OPEN LETTER To POTUS #44

Dear President Barack H. Obama, 

Let me extend a heartfelt “Congratulations” for your historic achievement. I hope you can hear me over the deafening chorus. Our country deserves and needs a pragmatic leader at the helm at this precarious juncture in history. We especially appreciate that you’ve taken as much responsibility as decorum allows since the election because there is no time to waste addressing this global economic crisis.

It’s refreshing that you address citizens as accountable adults instead of as immature children. Don't forget that sometimes you will have to scold us to do what’s right because we’re going to whine and whimper for candy when we should be getting out fiber. We expect to receive trophies for nothing. Meanwhile, the rest of the world is hungryand wouldn't mind seeuing us being knocked a notch or two even they depend on our prosperity. It might be hard for you to understand, actually, since your own girls seem to be so well-behaved and well-adjusted.

As I see it, this financial crisis is a prime opportunity to radically reform our entitlement system as opposed to the futile obsession of exiting this recession as soon as possible. Prioritizing the latter above all else has been the underlying cause that has led to today's predicament. The imperfections of the financial system and the lack of effective oversight are major problems, but ultimately manageable. Economic cycles, on the other hand, are not. We must pay the high price for learning nothing from Long Term Capital Management collapsing or responding to the Tech bubble with remedies that led to this credit/housing bubble. Former Fed Chairman Alan Greenspan put the cart before the horse believing bubbles can be managed more effectively than having to deal with the thorny issue of deflation; he failed to consider that a burst bubble could be the very cause of deflation.

The end of our long credit expansion cycle didn’t start on your watch so milk that for all its worth. Tacitly blame Bush when needed; he understands it’s not personal. However, as you may have noticed, no matter how hard our best and brightest are working on solving this financial crisis, it is an unprecedented situation that will probably take years, not months, to stabilize. Let’s try and live by that prudent assumption. As the outcome of executing the best possible fiscal and monetary policy would satisfy only a necessary condition for recovery, and nobody has any idea what’s going to happen in the longer term, we’re better off trying to focus on solvable problems that may be less politically expedient. Applying triage is about stabilizing the patient, not accelerating the rate of convalescence. Help keep real banks solvent, but rationalize the size of our “shadow banking system.”

The danger of depending on this stimulus plan is that at the end of the day it’s government spending and is probably spread too thin despite the large headline number of $825 billion. We understand politics demands you appear to be energetic dealing with the here and now, but what is must important is maintaining global confidence that the U.S. is the most credit-worthy nation on Earth.

On the other hand, we are certain that all prudent forecasts of future Social Security and Medicare liabilities project to be mind-boggling, but at least a window of opportunity has opened. What little I do know about politics is that fundamental reform only takes place in response to crisis; so we have to act now. If you want to merit a legacy of leadership comparable to a Lincoln or Roosevelt (either), you must find a way to force Congress to heel on these Third Rail issues.

To your credit you’ve already stated that reform is high on your to-do list and that you plan a FISCAL RESPONSIBILITY SUMMIT in February. I just fear that you need to try and push things through now, while Congress is still smitten with your charm and not by the fourth year of your term when you may be most vulnerable to the inevitable Democratic backlash. The burden of power cuts both ways when economic realities are less-than-ideal. As a history buff you also know presidents rarely have the opportunity of freely pursuing their own agenda.

It seems that the consensus view that the U.S. will emerge from recession in 2H09 is irresponsibly optimistic. We may have The Great Depression and the Japanese Lost Decade as instructive case studies, but it’s going to take more than a few years yet before the housing market bottoms. And, if anything, our situation may be more comparable to the former due to global synchronization; what happens if China, Russia or India also crash? We haven’t even stabilized our banking system, so as far as I’m concerned, the countdown to recovery hasn't even begun. Keynesian economics fell out of favor in the past for a reason: The efficacy of federal capital injection is limited without complimentary pickup in the velocity of money (i.e. lending activity).

The innate sense of optimism and hope is the essence of American culture, but we need to take some bitter medicine while what ails us is still treatable by conventional methods. Please don’t indebt Generation X and beyond any further than absolutely necessary. Emerging market demand (eventually) will attract a greater proportion of investment dollars so we must maintain our role of a safe haven while we are still the big dog wagging the tail that is rest of the world. We must always be the country of immigrants. The audacity of hope may have earned you the keys to the White House, but that by itself is a terrible investment strategy. If we keep our priorities in order everything else should fall into place as always. Best of luck! 

Sincerely,

/s/ Paper Horticulture