The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( TheStreet) -- A friend whose judgment I respect said the just-published study on U.S. economic policies titled the Way Forward by Daniel Alpert, Robert Hockett, and Nouriel Roubini was a must read. Joe Nocera of The New York Times, also gave it a lot of attention, writing: "Its analysis of our problems is sobering. Its proposed solutions are far more ambitious than anything being talked about in Washington." So I read it. The authors' omission of what caused the world's economic problems and what should be done about them is so glaring it makes me wonder who paid for this study.
Summary of StudyThe authors do an excellent job of detailing today's global economic problems:
- high unemployment and the threat of renewed recession;
- the possibility that the European sovereign debt problem will spiral into a full-fledged global banking crisis; and
- the hoped-for demand boost from emerging-market countries is fading as policies to control inflation and credit creation kick in.
Their Solutions: 'Three Pillars'
- Pillar 1: a $1.2 trillion five-to-seven year public investment program;
- Pillar 2: a national debt-restructuring program focusing on banking and real-estate sectors in particular;
- Pillar 3: global reforms.
DiagnosisAHR say the world got into this mess as the result of two related factors:
- The "worst credit-fueled asset-price bubble and burst since the late 1920s"; and
- "The steady entry into the world economy of successive waves of new export-oriented economies, beginning with Japan and the Asian tigers in the 1980s and peaking with China in the early 2000s, with more than two billion newly employable workers. The integration of these high-savings, lower wage economies into the global economy, occurring as it did against the backdrop of dramatic productivity gains rooted in new information technologies and the globalization of corporate supply chains, decisively shifted the balance of global supply and demand. In consequence, the world economy now is beset by excess supplies of labor, capital, and productive capacity."
- buy up these risky assets;
- package them;
- in some cases insure them; and
- sell them off for a commission.
Policy Prescriptions1. Banks Inasmuch as AHR did not mention private banks in their diagnosis of the problem, it is understandable that they did not mention more bank regulation in their policy recommendations. I believe this is a fundamental shortcoming of their study. And it seems that this point is so obvious that it makes me wonder whether the American Bankers Association didn't help pay for this study. As I have written, the primary job of depository banks is to protect depositors. It is not to engage in risky trading to justify high salaries for bank senior executives. John Lounsbury has supported consideration of some banking activities being operated as public utilities. I agree. Deposits should be risk free, and this is certainly not the case today. In addition, any depository bank insured by government should be required to manage its own loans and not allowed to trade for its own account. The Congress did this back in 1933 when it passed the Glass-Steagall Act that removed investment banking from depository institutions. Remember Paul Volcker? He told Obama to do the same thing but was shunted aside by the bankers' lobby (Larry Summers and Timothy Geithner) in the Obama administration. Some might still believe new bank regulations will solve the problem. Have you talked to a bank regulator recently? I have. They are totally confused. I quote from a piece by Michael Rapoport on what is happening in Europe:
"The problems for investors in evaluating European banks first arose during the summer, when the banks made different choices in how they valued Greek government debt, as a financial crisis made it clear that the bonds wouldn't be repaid in full. Some banks valued the debt at its market price, about half of its face value, and took an impairment charge against earnings to write down the other half. But others declared there was no viable, active market for the debt, so they used their own models to value it, as accounting rules allow in such circumstances."