Saturday, October 11, 2008

A Leader Must Know How to Seem

Although I and others have been critical of Prime Minister Stephen Harper’s slow-going on conservative issues while in office, he remains the strongest choice among Canada’s party leaders to steer the country through the current economic crisis. Harper’s problem in recent days, however, has been one of style.

Harper has been pilloried for his lack of empathy (by Bob Rae of all people, who both feels and causes voters' pain). But on the numbers and the facts, much of what Harper has suggested – Canadian banks remain relatively solvent, there are bargains to be had in the stock market, etc. – is probably correct. So what if he lacks the ashes and sackcloth his rivals prefer? Leadership, however, is not solely quantifiable. A leader must know how to seem.

A remark can be truthful without being helpful. This is a rudiment of politics. Harper is a trained economist and, as a politician, he is a very fine economist. With all the bedside manner of a gout-ridden Scottish surgeon, he has told the country the facts in clinical terms. But what Canadians are looking for is heart. The country wants a leader who cares and, as polls shift away from Harper, voters are less in search of sober assessments than a hug.

As to that, Harper has famously packaged himself in casual, cozy vestments by the fireplace and, in the heat of this crisis, NDP Leader Jack Layton has said, "Now we'll finally see what's under the sweater." Indeed, on October 14, we will discover if a sweater-vest is to Stephen Harper as a wetsuit was to Stockwell Day. Liberal Leader Stephane Dion, meanwhile, has criticized Harper as "out of touch." But Dion is out where the buses don't run – and hybrid buses, at that. Carbon taxes and green shifts and environmental hocus-pocus are off the agenda for the moment. Canada is entering a difficult economic period. The country needs a leader with a serious, comprehensive approach. Stephen Harper is that fellow. Who cares if he can't cry?

Voting involves making imperfect choices. So, in order to assess Harper’s ability to address economic concerns, we must contrast his philosophy and track record with those of the other leaders on offer.

Displaying the scattershot indignation that has been a hallmark of the socialist movement since its inception, Layton is eager to be angry. He is like a heat-seeking missile with a moustache, screeching across the sky in search of a target, from bank regulations, to tax cuts, to corporations, to George Bush. But his economic policy merits the same criticism that physicist Wolfgang Pauli gave a muddled paper: “It isn’t even wrong.” Layton has blamed the market meltdown in the United States on Bush-style tax cuts – as though decades of bad mortgages bundled into shaky securities, which caused this mess, had the first thing to do with lower taxes.

As for Dion, until recently, the worst that could be said about him was that he is friendly and misguided. But his outbursts at opponents and reporters during the campaign have surrendered his ivory tower high ground as the befuddled professor. This is unhelpful, as the world has no shortage of angry environmentalists.

Incumbency can be both a blessing and a burden. For this reason, despite his opponents’ shortcomings, it is the Prime Minister’s lack of empathy that is driving the polls.

But practical prescriptions should matter more than personalities. As just one example of what a prime minister might do to alleviate the current crisis, he could reduce or eliminate the capital gains tax. 14 of 30 OECD countries have eliminated capital gains taxes altogether, and capital gains cuts have been shown to be self-financing. They increase tax revenue, as the money spent on preparing and paying taxes is instead invested into the economy. Despite Harper’s foot-dragging toward meaningful tax cuts, he is far more likely than Layton or Dion to take such a positive step. Such free-market thinking is what we need now.

Stephen Harper is not warm and cuddly, and his attempts to appear so may be unsettling, but he is the right leader for this difficult time.

Theo Caldwell, President of Caldwell Asset Management, Inc., is an investment advisor in the United States and Canada.

Thursday, October 2, 2008

Two Tenets, Two Truths

The crisis that is affecting financial markets around the globe finds its basis in two tenets that have been fundamental to the American way of life since the dawn of the Republic. To wit, everyone has the right to own a home and everyone has the right, within the confines of the law, to make as much money as possible. These are not ignoble sentiments; indeed, America has become the world’s largest economy and most powerful nation – lifting much of the world from poverty in the process – through innovation and commerce that is made possible by private ownership and free markets.

But when these fundamental beliefs are stretched to absurdity, in defiance of common sense, the results can be dire. In this case, mortgages were for decades granted to people who could not afford them. Financial institutions, meanwhile, saw opportunities to make slightly more money than they could through other investments by bundling these ill-considered loans together into Mortgage-Backed Securities (MBS). The rest is history.

First, to the matter of home ownership: In 1977, President Carter signed into law the Community Reinvestment Act (CRA), which stipulated that mortgage loans should be given to a broader base of Americans, including and especially those with lower incomes. The CRA was strengthened by President Clinton in 1995. Clinton’s Secretary of Housing and Urban Development, Andrew Cuomo, was forceful in demanding that lenders, as well as the government-sponsored agencies that backed them, Fannie Mae and Freddie Mac, give mortgages to as many poor and minority applicants as possible. It was mandated that unemployment and welfare payments be included as legitimate income for mortgage eligibility. Lenders found themselves scrambling to ensure they had enough CRA mortgages on their books to avoid lawsuits or charges of discrimination. The priority was carried into the early part of this decade, with President Bush boasting that more Americans owned their own homes than ever before. The good intention, of course, was to let everyone own part of the American Dream, regardless of their socioeconomic status. The unfortunate result, however, has become a matter of global concern.

The way in which this national miscalculation became a worldwide phenomenon is that mortgage-backed securities were purchased en masse by banks and financial institutions in numerous countries. When the American real estate market declined, mortgages went into default and MBS notes lost their pricing. By purchasing MBS paper, financial institutions had been hoping for slightly higher returns than could be achieved through more conventional securities. Whoops.

Americans have always been protective of their property and rights. As others have observed, these are folks whose forefathers rioted because the British put a tax on their breakfast drink – and it wasn’t even coffee. But somewhere in that justifiable urge to acquire and own according to diligence and talent, some room must be left for caution.

The simple lessons are these: Do not lend or borrow what cannot be repaid, and do not risk your entire financial well-being for a slightly higher return.

America is a good and resilient country. Capitalism is, as Churchill described democracy, the worst system in the world, except for all the others. Difficult as the present crisis may seem, we will get through this. Let us hope that government and citizens alike have learned what they should.
Caldwell is President of Caldwell Asset Management, Inc.