Ravengate
Partners - Stock market, economic and political commentary by Patricia Chadwick

Leaving aside the issue of influence via political contributions and lobbyists (as they are as yet unproven) the moral of the Solyndra debacle seems simple to me. The Federal Government should stay out of the investment business.

Solyndra was an accident waiting to happen. The company couldn’t get funding from the private sector. A hoped for public offering had been cancelled. It was apparently obvious to analysts and lenders that the company was, at a minimum, not an attractive investment and possibly not even viable. They chose to avoid providing either equity or debt capital to the company. The macro factors were compelling – in an industry where the competitors’ raw material costs were falling, Solyndra was a classic case of a company with variable costs that were simply too high.

One has to assume that the Federal Government employees responsible for doing the research on Solyndra simply lacked the technical skills to do a thorough analysis of the company’s long term (or even short term as it turns out) viability. That is the most charitable thing that can be said.

It is hard to imagine that they were so dimwitted that they were willing to risk the embarrassment of a default on a loan of over $500 million. So it is fair to say that they didn’t really believe the company would go into bankruptcy. Common sense tells me that the powers that be who were making the final decision about which ‘green’ company would receive Federal Government backing most assuredly wanted it to be a success story.

Of course, it is possible that Solyndra’s management lied to the Government. That is not uncommon in the investment world, and that is what tried and true analysts are paid to figure out. The Government was in over its head. If an analyst in the private sector had recommended a loan or an investment in Solyndra and within two years the company had gone kaput, you can be assured that the yearend bonus for that analyst would also have gone kaput. In the investment world, there is a real incentive to be hardnosed, to get the facts right and to make a decision that creates a positive return. There is no such incentive system in the Federal Government. I doubt that anyone will lose his/her job over the annihilation of $535 million of taxpayers’ hard earned money being lent to Solyndra.

So assuming that there was no sinister under-story here, the problem must lie in the fact that the Federal Government employees charged with researching the case were simply not up to the task.

And therein lies the true moral of the story. Let the Federal Government stick to its appointed knitting, and for the benefit of all the people it serves, let it stay out of the sophisticated and specialized business of investing in and lending to corporations in the private sector.

Why is there no job growth in the U.S. Economy?

Depending upon whom you ask, you can get any number of different answers. Political demagoguery is the easy response, particularly when we are less than fourteen months away from the presidential election.

But I am confident that had John McCain won the election in 2008, the unemployment rate today would not be much lower than it currently is.

Contrary to what many Republicans say, the stimulus plan did indeed help the economy and certainly provided for jobs. And for the most part the money that was spent was used for long overdue infrastructure spending that the Government should have been doing all along. But there is no way the stimulus plan could be a long term solution for economic growth. That is the responsibility of the private sector.

The real problem underlying the dearth of new jobs today is twofold.

On the one hand, it reflects the fact that the consumer is paying for the sins of the past. For two decades, consumers in this country went on a spending spree. With the aid of banks and other lending institutions, they used the equity in their homes to borrow money, over and above what they were earning, and then they spent that money. Such behavior acted as a stimulus to the economy, that is, until the music stopped.

The recession that started in 2007 brought an end to the profligate borrowing, as the decline in home values eviscerated many homeowners’ equity. Banks turned off the lending spigot and consumers were forced to alter their lifestyles. Instead of turning to a new line of credit in order to pay off the old one, they found themselves forced to repay their loans, often as their own income was diminished. Their response was quick and logical. They cut back on spending and started to save, and savings rates, which had plummeted over the past twenty years of excessive spending, began a sharp reversal, rising dramatically over the last four years. All of that sounds like good news, and in one way it is because it means that the consumer’s balance sheet is improving.

However, savings increases are coming at the expense of spending and therein lies one of the big problems for job growth and the economy in the short run. Savings by definition is money NOT spent. Savings in the long run will be very beneficial and will allow consumers to replenish their balance sheets but the process is painful. And because the consumer had so much debt at the time of the recession, it is likely that it will take a number of years still before consumer spending becomes robust again. And without robust demand, it is difficult to create new jobs.
On that score, it is not fair to blame the current administration for the lack of jobs. Consumers brought this state of affairs on themselves, and they are slowly rectifying it.

On the business side of the economic equation, which is the investment part of the economy, the issue of job creation is also a problem. In part, it is the result of slow final demand by consumers who are unable to spend as freely as they could when borrowing was at their beck and call. However, the problem is bigger and more dire than that.
Businesses spend their capital and/or expand their labor force based on the profits they expect to generate from those investments. Entrepreneurs make decisions about starting new businesses (and more than half of the job creation in this country comes from new and small companies) on the basis of the long term outlook for growth and profitability.

What has emerged over the last several years is an environment of Government regulation that is truly crushing the entrepreneurial spirit in this country. Companies large and small are facing an array of rules, restrictions, and profit-destroying constraints that have immobilized capital. The threat of higher taxes for corporations and small owner-operated business is a powerful deterrent to capital formation.

Until and unless there is a major reprieve from such stultifying over-regulation, our economy will not make forward progress and unemployment will remain unnecessarily high. The blame for this state of affairs can indeed be laid at the feet of the current administration. President Obama is either getting bad advice from his inner circle of advisors or not heeding them, but he ignores the problems facing business and employment at his own peril.
There is not much time between now and Election Day in 2012 to remedy the unemployment rate. However, massive elimination of regulation and an equalization of corporate tax rates that allows the U.S. to be competitive with other countries would be a major start. A bold move such as that would send the message that the President understands how the economy works and what it needs to get it turned around. But as of now, people don’t think he gets it and they will be looking for someone for President who does.