Listen to the President-Elect (really)

I voted for a third-party candidate for President this year.  Aside from voting for Bob Casey, Sr. for governor back when I lived in Pennsylvania, that is unusual for someone who has generally voted Republican.  Though I am generally a libertarian on economics and a conservative on social issues, I try to stay flexible enough that I can appreciate where each side of the political spectrum is coming from.  Even as I write about economic policy, I write on two levels:

  • Optimal policy (usually non-interventionist, or correcting mistaken prior interventions)
  • Okay, since optimal isn’t on the table, what’s the best you can do if you are going to meddle?

So, I heard our president-elect on the radio today, and my friends that I met with mentioned what they heard as well.  When he spoke to the Conference of Governors, he said in closing:

Now, let me just wrap up by saying this. I know these are difficult times. I don’t think anybody here is viewing the situation through rose-colored glasses. We’re going to have to make some hard choices in the months ahead about how to invest these tax dollars. We’re going to have to make hard choices like the ones that you’re making right now in your state capitols, we’re going to have to make in Washington.

And we are not, as a nation, going to be able to just keep on printing money. So at some point, we’re also going to have to make some long-term decisions in terms of fiscal responsibility. And not all of those choices are going to be popular.

But what I can promise you is this. That I’m going listen to you. I’m going to seek your counsel. And, by the way, I’m going listen to you especially when we disagree because one of the things that has served me well at least in my career is discovering that I don’t know everything. And all of you, I think, are going to be extraordinarily important in keeping us on track, not allowing Joe and myself to get infected with Washingtonitis, and to constantly be reminded of the realities that are happening to folks back home.


If he wants me to think that he has a head on his shoulders (not required in politics), he has made a good start.  Yes, we can’t make our way out this situation by printing money, or borrowing money.  My view is that we will only get out of this mess as overall debt levels are reduced to around 1.5x GDP, and ordinary lending to high quality borrowers begins again.  It will be a smaller financial sector, but a more stable one.

Two asides:

1) I suggested that the US Government lock in long term yields with a century bond.  Now the head of BlackRock, formerly the guy who formerly eliminated the 30-year, agrees.  Hey, I admire intellectual flexibility.  That takes humility.

2) Yes, others have noticed the move in the Yuan.  This is a worry.  If China wants to compound their own adjustment problems, and finance the US Treasury at the same time, that is a way to do it.

5 Comments

  • baychev says:

    David,
    your suggestion of 100 year bonds is baffling. it screams zero responsibility for unborn generations for the immediate gratification of a heavily indebted generation so it does not die in the poverty it deserves with its fiscal irresponsibility.

  • baychev, in a crisis I might suggest things that I would not otherwise do so on the basis of “if you are going to meddle, do this.” There is demand in the markets for such a bond. Even a perpetual bond would have demand.

    The debt maturity structure of the US is too short, and runs the risk of not being able to roll it over if the crisis deepens. Best to lengthen maturities when invited to do so, not when you have to.

  • UrbanDigs says:

    David,

    Can you please email me, its provided on this comment.

    I would like your opinion on an alternative to stimulate housing instead of the govt meddling with rates to 4.5% and buying up loans from GSE’s..

    Its such a bad idea and they are digging this country into a debt ridden hole.

    Why not tweak the tax code for investors from a 1031 deferrement to a 5 YR qualification primary residence like exemption?

    http://www.urbandigs.com/2008/12/instead_of_meddline_w_rates_wh.html

    GRANT THE PRIMARY TAX CAPITAL GAINS EXEMPTION BENEFIT TO INVESTORS AND CHANGE THE QUALIFICATION TERMS SO THAT THE PROPERTY PURCHASED BY THE INVESTOR MUST BE HELD FOR A MINIMUM PERIOD OF 5 YEARS

    Thoughts? As an alternative to help the hoousing supply problem without the unintended consequences of govt meddling, moral hazard, taking on more risky assets, and trying to convince people to buy for the wrong reasons, like 4.5% rates.

  • Lin Mei says:

    David,
    You once said that the crisis ends when Debt to GDP ratio falls down to 150%, from whatever the current level is, like 300%.

    A country can only reduce the debt when it is cashflow positive.

    Given China has a few hundred billion in trade surplus each year, and use that to buy treasure note, you can’t be cash flow positive with that white elephane untouched.

    Have a lower mortgage rate will help the cash flow a little bit, but if China does not own these mortgage, you are just internally adjusting the cash flow, with no impact to the country’s cash flow.

    What we need is for Chinese import to drop in price like oil, so we will have a trade surplus with China, like we have now with some gulf states at 50 dollar oil. Once that is acomplished, everything else just flow through.

    The problem right now is that the 300% debt are coming due. Unless we can push back their due date, we have no time to turn around our cash flow and reduce the debt loan to 150%. Having a 100 year bond would do that, but it needs to be like 2 trillion dollars to make an impact.

  • sysin3 says:

    I aver that Obama deserves listening to. His book, “The Audacity of Hope” will explain why.

    And this comment is coming from a lifelong Republican, Southern, redneck.

    Not so much what he says …. more in how he says it.

    I sure hope he works out. But he is a politician, after all. We’ll see.