Trying to Understand Congress

At "A Dash" we have avoided taking an advocacy position on the proposal popularly known as a bailout or The Paulson Plan.  Unlike many other investment bloggers, we have described positions in real time, including plenty of hedges over the last few weeks -- win or lose.

In short, we try to analyze rather than to recommend.

Analyzing the House Decision

Last week we had an inquiry from an astute reader who is very much in tune with the popular sentiment on the Paulson Plan and especially on the GOP attitude.  She agreed with all of the standard public opinion arguments -- Paulson helping his pals, taxpayers on the hook for $700 billion in losses and maybe more, various allegations about money going to liberal groups, etc.

Here was my email response:

If
you really want to understand what is happening, read this week???s piece by John
Mauldin.  Ideologically he is much, much closer to you than to me.  He has a
knack for explaining things, and he has good contacts.

Everything
he describes is something I have written about.  Despite the length of the piece
and many contentions, I agree with nearly everything he says.  You can
understand it, but you might need to run through it once and then read
again.

We
are in a vicious circle that I call the ???death spiral.???  There is a school of
thought that maintains that this is a normal functioning of the business cycle,
that we were too highly leveraged, and that we must go through the de-leveraging
process sooner or later.  These people, including both academic economists and
bearish market pundits (who are cashing in on short positions and selling
books), have missed a key point.

This
spiral has no natural level at which it will stop.  There is no ???correct??? amount
of leverage.  The Mauldin column shows that we are way past any normal level in
many securities.

The
problem is that the average person does not (and cannot) understand this.  The
average Congressional Rep can???t either.  It is as if we were in one of those
movies where an asteroid was headed
toward earth.  Some folks think this is an act of nature or God and will hit us
or not.  Others think we should try to send missiles to intercept it.  Those
discussing the missile plan are arguing about what color the missile should
be.

Seeking an Analogy:  The Asteroid

As an analogy, let us try the Bruce Willis film, Armageddon.  We'll take some liberties with the plot to make our point.

Let us suppose that some scientists determined that an asteroid was on a collision course with Earth.  The expected force would be similar to a nuclear explosion.

• There is a group of scientists who expect the asteroid to hit Earth, with the effect of a nuclear weapon.
• Some scientists disagree, using the "157 theorem".  They argue that the asteroid will have a minor impact and restore a normal and natural balance.
• Others argue that the asteroid will miss earth.
• Some contend that an asteroid strike is a matter of nature.  We cannot repeal nature!
• Some participants in the debate have real estate holdings in caves.  They profit from the scare, and encourage it.  Others are selling gold.
• Some participants in the debate are selling books -- why our scientists failed to see this earlier, why earthlings should buy gold and shotguns, and why we should prepare for disaster.
• Some are attempting to destory the asteroid.  They want to send up a team to destroy it before it strikes.
• There is considerable debate about the best way to deflect the asteroid.
• The program to attack the asteroid has a cost, possibly an investment in the future, and possibly a waste of money.  It requires granting considerable executive authority.
• The media harps on the potential for waste and possible scientific errors.  Leading bloggers join in.

The Solution?

Congress meets in emergency session to authorize a plan.  The public has no way of determining the merits of the contending scientific arguments.  Members of Congress struggle to understand the contending scientific arguments.  The legislators have the responsibilty of office.  They have two choices:

• Put a wet finger to the wind and do what constitutents believe to be the correct scientifict interpretation; or
• Make their own determination of the facts.

The President, his top advisors, and the leadership of both parties advocate action.

The Result?

A majority of legislators votes to take no action.  What will be, will be.  They do not want to face constituents.  They have little cover from the popular media.

Everyone agrees that asteroid planning should have taken place eariler.  Many pundits pontificate about which agencies were at fault.  Few bother to look forward to find a solution.

It is wonderful to live in a democracy.  We do not have to deal with tyrants and dictators.

The problem:  Looking forward takes strong leadership.  It requires the ability to explain consequences before they actually occur.  No President gets credit for avoiding problems, since in that case the results never actually happen.   It is only when the impact is palpable that public support develops.