Sunday, May 27, 2012

…and it makes me wonder

…and it makes me wonder

·         Situation in Syria is growing more complicated as Sunni insurgents have joined the fray against the Assad regime.  This is quickly pitting Saudi Arabia and Turkey against Iran and Syria and possibly an al-Qaeda/Muslim Brotherhood/Hamas versus Hezbollah while Israel sits back and monitors the situation.  The humanitarian crisis has become a geopolitical chaotic free-for-all; of course that won’t stop John McCain from calling for immediate U.S. intervention.

·         I’m no economist, but I am unsure just how synthetic collateralized debt obligations help lead to economic growth.

·         Imagine a plant in Alabama that produces goods for the consume products markets.  The plant employees hate Democrats and President Obama so they will vote for a Republican.  But the demand for consumer products is down because the 2008 financial crisis has wiped out household balance sheets and disposable income is tight.  These households purchase less as they make cleaning supplies last, they buy fewer over-the counter products, and they stretch the use of consumer staples.  As revenues drop at these consumer products company they also scale back on new product and packaging developments.  The managers at the Alabama plant see their revenues drop and realize they have to cut cost and they quickly target labor as it is the largest component of COGS (Cost of Goods Sold) and the fastest way to help the bottom line.  So now these same, now unemployed, workers will seek unemployment benefits and go to the polls still voting for Republicans.  Meanwhile, factory management has discovered the beauty of productivity gains, rightly so, and as the economy recovers they no longer need the same level of staffing.  Worse those same Republican leaders fail to see the need to invest in education for their constituents to make them more competitive for the manufacturing methods of the future.  In short time, the factory becomes uncompetitive because it lacks the necessary skilled labor to compete globally and it shuts its doors.  The end.  Epilogue: It didn’t need to end this way.

·         Nobody likes uncertainty.  Employees need to know that someone in management is looking out for their best interests.  They also trust that the firm’s leaders have set a vision and are steering the company effectively.  Investors need to understand where they can get the best rate of return.  Banks need to know if the probability of default is increasing before they approve a loan to a start-up or emerging business.  Yes uncertainty can be crippling.  Which is why I agree with the GOP claims that the economic recovery is partially being hamstrung by uncertainty.  The problem is we completely disagree on the causes of the uncertainty.  The issue is not new regulations, George Bush initiated more regulations in his first 3 years than President Obama by  a 931-886 margin, but fiscal uncertainty brought on by political failure.  The GOP controlled House and the filibuster friendly GOP Senate make compromise impossible.  Without compromise, the nation is unable to put together a long term plan that promotes growth in the short term and deficit management in the long term.  Boehner’s unwillingness to agree in principle to President Obama’s ‘grand plan’ out of fear of a GOP House insurgency is creating this uncertainty.  When Wall Street executives plead with Republican leaders to come to their senses and agree to a tax increase/spending cut compromise, they are displaying their fear of, not the unknown, but the known fact that gridlock equals uncertainty which equals anemic growth.

·         I have no doubt that Sarbanes-Oxley, Dodd-Frank, and other regulations can add costs to businesses.  It seems the biggest beneficiaries of these regulations are the consultants hired to implement the necessary controls.  Did government overreach?  That depends on whether you think the free market enterprises can be trusted to regulate themselves.  I do believe most business leaders are honorable men and women, unfortunately Enron, WorldCom,  Tyco, AIG, Lehman Brothers, and scores of others have ruined the idea of self-regulation.  The problem isn’t the presence of regulation, but the amount of ineffective legislation resulting in poor enforcement is the result of outsourcing the creation of laws to lobbyists and special interests.  Government certainly cannot regulate behavior but too many cases corporate boards are ineffective in managing risk or overseeing compliance. 

·         There’s a belief that whatever the government does, the private sector could do more effectively, efficiently, and cheaper.  There is some truth to that.  True free market competition drives innovation which eliminates waste and improves performance especially when compared to SOES (State Owned Enterprises) which tend to become bloated and stagnant.  But is that true when the government outsources or privatizes some services?  Well no.  Have you ever heard of a defense project coming in ahead of schedule and under budget?  Did you know, according to Rachel Maddow’s fine book Drift,  the Halliburton subsidiary Brown and Root charged the federal government $86/sheet of plywood to build the barracks for our armed forces sent to the Balkans in the 1990’s?  The bid price was $14/sheet, but since the government must use a cost+ model with contractors, the American taxpayer got stuck with that ridiculous bill; a price that hurricane fighting residents in Florida never see during the peak of price gauging.  The scary part of plywoodgate?  The price increases were necessitated to cover “Management and Administration” also known as non-value added overhead.  Now what was that about government waste.

Government bashing is easy but putting a Venture Capitalist at the helm isn’t a solution. 

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