Like it or not, there are no easy solutions
Www.waltonsun.com
December 11, 2010
If you catch me in one of my 30A haunts wearing a ball cap with FOOL emblazoned on the crown, don?t judge too harshly. Tom Gardner, one of The Motley Fool?s founders, personally gave me two FOOL ball caps. In ?As You Like It,? Shakespeare references ?? a motley fool,? or the court jester as the only person who could tell the king the truth without worrying about losing his head.
In 2005, economist Dr. Raghuram Rajan boldly predicted the pending disaster affecting the U.S. economy. What made Rajan?s prediction so unusual was the venue ? long serving Federal Reserve Chief Alan Greenspan?s Jackson Hole, Wyo., retirement bash. Rajan alone dared to question Maestro Greenspan?s policies with his presentation ?The Greenspan Era: Lessons for the Future.? No one lopped his head off, although Larry Summers, former head of President Obama?s Council of Economic Advisors, directly confronted Rajan after his speech. Summers claimed increased regulation would reduce the productivity of our friends in the financial industry.
Many blame the financial crisis America still struggles with on housing, but Rajan boldly (again) sees the housing bubble as a symptom of a more insidious problem ? income inequality. Before you throw the paper down and shout ?wild-eyed liberal,? remember Rajan teaches at the University of Chicago, a freemarket bulwark. For those reading online, don?t blow your coffee on the screen either. Both the good doctor and I are pragmatists.
Beginning in the 1980s, income inequality in the United States widened significantly. Since there was little political pressure to expand welfare or other income redistribution ideas, housing became the panacea. For Democrats, home ownership for the poor would benefit their constituency and Republicans thought homeowners would eventually vote Republican. Politicians from both sides of the aisle pushed Freddie Mac and Fannie Mae to subsidize more mortgages.
Unlike equities, housing prices could not drop. Didn?t you hear that pitch? Plus, homeowners could borrow against ever-increasing home values, thus fueling demand for goods and services.
We know how this story is playing out. Despite the recession ending, we will be facing tough economic headwinds for quite awhile. Rajan projects we are looking at five years from the trough of the recession (mid-2008) before job numbers return.
To prove his free-market moxie, Rajan disdains the argument we should stimulate demand because ?it is not about demand? we have a structural problem,? ? specifically income inequality. Without addressing income inequality, pumping up demand only creates the illusion of growth.
Trying to redistribute income does not work either, Rajan argues. Rather, the best way for American income inequality to drop is by improving education and/or developing skills that translate into 21st century jobs. Few Americans can afford a good education anymore; costs are enormous.
One reason the United States has enjoyed its success for so long is because when problems get big enough, we have historically come together and worked toward a common goal. Income inequality makes compromise fruitless and creates treacherous political dynamics. We need to get away from bumper sticker solutions and begin to accept the fact there are no easy answers.
Anything else is foolish (with a small f).
Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Contact him directly at 850-267-1068 or at buz@LivingstonFinancial.net? .
BUZ LIVINGSTON
Www.waltonsun.com
December 11, 2010
If you catch me in one of my 30A haunts wearing a ball cap with FOOL emblazoned on the crown, don?t judge too harshly. Tom Gardner, one of The Motley Fool?s founders, personally gave me two FOOL ball caps. In ?As You Like It,? Shakespeare references ?? a motley fool,? or the court jester as the only person who could tell the king the truth without worrying about losing his head.
In 2005, economist Dr. Raghuram Rajan boldly predicted the pending disaster affecting the U.S. economy. What made Rajan?s prediction so unusual was the venue ? long serving Federal Reserve Chief Alan Greenspan?s Jackson Hole, Wyo., retirement bash. Rajan alone dared to question Maestro Greenspan?s policies with his presentation ?The Greenspan Era: Lessons for the Future.? No one lopped his head off, although Larry Summers, former head of President Obama?s Council of Economic Advisors, directly confronted Rajan after his speech. Summers claimed increased regulation would reduce the productivity of our friends in the financial industry.
Many blame the financial crisis America still struggles with on housing, but Rajan boldly (again) sees the housing bubble as a symptom of a more insidious problem ? income inequality. Before you throw the paper down and shout ?wild-eyed liberal,? remember Rajan teaches at the University of Chicago, a freemarket bulwark. For those reading online, don?t blow your coffee on the screen either. Both the good doctor and I are pragmatists.
Beginning in the 1980s, income inequality in the United States widened significantly. Since there was little political pressure to expand welfare or other income redistribution ideas, housing became the panacea. For Democrats, home ownership for the poor would benefit their constituency and Republicans thought homeowners would eventually vote Republican. Politicians from both sides of the aisle pushed Freddie Mac and Fannie Mae to subsidize more mortgages.
Unlike equities, housing prices could not drop. Didn?t you hear that pitch? Plus, homeowners could borrow against ever-increasing home values, thus fueling demand for goods and services.
We know how this story is playing out. Despite the recession ending, we will be facing tough economic headwinds for quite awhile. Rajan projects we are looking at five years from the trough of the recession (mid-2008) before job numbers return.
To prove his free-market moxie, Rajan disdains the argument we should stimulate demand because ?it is not about demand? we have a structural problem,? ? specifically income inequality. Without addressing income inequality, pumping up demand only creates the illusion of growth.
Trying to redistribute income does not work either, Rajan argues. Rather, the best way for American income inequality to drop is by improving education and/or developing skills that translate into 21st century jobs. Few Americans can afford a good education anymore; costs are enormous.
One reason the United States has enjoyed its success for so long is because when problems get big enough, we have historically come together and worked toward a common goal. Income inequality makes compromise fruitless and creates treacherous political dynamics. We need to get away from bumper sticker solutions and begin to accept the fact there are no easy answers.
Anything else is foolish (with a small f).
Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Contact him directly at 850-267-1068 or at buz@LivingstonFinancial.net? .
BUZ LIVINGSTON
