All We Have to Fear...

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.

Everyone knows the balance of this famous line from Franklin D. Roosevelt's first inaugural address in 1933. But as FDR soon discovered, fear is a tenacious emotion. Without the sophisticated economic modeling that we have today, the government at the time put in place policies to take complete control of the economy even to the detail of setting the price to be charged for pressing a pair of pants. Instead of restoring confidence to the population, the policies encouraged the people to rely on the government for assistance. Unwittingly, they made the fear worse. Consequently, the Great Depression stretched on another seven years in the U.S., well beyond the time when other industrialized nations had recovered.

As we contemplate the situation today, there is no shortage of worries. The stock market seems to a have run out of momentum; the housing market is still in a funk with more price declines; jobs remain scarce and prices are moving up. Gasoline is $4 a gallon, so is milk. A box of cereal, $4. A bag of Cheetos, $4. A pound of hamburger, same. In fact everything now costs $4. When did that happen? It is no wonder that both the Michigan and Conference Board measures for consumer confidence have fallen sharply in recent months.

Worse, the media have trotted out that old statistic from the Carter era: the misery index. The misery index is the sum of the unemployment rate and the inflation rate. Last week it hit the highest number since 1983. Some naïf of an economist was quoted on network radio saying we need not worry about inflation so long as unemployment remains elevated. I almost lost control of the car as I convulsed with laughter. I suppose he never read about 1980, when unemployment was north of 7.5 percent and inflation was progressing at a robust 12.5 percent per year.

Then there is Greece and the other PIIGS in Europe. There is no question that Greece will default along with a few other countries if you define default as not paying principal or interest on time. So what is the big deal? In the past banks had written off the odd, small country without batting an eye. In the 1980s large chunks of Latin America and virtually any country in sub-Saharan Africa without oil reserves defaulted on their debt. There was no talk of contagion. Certainly no one expected these circumstances to disrupt the economies of major industrialize countries in any meaningful way.

Where are the men and women who steered us through the Mexican debt crisis of 1982 and the peso crisis of 1994? Who was on the ground during the Asian currency crisis in 1997, the Russian bond default in 1998 and the failure of Long-term Capital Management? Anyone remember the Argentine bond default in 2001? What about Venezuela, Ukraine, Pakistan, Ecuador and Uruguay? Suppose a French bank bought €10 billion of Greek government 10-year bonds yielding 6.25 percent at par. Today they yield 16.0 percent, meaning a paper loss of about €4.7 billion. As the situation sorts itself out, the bonds will likely accrete to par anyway. So take the write-off and move on.

What has happened to the intestinal fortitude of our international financiers? They seem to have become so dependent on government money and afraid of politicians whining about bonuses, they no longer have the courage of their convictions as risk takers. Is just seems bizarre to us that the world can no longer write off a couple little countries like Greece and Ireland for a few years and just get on with business.

The biggest fears for households and business, of course, still emanate from Washington. It seems our esteemed public servants did not receive the message in November 2010. Reams of financial regulations are still pending from laws passed by the last Congress. Companies, states and unions subject to our new healthcare insurance laws are receiving waivers in some random pattern. For reasons completely beyond comprehension, the National Labor Relations Board is blocking use of a new Boeing plant in South Carolina and destroying 1,000 "good manufacturing jobs" in the process. It looks like the specter of uncertainty surrounding government actions has returned with vigor.

That factor has now become so clear that people are once again hunkering down until some rational policy actions emerge. For the populace, the debate around the debt and deficits is pretty clear. They are posing a very modest question. What government service or benefit is important enough to oblige us to go hat-in-hand to the Chinese to pay for it?

What would happen if every budget resolution required a financing plan like a business? Let's imagine the presentation…"Well, team, we totaled up the tax collections forecast and the spending and we're $1.7 trillion short. Geithner tells us we can sell bonds to the Chinese and the Japanese totaling $800 billion, Bernanke will get the Fed to pick up $300 billion or so. The rest we can easily lay off on the public and a couple foreign banks that owe us favors. Next week we have meetings with the rating agencies and we think we can get them on board to hold off on any downgrades for at least another six to nine months. I think we're good to go here."

We wrote many months ago that, with the government rather than the private sector taking center stage in the recovery, a positive inflexion point in the economy was waiting for an upside surprise in the political arena. Now, disappointed at the continuing gridlock and lack of focus after the last election, that is still the case. The public seeks meaningful action to assuage the nagging sense that their leaders do not understand the situation, do not know what to do or cannot agree on anything and so will do nothing. Whether they get that action or not is an open question.