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Investing America's on hold because the world's turned upside down.


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Larry Kudlow

The dollar is falling, but the treasury secretary is off in Africa debating a rock star. Enron aftershocks continue to sound through corporate America, but Congress can’t pass a bill to right the accounting-fraud wrongs. The head of homeland security has a color-code system for terrorist alerts that not one person in a thousand takes seriously. The president says there’s no science to back up the so-called global-warming threat, but then he issues a lengthy report on the subject to the U.N. He also insists that the government will be frugal with taxpayer money, but then he signs every spending bill Congress sends him, making LBJ look like a skinflint.

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No wonder investing America has put itself on hold. No wonder stocks are tanking. The world’s turned upside down.

Investors need answers. They need to know who’s in charge, and they need to see America’s unsettled accounts get settled. Until they do, the market is going to struggle.

For starters, America needs to know who’s in charge of reaching closure on the accounting scams and the complete breakdown of corporate governance. But SEC chair Harvey Pitt seems incapable of putting together a much-needed reform plan. Will executive compensation gained from fraudulent or inappropriate activities be given back? That’s hard to answer, because Pitt no longer talks about it.

Shouldn’t corporate boards of directors be comprised mainly of outsiders, people who can make independent decisions? They should, but they’re not. Shouldn’t stock options be scored as legitimate liabilities, matched against the human capital of those who receive them, and then expensed properly on an income statement when the options are exercised? And shouldn’t option repricing be banned altogether? Sure, but that’s not happening. Shouldn’t off-balance-sheet partnerships be properly and transparently scored when corporate credit risk is backing up the partnerships? Of course, but that’s not happening either.

Shouldn’t the conflict of interest between auditors and consultants be resolved? Not happening. Shouldn’t an outside oversight board be formed to advise the SEC on all these and other issues — a board comprised of independent thinkers who are not in anyone’s back pocket? Not in place. When will Pitt name such a board? When will it begin its much-needed work?

If this lack of answers isn’t bad enough, we also hear almost daily from the president on down that terrorists are about to bomb us again. Trouble is, we have no details. Will it be poisonous gas wafting over our shores? Will it be a homicide bomber lighting himself up in the lobby of one of our great buildings, or atop a bar at a chic restaurant? Will terrorists hit an Amtrak train? A nuclear facility? A tunnel? A harbor? An airport? Will they scuba-dive their way in? Will they fly in? Will we actually know them because we see them at the neighborhood deli? Can anyone answer these questions?

The FBI says the CIA didn’t tell them. The FAA says the FBI didn’t tell them. And the director of the CIA, who is supposed to oversee all of our intelligence operations, is too busy advising Yasser Arafat’s PLA on how to set up better security arrangements and how to smooth the way for the inclusion of Hamas in a new Arafat coalition. Is this for real? Sadly it is.

The stock market is falling and, no — it’s not the economy, stupid. The data show that production, factory orders, housing, consumers, and even corporate profits are recovering from the recession. Interest rates are low, the Fed is putting plenty of new cash in the pipeline, and even taxes are coming down a bit.

No, it’s not the economy that is driving the stock market down. There’s a malaise over Wall Street because people are worried, fearful, aggravated, and downright blown away by the incongruous behavior of our leaders and elected officials. This level of indecision, fingerpointing, and suspended animation shouldn’t be happening in this great country, but it is happening.

What’s the solution? Where are the answers? No one knows for sure. But decisive action by our nation’s leaders in business, finance, accounting, law, and governance must emerge. We need a Paul Volcker at the SEC, but we’re stuck with a Harvey Pitt. We need Bill Casey at CIA, but we’ve got George Tenet. We yearn for Rudy Giuliani to replace Robert Mueller at FBI. We need corporate builders like ITT’s Harold Geneen, IBM’s Thomas Watson, Citibank’s Walter Wriston, or even old J.P. Morgan — but we’re saddled with Kenneth Lay and the rest of “formerly of ” crowd that includes Dennis Kozlowski (Tyco), John Rigas (Adelphia), and Gary Winnick (Global Crossing).

We need help. More specifically, we need leadership, action, and closure in order to keep our businesses open and get people safely home to their families. Now.



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