Regarding Criticism of President Bush's Economic Team

President George Bush and his economic team have been getting all sorts of bad press for the past few months.

First it was Congressional Democrats and Presidential candidates all referring, with various riffs on the main theme, to 'failed economic policies' of the Bush years. And 'deregulation.'

Then, in the weeks since the election, there has been a sudden, mewling outpouring of sentiment that the newly-elected President 'will have a plan,' whereas the Bush administration's team have, to use words of a pundit I heard Monday morning,

'...been working weekends to contain financial market damage. You wonder what new event in financial markets will have occurred to greet you when you awake on any Monday morning.'

I think these criticisms, particularly the latter ones, widely miss the point of governmental action in the face of plummeting consumer or investor confidence and the early stages of a contagion among heretofore-untested linkages between abstruse financial instruments.

For example, I have had many discussions with experienced, educated friends, among whom is my business partner, regarding steps that 'should have' or 'could have' been taken as far back as August of 2007.

For example, my own perfect response, in retrospect, would have included:

-July, 2007: modify 'mark to market' valuation by executive order, in response to the two Bear Stearns' funds collapse due to failure to rollover debt of leveraged funds as the assets failed to find priceable markets.

-August, 2007: no Fed rate cuts, but an announcement of increased audits by all Federal oversight agencies with respect to mortgage loan paperwork, criteria, and loan performance status.

I contend that these two steps, and especially the first, would have avoided the worst of the vaporization of market-valued capital due to the senseless insistence that a lack of current market prices for held-to-term structured financial instruments, necessitated their near-total markdowns. This large-scale vaporization caused the hundreds of billions of dollars of bank asset writedowns, irrespective of the actual performance of the securities, which triggered the credit contraction and led to the ability of the CDS market to wreck AIG and the investment banks.

If these steps had not worked, I'd have preferred Treasury and the Fed to have begun an organized nationalization of the banking sector by early this year.

Most of my friends, however, believe such radical, early steps would have triggered even more panic and loss of confidence in financial markets. They contend that early, large-scale steps would have led to investors having a reaction something like,

'Oh my God! If Bernanke and Paulson are pulling out such radical, sector-shaping solutions NOW, this must be one of the worst financial/economic crises since the Great Depression!'

And, of course, amidst a Presidential election, the out-of-power party would have trumpeted precisely this message. Which it did, anyway, but with much less actual evidence.

As a result, it's clear that Bush, Paulson, Bernanke and Bair preferred to handle each new problem incrementally.

Once the lending functions has seized, as I discussed in this recent post,

"Since leverage, a function of debt, implies confidence in the future returns of loans placed with various enterprises, its unwinding corresponds to a loss of such confidence. The forced reduction in this leverage began, understandably, with the short-term borrowing instruments of both financial and non-financial instruments- commercial paper, most notably.

As this massive de-leveraging of fixed income instruments occurred, the simultaneous drop in real estate values and equity market values caused several consequences.

First, large-scale losses in US, and other nation's market, i.e., societal capital stocks, valued notionally, plunged. Those who previously owned the capital suffered large losses. In the US, the Treasury and Fed moved to support the Federally-registered banks via direct preferred equity purchases and, separately, takeovers of Fannie Mae, Freddie Mac and AIG."

Again, with each new institution's survival in doubt- Bear Stearns, Fannie, Freddie, AIG, Lehman, Merrill, WaMu, Wachovia, Citigroup- Bush's team moved to contain the damage a failure might create.

If, at any time, they had come forth with a stated list of criteria, upon which some action would be taken, you can be sure that large-scale investors, including hedge funds, would promptly take short positions in suspect firms, then drive the criteria over the trigger points, in order to reap their gains.

Anyone who fails to understand this, does not understand markets.

People who criticize Bush's team for 'having no plan,' fail to realize that, in financial markets, such a plan would only result in investors rushing to make the plan reality, while profiting on the downside from having done so.

Amity Schlaes and other researchers have noted that, without Hoover's tentative steps to lessen the damage from the financial market crash and resulting economic recession/depression in 1929-32, FDR could never have launched his massive, but ultimately failed socialistic agenda in 1932-38.

In that same sense, the newly-elected President's team has both an easy target at which to take shots, and a considerable base of effective actions on which to build, thanks to the Bush team's quick responses to each emerging shock in the financial markets during the past eighteen months.

I write 'effective,' because, as of the date of this post, we have avoided the actual rerun of the Great Crash and Depression.

Equity markets are not dead. Banks did not have a 'holiday.' An orderly liquidation of various weak institutions prevented an unchecked spread of loss of confidence in: money market funds, bank deposits, and commercial paper.

I'm quite sure, were the roles reversed, the incoming President would have acted with no more of a long-term plan to 'solve the crisis' than Bush has. Just like the current administration, you can bet that the newly-elected Democrat's team, too, would have acted step by step to minimize each new threat's effect on the nation's financial markets and banking system.

The fact is, unveiling an explicit plan, either last August, or now, to nationalize the banking system and provide a wholesale redesign of the US financial sector, while it is under threat of unraveling, is simply unrealistic.

Bush's team did a good job in an unforeseen, novel situation. And let's be clear, unless Hank Greenberg, Hank Paulson, John Thain or some other financial luminary is elected President, you can be sure that the sitting President is never the one dreaming up the solutions for our financial sector's ills.

This is one area where the President's role as CEO is paramount, in that s/he must wisely choose an effective, intelligent and experienced team of cabinet and other agency officials to advise her/him on what actions to take.

But don't think, for a second, that the incoming President has any more sense of what's going on in financial markets or the banking sector than does our current President, George Bush.