"The Promise of Capitalism Will Return - Just Not Yet"

Sydney M. Williams

Thought of the Day

“The Promise of Capitalism Will Return – Just Not Yet”

June 3, 2010

Two years ago this evening, in St. Paul, Minnesota, Barack Obama, having just secured the Democratic nomination, gave a victory speech. He sounded like a cross between an Old Testament Prophet and King Canute, absent the modesty of either. He ended the speech, “…I am absolutely certain that generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs for the jobless; this was the moment when the rise of the oceans began to slow and our planet began to heal; this was the moment when we ended a war and secured our nation and restored our image as the last, best hope on earth.”

Now, fifteen months into the Presidency, Mr. Obama is facing challenges, most not of his making and, I am sure, not anticipated. Despite the economy gradually extricating itself from recession, unemployment remains high. In spite of extending open arms to the Muslim world, Mr. Obama has been rebuffed by Iran. The War on Terror, by whatever name, persists. Hundreds of people in Detroit and New York are alive today, not because of our government’s success in preventing terrorist’s attacks, but because of the incompetence of Umar Farouk Abdulmutallab and Faisal Shahzad. Mr. Obama finds himself helpless in an accident (preventable or not) in the Gulf of Mexico, which looks to be the greatest ecological disaster our Country has ever known. (While the government now claims they are “in charge”, it will be the engineers at British Petroleum that ultimately will fix the leak. Nevertheless, expect a dozen or more government hockey sticks to be raised when the leak is plugged.)

The Presidency must be a humbling experience. The truth is that not all problems can be fixed. Accidents happen and not every one can be prevented, or even anticipated. Nature is more powerful than anything man has created. The ability to hate, unfortunately, lies deep within the psyche of man. We should, of course, never stop trying to improve ourselves and our environment, but life is not without risk. We must weigh the obvious benefits of accident prevention against the rewards that come from innovation and development.

Thirty years ago President Reagan was elected on the claim that government was the problem, not the answer. President Obama was elected at a time when the financial system had come close to failing; government, to him, was the answer. The truth is that both sectors, left to themselves, exceed the norms of common sense. Capitalism thrives on self interest, but, when society suffers at the expense of personal greed, collapse becomes inevitable. But we also know that government’s appetite exceeds its ability. The U.S. Post Office will never get marks for efficiency and anybody who has ever been to the department of Motor Vehicles understands the futility of dealing with government bureaucracy. The Obama Administration has fewer people in its cabinet that come from private enterprise, than any previous administration. The U.S. Congress is a master of spending money, but has no concept as to how to generate revenues, other than through taxation.

Mark Steyn, a cultural critic and political commentator, recently wrote a column, “We’re too broke to be stupid.” He points out that the expansion of entitlements, which transfer money from productive sectors (taxpayers) to unproductive sectors (non-taxpayers), are, perhaps, understandable when we are “rich”, but are stupid when we are “poor”. And a nation of 300 million with $13 trillion in Federal debt ($40,000 per person) is certainly not rich.

The oil spill in the Gulf will cause drilling to be curtailed, even in areas deemed to be safe. Clean energy is a worthy ideal, and a goal worth aiming at. But the truth is we have been doing just that for most of my life. When I was born, most apartments in New York City were heated by coal, and the smell and smoke filled the skies and clung to the buildings. In the 1970s, there were many days during the summer when the beaches at Sea Bright, NJ were closed because of pollution. The Connecticut River, on which I have a home, is cleaner today than it was two hundred years ago. I am a believer in conservation and support their causes, but there is a cost to clean energy that must be weighed against its benefits.

In my view, the stock market continues its long adjustment that began in early 2000. Like the 1920s and the 1960s, the 1990s were a time of “irrational exuberance”, a period when investors priced stocks to perfection. Those halcyon days came crashing down as the tech-telecom-internet bubble imploded over two and a half years. But the speculative juices were not quenched, as the Fed kept interest rates low and speculator attention was transferred from internet stocks to home prices. The collapse of that bubble finally took the wind from the sails and with it confidence in the long term future of our capital markets. As portfolio managers struggle today, it seems to me it is best to try to view where we are within the perspective of a continuum of time.

Part of what bothers the market, in my opinion, is this tug of war between the demands of the state versus the wants of capitalism. The pendulum has only recently swung in favor of statism; it is probably too early for it to swing back toward free markets, but it will. In my opinion, it is not unlike the 1970s. The election of Ronald Reagan almost a generation ago ushered in an age of free capitalism and produced the greatest spurt of growth and wealth creation our Nation has ever known. Social welfare states do not work, even those of a benevolent nature, as we can see from the troubles in Europe. Burton Malkiel writes in today’s Wall Street Journal: “Western governments have made entitlement promises that are increasingly difficult to keep.” Socialism certainly does not work when governments are evil, as in Venezuela, or as was true in the former Soviet Union, and it will not work in America, but memories are short; so to the extent we rely on our most recent experiences, at the moment it is the problems of greedy banks, unscrupulous brokers and, now, oil companies drilling in the deep waters of the Gulf that are in the forefront of the minds of the people. However, this period, too, will pass.

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Tomorrow I have a stress test; so please do your best to make the market minimally stressful as possible. Another day like Wednesday would be just fine.