Connelly on Commerce

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

As we follow the projected path of the latest Atlantic hurricane just after the Bernanke speech last Friday in hurricane-proof Jackson Hole, consider that  the “cone of uncertainty” weather forecasters use to frame the potential path of the storm up the US East Coast is an apt metaphor for the state of the US economy.

And just as this week we will learn the actual path that the hurricane will take, for good or ill, this week we will learn economic statistics that will set the tone for the month of September in the financial markets: the Challenger report on August corporate downsizing; the ADP report of payrolls, the weekly new jobless claims, and unemployment and net job creation for the month of August.

While some of these numbers are enlightened guesswork and especially the last listed is prone to later revisions, if the economy goes “0 for 4″ on these key measures of return toward growth, we will be in for a rough week in equities and a stellar week in bond-bubble-land.

We have already been rocked by downward revision of the GDP estimate for Q2: however, bear in mind that the “final” revision for Q1 turned out to be about 30% wrong to the downside  — we learned just four weeks ago that Q1 was actually a 3.7% growth period, not 2.7%. Imagine what the equity market would have done with that news had it been delivered the last week of April instead of the last week in July!

As it was, that disappointing but wildly erroneous number set the stage for the market swoon pushed on by the frightening (and equally erroneous) cries of doom in May from the merchants of pessimism about European sovereign debt: Greece was going to default, followed by Spain; Germany was going to pull out of the Euro; the Euro was going to parity with the US dollar.

NONE of this came to pass, but US businesses clearly pulled in their investing and hiring horns in response to the story line (as did US consumers): they all took the summer off at the beach, with predictable results in terms of the economic data for June, July and August.

So we have now once again proven to ourselves that the “Big Lie” — or at least the “Big Hedge-Fund , CNBC driven Panic Rumor” — can knock stock prices silly.

No surprise, then, that individual investors have fled the equity market, given  May’s “”flash crash” and the constant ideologially-driven drivel from the usual suspects CNBC rounds up every day to use the latest faulty economic “data” to bash the Obama Administration and tout a Republican victory in November.

No argument from this quarter against CNBC trying to emulate Fox News — but one wonders why a network dependent on individual stock market investors for its audience would be intent on eliminating that particular species from the food chain?

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Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Let’s imagine a new business offering a service, priced significantly higher than many available alternatives, that somehow manages to get the US Taxpayer to front-up its operating costs in the form of loans to its customers up to 90% of total revenue, and then uses that Federal subsidy to fund not only the basic service cost but in may cases an even greater amount of spending on all manner of advertising to drown out its competitors with expensive national media campaigns and call center operations rivaling the heyday of the sub-prime mortgage industry with misleading sales tactics recently uncovered by Federal agents shopping in disguise. To top it off, the taxpayer is stuck with any default losses on those customer loans, which  must be repaid even if the customers don’t get the full economic benefit of the services they paid for up-front. And let’s add that this taxpayer- underwritten business model generates profit margins about 300% higher than the typical Federally-funded defense contractor.

Would The Wall Street Journal  not rail against this model as  a classic, Fannie Mae case of privatizing gains and socializing losses? Would the WSJ not conclude that paying the taxes on such extraordinary earnings is the least this business could do to compensate the taxpayer for taking the risk of funding its marketing campaigns? Would the Journal not lecture us that separating economic risk from reward is particularly inconsistent with your core free-market principles?

Yet this is the very same business model followed by many of the for-profit colleges and universities you conclude are being unfairly scapegoated by the Obama Administration. Would taxpayers not be far better served by focusing their subsidies on customers of public (and private) educational institutions that charge lesser (or even equivalent prices) for educational services where the vast bulk of the public money (and risk) supports the cost of education rather than a crescendo of questionable advertising?

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