The Economy: Does Either Candidate Get It?

Watching the final Presidential debate Wednesday evening, my undergrad classmate Mike Markowitz blogged " Must Kill... Joe the Plumber... Must Kill..."

I am significantly less clever, so my thoughts went to Winston Churchill: "Those who fail to learn from history are doomed to repeat it."

Sen. McCain's failing: Mistakenly placing the blame for our failing economy on the sub prime market.

Sen. Obama's failing: No proposal to get the liquidity into our markets.

Both candidates spent more time arguing that their proposals would lower taxes for Joe the Plumber. Meanwhile neither is really addressing ways to generate sustained growth of our economy, and therefore either one is likely to kill Joe the Plumber - at least financially.

I have said it in previous posts, and its important, so lets repeat it: Sub prime lending did not cause our economic downturn.

If it had, then the actions taken which have eliminated sub-prime lending would have corrected the problem. We wish it were that simple, but of course it is not; so McCain, the press, and everyone else needs to stop banging that sub prime drum, because that instrument is out of tune with the music of our economy and markets.

If sub-prime lending was not the culprit, what was?

A lack of economic growth outside of the real estate industry, and an abrupt termination of liquidity, including and specifically sub prime lending, but also leveraged lending.

The 1990s were a time of information technology development that literally changed the way everyone of you reading this post does business. Companies such as Amazon, Ebay, Google and Yahoo came into being, and modest size companies such as Microsoft, Cisco, Oracle, and Intel became the behemoths that they are today. Information technology was a key driver of the productivity gains in the US from 1995-2000.

The current decade has seen no such transformational development, and no such productivity gains. We need to change that if the economy is to improve.

How?

Stop the bleeding. The candidates talked about a short term moratorium on foreclosures, which ultimately doesn't address the problem. Instead, they should implement an 18 month freeze on mortgage rate resets. Make it retroactive for six months, and waive accrued fees, so folks that are in default due to resets can get current. This will allow people to stay in their homes, while giving the real estate market time to firm. In 12 months the freeze should be reviewed for a possible one year extension.

Increase liquidity - lower short term rates - a lot. This allows banks to keep rates low and still make a profit, getting them healthy in a hurry. One month Libor is roughly 4.40%. It needs to be 200 basis points lower and needs to stay there for awhile.

Increase liquidity - encourage mortgage lending including sub prime - but not mortgages with short term rate resets. Why do we care if a home owner borrows 50% or 100% of the home price provided he/she can AFFORD THE PAYMENTS!!!! Fannie Mae and Freddie Mac are a catastrophe, so start a new entity to buy mortgages from banks. In a previous post we named that entity Billie-Mike after Bill Gross and yours truly - I think its kinda catchy.

Now, onto industrial growth.

Develop non-polluting energy resources. OK, this isn't new, but lets put some numbers on this:

Exxon-Mobil and Chevron, the nation's largest oil companies, earned record profits this year of $40.6 billion and $18.7 billion, respectively. Yet the industry devotes annually less than 1/2% of their revenue to R&D. For Exxon-Mobil that’s roughly $2 billion, and for Chevron thats roughly $1 billion for total R&D that includes but is not exclusive to renewable energy. It is simply not enough. We need to devote 20x that amount solely to renewables if we really hope to make any meaningful progress.

The benefits? Reduce payments for foreign oil. Reduce demand for oil which should reduce the price, which should reduce corporate energy costs. Reduce emissions, which lead to pollution and global warming. And most importantly, create new companies and hundreds of thousands of new jobs! But without order of magnitude increases in investment this will be nothing more than a pet project for a few engineers for the foreseeable future.

Encourage auto lending, particularly for hybrids and battery powered cars. Previously 90+% of auto loan applications were approved, currently its down to 60%. Meanwhile the auto industry has declined from selling 17 million new autos per year to 12 million. That’s a whole lot of lost GDP and a bunch of lost jobs. Hybrids are $5000 - $8000 more than their polluting alternatives. GM's Volt, to be released in 2-3 years, is estimated to cost $43000, or about $20k more than its current comparable gas powered autos. We need to subsidize these costs through loan programs and tax credits to get more of these in the hands of consumers quickly and drive job growth (pun intended).

Contain medical costs. Extend basic coverage to those without care. Create a system of free clinics so that pregnant women get pre-natal care, and mothers get basic care for their kids. Create trauma centers so people can get treated for injuries. Staff both with doctors and nurses who will get college loans waived in exchange for serving in these facilities for three years after leaving med school. Use technology to allow for remote chart and test reading by specialists. Create a payor system that reimburses providers, therefore cutting insurance rates for the rest of us.

These changes will reduce the cost of providing health insurance to employees, which should lead to a healthier workforce with less worker down time - ie increased productivity.

Invest in medical technologies, whether adult stem cell, nanotechnology, or other research approaches. In addition to longevity and quality of life benefits, this will create jobs!

Finance start-up businesses. Where can a start-up get financed today, particularly with the IPO window closed? Without start-ups, where will the next Google come from? Fund the Small Business Administration, and restart SBIC venture and buyout programs.

So? By following these recommendations, we will get liquidity into our markets and fund new industries, thereby creating GDP growth and jobs.

And maybe we won't actually kill Joe the Plumber......