"Moral Hazard" Meets "Too Big to Fail"

Economic depression cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body - the producers and consumers themselves. – Herbert Hoover

Nero would have been at home here fiddling while the economy imploded. We have listened to the politicians and talking heads pontificating about moral hazards of not letting a company fail (free market red blooded Americans) or about a company being to big to fail (socialist pinko reds).

The Guilty

Who is guilty in creating this economic mess?

• The President and his cabinet who are too busy trying to kill terrorists to understand the real threat to America is economic.
• Congress who would rather develop and understanding of an issue with a lobbyist on a yacht than spend day in the trenches.
• The Fed which has its own agenda for its club members to profit.
• The Company Operating Officers and their board members who profit from short term fixes instead of long term solutions.
• Wall Street for embracing quick profits. Does anyone really believe a portfolio of shorts actually creates a healthy environment for long term economic growth?
• All investors in properties and equities – we knew things were not right but we kept on investing because the profits kept coming.
• The workers – instead of saving and investing your money you lived over your means. You consumed until you had no credit to consume any more.
• The media which has abandoned the principles of Walter Cronkite and now embraces Rupert Murdoch. We have returned to the yellow journalism of William Randolph Hearst.
• The voters who are too ignorant to go out and understand the facts – who would rather get simplistic one line solutions uttered from the extremists on the right and left.

The Losers

I want to apologize if I left anyone out of the guilty list. We are all guilty. So get off trying to punish somebody. We will all be punished now. Very few people will come out of this whole. We are all losers.

The Solution

Do you actually think there is one? This is the rub – to have a solution there has to be a choice which will steer the economy into smooth waters. There are no solutions – we only have terrible choices to try to prevent un-repairable damage.

The issue is what the American economy looks like when it exits this non-recession/depression.

• Will the center of finance be in New York if we continue to allow the investment banks to fail? New York is not the only place in the world, and in 2007 only 53% of investment banking was done in America. America only had a handful of investment banks anyway and to allow any more to fail or be absorbed will create a large anti-competitive environment. I am sure JP Morgan (JPM) would be happy to see all of their competition fail.
• If we allow certain companies to fail, we are simply moving the jobs overseas. Personally I don’t care why Ford (F), GM (GM) and Chrysler are in trouble as a significant portion of our national employment comes from the auto industry. Okay, they screwed up – get over it. The credit crisis was not created in Detroit. What would be a simple financing problem two years ago is a major obstacle today. We cannot allow companies to fail because they can not get to a credit window.

The question is how we support these companies to keep them afloat. I am against government intervention and taxpayers holding the bag – but you will be holding this bag one way or another. You will lose at the end of the day no matter the outcome. I am willing to compromise my beliefs as I do not see a better way. All solutions are bad.

I do have one hatchet I am carrying - any financial help given requires the board, officers and senior management of that company to give up some pay. No labor unrest allowed – forced arbitration. And no lobbying. They do not get these rights back until every penny is returned.

On a different subject…

And one final thought for President Bush, Boeing (BA) and the IAM. I do not care which of you is at fault, but you are hurting each and every American. These are not the best of times and you are adding to the distress we all are feeling.

Mr. President, two of your children, Boeing and the IAM, are not getting along. They are not even talking to each other. They are playing economic brinksmanship with not only their own company and their jobs – but also with the US economy. The US Government allowed this monopoly to be created. Invoke a cooling off period based on national security. Force the children to the table and force mediation if necessary. Times are not good as we are in an economic war, and the American people are going to carry economic burdens for solving many economic crises which their government should have foreseen. Please do not let Boeing and the IAM add to this burden.

Disclosures: None.
 

Comments

[David Martin:]

Actually, the top executives who ruined their companies then scarpered with huge bonuses seem to have done quite well, as do the various politicians and folk like Bernanke who aided and abetted them, and will doubtless be suitably rewarded.
These are criminally negligent actions, not that of folk who bear 'some responsibility', just like the the folk who have lost their houses and been ruined, who according to you should not be cross and nasty at the scammers who have been pillaging the country.

2008 Sep 15 08:53 AM

[biomedlives:]

Amen to "the real threat to America is economic." We have to find a way to reduce our trade deficit and to compete in a world in which our labor costs are considerably higher than those in many other countries.

2008 Sep 15 09:16 AM

[john s. gordon:]

the predatory loan sharks in the residential housing caper seem to have done quite well also = grab your fees & run.
> jack

2008 Sep 15 10:48 AM

[carey_jim:]

You have left the most important players off the list: Corporate America itself.

Corporate America wastes a huge amount of money traveling around the world to attend useless meetings and conferences and rewards its executives with a feudal life style of private schools and gated communities which are tending towards a hereditary caste system.

The American Corporate quote person is at the antipodes of democracy and the American Constitution.

Microsoft, to cite only one example, looks more like the disutopia described by George Orwell in 1984 than it does America.

Corporate America controls American politics from the local to the federal level.

Who are the moral police and where are the judges and jails for all these moral offenders?

They are the body politic which lies on its back, comatose, dreaming that a soccer mom can lead the free world out of the dark wood.

2008 Sep 15 10:54 AM

[kurt walter:]

BAC buys Countrywide Financial. Big error. BAC buys MER. Big error. The too big to fail test will be BAC.

2008 Sep 15 07:17 PM

[rcraig:]

Wha! Wha! Wha!
Sounds like a typical liberal scapegoat to blame everone one else for your own guilt.
The fact is we are about to whitness the second wave of financial attacks on our nation when corporate exes jump at the foriegn bait that will be chummed out before them. Like greedy sharks in a feeding frenzy they will jump at the fist sign of cash in hand waiting to bail them out of the mess they created.
I wonder how many of the executives who lead these companies into financial ruin are graduates from the Eli Broad School of Finance, or at least apply his principles for wealth.
T. Boone Pickens was half right when he spoke of the greatest transfer of wealth in the history of the world. The other half of the transfer is well ahead of the long term plan.
While the real estate market is in a whirlwind we should be looking past it and focus on what is productive and still working. Such as the techno-energy development areana which includes geothermal, support service for pipe lines and transfer equipment including but not limited to motors and generators. solar, and wind power. Forget the big boys. Let them die the slow painful death they created for themselves and move past them in this global financial war.

2008 Sep 16 11:48 AM