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Friday, December 5, 2008

Eliot, Be Good

Eliot Spitzer, former Emperor's Club VIP, returned from the dust heap of recent history Wednesday to write a slam dunk, right on article about the current bailout for Slate. I myself have done my best over the past few months to tell you exactly what I think about the mess, but my limited knowledge of economics makes me very much like Bambi- I can sense when something's amiss, but I can't tell you why exactly I'm running. Eliot, ex-Wall Street fighter he was, knows why it is amiss. Let's start with what's wrong with our economy:

  • Our trade deficit has ballooned from about $100 billion to more than $700 billion annually in the past decade, and our federal deficit now approaches $1 trillion. These twin deficits leave us at the mercy of foreign-capital inflows that may diminish as Asian nations, in particular, invest increasingly at home.
  • Our household savings rate has been close to zero—and even negative in some years—not permitting the long-term capital accumulation required for the investments we need; China's savings rate, by comparison, is an astonishing 30 percent of household income.
  • U.S. middle class income has stagnated over the past decade, while the middle class in China—granted, starting from a lower base—has seen its income growing at about 10 percent annually.
  • Our intellectual advantage could soon turn into a new "third deficit," as hundreds of thousands of engineers are being created annually in China.
  • We are realizing that the service sector—all the lawyers, investment bankers, advertising agencies, and accountants—follows its clients and wealth creation. This, not over-regulation, is the reason investment-banking activity has begun to migrate overseas.
Yes, yes! So true, especially that last one. All the white-collar yos who are out of work right now who think they have it bad? Wait until ten years from now, when most of their industries follow the money to India, China, or Europe. It was one thing when high-school guys lost their industrial jobs. Not much tear-crying by the degreed powers-that-be. But when a Burnett copywriter is serving up lattes at Starbucks? Ladies and gentlemen, there will be a symphony orchestra playing at every street corner.

Gotta get into the studio to lay down 'Brother, I'll Tell You How To Make Some Dimes'.

Spitzer goes on to state that we're propping up dinosaur industries- not just Detroit, but the lot of them. I've believed this, too. I know we need to bring money into the market because the banks are tighter than a Catholic school paycheck, but why are we putting the money into the same failed institutions?

A more sensible approach would focus not just on rescuing pre-existing financial institutions but, instead, on creating a structure for more contained and competitive ones. For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations, ethical abuses in cross-marketing in violation of fiduciary obligations, and now the need for major taxpayer-financed capital support for virtually every major financial institution.

Eliot, my man! So in short, prop up credit markets with new vehicles. Do NOT give money to the chuckleheads who drowned the baby and now can't find the telephone. Dude may have hired some ladies of the evening, but you know, leadership comes from strange places. This is by far the most well-reasoned piece I've read about our current plight.

You heard it here first. Eliot Spitzer. US Attorney General. 2012.

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