Opinion

The Great Debate

Ten commandments for the first 30 days in office

November 6, 2008

juan-enriquezJuan Enriquez is managing director of Excel Medical Ventures and the author of “As The Future Catches You.” Any opinions expressed are his own.

There are two ways of viewing this debt crisis. One is that it is simply a temporary dislocation in the credit markets and a liquidity problem. The second is that it is a crisis triggered by subprime lending, accentuated because most people still can’t afford their houses, and compounded because almost every bad loan was highly leveraged. If it is the second type of crisis, one should remember: if trapped in a ditch full of debt, quit digging.

We are piling debt on debt. U.S. consumers are tapped out. Net household savings have gone negative. Corporate debt, particularly derivatives exposure, has reached truly dangerous levels. (Outstanding derivatives exceed $655 trillion. The U.S. economy is around $13 trillion). Government indebtedness is also approaching levels that exceed even those reached in the Depression and World War II. Add these three sources of debt together and the U.S. already owes almost four times its GDP. Now we are adding trillions in bailouts and face rocket-fueled mandatory spending programs. These trends may end up being fatal if we do not act. Right now.

For years, many have been warning, pleading, threatening. Now the crisis really is upon us. And because the numbers are so large, the Obama administration has a very narrow window, say thirty to sixty days, to send ten very clear signals and buy itself some financial breathing room.

First and foremost, Obama has to focus on the dollar. There is ever more pressure on rating agencies to question whether the U.S. remains a triple AAA credit risk given the current debt overhang. If U.S. debt is downgraded then a whole series of institutions could not hold T Bills and short sellers would begin to hunt. Maybe some of the same ones that brought down the British pound.

We have to send a very clear signal that we are going to begin to live within our means, spend what we earn, eventually begin to save. This requires a bipartisan program that makes both Democrats and Republicans most unhappy as we begin to restructure our debt.

We cannot save every dying whale. Everyone wants a handout. Some are essential. But we simply cannot afford most bailouts. We cannot spend a few hundred billion more, every week, without major consequences. Some banks, some major companies, cannot be saved.

All entitlements must be fair game. They were going to exceed all government revenues by 2030. The current bailout, guarantees, and supports accelerate this reckoning by five to ten years. We are out of time. So if you are 60 to 65 you probably just lost a good chunk of your nest egg. You get a free pass. 55 to 60? We need a year’s more work out of you before retirement and benefits. Under 55? We will need at least three more years. This is fair given that benefits like Social Security were provided when being 65 was considered old and life expectancy was 68.

The U.S. cannot simply pull out of all military commitments overnight; we already saw the consequences of this in Afghanistan in the 1990s. And even if we did pull out, there are enormous cost overhangs in veteran care and benefits that have to be respected. But at the same time, we cannot afford to maintain the military we have. So there has to be a commitment to cut military spending by 2-3% per year for a decade. If we can do this in the context of mutual disarmament treaties with China and Russia, so much the better.

The greatest single threat to the budget is medical spending and benefits. We currently spend about 17% of GDP but the trends are horrific. And we only spend one out of seven dollars directly on doctors and nurses. There is much to be cut, much to be rationalized. So let’s commit to capping medical costs at 20% of GDP (it is 17% today). Begin by covering essential services first so we do not end up in budget games like: “if you wish, I’ll just shut the emergency room.”

Which brings up the matter of budget transparency… CEOs who exceeded a budget by as much, or hid as much debt, as most governments routinely do would, at best, be fired. More likely they would be jailed. We need to apply a simplified Sarbanes Oxley to business and to state and federal government. We also need to apply some transparency to unregulated markets, like derivatives.
While cutting in some places, the U.S does have to keep fast-growing start ups alive. Venture backed companies invested about 0.2% of U.S. GDP to create close to 18% of the economy. This is where you generate most of the jobs, not in the Fortune 500.

As a last, and perhaps the most important commandment and priority, the financial crisis will pass. But the long term survival of the country depends on treating education like a varsity sport. If you want to play varsity you have to put in the twice daily practices, summer training, hire the best coaches, move the incompetent aside, and build large organizations of committed parents and boosters. Not everyone can, or even wants to, play varsity, but those who choose to compete should get extraordinary resources.

If the U.S. lets people know it is serious about getting its financial house in order, we will survive and thrive. The alternative that was followed by so many others is just to keep spending, which is why the last thing most great empires do is drive themselves into bankruptcy.

This essay is adapted from a talk that Enriquez gave at the Pop!Tech conference in October. View the video below.


Juan Enriquez (2008) Pop!Tech Pop!Cast from Pop!Tech on Vimeo

Comments
19 comments so far | RSS Comments RSS

Spot on!
Although I believe strongly in expanding the military to its former strength of 18 armored divisions (dissolved to 10 during the Clinton administration), these are extraordinary times. Mr. Enriquez is also tuned in to what must happen with the U.S. education system. We simply can’t support the public school system as it stands today. It’s just too big. If Mr. Obama will begin to preach what he practices, that is, allowing every American to send their children to the school of their choice, school vouchers would clean up much of what ails in our public schools. Further, as much as conservatives over-quote Ronald Reagan, one of his is a universal truth. ‘The strength of a nation is directly proportional to the strength of its currency.’ We must act quickly and decisively, or, as Mr. Enriquez states, this city on the hill will drive itself into bankruptcy.

Posted by al hoidal | Report as abusive
 

This article was dead on with what the next presidential administration not only faces, but how it needs to react and react quickly. Very insightful and I’m printing it to show all my friends.

 

Thank you for a clear view of the real problems the USA – and many other countries – face today. I am refreshed to see that some people understand the issues and can speak to them in apolitical terms. I fear, however, that continued partisan bickering and corporate control over the electoral system & K-Street will cause matters to get worse before they get better. Corporate irresponsibility combined with lax regulation created the current fiscal crisis. Let us hope that America will change itself. Could this be the end of the “Me Generation” and the beginning of a worldwide cooperative relationship?

Posted by Jean | Report as abusive
 

I am a hedge fund manager. What is an economy?

Posted by John Blodbrett | Report as abusive
 

how about starting with goverment and senate use retirement like regular people, and we do away with the golden fleece…

Posted by jacque | Report as abusive
 

stop supporting companies that are failing, instead of bankruptcy and taxpayers taking up mantle, how about company sells assets and pays debts….i.e. Delta Airlines….how about we stop supporting illegals and start concentrating on getting them back where they should be until immigrate the right way, and get our people on their feet and stop looking for handouts???why should teachers lose their jobs because they aren’t bi-lingual, when they (schools) want them bi-lingual for illegals? Think about it-

Posted by jacque | Report as abusive
 

I applaud Mr. Enriquez’ ideas. But I worry: the financial industry always wants greater returns. In a low interest rate environment, won’t the industry “players” make ever more exotic instruments to get higher rates of return? And if rates are raised…watch out! Even worse problems!

Posted by Sarah Dowson | Report as abusive
 

There is much to be done and yet I see no reason to take anything offered up here as anything but the blandishments of a few obvious steps that might be taken and a few statements that prey upon semantics to justify some of the outrageous fiscal crimes of the past few decades under a regieme of ‘Reaganomics’.

The author is presumptuous in the extreme when he blatantly stated at the start of this article that there are but “Two” (2) ways of “viewing this debit crisis” … and for that reason it is pointless to contemplate the entirety of what he has said as serious reflection or recommendation … Smarten up before laying down such babbling drivel that avoids speaking to the issues in a honest way!

Posted by Barrie O. Ward The Canadian Geezer | Report as abusive
 

Why didn’t you tell George Bush and the Republicans this years ago?

Posted by Willy Marshall | Report as abusive
 

Spot on. Its nice to see that someone gets it.

Posted by steve | Report as abusive
 

Indeed. Probably the best place to start would be cutting military spending, quickly withdrawing from all bases around the world. All capitalization requirements for banks should be lifted so that the financial industry cannot be dominated by a few corrupt behemoths, but rather would be a free market of worker-run credit unions and mutual banks. This would have the additional advantage of increasing class mobility and breaking the power of the plutocratic caste. Returning to a commodity-based currency would be a good first step, although ultimately it is important that people be able to freely decide on their own currency, in which case any that is backed by labor may be seen as valid. Naturally, all corporations whose position in the market is due to state intervention (which is equivalent to all major corporations today, given the role played by IP laws, state control over credit, leasing privileges, tariffs, corporate welfare, and the whole lot) should be taken over by their workers, such that they receive the full value of their labor.
Steps such as these, I believe, would be a good start in dealing with the financial crisis. Finally, establishing the universal right of democratic self-government and thus secession would trim much of the fat off the U.S. budget, since throughout history bloated and overextended empires have tended to do badly. So we need to work on making sure government only exists by the consent of the governed, first and foremost.

Posted by Nick | Report as abusive
 

Please Mr. Obama play the important role as the reflection of the United States of America citizen. I am a little bit worried about the puppet President of the irresponsible community. The good thing of the promise should be process into reality. The role as “world policeman”, “the superpower country”, such as contribution in Iraq is better in another shape. Thanks to the America, because it is care to another country in the world. Anything is possible there.
God bless America

Posted by Andre Budianto | Report as abusive
 

No mention of eliminating the trade deficit, the root cause of our whole financial meltdown. This guy is clueless.

 

just adopt indian financial system and you will survive
you can not spent more than what you earn …

Posted by ajay kumar singh | Report as abusive
 

Bravo to Mr. Enriquez.
I believe that appointing Paul Volcker as Fed chairman would be a great sign that the Obama administration takes fiscal and monetary responsibility seriously, and would send a clearcut signal to Congress and the markets.

Posted by Gary Leeper | Report as abusive
 

DEAD ON !!!

BTW, this is exactly what Ron Paul, Texas Senator and former presidential candidate was trying to tell us all for years

the best cure to debt addiction is 100% commodity currency standard and requirement for 100% bank reserves

money should be created through savings not outof thin air in this giant debt Ponzi scheme of fractional reserve banking

Posted by Marek | Report as abusive
 

Better yet why didn’t we tell the Clinton Administration. We have this tendency to blame everything on the current administration but as Obama stated in his acceptance speach it may not happen in the next 4 years. While we are cutting how about we stop some of the spending to support our congressional leaders for their entire lives and their families entire lives. If the Senate and Congress would treat our money the same and they treat their own then we could get somewhere. And while we are going there how about we start random drug and alcohol testing with the Senate and Congress. I’m not so sure I care so much for their lawmaking after a 3 martini lunch.

Posted by Gail Bates | Report as abusive
 

I applaude!

unfortunatelly, nobody will ever win presidential race with this plan,

it is much easier to simply print money

 

no one is i will appoint the same old cronies that were here before this is a big change no drill for gas or oil wow sounds familiar

 

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