More of the Same

There have been a rash of articles over the past month or two about the death of capitalism in the aftermath of the credit crisis and the seeming incompetence of many of the ‘great minds’ of the Wall Street financial institutions (and others). Frankly, one might as well predict the end of government in the wake of various scandals (which won’t be listed here as it would take too much time).

But, there are some real lessons to be learned from this crisis, and like most lessons learned, they will be ignored by almost everybody.

First, Stay within your means. While it would be a good thing for everyone who wants to own a house to have one, it turns out everyone couldn’t afford the one they wanted. That shouldn’t be a news flash to anyone, but apparently it is to many mortgage companies. There is no hard and fast rule to ‘stay within your means,’ but like the Supreme Court Judge Potter Stewart’s pronouncement on pornography, the banking community knew better and simply played stupid.

Before anyone gets confused, I’m not saying people shouldn’t have high aspirations. They can and should. But we all need to earn our goals, not have them handed to us.

Second, If it sounds too good to be true, it is. While it would be nice to think we’ve seen the last of mortgage companies convincing people to step into a mortgage that’s 8 or 10 times their income, we have the example of one of the Auto Companies using US government cash to lower the minimum credit rating to qualify for a loan to stimulate the market. This is the same kind of thing in the housing market that started the problem. But that’s not going to stop them from luring folks in off the street and convincing them to buy a new, and too expensive car so the dealer can keep his inventory moving. What happens when they can’t afford the payments? Another bailout?

Third, people are greedy. This is along the lines of the inspector standing up in ‘Casablanca’ and saying that he is ‘shocked, shocked to find there’s gambling going on in this establishment,’ as the croupier pushes his winnings into the inspector’s hands. People are greedy is as much a news flash as ‘people like sex.’

Fourth, politicians will exploit a crisis. This is as shocking as the news about greed. What is alarming here is how much play is given to the issue of greed and how little is given to the idea that politicians, whose hunger for power is usually much greater than the greed of the businessman, have seemed to get a ‘by’ from the media, while they engage in a grab for power that is leaving the intent of the founding fathers in tatters.

Fifth, there are a lot of stupid people in senior management positions. Did anyone really need a crisis to figure that out? But, when you add greed to stupidity, and throw in a little hunger for power, of course you are going to have problems. It’s been that way for about the last 6000 years of recorded history.

Finally, there is no such thing as a free lunch (TINSTAAFL). The Banks and Mortgage companies were right in believing that Uncle Sam would come to their rescue no matter how badly they messed up. He has, and he continues to ride to the rescue. All of this because, as we have been told again and again over the past two months, to not do so would mean a severe recession lasting years. Interestingly, now President Elect Obama is saying that we are going to have a severe recession lasting many years regardless of what we do. Obviously, part of that is simply preparing the groundwork so that, if things go poorly, he can, like any good politician, say that “I told you,” and, if things improve, he can take all the credit. I’ll accept that, it’s part of the job description for any politician.

Nevertheless, we, and I do mean we, all of us, are now looking at a national debt on the order of 10 to 11 trillion dollars by the end of 2009. That means something like $700 billion dollars per year for the next 20 years just to pay of the debt. And that assumes no more deficit spending for that 20-year period.

More worrisome, is that this means a return of inflation, which means that everyone who has (or had) a retirement plan, will see that plan eroded over the next 20 years as inflation eats into the plan. And for those who don’t think inflation will be that bad, the general rule here is that inflation is the great tool governments have to erase past debt. It will be in the government’s interest to provide a certain measure of inflation so as to expand the dollar figure for the GDP, irrespective of any changes in productivity. We might wonder what the government’s response to declining retirement funds will be in 10 years? Another bailout?

I have a good friend, who is an excellent doctor, and he often notes that ‘people die in the short term.’ His point, and it is an excellent one, is that you don’t engage in long-term planning when someone needs CPR (or the boat needs bailing, or whatever other analogy you choose). Something needed to be done to shore up the banks, and steps are being taken. Were they the right steps? Hopefully. In any case, it’s too late to undo them. The question is, assuming we kept the patient alive, what now?

We need to stop looking to the government for all the answers. We do not want the US government to continue to simply throw money at this problem. It was the meddling of government, and the firm (and perhaps unfortunately accurate) belief that no matter what happened, ‘Uncle Sam won’t let us fail,’ that led to this stupidity. It’s worth noting that Uncle Sam is going to be a bit stretched for the foreseeable future and we don’t want to make that worse.

We need to make corporate governance a real issue among stockholders. Stockholders need to take charge. The guys who have been in charge in many of these companies had great briefs, with lots of colors and lots of impressive academic records. They failed. Repeat that: they failed. They chased bad ideas, they focused on quarterly profits, they managed themselves ‘over the cliff.’ Stockholders need to throw them out and bring in new blood. One thing is certain: in many cases they can’t do any worse.

We need to return to common sense and long term planning. Virtually every major company on the planet has strategies and long-term goals and all sorts of planning teams. But when you ‘pull the string’ on them, the long term goals are constantly ignored as they pursue short term issues and quarterly reports, the strategies are nothing more than paper (and usually are poorly put together at that), and planning teams exist but without the necessary training or real access to the senior leadership.

In the months and years ahead we can count on certain things: there will be more bad news; the market will spike up then down; oil prices will surge, then fall; there will be wars and rumors of wars; the great will stumble. Nothing that we face today is really new and nothing is insurmountable. But it should remind us that, in the end, it’s basics that get us through, whether on a production line, a battlefield or a hockey rink. Let’s get back to basics.