Conservative Logic

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Does Obama Understand Finance and Economics?

Posted by A Hamilton on April 1, 2009

I’m increasingly convinced that Obama doesn’t have a firm grasp on the basics of how our economy functions, how corporations do business, and how our banking system works.

Recently, Obama was speaking about the stock market and referred to the “profit and earnings ratio”, which doesn’t exist. Presumably, he was referring to the P/E, or price-to-earnings ratio, which measures relative stock value. It’s one of the first, most fundamental ratios any new investor learns about the stock market.

Obama has also commented on the strong dollar. But the dollar isn’t strong. True, it’s rallied recently, especially versus sick currencies like the GBP, but nobody even marginally familiar with this long term trend would think to call the dollar “strong”:

Weakening Dollar

Obama’s background and experience is politics and law. He’s never run a business, or even held an executive role in government. When he speaks on economic issues (particularly without his teleprompter), he looks about as comfortable as John McCain… In other words, not very comfortable.

It would be easy to assume that Obama was educated on finance and economics basics at Harvard Law School. But as a Harvard Law graduate myself, I know how easy it is to get through HLS without a working knowledge of business essentials. For every graduate who focuses study on contracts, corporations, and tax law, there are other grads (like Obama) who choose to focus on Constitutional law, criminal law, or human rights law. As a result, many Harvard Law alums would struggle to differentiate an income statement and a cash flow statement. I suspect Obama falls right in this category.

Why is this important? Surely Obama has advisors to guide him? Maybe. But at the end of the day, he’s the guy making decisions. He needs to be  able to listen to the self-serving statements of lobbyists, industry insiders, economists, and government bureaucrats, and separate the truth from the BS. Can he do it this effectively without the basic education he needs? Irrationally, he seems to think so. He’s decided to insert himself directly into American business (firing CEOs, setting bonus payouts, backing GM’s transmission quality with a government warranty). So now a guy who probably has a limited understanding of basic capital structure, the proper role of debt, equity, etc., and the functioning of credit markets is creating policy to recapitalize both the automotive and financial services industries!

Perhaps most importantly, I don’t get the feeling that Obama appreciates our corporate and financial institutions. Granted, our banking system is a disaster. And the economy is in bad shape. But a long term perspective is essential. And over the long term, the way that our capitalistic, market-driven system functions has created more good for more people than any other system in human history. Destroy the incentives that make the market work, insert government (aka political) influence into every nook and cranny of the economy, and you break that engine. The long term result is inevitably slower growth and less good for Americans. Does Obama understand that by breaking the American social contract, he ultimately ends up killing the goose that lays the golden eggs that (in turn) pay for the fat government he loves?

In the final analysis, if Obama doesn’t know the basics of economics, finance, and business, he can’t make good decisions when presented with alternative policy choices. He can’t anticipate the long term impact of his choices. He is liable to be susceptible to ideological or populist approaches (like big government bailouts), rather than relying on tried-and-true methods for resolving problems (such as bankruptcy proceedings). So far, this is exactly what has played out in terms of policy from the Obama Administration. Scary times for American capitalism, indeed.

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Posted in Credit Crisis, Economy, Obama, Taxes | 1 Comment »