Economic Tea Leaf Reading

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In this age of financial insecurity, everyone has their own cure for the disease that ails the economy. It is no different with the five panelists at a recent American Enterprise Institute (AEI) event. Each gave what he believed to be the way to save the economy, often echoing one another.

The first speaker, Tim Bitsberger, Bitsberger Consulting, has one main point: “Before any problem can be solved, we must fully understand what has happened.” Along this idea, he gives four Ds—Debt, Deleveraging, Deflation, and Depression. “Deleveraging needs to occur, and debt needs to be restructured,” he argues. “Next, deflation—I kind of view this as a crisis of confidence issue; I think it’s very short-term in nature…. Lastly, the big question mark, are we in a depression? I’ll defer to other people in the audience or on the panel, but I don’t think that there is an economic definition for the word depression. However, what I kind of lean on is falling asset prices, and constant arising debt levels sounds like a good one to me.” Bitsberger also lists what a plan needs to include: “it should target a defined set of problems, and articulate its goals; it should provide a means for monitoring; it should provide articulate messages in some type of scorecard; it should have an exit strategy; but most important, it needs to be implementable.”

The second speaker was Barry L. Ritholtz, Fusion IQ. His first idea is that the borrower’s ability to pay back debt is key: “For the past fourteen million years, all of credit and finance was based on one simple element, and that is the borrower’s ability to service the debt.”

He suggests that taxpayers need to start being labeled as investors in the economy: “I think we need to stop thinking about these bailouts in terms of taxpayer-funded, and start thinking about the taxpayers as investors. As investors, it’s been a horrific deal for them. We’re basically rewarding incompetent management, that’s demonstrated in inability to handle risk, to handle mergers, to do anything they’re supposed to be doing.”

Joshua Rosner, Graham Fisher & Co., was the third panelist. He holds that the financial crisis is not a housing crisis, but a credit crisis. He says, “To continue to define it as a housing crisis is to, really, miss the point…This isn’t a housing crisis; this is a credit crisis—plain and simple.” He does not agree with the “too big to fail” mentality: “Are they too big to fail or too big to allow the abrupt destruction of counterparties, of depositors, or of market functions? And I think those are very different concepts.”

The fourth panelist, Walker Todd, American Institute for Economic Research, holds that the government needs to inspect first and invest next when dealing with the taxpayers’ money. He says, “The old Resolution Trust Corporation…inspected first and put money in afterward. That’s what’s been missing all along…. So far, everybody in Washington is talking about solutions that involve… [putting] taxpayer money in first and maybe someday get around to inspecting the assets and institutions that we are rescuing. From a taxpayer prospective, isn’t that ridiculous?” He asserts that America needs to face the challenge before it: “People in Washington do not want to face up to what has to be done,” but they need to.

The final speaker was R. Christopher Whalen, Institutional Risk Analytics. He gives a four-point plan: his first point regards how to deal with good banks/bad banks. He says that problem is with the top four banks, so “the problem is identifiable, and it is containable, if we have the courage.” His second point is about “market structure and credit default swaps.” He says, “To me, they represent the epitome of idiocy on Wall Street.” He continues, “I think credit default swaps [have got to] be rationalized. How? I think we’re [going to] end up with an exchange-traded option that tracks the corporate bond that the trader would like to hedge.” His third point is about fair value accounting. He argues, “ I think fair value accounting is the last remnant of bubblethink that we have to deal with…. Letting accountants be standard-setters is a really bad idea…. I do think that fair value accounting is accelerating the problem.” His final point is that “there is no one right view.” He holds that “there are no answers” and “one rating’s not enough”—all sides must be examined.

Heather Latham is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.