As I was on a Virgin America flight to San Francisco yesterday, watching Hank Paulson stutter through another policy speech, I could only comprehend one point he was making, and that’s that the US government is going to continue to “Re-Regulate” US capital markets.
Flying across this fine country into California always brings back memories – mostly good research ones. Some, like when I got stuck here for 10 days during 9/11, not so good; but the long flight always gives time to read and time to reflect. Reflecting on where the economic leadership of the USA has come to today gave me great pause.
Most of you will remember the ‘good old boy’ Republican Reagan years. Recent Bush years they are not. From a macroeconomic cycle perspective, the “Reaganomics” years are now revered because this was when the US government embarked upon one of the greatest interest rate and tax-cutting campaigns in this young country’s history. The US economy was coming out of the nasty hole of stagflation in the 1970’s, looking for ‘change’ (sound familiar?), and instead of looking to empower a black junior senator from Illinois, Americans fell in love with the idea of an ageing white ex-Hollywood actor who, after switching from the Democratic Party to the Republican one, and losing a few Republican Primary races, finally got his audition right.
Apart from what most applaud today as ‘supply side’ economics, one of the massive underpinnings of Team Reagan’s success was the ‘DE-REGULATION’ of US trade and capital market businesses. As with anything political, successful policy ultimately went too far, and now, 20 years after Reagan’s departure, I was on a plane listening to the ex-CEO of Goldman Sachs attempt to articulate why Americans need to allow the Federal Government get a better handle on the risks implied in both the company he helped build, and other investment banks like it.
It’s all rather chilly isn’t it? It’s 2008 and Hank Paulson is leading another ageing ‘Good Ole Boy’ (who has also lost his share of Republican primaries) by the name of John McCain, past the lame duck, George Bush, into the waters of “Re-regulation”. As I was sitting in my seat, I was wondering what the Chinese and Indians must be thinking about our leadership as they watch this theatre of reactive behavior.
Turning back the clock to pre-Reagan, in 1978, China was only 1% of global GDP. Many of the buy everything ‘Ch-India’ investors out there obviously didn’t recall that China wasn’t a 2007 IPO! In the 17th century, China was 20% of global GDP. They have lived and learned, mostly the hard way. They have learned, like Americans did in the 80’s, that ‘de-regulating’ markets works much better than regulating them.
I guess Paulson’s speech is born out of the math. Since Bear Stearns imploded, it forced the political football question of “can US banks fail”? Historically, this young country’s resounding answer is yes.
Later on today, I’ll be putting up a chart on the portal of US bank failures since the Great Depression. You’ll see in the data that there are only two years in the last 75 where we have seen zero banks go away in the US – 2005 and 2006. I continue to pound on the economic similarities between 2008 and 1973 (when both the value of your homes and portfolios were going down at the same time as inflation running rampant and Wall Street falling in love with an Asian economy), and going back to US bank failures the most glaring example of them remains the 1970’s during the Savings & Loan Crisis.
No, Wall Street’s investment banks are not too big to fail. No, US regional banks of any size aren’t either. Stocks don’t lie, people do.
Take a look at investment banking or regional banking charts, and you’ll get a quick refresher of these unfortunate facts versus Wall Street’s fiction.
We need to get back to building businesses on trust and integrity. ‘Re-Regulating’ is a CYA strategy that most bureaucrats revert to when faced with adversity. As they point fingers and issue blame, some of Wall Street’s ‘Berlin Walls’ are shaking now. You can see it on Youtube. You can predict that some of them will eventually fall.
I’m looking forward to proactive ‘change’ versus reactive management. Changing the current Republican investment banking suit out of the role of US Secretary of the Treasury will be a welcomed start.
• This article was first published under the title Re-Regulation by Keith McCullough, CEO and Chief Investment Officer at Research Edge LLC in New Haven, Connecticut, USA. 8:15am EST, June 20, 2008