Why keep going when clearly you are heading in the wrong direction?

Part two of a series: Why keep going when clearly you are heading in the wrong direction?

In the Sunday edition of San Diego’s newspaper on December 16 there was a question put to four economists and four chief executives, all San Diego-based.  “Is the up-and-down stock market a sign that the economy is heading for a recession in the next two years?” Two economists and two chief executives responded “yes” and the other two of each group said “no”.  Professor Norm Miller cited “adolescent-induced trade wars”.  Others offered a variety of indicators including Federal Reserve policies, Brexit, Federal deficits, the Mueller investigation, investor pessimism and inverted yield curves. Phil Blair talked about “erratic behavior throughout the world, but especially in the current Washington administration” and Gina Champion-Cain perhaps said it best: “When unprecedented levels of positive economic conditions collide with chaotic political uncertainty, you create self-destructive market fear; a condition ripe for volatility, but not recession.”

They editors didn’t ask my opinion.  If they had, I would say those well-informed comments are excellent but don’t go far enough. There are underlying trends, which I referred to in my previous blog, also contributing to the stock market’s recent volatility. If left unchecked, however, these trends threaten to have profound undesirable effects and may well lead the stock market to much lower levels on a sustained basis. These trends are undermining the stability and sustainability of American society as we have known it most of our lives. I don’t think I am Chicken Little crying “the sky is falling”.  I have reasons for my fears. I first drafted this post about a week ago and planned to publish it today, not knowing the stock market would have a terrible period between then and now. Hopefully this is not the harbinger of a sustained market decline though I fear one will occur if the dangerous nonsense in Washington, D.C. does not end soon. I will publish part three in the first week of 2019.

My great concern about recent stock market volatility is that it is symptomatic of more fundamental and troubling problems in America: unacceptable behavior that may be unprecedented in my lifetime--mistrust, egotism, bullying and deceit on a national level, incivility in public discourse, disrespect for authority/truth/the rule of law, political polarization making compromise all but impossible, disdain for America’s long-standing allies, and increasing incidents of domestic terrorism. 

Another trend deserving its own mention as reinforcing several of the bad trends I mentioned previously is the practice of media quoting “unnamed sources who can’t be identified because they were not authorized to speak on the issue”.  Which first means there can be no guarantee of privacy and confidentiality in any conversation or other form of communication, no matter the significance of the topic, including national security issues. Second, “unnamed sources” also means no third party can corroborate the truthfulness and accuracy of what these unnamed sources state as facts. Which then begs the question of the veracity and integrity of the media organization citing “unnamed sources”.  

Today, the majority of the largest news organizations seem to have taken sides and are reporting news that reinforces their biases. Why should we believe they have vetted the statements of their “unnamed sources”? The use of unnamed sources is a perversion of the concept of “freedom of the press”.  Becoming a commonplace practice does not legitimize it.

These behaviors are making our country vulnerable to all sorts of anti-American initiatives by other nations and other groups. Anyone examining American behavior patterns since World War II should be asking themselves, where and when did we make a wrong turn and why in the world do we keep on going despite overwhelming evidence we are headed in the wrong direction?

 To those who think a bit of rudeness or lying or disrespect for authority at the national level are just examples of boys being boys, and that the consequences of such behavior are not dangerous, I beg to differ. There is a parallel to my present worries.  In the years leading up to the housing and mortgage market crashes in 2007 – 2009, participants throughout the mortgage market were making riskier and riskier loans, and investors were buying them (overpaying) at high prices that failed miserably to reflect the poor quality of those loans and the likelihood they would end up in foreclosure, which of course they did.  Everyone involved directly or indirectly in real estate lending was betting (against their better judgement) housing prices would continue rising forever and bail out lenders and borrowers overpaying for home mortgages and homes.  When enough consumers stretched their housing budgets well beyond their capacity to pay, both housing and mortgage markets collapsed.   Everyone could see the debacle coming.  No one did anything about it. After the crash, as usual, there also were cries for more regulation of lenders and efforts to fully privatize Fannie Mae and Freddie Mac, as if doing those things would have prevented the collapse that had occurred.

Truth is, we did not need more new regulations and we did not need to privatize Fannie and Freddie.  Instead, Federal Government regulators needed to enforce regulations and accounting rules already on the books.  Rules existed for lenders as well as for Fannie and Freddie.  The failure was a failure of enforcement. Individual lenders who tried to behave responsibly and follow the rules in an otherwise crazed mortgage world had a miserable time trying to survive because their interest rates were higher than those of lenders who were ignoring risks in pricing their loans. Further, their underwriting guidelines (correctly) were tightening as risks grew while irresponsible lenders loosened theirs in order to make still more highly risky loans.

At one point several senior lenders and private mortgage insurers came to me with the suggestion I go to Washington to testify and urge the Congress to demand that regulators toughen their enforcement efforts and require everyone to play by the same rules, not just the responsible lenders. These industry executives saw clearly why the rules had to be enforced equally for all mortgage market participants: if they were not, irresponsible lenders would drive responsible lenders close to or totally out of business.  Their instincts were right on target, but they could not arrange for me to testify.  No one in D.C. wanted to be told they were making mistakes. Markets had to collapse, at extremely high costs to society, before regulators toughened their enforcement practices.

I am a firm believer in the concept of “the tone at the top”.  It is a travesty, therefore, when someone occupying a position of awesome power arguably is the major player practicing many of these bad behaviors. I’m reminded of some of the headline-grabbing petulant dictators in South America’s past.  In corporate America such an executive would be terminated. Not so in our Federal Government, however. Consequently, bad behavior is legitimized when in fact it should be stopped. It is not just one person, of course, nor is it just one branch of government. Nonetheless, there is only one place where the buck ultimately stops.

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