There are two Op-Ed pieces today that we think are vitally important, and necessitate alerting our readers to. First, the New York Times published a piece by Warren Buffett entitled The Greenback Effect. He lays out the looming trouble that America faces from the prospect of running a government with such massive deficits. As he describes, fiscally speaking the rescue efforts of the past year have left us in “uncharted territory.” While we are not always in agreement with Buffett, we certainly respect him, and when he speaks we listen.
“The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.”
Many economists have discussed the massive spending increases that has been undertaken in order to combat the meltdown of our financial system. However, rarely has anyone laid our the potentially detrimental effects more clearly than does Mr. Buffett. He goes on to describe the possible outcomes of dealing with the massive amounts of fiscal deficit, and he is rightly skeptical of the political will that will be required to make the difficult decision to slow down the printing presses.
“Slowing them {the printing presses} down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.
Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.””
No matter what your opinions of the bailouts, we are going to be dealing with the fallout eventually. It is only a matter of time. Every American owes it to themselves to become educated on the problems, and reading the Oracle of Omaha’s Op-Ed is a must.
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The other Op-Ed that demands attention this morning was written by brokerage pioneer Charles Schwab for The Wall Street Journal. He has been compelled to state his case to the public after his firm was sued by New York Attorney General Andrew Cuomo. The AG has filed suit against Schwab for their marketing practices of Auction Rate Securities, and in a statement Cuomo said that Schwab should have seen the financial meltdown coming and appropriately steered clients away from the threat of losses from those securities.
Mr. Schwab makes his case very well in Brokers Aren’t Responsible for Bad Bets, and if what he claims is true then it would be very hard for a court to rule against his firm. However, more importantly he takes aim at the notion that investors should be guarded from risk. Risk is an essential part of a properly functioning market, and it is not the government’s job to make investors whole again.
“We have never guaranteed individual success. Our investors understand that along with investing comes risk, as well as potential reward. Unfortunately, we are now seeing a conscious effort to limit—if not eliminate—all risks for the individual investor, whether through consumer “protection,” fiduciary liability for brokers, or the threat of litigation that attempts to make our firm, and others like us, more like an insurance company than a broker…
Though this market operated smoothly and reliably for over 20 years, it is a market that we had no direct involvement in establishing or maintaining. It’s a market where roughly 90% of the clients who invested in these securities came to Schwab asking us to locate and make available these investments for them. We did not create the products, actively market them, and had no involvement in the events that led to the collapse of the Auction Rate Securities market.
The implication of this lawsuit is that firms like ours should have known that the market would fail. Should we also have known that Lehman Brothers or Bear Stearns were going to go under and compensate clients who bought their equity or debt? Should we have been able to predict which financial institutions would be the beneficiaries of government bailouts and which would not? I think it’s fair to say we have all been surprised by many events this past year.”
Most other brokerages and investment banks that have come under Cuomo’s microscope have quickly settled in order to avoid public scorn. Mr. Schwab is showing that he will not take these accusations lightly and he is fighting back.
