Friday, March 27, 2009

Food For Thought

Wrapped around the daily trials and tribulations of the markets and economy, and often lost in the forest for the trees, are three great debates that investors may want to tune their ears to. These debates – the future of Finance, the future Economic model that leads the world economy, and the future Socioeconomic model that drives America – frame the particulars within which economic, political, and investment decisions will be made. I submit them for your consideration.

Future of Finance

The first great debate raging is one between new finance versus the small banking model. Paul Krugman notes this in his current commentary when he states “…it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.”

Krugman’s protestations notwithstanding, if Secretary Geithner has his way the new finance model will ultimately win the day as the dysfunctional components of the new finance model are remedied (via the Risk Czar) and complex financial instruments live another day: this time with better supervision and, hopefully, fewer financial catastrophes.

Interestingly, Mohammed El-Erian apparently supports the Geithner view. As noted in his excellent book “When Markets Collide”, the PIMCO CEO reveals his thinking when he states that the one area in finance that he would recommend his daughter pursue is structured finance. Well, it seems hard to image a bright future for structured finance without a robust financial model. And that is something that you don’t’ get with the small banking model expressed by Meredith Whitney.

Tied to finance is the second great debate area – the future economic model.

Future Economic Model

With the demise of “cowboy capitalism” what will be the reigning economic model? Will it be the European socialist model? Some revised American model? Or will a hybrid model emerge out of the multi polar world, with America, Europe, and China sharing and influencing power? The answer to this question will likely not be clear for several years. Moreover, it will greatly influenced by how the future finance model evolves.

The third great debate is solely a US issue.

Future Socioeconomic Model

This great debate area can be summed up in the following phrase, “Never let a good crisis go to waste”. Here the debate is divided along US political lines with Republicans warning of the third wave expansion of government intrusion while Democrats insist that their hands (and motives) are clean and necessary given the economic mess left by the Republicans. The blame game always rules politics.

Note: I believe there is much to the argument being made by the Republicans. Power is a very strong force and human nature never changes, regardless of campaign rhetoric.

The chronological center point of this debate is the Great Depression. Advocates for greater government spending say the New Deal saved the country while opponents say that is false, that it took World War II, and not the New Deal, to lift the US out of its deep economic funk.* Then there is the subplot to this debate: with greater government intrusion comes greater government power. This is where things like infrastructure spending come into the picture. You don’t stop a road or a bridge in mid construction. Therefore, those that institute the spending will exercise political power for years to come.

Food For Thought

What I have articulated above is meant to be a listing of key issues that investors might want to better acquaint themselves with, and obviously not a comprehensive examination of the subjects noted. A little food for thought.

Have a good weekend.

*In this area, readers may want to acquaint themselves with the writings of Amity Shlaes as one who has been a good source for understanding the Republican argument.

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