Churchill once remarked that “Americans can be trusted to do the right thing, but only after they had exhausted all the other alternatives.” As we look at the new administration’s actions to get the country out of a deepening recession, the financial markets are judging that we have started on the wrong course.
The facts are stark. America is frighteningly overleveraged, saddled with $54 trillion of debt, or 360 percent of our $15 trillion economy. Americans’ pre-2008 $56 trillion of net worth has dropped $20 trillion in the last six months alone—the greatest loss of wealth in the shortest time in history. US FDIC banks are insolvent and can’t lend. While they recently raised more than $1 trillion, they have $1 trillion to $3 trillion more in pending losses.
Let’s stop propping up values, stop throwing good money after bad businesses, and begin to think outside the Beltway box.
Clearly, a bazooka-like response is necessary. If government spending does not replace the huge drop in consumer consumption, the situation will continue to deteriorate. The question is: Can we stimulate the economy short and long term in a way that ends the financial meltdown but does not mortgage the future of our children and grandchildren?
The answer is yes, but bottom line, we must stimulate through more investment and less consumption. Investments will generate jobs. More consumption will sap our already depleted wealth. A new plan needs a new vocabulary; let this not be a “bailout” of banks, but a “reengineering” of America. Let’s stop propping up values, stop throwing good money after bad businesses, and begin to think outside the Beltway box.
America needs to be restructured. Americans lead the world in consumption. But we are also the world’s largest and best investors, the mortgage debacle notwithstanding. The retooling of America ought to begin with a new vision of what America can become in the 21st century. Such a view ought to embrace the gradual shifting of America from a country that consumes 30 percent of the world GDP to one that becomes the largest saver and investor—say, 1 percent per year, until we reach 6 to 10 percent of income.
The government needs to lead by example and act as the catalyst.
The catalyst for a new plan should be the immediate reform and recapitalization of the banking system—with a clear timeframe. And within that timeframe, net of toxic assets, America needs to be reassured that the US FDIC banks will have the same $1.4 trillion in net worth that they had before the financial meltdown. All banks should not be treated similarly, and the concept of a nationalized banking system should be abandoned. Why should bad banks be allowed to compete unfairly with good banks because they are government-owned and have a lower cost of funding?
There are at least four better alternatives: 1) let banks fail through bankruptcy and quickly transfer deposits to good banks; 2) allow good banks to remain while transferring toxic assets to a government vehicle for orderly liquidation; 3) force consolidations, merging weak banks into stronger ones; and 4) implement asset-insurance schemes under which the government insures problem assets above a certain percent, say, 10 percent of the loss, which would be retained by the banks, which, in turn, would pay an insurance premium with, say, nonvoting preference shares. To ensure the banks end up with the required $1.4 trillion, the government should put in capital pari passu with investors.
The government must also reform its own accounting. There is a huge difference between government investment and consumption, but it is all equally expensed in the budget. Consumers realize that it’s one thing to borrow money to buy a house that they’re going to live in for many years and quite another thing to borrow money to pay for groceries. The same concept should apply to federal spending. Borrowing to build a bridge, for example, or to invest in a solar-technology company that can serve the public for years is very different from borrowing money to pay the salaries of government workers. It’s reasonable to pay off the cost of long-term investments over a period of years because we’re reaping the benefits over a period of years.
A stimulus package focused on investment will not mortgage our children’s future. So, let’s begin making the critical distinction between investment capital and operational expenses this year.
We must put this “bailout” in the proper long-term context of a “reengineering.” The amount eventually needed may exceed $3 trillion, and while this may be a mind-boggling number, it is dwarfed by looming Social Security and Medicare expenses, which in today’s dollars exceed $48 trillion. By comparison, the current amount that needs to be invested to reengineer America is not so unworkable, particularly if we properly account for all these obligations in one pot. For example, asking Americans to work two to three more years before they receive Social Security benefits can have an economic impact that rivals the current investments the government must now make and sensibly shift our response from consumption to investments. Let’s establish the world’s largest “endowment fund,” similar to those of charitable institutions, whose sole purpose is to partner with Americans in this reengineering by investing pari passu with them.
Now is the time for bold long-term thinking and short-term government activism. If done correctly, and if we can largely keep politics out of the investment process, the American people can benefit from potentially the greatest opportunity of this century and begin to endow their economic future.
Americans are can-do people who will quickly fix their problems if allowed to do so in a rational context. Failing to trust the American people could become the greatest failure of this administration. All Americans, indeed the entire world, not only want but desperately need this administration to succeed. The president’s message of hope continues to be well-received. If he can combine that with a clear blueprint of the future and a credible plan to get there, he will prove Churchill right and the naysayers wrong. Confidence is an incredibly powerful lever.
Alan G. Quasha is founder, president and CEO of Quadrant Management, Inc., which invests in and advises midsized underperforming companies as well as emerging businesses, often while serving in active management or chairmanship roles.