We all know that the U.S. Federal Reserve and the U.S. Treasury are trying very hard to bring investors back to the U.S.   The objective is becoming more and more difficult as time goes by and as the political system continues to meddle with the workings of the markets. I am a convinced free-market economist, but I believe that government intervention is sometimes necessary and this is one of those times. However, investors have lost so much money since this crisis started that they are not going to come back to the U.S. financial system until they are guaranteed that the rules of the game are clear and that they can make a conscious and rational decision on whether they are going to invest in this market or not.

But what is happening today in the U.S. financial sector is all but clear. Politicians are overreaching their regulatory boundaries on the argument that the taxpayer’s money is at stake and that they are representing the taxpayers. Thus, the limits between the political system and the economic system have become blurred, and it is very difficult to know what is going on. Much of the credit thawing that has happened in the market since last year is just a “mirage” rovoked by the direct intervention of the U.S. Federal Reserve in some of these markets. However, if the Federal Reserve would leave the markets today, I believe markets would freeze back up once again. This seems to be clear just by looking at the spreads in the corporate bonds market, which remain at almost the same levels they achieved immediately after the Lehman Brothers collapse, compared to the clear “Fed-led” improvements in the commercial paper and mortgage markets since the Federal Reserve started intervening in these markets. While I understand the frustration of many regarding the current environment, we have to agree that the commercial banking system is just one piece of the puzzle in the current crisis; others are the investment banks, mortgage banks, politicians, regulators, risk rating companies, etc. Everybody has its share of blame for the current crisis. During a question-and-answer section at my last speaking engagement, a person from the audience asked me a very good question: how can investors decide on the worthiness of an investment if politicians, not markets, are determining the winners and the losers in this economy? I think the question is a very good one. How can we expect private capital to fund the recapitalization of the banks, which is the only way the economy is going to start growing again, if political decisionmakers are the ones behind the success or failure of these firms? And even if we allow markets to work again and decide the correct or optimal allocation of resources, it will take a long time to bring back the financial system from the brink of collapse. And that’s why economic recovery will take a while longer than what most believe today.

 

 WRITER DOES NOT REPRESENT THAT IT IS ACCURATE OR COMPLETE. NOTHING IS GUARANTEED. © 2009 Wells Fargo Bank, N.A. All rights reserved.

 

U.S. Consumers: From Buyers to Fixers?

Something interesting is happening in lieu of this new economic environment. While reading a newspaper (on-line

newspaper, of course), an article caught my attention. The article argued that the latest “boom” in a town was the “auto

repair business” as well as selling used tires. It is true that the particular town has been severely affected by the demise of

the U.S. auto manufacturing sector, but the point is still valid: more people are fixing their cars today rather than

exchanging them for a new car as it used to be the case before the crisis. And this could very well be the new trend in the

economy, especially if the economy takes a while to recover and consumers keep on saving as they have been doing for

the last several months…to the dislike of the many who are trying to bring interest rates down so as to spur a new wave of

consumption and indebtedness.

In fact, this FMS ties with two others I wrote last year (see the FMS for July 14, 2008 & August 11, 2008) that argued that

the crisis may change the way consumers behave and that firms will no longer be looking at the U.S. consumer to be the

trendsetter in terms of innovation. Will this crisis be so severe that it will affect the pace of industrial/service innovations?

If we are to believe the recent news that Americans, once considered the most mobile labor force in the world, have

slowed down the rate at which it changed living places, then the crisis is already having a large impact on the “American

way of life.” If so, then the best investments will probably be on those firms that “fix” what we already have. Are we

going to see more TV repair shops (remember them?), or shoe repair shops, etc., making a comeback into our economic

landscape? The answer: probably not. In fact, for this to happen it will be necessary to see a very steep decline in the

pace of innovations such as to prevent prices of those goods that are in the market today from losing their value. That is,

one of the first indications that we may be reverting to a “repair shop based economy” would be if we see less turnover of

models, that is less product/service innovation, because whenever a new model/product innovation comes in, it displaces

the previous one and its price drops, making fixing the old one a waste of resources. I remember I had to change my Palm

phone because the “antenna” wasn’t working properly (I have always wondered whether the antenna’s short life span was

determined by the manufacturers ahead of time, one of those conspiracy theories of mine!) and fixing it would have cost

much more than buying a new, and improved, phone under a new two-year contract.

However, I sincerely doubt that the effects of this crisis will have such an impact on our newfound ways of living. But we

shouldn’t say never again. Remember, we used to be very boring before we started changing our cars every 2 years, our

phones every year (or even less, depending on the rate of innovation), our computers every two to three years, etc.

However, today’s income, credit, debt, employment and consumption environment are the perfect ingredients to go back

to old ways of living. If this happens, it will be a shock for the entitlement generation who still has a hard time

understanding how we survived if we didn’t have PCs, Internet, cell phones (one per family member) and two to three

cars per household. I will probably survive, but will they?