Brad Baldwin began be saying, “Thank you gentlemen.  This has been a hard environment for all of us, and your efforts are appreciated.  Unfortunately, at this time, we must assess what is working and what is not.  We must…”

“Brad.  Allow me.” Stan Bullard stood up and said, “Gentlemen, I am younger than all of you, but I am the chosen leader of the Bullard extended family.  My Grandfather and Father built this business, and I have no intention of letting it fail.  Times are tough, and we may need to take tough actions.”

Looking at the CFO and Corporate Actuary, he continued, “I’ve studied the history of our company, and tried to understand our culture.  I may be young, but I recognize the value of wisdom accrued of lifetimes.  Our culture has been relative decentralized and free.  We have allowed subsidiaries to set their own accounting policies and their own investment strategies.  That might be fine during boom times, but it is never acceptable during times of economic crisis.  Since we can’t predict when crises will come, that means these policies are not ever acceptable.”  Looking at Peter Farell, he said, “From now on, all investment policy will be determined by our Chief Investment Officer, Peter, in consultation with the CEO and the Board of Directors.”

Looking at the CFO, he added, “Also, accounting will be centralized as well.  Because of deviations from accepted accounting practices, we must standardize accounting across all of our subsidiary companies.”

John wondered at that statement.  “Deviations?  Huh?” he thought.

Brad picked up the conversation, and added, “There is more.  Let me introduce our guest, Caleb Matmo.  As a private stock company, our risk analyses are a little behind the rest of the industry.  We have Statutory and Tax valuation bases, but we do not do GAAP as publicly traded companies do.  Our one bow to GAAP is the debt covenants with our bankers, which thankfully we have no difficulty complying with.”

“Mr. Matmo and his firm have pored over our financials and our businesses in detail, in order to understand the risks involved, and give us a feel for whether we are taking too much risk relative to the returns that we receive.”

John wished his Chief Actuary, Greg, was with him. Greg was conservative, but not foolishly so.  It would be useful to have an independent perspective on this new consultant.

Caleb Matmo stood up and said, “For over one decade, my firm has been evaluating insurance risks and I beieve that we have a good process.  We use a rigorous actuarial risk model, and we give little credit to financial risk models as are commonly used by hedge funds.”

“Maybe Greg would like this,” thought John.

“Pass out the reports, Miss Kendall.”  A young lady passed out three reports, two from Peter Farell and one from Caleb Matmo, to each person at the meeting.

“Before I go on,” Brad Baldwin said, “I need to tell you about our defunct financial guarantee insurer.  We have put it into runoff.  Given that we have removed the manager, we will need a manager to manage the runoff, until it is so small, that we sell it off.  Marc and Henry, either one of you may manage the runoff, or you could recommend external managers to us.

John looked at the handouts, and thought, “You know, maybe I have a chance here.”

What I am about to write will sound out of character.  In writing, I often try to strike a balance between what should be, and what is possible.  In this piece, I am temporarily ignoring what should be, for what could help solve our economic problems at minimum societal cost.  Please understand that I am a principled man who hates inflation, but with the doofuses that mismanage the Fed, I am aiming for “second best” policies here.

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Al McGuire, past coach of Marquette Basketball, was once asked (something like), “Would you rather have an A student or a C student at the free throw line in a tense situation?”  His answer was the C student, because he wouldn’t think about the situation, he would just act, and sink the free throws.

The current Fed is clever.  Too clever by half.  They have aimed for a trifecta of fixing short-term lending markets, not raising inflation, and stimulating the economy.  Though they may have had modest success with the first goal, the second goal has been rendered irrelevant, and the third goal is a failure.

It would have been better if the Fed had simply revved up the printing presses (virtual as most of them are), and began monetizing the government debt.  That is too crude of a strategy for our central bankers, who have delicate constitutions, and are fighting a war that ended 20 years ago.

How would higher inflation help the current situation?

• Wages and the nominal value of collateral underlying loans would rise, reducing credit stress.
• People and institutions would stop sitting on their savings waiting for prices to fall further before acting.
• Inflation would cheapen the dollar, making imports more expensive and exports cheaper, stimulating the US economy.
• Inflation would reduce the real value of debts owed to foreigners.

The Fed is wasting its time with its alphabet soup of credit easing programs.  They accomplish almost nothing for the real economy, while lavishing liquidity on markets that tangentially help financial institutions.  That is a great way to aid average Americans, not.

Far better to fire up the helicopters (that’s a figure of speech), and mail a check for $1000 to every person with a Social Security Number (or their parents if they are in their minority).  All of the complexity in the TARP and in the stimulus bills could be dispensed with, if we trusted the American people.  Give them the money, not the credit markets.  The people know better than the Fed.  After all, who is the Fed supposed to serve?

Historically, In times of extreme credit stress, the US has acted in this way, to relieve the stress of an indebted population through inflation.  (Think of bimetallism.)  Though I am not crazy about inflation (it will hurt me), nonetheless it would be good for the nation as a whole.  (Of course, with harm to those on fixed incomes.)

Mortgage rates would rise, and other interest rates would rise, harming economic activity, but the economic tempo would still increase as people would seek to use their money before it declines in value.  Inflation is a cost worth paying in order to get the economy moving again, giving debtors some breathing room.