Wednesday, November 12, 2008

Seeing the Forest actually beat me to what I was going to post about today, but I'll go on anyways.

I was struck as I was reading about venerable credit card company American Express declaring itself a bank in hopes of getting a piece of the federal bailout plan. Does anyone else see the absurdity of this? A credit card company- a company that built its business by convincing ever increasing numbers of people to spend ever increasing amounts of money they didn't have; a company that had a division of financial advisers who worked knee deep in the complex financial derivatives that everyone now understands caused this mess we're in- all of a sudden, weeks after the bailout plan is passed, decides that it wants in. Not only is this unethical, all it's going to do is dig a deeper hole; just as with all the other banks, American Express will horde the cash to allow it to increase its share value, to please its shareholders, which now includes you and me. Ironic- I can't get an American Express card, yet I'll soon be a shareholder, like it or not.

The conventional wisdom that the government is putting forth is that by propping up banks and companies like AIG, these companies will in turn do the "right thing" and push that money out to the (and you'll forgive me for this, i hope) "Joe Six Packs" of the world, thus keeping the economy moving. The problem? Companies have no incentive whatsoever to do this "right thing"- not now, not ever! By definition, companies have to take care of their shareholders first, and then their stakeholders. They are not moral actors, because moral actions do nothing for them- the pleasure of a job well done means nothing if the share price doesn't go up. The only reason companies do anything in the public good is because the government tells them to. How? Cover the children's ears- by regulation! To ask them to do the right thing is foolhardy, and Hank Paulson knows it- that's why we're saddled with this plan to begin with- his buddies get rich, and the rest of us are screwed as we're told to wait for the "trickle down" effect.

It's simple- the average person's discretionary money is disappearing, if not non-existant at this point. Because wages in the office are stagnant, families can't go out to dinner every Friday night. Because families aren't going to dinner every Friday night, restaurants are being forced to cut back on staff, and eventually close. And if those waiters don't have tip money to spend at the box stores, the box stores see their revenues drop and the holding companies that own them shut them down. Which means that all those employees won't be able to go on vacation to the beach, because they're on unemployment. Which means that the high school kids working at the beach front resort will be laid off because of lack of customers, so they won't be able to pay to go to college. And it goes on, and on, and on... And it's all because the companies are watching their bottom line so that their shareholders are happy and hold (and hopefully buy more of) their stock.

And so we've created this massive imbalance in the economy. And smarter people than I (hopefully the fine folks on President-elect Obama's economic team) are coming up with ideas on how to restore the balance. I certainly hope they hurry, because I sit at my desk every day, waiting for the other shoe to drop. I'd rather it didn't.

P.S.- there's a fantastic article at Portfolio that follows some of the people on Wall Street who knew the house of cards built on C.D.O.s and bad mortgages, and bet against it. It's a really long, in depth article, but it's well worth the time.

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