American Industry: We Are the Cavalry

This is an open letter to America’s managers, executives, and investors.

If America is going to come out of this crisis, it’s going to be up to us to make it happen. The cavalry is not going to ride in at the end of the movie to save us.

We are the cavalry.

It’s critical to understand the situation we are in. We are not in a recession, economic slowdown, demand slump, or any of those other phrases used to describe the normal variations of the business cycle. We are in a full-blown financial and economic collapse brought about by years of public mismanagement.

There is a political narrative being advanced that the current financial crisis was caused by deregulation. In fact, the opposite is true.

Congress actively encouraged the origination and securitization of subprime loans, and it is to no one’s surprise that the most regulated entities in the system — the FDIC-insured banks, the investment banks, and Freddie Mac and Fannie Mae — ended up holding this worthless paper, going under, and getting bailed out.

Then we were told by the same Congress that created the problem, and then failed to act as it worsened, that the remedy for a massive misallocation of trillions of dollars of wealth is to spend trillions more to bail out the guilty. The public recoiled and responded with protests in 100 cities. Still, the bill passed within two weeks, supported by the presidential nominees of both parties.

Upon taking office, the new president promised to make economic recovery his top priority and announced one more stimulus, the largest yet, that would create or save three to five million jobs by directing funds into shovel-ready projects. Four months later, less than six percent of the funds have been spent, two million more jobs have been lost, and the vice president charged with overseeing this fiscal outlay has only the lame excuse that “everyone guessed wrong.”

Still, more fools are asked to suffer gladly.

If the new president and the same old Congress and administration officials have any deeper understanding of economic or fiscal issues that they did in the past, they are hiding it well. The new budget threatens to turn a banking crisis into a currency crisis by piling up seven trillion dollars of new debt in the next several years, backed by nothing except the conceit that the world’s investors have no choice but to double down on a failed financial system.

To add insult to injury, this summer’s legislative agenda brings far higher energy taxes, higher taxes on business and investment, health care taxes and mandates, anti-industry regulations, and unionization policies. All will collectively hammer the economy and transfer more resources from a shrinking productive sector to the government, labor unions, special interests, and other political constituencies, all under the guise of fairness.

While reasonable people can disagree on the role and responsibilities of the public sector, it defies logic to assert that the U.S. government can provide everyone with better health care, education, or other public services when the economy is shrinking. This year federal tax collections are down 30 percent and lower stock prices have blown huge holes in public pension funds. A universal truth is that healthy economies provide higher standards of living and vice versa.

Yet the administration persists in divisive political oratory that positions labor and the public sector against management and capital. Companies with legal and profitable foreign subsidiaries are labeled tax cheats. Bond investors that protest after getting their payouts slashed by government auto czars are called greedy and even threatened. A crusade is under way against executive compensation, years after Franklin Raines was allowed to exit Fannie Mae with tens of millions in the bank.

And inside and outside of Congress, failure has been institutionalized. Barney Frank and Chris Dodd still have their jobs and are responsible for reform. The failed regulators at the Treasury and the Fed are given vast new powers. The bankrupt health care programs are expanded every year. The comically named Bank of America is bigger than before, now owning Countrywide and Merrill Lynch, and flush with more than $160B of taxpayer money and guarantees.

The bankrupt General Motors and Chrysler can now sell their wares with taxpayer-funded incentives, financing, and warranties. In the finance, transportation, energy, and health care sectors, government will own the largest firms in the market and also be tasked with regulating those industries, a dangerous conflict of interest.

Its time to face the reality that our leadership will not fix the problem — indeed, they are incapable of anything except making the situation worse. We are the only ones capable of moving America out of the crisis that it is in, and it is past time for us to act.

In part two of this letter, we list seven things that you must do to help turn this situation around.