David Einhorn delivered a remarkable speech at the Value Investing Congress yesterday.
As I see it, there are two basic problems in how we have designed our government. The first is that officials favor policies with short-term impact over those in our long-term interest because they need to be popular while they are in office and they want to be reelected.
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The second weakness in our government is “concentrated benefit versus diffuse harm†also known as the problem of special interests.
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In the context of the recent economic crisis, a highly motivated and organized banking lobby has demonstrated enormous influence. Bankers advance ideas like, “without banks, we would have no economy.†Of course, there was a public interest in protecting the guts of the system, but the ATMs could have continued working, even with forced debt-to-equity conversions that would not have required any public funds. Instead, our leaders responded by handing over hundreds of billions of taxpayer dollars to protect the speculative investments of bank shareholders and creditors. This has been particularly remarkable, considering that most agree that these same banks had an enormous role in creating this mess which has thrown millions out of their homes and jobs.
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…at some level, Americans understand that the Washington-Wall Street relationship has rewarded the least deserving people and institutions at the expense of the prudent.
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On the anniversary of Lehman’s failure, President Obama gave a terrific speech. He said, “Those on Wall Street cannot resume taking risks without regard for the consequences, and expect that next time, American taxpayers will be there to break the fall.†Later he advocated an end of “too big to fail.†Then he added, “For a market to function, those who invest and lend in that market must believe that their money is actually at risk.†These are good points that he should run by his policy team, because Secretary Geithner’s reform proposal does exactly the opposite.
Great stuff. He also has something to say about comparisons with the Great Depression:
We are now being told that the most important thing is to not remove the fiscal and monetary support too soon. Christine Romer, a top advisor to the President, argues that we made a great mistake by withdrawing stimulus in 1937.
Just to review, in 1934 GDP grew 17.0%, in 1935 it grew another 11.1%, and in 1936 it grew another 14.3%. Over the period unemployment fell by 30%. That is three years of progress. Apparently, even this would not have been enough to achieve what Larry Summers has called “exit velocity.â€
Imagine, in our modern market, where we now get economic data on practically a daily basis, living through three years of favorable economic reports and deciding that it would be “premature†to withdraw the stimulus.
An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial. So whenever it is eventually removed, there will be significant economic fall out. Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline.
He is expecting the former and has positioned his portfolio accordingly, meaning gold. I would love to see a debate between him and Hugh Hendry.
I do not believe that the problems are in the design of the government. The issues he identifies are applicable to organizations of any size. Instead, the problem looks back at us in the mirror every day.