One of the great so-called “urban myths” is the one about alligators prowling around in the sewers of New York City. The myth has its roots in the ‘50’s when tourists, coming home from Florida, would bring home baby alligators that they would eventually flush down the toilet when the novelty wore off. I know for a fact that this myth has an element of truth. Improbable as it seemed in Vermont, our neighbors brought one back from Florida and had it as an in-door house pet for their four children until, lumbering around at about four feet in length, they had it euthanized.
A similar urban myth seems to be the failure of President Obama’s stewardship of the economy during his term of office. Regardless of which party is making the case, the consensus is that he has left a huge swath of the American population in dire straights.
In fact, the unemployment rate today is down to 5 percent from the 10 percent it was shortly after he took office. The last time it was 10 percent was when Ronald Reagan left office. It’s true that the 5 percent is subject to debate and that, for instance, middle aged workers who are back at work have jobs that pay less than before. Call that the element of truth. But the flip side is that many of those older middle aged people now see themselves as free to work shorter hours or at part-time jobs because they are guaranteed the right to health insurance without having to work full time. Meanwhile, if you look around at traffic flow, rent and home price increases and other anecdotal evidence here in the Bay Area , there is no question but that the economy has vastly improved overall. More directly, the broad cross-section of companies with whom we do business are generally healthier.
In Indiana, a rust belt state, the unemployment rate is only 4 percent and companies desperate to find workers have been recruiting in homeless shelters. So, overall economic success is not just confined to some technology bubble here in Northern California. Indiana can thank much of their success on the fact that we saved the auto industry.
After a long interview with President Obama that spanned a three-day period, Andrew Ross Sorkin wrote in the New York Times Sunday Magazine about the disconnect between public perception and what has actually been the case regarding the economy over the past seven years. For example, 70 percent of people in polls think that the deficit (the amount we spend per year that is greater than the amount collected in taxes) has increased under Obama. In fact, the deficit amount has dropped by more than three quarters from what it was when he took office. The government debt is still at an historic high, but it is being financed over the next thirty years at historically low interest rates.
With all the criticism over bailing out banks, insurance companies, the mortgage industry and the auto industry, the fact of the matter is that they survived and the government made money on every bailout. We apparently know to negotiate --- and make money.
Discounting all this success, some credit the action of the Federal Reserve as the only reason for whatever success the economy has experienced, but it was Obama who chose to re-appoint Ben Bernanke for a second term and who later chose Janet Yellen to replace him. Moreover, President Obama and the rest of us all got lucky from the unintended consequence of the financial collapse --- the resulting $17 trillion in cash sitting in banks and money market funds earning nothing but offering reassurance that the next crash will not leave investors and financial officers exposed. The fed rate is immaterial if banks don’t have to come to the overnight window for money.
It’s interesting to consider what might have happened if we had just let the banks fail when many politicians thought that was the wise course of action. It took some fear mongering and a second attempt to pass the Troubled Asset Relief Act. Without it, all of the banks would have failed. An insolvent Merrill Lynch, borrowing heavily on customer assets for example, would not have had the Bank of America as its savior, and American investors with more than $500,000 in securities held in street name would have had a first-hand experience of what it felt to lose everything beyond the SIPC insurance level. As Barney Frank’s bumper sticker says, “Without us, it would have sucked worse.”
I hear complaints but no solutions these days from either political party. Those who profess to care about the demographic of Americans who have fallen through the cracks need to think along the lines of the Civilian Conservation Corps of the 1930’s. Back then, we spent $3 billion over nine years employing a total of three million young citizens. In today’s dollars, that would be $6 billion a year --- a third of our oil industry subsidy. We have the money to do something bold again. The element of truth is that we have pockets of despair in a slow growing economy, but the repeated cries of a totally broken America all the fault of the current administration is just another urban myth. Any investor letting that myth rule their investment decisions for the past seven years lost the chance to make a lot of money.