1-31-2010

Why Do We Focus So Much On Politics?

The purpose of Beacon Commentary is to guide the investors who read it. Why do we focus so much on politics? Why don’t we focus more exclusively on economics and stock market fundamentals? The reason is relatively straightforward. At no time since the 1930’s has the political atmosphere in the United States been so destructive. The possibility of politics dramatically holding back progress in these United States is elevated. The stock market has begun to realize this.

The sad reality is that politicians in the United States believe that they have only one job, and that job is to be re-elected. Every decision they make is weighed relative to its impact on the base of voters that they believe will re-elect them. They rarely weigh what they believe is right or wrong in the absence of consideration of the “special interests” that they believe will keep them in office. Term limits is the answer, but it is nowhere in sight.

The depression of the 1930’s led to a massive exercise in finger pointing. The congressional political game of the decade was blaming someone. In fact, during the entire 8 years of FDR’s first two terms he consistently reminded the country of the horrible nightmare he inherited from the previous administration. World War II pulled us out of the muddle our economy was in and cast us into the leadership role in the world. FDR will go down in history as a great leader because of this. However, the tone he set in those first two terms really did little to get things going. The country would not have rebounded from the public works jobs alone. 

The targeting of scapegoats that we are currently living through is also having a deleterious effect on the country. This is not reserved for the President or Democrats. Lots of Republicans are also to blame. Some examples will illustrate this point. Ben Bernanke is not Superman. He does, however, appear to be a super-man to me. He didn’t see things coming. NO ONE DID. He came up with incredibly creative, historic mechanisms to prevent a depression. For this effort, he received the most negative votes ever in a Fed Chairman approval vote. There is no doubt that we spent too much money during President Bush’s two terms. We probably should have followed the Federal Reserve’s recommendations to reform Freddie and Fannie, and we probably should have adopted a pay as you go policy on the Iraq war. However, bashing the last administration continually only makes people feel helpless.

Leadership requires calm under fire. People crave leaders. Congressmen and Congresswomen can be leaders. Senators can be leaders. The President has to be a leader. However, we are receiving too much in the way of unrealistic platitudes about restoring American greatness, and too little in the way of calm leadership explaining how we are going to get there. 

Thankfully, 90% of a business cycle happens from the millions of participants in the economy making the decisions they make to prosper, then protect themselves, then prosper again. Only 10% comes from policy decisions the government superimposes. (There is no magic to these percentages, but you get my point.) The 10% does require action that keeps the banking system functioning and the currency of the nation valid. 

The government has done what it needs to do to allow a recovery. We have avoided a depression and there will be a cost associated with those actions. However, we have the ability to pay that cost if the government stops bad-mouthing the economy, the banks, each other, and those outside the United States.

The current stock market correction will run its course and we will back in a bull market later this year. The market, however, is telling us that the risks associated with the current political behavior will create doubts home and abroad over the next few months. 

The country wants calm leadership. If the current state of affairs continues, we will witness a “throw the bums out” firing of incumbents; the likes of which we have never seen in our country’s modern history. If the name calling and infighting continues, we will still get where we need to go. Unfortunately, it will take longer, be a little more costly, and have some unintended consequences in the shifting of economic power away from our country.  

Fred S. Fraenkel
Vice Chairman and
Chairman of Investment Policy
Beacon Trust Company

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