They Are Bailed Out…Now What Should We Do?

I was reading the posts of a lot of those investment rich guys who are more directly effected by the financial mess; they’ve been trying to make sound reasonable something that isn’t reasonable. And all I can do is shake my head and laugh. And cry. It’s what I call the MBA mentality: the thought that this is all an academic exercise where the one with the most, wins…regardless of how you did it (as long as you don’t end up in “Club Fed”). I mean, the language they use: “leveraged accounts”, “risky investments”, and so forth…you know, the stuff that when applied to less connected people are more familiarly known as “cooking the books” and “running a scam”.

It’s time for a drastic change in how we do things.

Loans

By loans, I’m thinking all of it: mortgages, corporate, credit cards, all of it. It’s time that we stop playing games with the people’s and the nation’s money. It’s time to simplify. As Star Trek‘s Scotty once said, “The more they overthink the plumbing, the easier it is to stop up the drain.”

A root cause of the current financial mess is the “Credit Default Swaps” (CDS) that were cooked up was so that the banks that were making loans could free up the cash that federal law required them to keep on hand so that they were covered in the event of loan default. At that point, it was really only a matter of time.

I think we need to go back to requiring the loans have backing and that the risk can only be shared by someone adding funds to increase the backing…not by accounting tricks. To the end, I think we also need to simplify the accounting process so that any attempt to present the appearance of being better situated than is the case in reality becomes obvious and an immediate target for oversight/audit.

In any event, there needs to be some mechanism in place that allows for a fair portion of moderate-to-high risk loans. We all know the old saw of, “The only way to get a loan is to prove you don’t need it.” Clearly this is wrong in some cases. New businesses are generally of dubious risk. Young people trying to buy a first home are also risky. Still, they should not be summarily denied simply because of the risk. The fact is that a good portion of these types of loans will default if we follow the practices of recent history. I think we need to go back to evaluating these loans on a more personal basis. Instead of saying yea or nay based only on number crunching, you instead research the situation to determine if it is more likely to get a return on the loan than not…THEN you can make a decision.

As for credit cards…we need to once again raise the standards for both the user and the issuer. First off, no more just handing out the name cards like they are candy to young adults. It seems like a starter secured card, for even $100, could get the credit ball rolling. Once a person’s credit score and history of paying back on time their debts are positively established, then they should be refunded or credited their security and the card then becomes a true credit card and they can then obtain future “normal” credit cards. The issuers should be barred from unilateral rewriting of the terms, especially for current debts where terms will be unfavorable to the card holder.

Here’s a big one: personal information must be better regulated. Right now there seem to be no limits that can be used to mine a person’s “public” (and some private) data in order to find a reason to make a decision as to their fitness. While arguments can be made that make any specific case a valid example, the side to err on should always be personal privacy.

Banking

Banks have totally lost their way. Time was that banks were funded on the interest from the loans they made and the interest on the investments made with the deposits of their members. There wasn’t this mountain of fees that formed a moving target for the customer that had to be paid…they were folded into the general operating expenses of the bank. Part of the problem has come from banks trying to be all things money to the hoi polloi.

While it can be convenient to make investments via a bank, and to get loans from a bank, and to get your car washed and ass wiped by a bank (but these last two perks only if you’re a large depositer), I think for the sake of monetary protection and simplicity of regulation, we take a step back and have banking being about the safekeeping of money and the gatekeepers to its liquid flow.

Obviously, the investment market aspect of modern banks needs to be placed in investment houses/brokers. As for loans…we need to resurrect the Savings & Loan industry. Yes, some schmucks managed to cook the books before with that, but that doesn’t mean that it wasn’t a good idea. It goes back to the risky loan thing and trying to use money to make more money than should normally be expected. If S&L is separate from ordinary banking, combined with the lessons learned, it should be easier to regulate.

Investments

I would propose that ALL investments have a hold period from the date of issue, and that the minimum limit for a stake to be held before it can be sold is 6 months. Our current method, again of using money to make money, that is so happily exploited by day traders and automatic black-box investment software, totally goes against the idea of what an investment is. By definition, it’s an investment. You think well enough of a business that you are willing to risk some of your assets to help them succeed. While, from the business perspective this probably won’t make a lot of difference, it could mitigate the wild fluctuations we see in the markets.

Also, I would abolish the ability to sell short. Betting on a company to under-perform is just skanky. In addition, the ability to buy on margin must be tightly controlled. In recent times there has been some amnesia about how dangerous it is to the economy for people to buy on ridiculously small margins.

And when the market falls? Well, the investors pretty much have to eat it. No tax breaks, no bailouts. Let’s not lose sight of the fact that this is gambling, pure and simple. The investors are placing a bet that the horse they are backing will do well. If it doesn’t, then the investor has little to show for it than red ink on his or her ledger. That’s why it’s called gambling and not sure money.

The Business Mindset

A major aspect of the problem is this mindset that if a business isn’t growing at some amazing pace, that it is doomed to fail. This is absurd. Walking around town you can see many businesses that don’t need to grow and franchise, issue an IPO, and then go national and global. No…they just have to make enough money so that they can pay their workers, their governments, and invest back into the business so that it can continue. For most people who want to run a business, that would be a success.Thing is, too many with the MBA mentality think that it is only profit that matters…damn the rest.

America used to be a producer nation. We would make arguably the best products in the world and they were gobbled up by those overseas who could afford them (which, following WWII, wasn’t a lot). What does the country produce now? Business hailed the shifting from an industrial nation to a service nation to an information nation. How does this help with the trade deficit? Almost by definition, trade requires product. But in the interest of increasing profit, we’ve shifted that to other countries so that we can import the products that we once made ourselves.

We are very near the end of our trade deficit rope. The only hope of shortening it is to increase the number of QUALITY products we export. We need to exploit our population resource and create things that others aren’t. Unfortunately, the clock is ticking and I’m not sure the economy will be flexible enough to wait out the few generations it will take to make this shift organically.

Tariffs. Yup, I used the “T” word. The merest thought of this immediately causes the entire rest of the world to rise up and say in one voice, “Trade war!”. Do you know why? Because they are taking advantage of their trade surpluses with us and they don’t want even the smallest hint that we aren’t going to be their bitches any more. But I’m not seeing any other way to make it so the U.S. can not only stand up again, but not walk funny afterward.

I’m not saying that we have to institute high, isolationist tariffs, but they need to have enough bite so that prices start to regulate—not only in America, but globally. They need to get to the point where the value of a product isn’t mostly based on the price of its labor. We aren’t the only country that gets hurt by this so I think some creative diplomacy can find some reasonable ground. After all, if the U.S. runs out of cash to buy the stuff the other countries are making, where are they going to sell it? It’s in everyone’s interest for the U.S. to get its share of the pie.

That won’t happen, of course, if we don’t change the attitude of those doing business here. We need to start limiting the salaries of the top executives to being a fixed percentage of what their workers make (except for company founders…for whom there should be no limits as they did take the risk to found a company with the right idea). We need to have as the CEO of a company someone who actually understands the company—that particular company, and not some generic widget producer.

When business in all its guises: financial, products, services, whatever; concentrate more on having a robust company instead of adopting an engulf-and-devour mindset, perhaps we can avoid having to make the huge American economy a hostage to those with a more selfish mindset. No, it’s not socialism, it’s good business and patriotic.

If you want good citizens, they need to be paid fairly so they can pay taxes and buy the stuff you are selling. They need to be able to do this with cash on hand, not by having to mortgage their financial futures. It’s in the interest of all the parties involved. Henry Ford understood this. His workers were well-paid so that they could afford the cars he was making. He understood his company and he understood the realities of his community. It wasn’t out of sympathetic largess that he did what he did…it was to make money. And by understand all of the playing field, he made even more money.

Government

I think one of the worst crimes the federal government has done to its citizens is by adopting the Pollyanna thought that riches would trickle down, or that companies would act in the best interests of their employees, and other such nonsense. This feudal idea was as misplaced in the 12th Century as it is in the 21st. No…most businesses are in it only for themselves, and the rich tend to only be philanthropic when they have embraced their own mortality (i.e. they are trying to buy their way into Heaven’s good graces). The people only have the government to turn to for any civil resolution to this one-sided balance of power.

It’s not an easy balance, to be sure. But when you live in a time, such as now, when many of the wealthiest people in the country readily admit that they don’t pay their fair share of taxes—and then the government offers them more tax breaks—something is very very wrong.

The redistribution of wealth is a tricky thing in our republic. Many immediately cry socialism as if to say, “You will burn in Hell.” Thing is, it’s the responsibility of the government to find the balance between letting the privileged enjoy the fortunes of their privilege, and ensuring that even the meanest of our wretched refuse have some means of surviving in a humane way. Mostly, since we’ve defined ourselves as a three-class society, the government must ensure that the vast middle-class isn’t forced to struggle just to make it to the next paycheck. That situation is more a definition of the lower-class than the middle. If that’s indeed the case, then it could be said we actually have a vast lower-class…and for that, the government should be ashamed.

So, now that the immediate remedies of this financial crisis have been plopped on the heads of the vast not-upper-class, where to next? We need to stop and take a good hard look at the sort of country we have and the sort of country we want to have. It’s not too late to get there from here, and be “green”, but it will be if we do nothing. I’m old enough that I’ll probably not have to witness the result. I’m mostly concerned with the children, their children, and the generations to follow.

Our ancestors used to be concerned about how posterity would judge them. It’s time that we adopted the same forward-thinking view. And you upper-class out there…you need to at least pay your employees better. You can afford it.