October 26. 2008 12:14

Fidel,

I know Greenspan was a very close follower of Rand in the 60's and 70's. I understand he feels he was mistaken in believing banks would be responsible in their own self interest.

Here's my premise which I think is being overlooked. Short term gains are usually prioritized over long term stability because the CEO's and leaders of said institutions are NOT in it for the long haul. They come and go like water which means that there is absolutely no concern over the 'banks' true self interset.

It reminds me of people who say that kids who do drugs, sex, etc are the very proof that following the path of God must NOT be a 'self-interest' path and is 'selfless' instead. I would submit that it is the path of true long-term self-interest to not self destruct with the things of this world. Ayn Rand seems more like a true Gospel disciple only she never really realized it.

If the banks were living breathing things, they might have picked short term riches (as some people pick short term substitions for happiness) BUT some would forgo the short term risky behaviors and focus on long term survival for their own self-interest.

Rand is still dead on in her premise, all it means is that the kids running the show have no interest in a third parties self interest - and to them the bank itself is a third party.

Lisey

October 26. 2008 17:44

I don't like the general tone of the broader debate about the ongoing financial crisis.

Sure, greedy executives colluding with the board to rape the company and buy costal villas wherein they can twirl their mustaches and chew on the scenery is a frightening (and all-too-common) proposition.

But is that the problem, exactly? As satisfying as it might have been for everyone in America to line up for their turn to punch Jeff Skilling in the stomach, it wouldn't have done much to avoid what is happening.

And I'll tell you why.

First the narrow concern about executive greed. Suppose a company's executives adopt a rather dysfunctional management philosophy; one that, expressed perfectly by Scott Adams, "rhymes with 'village'" (and it's not "fillage").

Well, that's no good. Supposing the first failsafe (the board) is bought off with smiles and dollar signs, there's still the shareholders; rather neutered in Fidel's view, but still with certain and definite powers: the first to vote, the second to sue, and the third, and most important, to sell.

Well, if a company is run so poorly - or let's say ALL companies are run thus - what happens? Investors flee the market, the index tanks, gold goes to $10,000 an ounce, and millions of mattresses are sold for investors to hide their hard-earned cash in. Management of these companies see their stock tank, have a remarkable change of heart, turn out the rascals and bring in stable and inspired leadership. Investors are reassured, the matresses get donated to charity, and the market thrives. Problem solved, and no regulation or anarcho-syndicalistic communes needed!

Obviously other bad things will happen, too, but the point I'm illustrating is that the only reason they could get away with it is that they were able to convince investors that the company would remain profitable despite their silliness.

Shareholders aren't Medieval tenants at the mercy of their landlords. They're willing agents with every ability to reject a losing proposition. If the investors don't like you running "their" company, you are out, with only your $50 million severance package as consolation.

The question we should be asking ourselves is why so many of them (or I should say us) were willing to own stock of such poorly run companies?

Now that the fat is in the fire all the Democrats in Congress are willing to piously lecture Alan Greenspan on what he should have known - too true, I suppose - it's not some huge secret about what has been going on.

Well, none of this was a secret for him or us or anyone else, but none of us thought it would really matter. Or it did but the profits would keep rolling in.

We focus too narrowly on executive self-interest - what about these poor suffering shareholders? Make no mistake that what they most fondly desire is what the executives want (which, duh, is why executive compensation gets designed the way it is) - eternal and unceasing appreciation in stock values.

It is, of course, HARD to make stock go up forever. In business school they taught me that it was a factor built into the market - a fundamental requirement of an investor is that their stock should, generally, go up. That factor gets included in the pricing of each asset in the marketplace.

This is a reassuring trope, but the only reason we believe it is because it has happened thus for a hundred years. We have no guarantee that it will be always thus.

And even if it was, measly 4-5-6% returns every year are thoroughly unsuitable and are a good way to get your company's stock despised by the marketplace. Companies (and shareholders!) want the big kill, the big appreciation. The American dream.

The problem with my line of argument is that it's hard to keep it from going in a direction that leads to philosophies where the process for saving the world has one step something like, "2. Now change human nature permanently" - which I find an obnoxious affront to liberty. But the fact remains that human nature is often ugly, and our financial and stock markets ARE greviously afflicted by greed.

What to do about that is a more difficult question. Stop blaming the barons of the boardrooms for your sins. We have seen the enemy, and he is us.

Tertium Quid

November 3. 2008 15:51

When the world economy falls like a set of dominoes because the United States of America's economy has fallen, watch what happens, Fidel. Millions upon millions will die of starvation, disease, war, violence of all kinds. The USA has been a bedrock for charity throughout the world--and when we fall, that charity falls with us. I do not see the wealthy Arab states stepping up to any charitable plate and contributing....even to their own miserable millions. Your clucking about the "evils" of the capitalist system will soon turn to a lament about the massive death worldwide that will soon occur. Blame yourself and your short-sighted Commie pals, Fidel.

Cyn