Something is Missing…

The Dow-Jones Stock Index dropped almost 400 points yesterday. European stocks also dropped substantially…the FTSE 100 dropped by over 4 and one-half percent.

European sovereign debt continues to grab headlines a the interest spreads on ten year bonds of troubled countries versus the yield on ten year German bonds remained near peaks.

The Economic Union moved to speed up the recapitalization of banks that did not show well in the recent stress tests administered to more than 90 banks. “The move would affect mostly mid-tier banks. Seven are Spanish, two are from Germany, Greece and Portugal, and one each from Italy, Cyprus and Slovenia.” (link) But, there is little confidence that this move will resolve things because the stress tests were such a joke!

Moody’s downgraded Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C)…and a couple of days ago a few European banks…that passed the stress tests.

And, the top officials in the European Union continue to argue over this issue and they continue to argue over that issue and resolve little…but still hope to kick the can down the street a little further. No one seems to be facing the real issues because their solutions appear to be so painful.

In the United States, Ben Bernanke and the Federal Reserve attempt to grasp another straw in the wind as they continue to throw “stuff” against the wall, hoping that some of it sticks. For three years now the Fed has thrown “stuff” against the wall but it must be too wet…for very little is sticking to the wall. The Fed’s current monetary policy is to make sure that they throw all the “stuff” they have against the wall so that no one writing future history books can accuse them of not leaving any unused “stuff’ in the …

And, President Obama has come up with his new economic re-election platform disguised in the form of a jobs program, which includes new proposals to finance the program with various tax increases. Since this combination is a part of the re-election campaign it must contain a little of this and a little of that to appeal to different parts of his voter base. The problem with something like this is that it just makes the tax code more complex and provides incentives for the more heavily taxed…in the words of George Shultz, the former Secretary of the Treasury, ”the wealthy and General Electric”…to find ways to avoid bearing the burden of the tax. (See my post from Tuesday, September 20, “The Case Against the Obama Taxes”.

Something is missing!

My answer has been and continues to be, that the something that is missing is leadership!

The problem is that there are no easy answers…no painless answers.

People in Europe and the United States have been living high for fifty years. The goals of high levels of employment and income re-distribution through the spread of home ownership have produced their consequences…excessive amounts of debt in households, businesses, national, state, and local governments.

The economic policy of almost consistent application of credit inflation for the past fifty years has produced, in the United States, an 85 percent reduction in the purchasing power of the dollar, an under-employment rate of at least 20 percent, and the widest skewing of the income/wealth distribution in recent history. If this is what credit inflation achieves…I don’t want it.

Continuing to apply the policies of the past fifty years to the current situation will only exacerbate things. We are facing an extended period of economic stagnation, at best, and a double-dip recession, at the worst. Little or no growth in this situation will be accompanied with continued increases in the under-employment rate. And, of course, continuing with all this stimulation with little of no economic growth will result in even more decline in the purchasing power of the dollar.

And, as a consequence of the uncertainty related to the attempt to solve these problems, volatility continues to plague the financial markets. Experts predict that the volatility of these markets will not subside until things settle down on the policy side and some true leadership is shown amongst our governmental officials and regulators. That is, the volatility will continue until someone steps up to the plate and initiates a real solution to the existing situation.

The problem is that the main job of politicians is to get re-elected. It is very clear to most politicians that resolving the debt-situation is going to be painful and many are already hearing the discontent of their constituents. Riots in the streets of Greece and Spain are just a small indication of the disruptions that the politicians fear. But, there is the fear that if they do too much they will not get re-elected. The are caught in the trap of having to do something…but not too much.

The financial markets…the economy…are getting no clear vision of what the future may look like. They don’t know what their taxes are going to be. They don’t know what the rate of inflation will be.

All the financial markets…and the economy…can do is go up…and go down…

Something is missing and the problem with this is that no one in the financial markets…or the economy…can identify where the leadership is going to come from.

Can you?

About John Mason 79 Articles

Professional history: Banking--President and CEO of two publically traded financial institutions; Executive Vice President and CFO of another. Academic--Professor at Penn State University and at the Finance Department, Wharton School, University of Pennsylvania. Government--Special Assistant to Secretary George Romney at Department of Housing and Urban Development; Senior Economist in Federal Reserve System. Entrepreneurial--work in venture capital and other private equity; work with young entrepreneurs in urban environment.

Visit: Mase: Economics and Finance

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