"Eat Your Spinach"

01 June 2010

May 2010 was quite a month – one that will likely be remembered by financial pundits for some time.  It was full of up’s and down’s (although there were more down’s than up’s).  On May 7 the Dow Jones Industrial Average closed at 10,520.32, a drop of 347.80 points, amid concerns regarding the debt problems of certain European countries.  Most interestingly is that before the day was over, the Dow had its biggest-ever intraday swing – 1,007 points.^1,2

Literally at the same time the market was going through these gyrations, I was part of a small group meeting with Paul O’Neill, Secretary of the US Treasury from 2001-2002 and former CEO of Alcoa.  He shared his perspectives and frustrations on government spending and accountability (or more precisely, the lack of accountability).  

O’Neill’s key observation was what he perceives to be a common malady throughout our government:  our governmental leaders are ignoring “major truths” and don’t want to hear what they need to hear – and very few are willing to tell them what they need to hear.  As he put it – “It’s time to eat your spinach!”  

“Major truths” he felt were being ignored:

• The federal government, in effect, “keeps two sets of books” and the actual unfunded liability is closer to $63 trillion – not the $11 trillion of issued public debt
• “30% of 10-year olds in the US can’t read, write or compute”
• Last year there were 300 million medication errors made by hospital personnel in the US
• The 2007-2008 financial crisis and continuing market volatility were, in large part, the result of a massive number of home loans that made “no sense at all.”

These are pretty strong statements from someone who was the Secretary of the Treasury less than 10 years ago.  But he was clearly optimistic and believes the people of America can “turn things around.” He says all we have to do is “eat our spinach” and adopt a “Concept of Certified Responsibility” in which decision-makers are held accountable.  As examples, he offered:

• Hospitals throughout the country should adopt simple procedures, proven to work by a few selected hospitals, which will virtually eliminate medication errors and patient infections.  He says that this alone would save $1 trillion per year in health care costs.
• A minimum 20% equity down payment should be required before a home mortgage is made.

O’Neill’s insights were particularly impactful for me because earlier in the week, I had been part of another small group meeting at the Hoover Institution of Stanford University where views on current fiscal policy on the budget, social security, health care, unemployment and the markets were expressed by:

• John Raisian, the Hoover Institution Director and former senior economist at the US Bureau of Labor Statistics and special assistant for economic policy at the US Department of Labor during Reagan’s first term
• John Cogan, an expert in domestic policy focusing on the US budget, social security and health care, and former associate director of the US Office of Budget and Management (OMB), and
• John Taylor, a former member of the President’s Council of Economic Advisors (1989-91) and Under Secretary of the US Treasury for International Affairs (2001-2005).

They also shared O’Neill’s optimism and faith in America.  Like O’Neill, they also expressed a sense of urgency and repeated their frustrations in attempting to educate members of Congress and the administration – only to have their expertise and advice ignored.

The common theme here is these issues can all be resolved – as a country we just have to get serious about resolving them, honestly and openly discuss alternative “solutions,” follow common sense, and hold policy-makers accountable.  

Spinach, anyone?

Citations:
1 – money.cnn.com/ [5/6/10]
2 - cnbc.com/id/36988229 [5/6/10]

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Investment advice offered through Smart Investor, a Registered Investment Adviser.