Streetwise for Sunday August 30, 2009

Streetwise

Lauren Rudd

Sunday, August 30, 2009

Fixing Past Errors Is Required

It would appear that a contagion of hysteria has rooted itself within the increasingly outspoken protests against a variety of government stimulus programs.

Since the country’s economic health is a key element in any investment decision, let me offer up a synopsis of what has taken place and its potential effects on your investment posture.

The salient details regarding the economic precipice we faced earlier are indisputable. We were on the brink of financial disaster and without the unprecedented actions orchestrated by the Federal Reserve; the Great Depression of 1929 would have been relegated to tea party status.

The current administration did not invent the budget deficit or the national debt. And while increasing both was distasteful, no other course of action was or is feasible, unless of course you have a penchant for bread lines and tin cups of pencils being sold on street corners. Furthermore, let me remind you that eight years prior we had a budget surplus.

Are we currently on the road to recovery, yes, but along the way it was necessary to correct some egregious errors in judgment and policy.

For example, in the name of global competition, the banking industry was given a free hand to do as it saw fit with minimal regulation, the idea being that banks would act in everyone’s best interest.

Former Fed Chairman Alan Greenspan even said as much in his memoirs, “The Age of Turbulence: Adventures in a New World,” when he wrote on page 368, ”Individuals trading freely with one another following their own self-interest leads to a growing, stable economy.” Needless to say that is not exactly what happened.

Should we have let Wall Street and the banking industry fall on their petards? Many thought it would be justice served. Unfortunately, to do so would have caused considerably greater harm than good, as was evidenced by Lehman Bros.

The transgressions of AIG, although legal, represent the pinnacle of poor oversight. While the failure of AIG alone may have been survivable, in the context of the subprime downfall and a teetering banking industry, the potential risks were too great.

The only alternative was to support AIG with government aid until an orderly unwinding could take place. Yes, several major banks and investment firms benefited from the undeserved largesse. However, AIG was an intractable problem with no utopian solution.

As the economy withered away, so did the domestic auto industry. Yet, theirs was a problem of their own making that began many years prior. On several occasions I wrote that the domestic auto companies were probably the worst managed companies on the planet. So how did they survive for so many years? When competition was minimal and market share all but guaranteed, a lot of peccadillo activity went unchecked.  Then the tides receded and guess who was swimming naked.

However, the tentacles of the auto industry are so far reaching that temporary relief with taxpayer dollars was more palatable than seeing a bankrupt GM and Chrysler auctioned off in parts.

Finally, we come to the contentious topic of healthcare reform. The recently eulogized quotes of the late Ronald Reagan, espousing freedom from ever encroaching government controls and oversight, were originally delivered in support for Operation Coffee Cup, a campaign by the American Medical Association to block the passage of Medicare.

Now all you over the age of 65, who want to give up government run Medicare, raise your hand. I thought so. The last thing the healthcare industry wants is increased competition or regulation. Sound familiar?

So how does this relate to your investments? The answer is simple. Unrestricted access to markets with minimal competition and ever rising profit margins, leads to higher share prices and a drug like euphoria for shareholders.