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Christmas 2008

"Oh my goodness, oh my goodness" seems a good way to sum up 2008. Orphan Annie's friend Tessie got it right, and she and Tom Wolfe were about the only people so to do. Wolfe, you may remember, was found roaming the Stock Exchange floor on the day in the summer of '06 when Blackstone, the giant of Private Equity went public. When asked to comment Mr. Wolfe said: "We may be witnessing the end of capitalism as we know it". The Dow was then at 13,337. It is now at 8,894, most of the decline coming since October. The economy, which looked resilient almost to October, faltered badly in the fourth quarter. The Fed injected billions in liquidity to stabilize the financial system. Cassandras appeared everywhere. For a few moments it seemed the sky was falling.

More likely, we are simply in for an old fashioned recession circa the early 80's. Unlike Congress and CNBC reporters I see no reason to panic because people are being laid off. It is unfortunate but natural. It is actually a strength of our economy because by being able to shed no longer viable jobs we can sooner get to a point where we can once again create jobs – lots of them. This is called a free enterprise system.

I find it galling to listen to Senators on the Finance Committee talk about our duty to save the jobs of Detroit automakers. If Detroit doesn’t have good products to sell, all the propping up in the world will not save their jobs. We may defer the day of reckoning, but that's all. Consumers will buy eleven million or so automobiles next year just as they did this year (down from fifteen million three years ago). We will find cars to buy and most of them will be made in America. Many will be made by U.S. companies, others by Toyota, Nissan, or Honda. The notion that, without massive public assistance, the automobile industry will fall apart is public relations spin.

Almost lost in the fourth quarter financial meltdown was the fact that we elected a new President. Moreover, we elected him with a solid majority and substantial support from both blue and red states. President Obama has already shown good judgment in picking able, experienced people for the new Administration. Competence seems to be the reigning criterion. It is one sorely needed, given the condition of the economy and the state of America's role in the world. Obama is sure to come in with a strong stimulus package. He will do well to heed the advice of HBS's Michael Porter who suggests making sure that a good chunk of the money going to the states gets to the state universities where there is increased demand for their services at a time when their budgets are being cut.

I am hopeful. Peggy Noonan put it well in her new book: Patriotic Grace: "But we are Americans, and mean to make it better. We long to put the past few years behind us, move on, and write something good on the page we sense turning. To me it is not quite a matter of rising above partisanship, though that can be a very good thing. It is more a matter of remembering our responsibilities and reaffirming what it is to be an American." Hallelujah.

2008 saw the passing of William S. Buckley, Jr., a man of generous spirit and an immensely entertaining vocabulary. In high school I used to read his books to improve my SAT scores. He was a voice for conservatism, but not the kind of small-minded conservatism of today. Buckley's was more the voice for Aristotelian logic and Burke's democratic principles. He was a 19th century figure born in the 20th. He may have been anachronistic, but he had such a charming way about him that he was easily forgiven.

In last year's letter I may have given our economy more credit for resilience than it ended up showing, However, I was correct in predicting the fact that 2007 marked the height of the folly of excessive CEO compensation. I noted, in particular, that John Thain was well over-paid in getting fifty million dollars to take over Merrill Lynch. The venerable Merrill Lynch did not survive the year, being absorbed by Bank of America after losing virtually all of its value in the market. Incredibly, Thain is trying to claim a ten million dollar bonus based on this performance. If Bank of America agrees to that request, I would expect the Fed to withdraw its infusion of capital.

Let me end on a more positive note. I believe we have turned an important corner with the economy. With the solid economic team Obama has put together, the worst is not quite over – but it is close to being. By the middle of next year we should be seeing signs of a recovery. This is indeed a resilient country and a resilient economy. We enter 2009 a bit battered and bruised, but, like Army's football team, we will all be the better for it in the long run.

My best wishes for a fine holiday season.