President Bush isn't right very often, but he hit the nail on the head yesterday when he declared that "This is a decisive moment for the global economy." He may not even know how correct he is. I must confess, I feel very vindicated-I never thought I'd see sentiments like this one from the mainstream press, as today's Washington post argued that "there is also no denying that American-style capitalism has been undermined by its own success. In its present incarnation, it rewards manipulation over innovation and speculation over genuine value creation, resulting in massive misallocations of capital and the accumulation of unheard-of wealth in the hands of money managers and top corporate executives who are more lucky than they are skilled."
That's what seemed so comical to me about the recent presidential election. Amid all the talk of socialism and tax rates seemed to miss the fundamental point that none of that matters right now. The machinery of capitalism is falling down around ears, and the only thing we heard from the candidates were pithy talk about change and hope and blah blah blah. Gone unacknowledged is the simple fact that our bills are coming due, there will be no more money to fund grand social programs. You can promise the world on the campaign trail, but it's a whole different story when the world of high finance is imploding, albeit a slowly. Yesterday's rally will be a case in point, I'm sure the pundits have already begun saying that we've hit bottom, just as they have for all of the previous short-lived rallies.
You think I'm being too pessimistic? Who would you rather hear from? Yesterday, I posted Nouriel Roubini's grim assessment. Remember, he's one of the few that saw this coming. Who else do you want to hear from? Henry Paulson came from Goldman Sachs, you want a Goldman Sachs guy to say it? Former Goldman Sachs Chairman and former Deputy Secretary of State John Whitehead says "I think it will be worse than the Depression"
"Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds," he said. "Eventually U.S. government bonds would no longer be the triple-A credit that they've always been."
There are at least ten "trillion dollar problems," facing the United States, he said, including social security, expanding health insurance, rebuilding infrastructure and increased spending on green energy. At the same time, the public does not want to pay for it.
"The public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs -- all very costly and all done by the government," he said.
Large deficits can weaken the country's credit and increase its borrowing costs, which already constitute a significant part of funding to cover expenses. Whitehead said it could take "several years" for the current problems to be resolved.
Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes.
"I just want to get people thinking about this, and to realize this is a road to disaster," said Whitehead. "I've always been a positive person and optimistic, but I don't see a solution here."
How about a billionaire? So much was made of it when Warren Buffett spoke out a few weeks ago in favor of buying stocks. Here's George Soros:
"I fully anticipated the worst financial crisis since the 1930s,'' said Mr Soros, whose fund is flat this year.
"But frankly, what has happened in the last eight weeks exceeded my expectations.''
Don't feel badly George, you're not alone. We've heard that all the way down... and I expect to keep hearing it as things continue to worsen. The New York Times last month published an account of how Secretary Paulson has been behind the curve on this crisis all year.
“I could have seen the subprime problem coming earlier,” he acknowledged in the interview, quickly adding in his own defense, “but I’m not saying I would have done anything differently.”
In 2005, I raised concerns that the protracted period of the underpricing of risk if history was any guide would have dire consequences. The crisis, however, has turned out to be much broader than anything I could have imagined.
So can we acknowledge that the current crisis is worse than anything that the smartest guys in the room ever saw coming? If so, then what are the implications for dealing with this? Hard choices are coming our way fast; Congress is unwilling to bite the bullet, and Obama appears unable or unwilling to rock the boat. All I know is that we need to radically re-evaluate our strategy in attacking this crisis or things are going to be totally out of hand in short order. Nothing they've tried so far is having the slightest impact. The Fed can only drop interest rates another 1%, then they're pretty much out of options. If the textbook solutions aren't working, it's time to throw the textbook out the window and start getting serious about saving this ship.