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Thursday, April 30, 2009

Where's the Bar?

Countless other pundits have weighed in on the results of the first one hundred days of the Obama Administration, what those results mean for Obama's long term political capital and even the usefulness of the 100 day milestone itself which compares every President's trajectory with that of FDR's first term. Have the first 100 days of the Obama Administration been successful? Who knows? A more crucial question has to be answered first.

Where's the bar?

With an appropriately fuzzy goal, proponents can always claim success or rationalize falling short due to extenuating circumstances. Opponents can always incorrectly claim "I told you so" even when the right solution is chosen if something unrelated to the original debate intervenes and derails progress. For people to see the right solution was chosen or the wrong solution avoided, a clear, quantifiable goal has to be established BEFORE making a change and a reasonable explanation of the linkage between the change and the result has to be provided to justify support or opposition.

Since the financial meltdown began in earnest in March of 2008, the only goals provided for any multi-billion dollar program or bailout or geopolitical strategy change have been overly generic "avoid a worldwide depression" or "avoid a nuclear terrorist attack" goals. These types of overly broad, cataclysmic goals do nothing to help the public and politicians understand tradeoffs between goals and the compromises needed in a world of limited resources and tax dollars. As anyone in business will tell you, most products and business ideas fail -- the key is to quickly recognize the failures, stop digging and move on to the next idea to find the winner.

Given the variety, complexity and criticality of the problems facing the United States, everyone involved in the process is going to have to do a better job of establishing criteria for measuring success or failure. If you're a supporter of whatever it is the Obama Administration plans on doing on all these fronts, you have to recognize not all of the plans will work on their first, second or even third incarnation. If you're an opponent, you'll need to provide enough detail into WHY you're right and Obama is wrong in order to point to the failure early enough when a course correction will still do any good.

Stop and think about what's on the United States' plate right now:

Iraq -- We're trying to wind down our combat presence, leave a stable social and political environment and focus our military efforts elsewhere. If violence re-escalates, where's the bar for sticking with the current plan, slowing down withdrawal, or cutting our losses and speeding up the withdrawal?

Afghanistan -- We're trying to ramp up forces in Afghanistan to re-contain the Taliban and re-establish a more moderate political environment so we can eventually get out of Afghanistan as well. What's the timeframe for sticking with the current troop levels and plan versus escalating under some new approach or cutting losses?

Pakistan -- Our failure to corral and defeat the Taliban in Afghanistan has allowed them to take over provinces within Pakistan and seriously threaten the stability of a government that has multiple working nuclear bombs and has actively proliferated that bomb technology to numerous countries. Where's the bar for standing pat and letting the Pakistani military fend off collapse versus actively engaging with them against the Taliban?

Automakers -- Chrysler Motors was forced into bankruptcy on April 30, 2009 and GM is highly likely to do the same within 30 days. Hedge funds controlling 30 percent of Chrysler's $6.9 billion in debt felt they could net more for their junk bonds by triggering a bankruptcy that would trigger payouts on credit default swaps on that debt than accepting 28.9 cents on the dollar under the umbrella debt restructuring deal accepted by a majority of creditors. (#1) Where's the bar for deciding between paying on the TARP bailout side versus the direct cash side versus withholding all funds and then spiking unemployment another 3-4 percent?

Banks -- Stocks of financial firms soared in March and April of 2009. Despite "better than expected" earnings and grumblings from some TARP recipients about wanting to pay back their "loans" to get out from under the government's thumb, the risks to the system have by no means been eliminated. Virtually all of the unexpected earnings by major banks was due to investment gains as the Federal Reserve dumped over $1.2 trillion dollars into the market via bulk purchases of bonds and Treasuries. (#2) Despite that not-so-subliminal support, an April 28 story in The Wall Street Journal indicated Citi and Bank of America may actually require more capital from new stock issues or cash from the government. (#3) Both banks passed the Treasury Department's "stress test" (?), yet the Treasury notified each that the test results indicated their capital reserves were not sufficient and they needed to raise more capital (???), yet there's NO NEED TO PANIC (????????).

Now step back from the list above and think about these problems from a different perspective. In normal times, any ONE of these issues would have merited weeks or months of debate and would have been viewed as the great problem of our day. Kinda makes you nostalgic doesn't it? At this point, many of these problems are actually DIRECTLY related. How?

Taking too long to leave Iraq will short-change our staffing in Afghanistan, jeopardizing our chances of stabilizing that country and increase deficits, spooking Treasury borrowers and further impairing our economy. Leaving Iraq too soon allows the chaos to return to Iraq, drawing us back in for an even more expensive return engagement or destabilizing the middle east and spiking oil to $120 per barrel again.

Failure to stabilize Afghanistan heightens the pressure the Taliban is putting on Pakistan, placing actual working nuclear weapons in serious jeopardy of falling under the control of militant Islamic fundamentalists. Over-escalating our effort in Afghanistan traps us in another expensive war of occupation, continues to wear out our military families and continues deficit spending that further destabilizes the economy, employment and credit markets.

Continuing to place billion dollar band-aids on GM, Chrysler and Ford may defer a spike in unemployment that could cripple many local communities but masks the moment of truth these firms require to fundamentally re-orient their product lines. How many quarters of $5 billion dollar bridge loans should be made before they are forced to sink or swim alone? In a battle between idiotic auto executives and speculative, sleazy hedge funds who bought automaker bonds in the past ten years, who do you choose or when do you decide to choose neither?

Continuing to bail out the largest financial firms each time they find bigger losses does… ….does….Well, it does NOTHING. Nothing helpful anyway. Bank executives see no incentive to review the true value of their own portfolios, write them down to realistic values and allow markets to stabilize and return liquidity. Even if the American economy instantly adapted to a lower level of credit utilization, the current lending climate cannot support that reduced level because of doubts about true valuations for homes, property and income stability. The longer this credit paralysis exists, the more nervous international investors will be about US dollar denominated assets, the less willing they will be to use US dollars for trade and the lower the demand for US treasuries will become. Once demand for US dollars and Treasuries begins waning, American's $11.1 trillion dollar national debt will begin dragging us to the bottom of the lake.

As bleak as all of this sounds, there is one bright spot. Nearly every other industrialized economy is just as screwed up as the United States is, only they don't have nearly the track record of innovation and productivity that can help begin eating away at the debt and generating growth in better directions. However, finding the right combination of solutions will require quick identification of the wrong solutions and a clear-cut framework for prioritizing the limited resources for the best overall result. Throwing everything at every problem won't work.

Then again, given the track record of our politicians and the mindboggling danger posed by any ONE of the multitude of problems we face, maybe we should just pose the question a different way.

Where's the bar?

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#1) http://www.nytimes.com/2009/04/29/business/29auto.html

#2) http://www.washingtonpost.com/wp-dyn/content/article/2009/03/18/AR2009031802283.html

#3) http://online.wsj.com/article/SB124088901025362487.html