing banks. As Wall Street Journal article titled, "U.S. Seeks to Stem Bank Fears" shows sometimes not saying anything projects something. Until Friday of this week the 800 lb gorilla in the room was the fear that some U.S. banks may fall victim to nationalization. Fears seemed to abate somewhat when on Friday afternoon White House spokesman Robert Gibbs stated that the administration, "continues to strongly believe that a privately held banking system is the correct way to go." Following the comments from the White House, the Dow came off its lows of the day which had threatened to return the exchange to levels not seen since 1997.

When there is an absence of clear policy, uneasy markets become institutions that are ripe for rumors to take hold. Last year Bear Sterns, a financial giant that had been on business since 1923, collapsed in less than 10 days amidst rumors of liquidity problems. Right now a repeat of the Bear Sterns collapse is what many banks fear the most. Citigroup is keeping close watch of its deposits. Any indication of a disturbing rate of outflows could bring on rapid failure. It is apparent that one thing is for certain, financial institutions don't like uncertainty.

Investment of Last Resort

An article in last week's Financial Times titled, "China to stick with US bonds" illustrates the dilemma that China feels with regard to the state of the U.S. economy. According to Luo Ping, a director-general at the China Banking Regulatory Commission, China is less than happy with the amount of debt that the U.S. government is racking up with its recent bank bailout, auto bailout and stimulus bill, “We hate you guys. Once you start issuing $1 trillion-$2 trillion . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do." To bad the leaders in Washington haven't figured out that increased debt will not stimulate the economy but is a great way to foster inflation.

While I agree with Ping as it relates to the U.S. taking on more debt, I totally disagree with him more when he states, "Deregulation in the US has gone a little bit too far. The market can’t be omnipotent.” In my opinion, it is government regulation that is the root cause of much of our current current. It was the government that decided that home ownership should be treated as right rather than a privilege.

Regardless of what the director-general at the China Banking Regulatory Commission thinks even he acknowledges that the U.S. Treasuries are the best of the worst investment out there.

Las Vegas Doesn't Have Immunity

The New York Times article, "Las Vegas Sags as Conventions Cancel" demonstrates how the current economic upheaval has effected the city of Las Vegas. Prior to the downturn in the economy Las Vegas had become the city of choice for corporate conventions and industry trade shows. However now some seem to think that Las Vegas epitomizes the excesses that has brought the U.S. economy to a near screeching halt. According to Mayor Oscar Goodman, "There’s an impression out there that somehow if you come to Las Vegas, it’s going to reflect on your business culture, and that’s a bunch of hooey.”

Government bailout money given to financial giant Goldman Sachs has also had a recent negative impact on the city. This week President Obama advised companies that they, "can’t go take a trip to Las Vegas or go down to the Super Bowl on the taxpayer’s dime.” Given the President's remarks, Goldman Sachs promptly cancelled the firms Las Vegas conference deciding that the $600,000 cancellation fee was worth the cost in order to avoid negative press. In a statement to the press, Goldman Sachs claimed their decision to cancel was “based on our best efforts to operate according to the requirements of the new landscape of our industry." Clearly, the economic crisis has had an effect on the economy of Las Vegas. Looks like,"What Happens There, Comes Here."

The Gallop to Socialism

In a 2004 interview with Fox News, economist Milton Friedman stated the following when describing four ways to spend money:

"There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income."

The stimulus bill as approved by the Senate, is a prime example of someone spending someone else's money on somebody else. When people spend someone else's money on other people marginal analysis is not the primary concern. The Wall Street article titled, "Stimulus Brings Out City Wish Lists: Neon for Vegas, Harleys for Shreveport" showcases some of the excesses that can occur when unbridled spending of other people's money by government occurs. A dog park for Chula Vista CA, a Frisbee course for Austin TX and more neon signs for Las Vegas to name a few. And while these projects may have merit to the residents of their local area, one wonders why federal tax dollars should be used for these projects. Unfortunately, it appears that the current politicians in Washington believe that government spending is the only way to get the U.S. economy back on track. Last Thurday in a speech before House Democrats, President Obama asked, "“What do you think a stimulus is? It’s spending — that’s the whole point! Seriously.” Looks like socialism is taking the lead in the race to control the U.S. economy.

Banks Should Be Careful What They Wish For

I would have loved to have been a fly on the wall of some prominent bank boardrooms when they got the news that government TARP money may come with a few strings attached. Yesterday, The New York Times article, In Curbing Pay, Obama Seeks to Alter Corporate Culture states that the current administration is considering placing limits on executive pay for the corporate officers of firms who have received bailout money and/or are looking to obtain money from the second wave of TARP. The current proposed limit is $500,000. However, in my opinion, why stop there? I think the limit should be substantially lowered. How about $50,000. I can think of no better incentive to get these former private-sector firms start thinking like capitalist again.

Apparently, just the discussion of limits has been enough incentive to make Goldman Sachs, which received $10 Billion in TARP money, to have buyer's remorse. Wednesday, David A. Viniar, the chief financial officer of Goldman Sach, stated firm is looking to repay the money they received as soon as possible in order to "be under less scrutiny and under less pressure." Welcome back to capitalism Goldman Sachs.

A Paradox for the Banks

The AP article, "Banks are pressured to hoard money and make loans" featured in Sarasota Herald Tribune illustrates how banks are attempting to juggle their role as a lender and their responsibility to adhere to government regulations. The paradox that the banks find themselves in is at the heart of the economic crisis. The Treasury has given the banks money for them to lend but the banks can't lend.

Why can't the banks lend even though the Treasury has given them the money to do so? It would seem the problem has a lot to do with another hand of the government. According to banking regulations established by the Federal Deposit Insurance Corp. (FDIC), banks must maintain capital equal to at least 12 percent of assets on their balance sheets. According to Greg Melvin, chief investment officer at investment firm C.S. McKee, "Two arms of the government are saying exactly the opposite thing -- it's ridiculous."

Absurd it this may seem, this is current situation that many banks find themselves in. On the one hand, you have the negative externality impacting the banks who in the past made bad loans and now find themselves having to adhere to strict FDIC regulations. On the other hand, banks are also the focus of positive externality in the form of government subsidies from the Treasury in order to make more loans available. The outcome appears to be gridlock.