Economic Thoughts That Still Apply Today

I was cleaning up some files today and found the following copy of a letter I sent to former Secretary of Education, Dr. Bill Bennett, on September 24, 2008.  I've had the opportunity to speak with Dr. Bennett a number of times on his nationally syndicated radio program.  I've sent him a handful of such letters through the years, and he has graciously read some of them on the air.  Following were my thoughts in the midst of the 2008 financial crisis and first Obama election cycle.  I still agree with them by the way (at least as applied in a secular sense without spiritual solutions), and they will help set the stage for some subsequent thoughts in a blog post on the "fiscal cliff":

Bill,
 I have been trying to call, but can’t get through.  All the analysis I hear is hitting on the symptoms of the current financial crisis rather than the root cause.

The root of the problem is the negative side of human nature that expresses itself as greed, envy and laziness.  It’s the desire to get something without working for it.  It’s the longing to have as much as the next guy, without putting forth real effort to do it.  That’s what drives an individual to buy a house he can’t afford on a risky mortgage.  It’s what drives investors to buy financial instruments they know nothing about.  It’s what drives a broker or bank to take more risk than their predecessors ever did. 

As long as there are humans involved, there are going to be investment bubbles.  People caught up in the notion of easy money will always find ways to get around regulations.  The only thing that will slow this down in our generation is the experience of living with the consequences.  Who built the booming economy of the 20^th century?  It was the post-depression era people who learned by experience that hard work, personal saving and knowledgeable investing were the only path to prosperity. 

I think the bailout (or some reduced form of it) is worth a try.  I hope that we can spread the collective impact of our bad decisions over time so that it is bearable.  Unfortunately, I fear that we are only delaying the inevitable economic collapse that is coming.  I fear this bailout will further devalue our currency, stoke inflation and delay the hard lesson that my generation has not learned.  I think the crisis is coming soon if we have a bailout, and sooner if we don’t.

I think McCain’s message should be:

1)      This bailout is going to be limited and those who’ve made foolish decisions are going to feel some pain.  Those who’ve been dishonest will face prosecution. 

2)      We are going to shore up the dollar by having responsible federal spending

a.       As a nation, we are going to immediately trim the budget to eliminate the deficit starting year one.  If we reduce outlays by just 12%, the budget is balanced.  It’s not that hard (politics aside) – we do it in business all the time.  We will not spend more than we have.

b.      By the start of his third year in office, we will begin reducing the federal debt (budget surplus). 

3)      Change the federal tax system to a fair (flat or value added) tax system. 

4)      Make energy independence the “Moon Shot” of our generation giving the United States control of technologies the rest of the world will clamor for.  This will generate whole new industries that can replace what we’ve lost.  Protect it for posterity. 

5)      Promote a tax system that rewards US manufacturing and industry.  That is where true wealth resides.  We can only trade and repackage mortgages and financial instruments for so long before our economy collapses – as we are seeing right now.

I work to understand as much as I possibly can about investing, international economics and business.  But I can’t get away from what my father taught me about personal and national finance a long time ago:  “If you don’t have the money, you can’t afford to buy it.”  It doesn’t matter what “it” is.  That is where we are as individuals and as a nation.

Mark Wilson