Wednesday, June 10, 2009

Antidote to Greed

Hypodermic Needle
Obama's answer to the financial problems forces more and more government intervention. Government handouts and subsidies only prolongs the problem and attracts more takers. When a business such as a bank gets careless and greedy, the one sure cure for over-leveraging and high executive compensation for non-performance is failure.

The executives at Enron experienced those results. What if we had bailed out Enron? They asked for government intervention but thankfully, the government refused their request. The courts dealt with the executives by sending them to prison. It was a fitting end for a crooked and ill run company. The customers, stockholders, and employees who suffered because of the shenanigans of the corporate office divided the spoils of that company. No, not made whole, but at least they shared in the proceeds of liquidation.

The government cannot be the side rails for a business. Only the honesty and character of the executive structure and the prospect of failure and disgrace can effectively control greed and avarice found in today's banking system. Yes, we have regulations but regulations can hurt as well as help. While regulations intend to prevent runaway fraud, they also prevent decisions that would be good for a business. Honest business decisions are frequently not made because of the prospect of running afoul of regulations. It is like the dog on a leash theory.

The leash theory goes like this. To prevent the dog from marauding through the neighborhood, we chain him to a tree. In this case, the chain represents imposed regulations and the dog is representative of a business. As long as the chain is long enough, the dog is happy. But more overturned trashcans in the neighborhood are upsetting the people, so we shorten the chain to prevent mischief. (As we impose stricter regulations, our chain gets shorter.) Now, the dog sees opportunities beyond the length of the chain and struggles mightily at the chain but the chain is unyielding. The dog runs around the tree searching for an avenue of freedom but with each trip around the tree, the chain gets even shorter. The chain finally strangles the dog. Of course, the moral of the story is that regulations have the ability to kill business if they are too restrictive. That is why we have to rely on the ethics and integrity of those in business.

When a business goes astray and proves to be untrustworthy, that business should fail. Failure is the ultimate cure for greed and avarice. We should avoid shackling our businesses with regulations inspired by the failings of another company. It is the old saying that "One bad apple spoils the whole barrel." Well, there are a lot of bad apples out there and believe me; they will take notice of business liquidations and prison terms. But the opposite is happening because of the government bailouts. Businesses from all over, even the porn industry has their hands out seeking taxpayer dollars. Taxpayer dollars for badly run companies and scandalous executives is nothing but honey that is attracting flies. Everybody wants in on the act.

Contrast what is happening to businesses now. If those same executives were shamed and their companies liquidated, other businesses and boards would pay attention. Going through the pain of failure is not an attraction coveted by any business, not to mention the prospect of prison terms.

When does the nightmare stop? Already some of the banks that received government money decided that they didn't need the help after all. The only problem with the whole episode with the bailouts was that there was no pain for the gross mismanagement of these public corporations. Some got a temporary reprieve with the bailouts, but only time will tell if the boards of these companies will step up to the plate and clamp down on the self-serving behavior of the executives that perpetuated the collapse of the banking system.

Hopefully, I am wrong and the bailouts will not just prolong the agony. The short run does look promising, but we haven't even begun to pay the piper yet. Inflation and depression are still lurking for the longer term. Our national case of myopia is dominating our senses and preventing us from taking the steps that would actually help.

Please note that I did not mention the culpability of congress in this whole sordid affair. That is a topic for another day.

Cheers,

-Robert-

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