Stack and tilt economics

The great new fad in teaching the golf swing has been the method known as Stack and Tilt. The basic premise of this technique focuses on two positions: the back swing and the finish. Simply, from address, reverse pivot to reverse-C. For some players, it has worked well, for others, it has knelled the end of their careers. Stack and Tilt can work for some golfers, and many have made millions on Tour by following its principles. Adherents of more traditional instruction have been skeptical of this as an alternative and equal approach to teaching the golf swing. Stack and Tilt emphasizes a reverse pivot where the weight does not shift to the right side during the back swing; many regard as a flaw in an efficient swing. How, the question goes, can a flaw suddenly become a fundamental?

 

Economic policy over the past ten years has followed a similar trajectory except for the fact that economic purists were seemingly ignored while fiscal and monetary levers were manipulated in ways which only delayed the inevitable, current mess. If the undergraduate economics professors of the Fed board of governors knew that their students would one day make such policy decisions, they would have certainly flunked their charges on the spot. One can blame group-think or a culture of endemic callowness within the administration where clash was almost impermissible, where no one rocked the apple cart, but the central bank is independent and in position to stand up to claptrap. Granted, no economist wanted the blood of a potentially lost decade as the one Japan experienced after the collapse of its equity bubble, and panic moves never end well. However, embracing ideas such as soaring deficits, tax cuts, and prolonged periods of cheap credit while ignoring the inevitable consequences of excess was dumb and passive.

 

Fiscal and monetary policy have been both grossly irresponsible. During the first term of the Bush presidency, the executive and legislature inherited a budget surplus which ought to have been used to pay down the monetized national debt. Instead, public money was squandered on many ill-fated, ill-conceived initiatives ranging from missile defense to faith-based initiatives. Moreover, the legislature, with a majority united to the executive. approved tax cuts during a period of unprecedentedly prolonged economic growth. Foolish, arrogant and short sighted, the quick sop to a country still not quite convinced the right man was in the Oval Office was a cynical ploy to get the public on board with the new president. However, without a way of replenishing the public purse, the country was unable to gird itself for the shit storm caused by both endogenous and exogenous forces during the next eight years. Monetarily, the recent record of the central bank is not so glowing either. Lauded as a genius, encircled by a seeming personality cult, former Fed Chairman Alan Greenspan could do no wrong, but he has since admitted he was wrong in many respects from bailing out LTMC to keeping interest rates artificially low. Years of unnecessarily low interest rates facilitated rolling asset price bubbles as the monetary lever was used to keep the wheels greased and delay a reckoning. Little of this seemed prudent at the time, for it all seems reckless now, as the state had guaranteed against any moral hazard.

 

Echoing the timbre of the last days of Rome, John McCain's assertion about the fundamental soundness of the economy showed that we had bought the bullshit, and the people selling it were the very ones that had the professional, philosophical obligation to remain above the fray. Here are a few examples of when someone ought to have thought of drawing the brakes:

• In winter 2000, it was common knowledge that recession was imminent. Rather than brace for recession, Greenspan opted for a soft landing. In hindsight, when much of the lost wealth was in paper assets due to rampant equity speculation, the segment of the population hardest hit would have been the wealthy. Not a chance of a correction taking place with Republican dominance of executive and legislature.
• In winter 2001, when the fallout of the dot-com era exposed malfeasance from faulty business models to disingenuous analytics to plain, old book-cooking (Tyco, Enron, WorldCom), the hastilycobbled Sarbanes-Oxley Act did little to give regulators the resources and scope to deal with crises in the future. "Self-regulation," came the cry. Good job.

Now, when policy decisions have affected not just the leisure or investor classes, but people whose meager net worth is tied solely to the value of their home and the amount of debt they have against the property value, no one is quite sure which is an advantageous step. Concomitantly, high stock market volatility, huge drops in global commodity demand, unfathomable levels of foreign and sovereign debt for the developed world are all symptoms of the collapse in credit markets. Moreover, a coordinated bailout of American investment and retail banks simultaneously doubled the national debt ceiling. The last decade has created a culture within the financial services industry that it is their birthright to have high yield on anything they touch. How is any of this fundamentally sound?

At the most basic level, economics is a science of allocating limited resources. As a science, it cannot predict the future, but as a study of statics, it can indeed illuminate causal, logical relationships. More philosophically, economic analysis can provide clarity, both logos and ethos, a cool breath of reason to policy debate when hot rhetoric and emotional appeal sometimes make for a muddle in determining the best course of action. Like medical doctors take the Hippocratic Oath to do no harm, economists must implicitly not buy into the bullshit. Why else would central bank autonomy be regarded as generally good? 

 

To restore the confidence in economics, capitalism, and the institutions acting as their instruments, a return to status quo ante would be a rash error, but some old style remedies are certainly in order:

1. Offer higher deposit rates - Current interbank rates are higher than ever even as risk premium for safe investments. What better way to access a lending capital pool then by paying out more than a paltry 2%? If banks offered short term CDs one percent below interbank lending rates, many depositors would queue up in no time.
2. Scrap the Paulson plan - No Fed Policing. Plain and simple. An expanded Fed cannot act as uber-enforcer of the rules. It contravenes its original mandate which it has seemingly failed to fulfill as of late. A bureaucratic expansion would do no one any good.
3. Reconcile the tax base - Short term increases? Distinctly possible, but economic crisis exposes structural defects as well as cyclical. While existing efforts untangle the fiasco at hand, the incoming administration must come up with an alternative to income tax.
4. Leverage ratios for investment banks - Light touch regulation such as this may seem like a capital control, but when pension fund portfolios are exposed to highly leveraged firms Bear Stearns and Lehman Brothers, the onus of default adversely selects the wrong shareholder. Also, why should Goldman Sachs enjoy a 2000:1 leverage to asset ratio? No one ought to be able to borrow 2000 times above his worth.
5. Proportionate funding of existing regulatory agencies - Given the scale by which the federal government has expanded the last eight years, it would be interesting to see the percent change in annual budgets across the myriad agencies. The SEC, FTC, CFTC and DOJ Antitrust division probably did not receive much largess. Adequate funding would allow these regulatory agencies to do their job in real time, learn how to treat complex derivatives, and not be forced to act ad hoc during a crisis. The regulatory and legal framework does a lot to reduce the risk of default. It is a quasi-gold standard, and the country cannot afford to see it diminished.
6. Tight money - To keep foreign investors keen during retrenchment as well as to combat inflationary pressure, Treasury will buy back its securities. The Fed will raise interest rates. Consequently, the higher yield on our bonds is more attractive. It will have to be, if politicians balk at enacting the change which got them elected this year, though such structural change will be quite painful.

This nadir in economic history will end, though probably not soon. There are three asset price bubbles from which Western and developed economies not quite recovered. Economists and policy makers should stop reinventing the wheel and simply stick to true fundamentals. Then, everyone can benefit, for the culture of double dealing and lack of accountability ought to be coming to an end. Ditch the Stack and Tilt, and then things can get to the right side.