Boulder to London

I’ve been following the news on the US financial situation very closely from abroad and am concerned with the bailout that is currently on the table and likely to be approved. As with any government intervention, this is going to interfere with the workings of a pure capitalist system and prevent the purge that the system needs to return to a truly healthy state. Unfortunately, the system is probably too far gone for tough love and the support in some form will be required to prevent a downward spiral in the US and global economies.  What I don’t like about the bailout in its current form is that it completely ignores reality. While the true cost of the bailout can be debated based on future performance of the toxic assets that are being purchased today, the short term impact is that cash needs to be generated to provide capital to the institutions that will be unloading the assets. Ideally, we won’t go further into debt by issuing more government paper and do the responsible thing by raising taxes and cutting spending. Unfortunately, those really aren’t options.  Starting with taxes, the American public is already facing some pretty tough times. The price of food and energy are very high by historical standards and unemployment is hovering around 6%. Increasing taxes will take money out of the pockets of Americans that are already hurting to pay inflated mortgages and put fuel in their SUVs (that they are also upside down in).  Since two thirds of our GDP is driven by consumer spending, this will create a tough condition for economic growth.  So how about spending…what can we do there? Once again, our back is against the wall. We’re 5 years into a war with no end in sight. We spend somewhere north of $500 billion per year on defense out of a total government budget of roughly $3 trillion.   When you factor in the interest on our current debt, Social Security and Medicare obligations, there is not much left for new programs or higher levels or service in existing programs given the current demographics in the US (aging population paying fewer taxes and needing higher levels of service supported by a smaller population of workers experiencing a decline in real wages).

So where does that leave us? A quick analysis shows that we should be bracing for some tough years ahead. Unfortunately, the American public seems unwilling or unable to grasp reality. If either John McCain or Barack Obama were to come out and say that it is likely (or actually guaranteed) during their term in office that the American people will need to pay higher taxes and suck it up to reduce both our budget deficit and possibly make a few payments on our debt, they would likely suffer a quick defeat. I’m an Obama supporter, but as one of my friends recently posted on Facebook, he reminds me of the popular kid running for high school president that has promised free pizza and soda, less homework and longer vacations. You know she can’t really deliver, but you may vote for her anyway since the campaign promising more classes, higher standards of education and more tests sounds like a lot of work.

So what do I recommend? I don’t have a good solution, but one of the things that Melisse and I talked about this morning was spending in an area that positions the US for success when this is all done. Back in the days of the new deal, this was infrastructure, national parks and agriculture. Today I think it probably includes alternative energy, advanced skills training, global sensitivity and fiscal education. What if we used the $700B to create universities and technology partnerships in places like Shanghai, Mumbai, Moscow and São Paulo to strengthen our relationships and understanding of emerging markets as well as the global population? We could create an exchange/training program for people that are currently facing unemployment that promote the skills and mindset that will be required to succeed in the future. In addition, we could reform our immigration program to support skilled worker immigration in areas of alternative energy and new technology with the intention of new companies being formed, job creation, and progress towards energy independence. We could tax these organizations at lower rates and even provide government grants to support research and development. Finally, we could increase our investment in mass transit and adopt a city planning philosophy around increasing population density to reduce our need for cars and dependence on refined petroleum.

These ideas are far from perfect solutions and I know the team working on the bailout is doing the best they can. The problem is that $700B is only the initial amount required and in a best case scenario provides nothing but a band-aid to the current problem. If the proposed bailout is widely successful, we will provide some short term funding that prevents a catastrophe from occurring and then 10 years from now we wipe the sweat off our brow and say…”Wow, that was a close one”. We will be no stronger, no smarter and no better off than we were before. During that same 10 years, other countries will have invested in alternative energy, understanding of the new global economy and will be years ahead of us.  Think of the US after WWII when our industrial base was still intact and the rest of the world needed to rebuild infrastructure and buy goods from our factories. We enjoyed several years of growth and prosperity while the rest of the developed world worked to clean up the mess they had at home. 60 years later, we are now largely uncompetitive in those same industries and have trade deficits with some of those same countries. I feel that history often repeats itself and while building cars is different than structured finance, the lessons learned apply in both situations. Any good coach will tell you that the best way to lose when you’re ahead is to only play defense. This $700B is all about defense.