A proposal for change, part II

A week ago I published the first part of, what I called, “a proposal for change, part I.” Here is part II of that missive.

Recall that in the first part of this post I addressed the Institutions that needed changing if the economy was to regain a firm footing and start to recover. Today’s post deals with the final two elements of the economy that need to change. Namely, the leaders of institutions and the ideas of the leadership. Because of the close overlap with leadership, the ideas portion will be included, too.

2 & 3. Leaders & Ideas

Let’s take the leadership of the various institutions, in turn: politicians; regulatory agencies; businesses; bankers and financiers; unions; and consumers.

Generally speaking, when I say the leadership of these institutions needs to change, I do not mean that all of the leaders must go. No, what I mean is that change needs to occur. If it happens to be the case that a leader is unable to adapt to the new environment then the leader must go. I have to confess that I do not have much faith in the ability for entrenched leadership to permanently change. I think most of them are sitting around trying to be accommodating up to the point at which they are mildly uncomfortable in hopes that the economic storm will eventually blow over. Sigh. Most of the leaders do not understand that capitalism in trickle down (trickle on) fashion is over. So here we go…

Many politicians were ousted in November. However, many of the same old players remain. So what do the pols have to do in order to help fix this situation? Mostly they need to engage in a dialogue about changing regulatory agencies. That change will take the form of greater empowerment for these agencies, as well as proper funding so that those agencies can fulfill the obligations of their charters. Duh! Next, pols need to stand behind their appointees (see below) and trust that they are doing their jobs for the benefit of all Americans, and not just a narrow constituency of folks. The idea is for politicians to make decisions with the long-term in mind. by long-term, I mean a 5-10 year horizon. Businesses are so “next quarter” obsessed that someone has to have a long view of managing the economy. Politicians could stand to change a lot more about the way that they go about their jobs, but this short list is enough for now.

Regulatory agencies also need to change. Their primary sin in both the dot.com era, and the mortgage bubble era, was that they lacked the spine to reign in drunken frat-boy behavior. This is largely a leadership issue. Unfortunately, the leadership of these institutions is appointed by Congress and without support from the Legislature, regulatory heads usually blink when confronted by the Big Bad Business Wolf. Sigh! There are many prospective regulatory heads that have “seen it all before” and who recognize bad business behavior when it is occurring. Let’s empower these people with a sharp-bladed axe so that they can cut heads off when decapitation is called for. Internally at the Davis Funds (my former employer) we were concerned about the “overly-low-interest-rate-fueled-mortgage-bubble” as far back as 2004. You cannot tell me that we were the only ones that recognized another bubble being blown. Pop! So another thing that regulatory leadership needs to do is to learn to act in concert with one another. It is a given that there are limited resources for these regulators, even if Congress increases their budgets. So it behooves these folks to cooperate, right? Right. Lastly, regulators need to take their case to the general public when it is necessary. They should be given the same access to the press that the President has in terms of having the ability to give a State of the Economy speech. As you know, the primary obstacle to regulatory effectiveness is entrenched Congress people and businesses. Yet both of these entities is answerable to you and me! Access to the public arena and earena (heh, heh) would change everything.

Gods! Where to begin with businesses? This is a vast wealth of ire-filled material. Argh! Let’s begin by suggesting that business leaders need to start following the “golden rule,” instead of the “gold rule.” However, this is a gigantic shift for businesses. Let’s focus on something more simple to begin with. Businesses cannot demand that Congress give them tremendous leeway to act however they please and then turn around and beg them for attention and public monies when things go horribly awry. Duh! Additionally, business needs to begin to earn their business from its customers again! For far too long, they have invested much of their efforts of finding ways to manipulate it out of our hands. This has to stop. For starters, it is ethically questionable. For finishers, it is ethically questionable. Lastly, business leaders across the board (of directors) need to change executive compensation so that pay is tied to performance. One suggestion, courtesy of my former co-worker Chandler Spears, is to high-water mark performance. In other words, if a business achieves a certain great performance in a year, the executives do not get bonuses until that level of performance is exceeded. That would eliminate pay for mediocre, run-of-the-mill performance on an annual basis. Instead, the corporation would have the incentive to always exceed that level of performance, regardless of when it occurred. Does this make sense? Another suggestion, from “your’s truly” is to include all of a corporations constituencies when evaluating business performance. These are all of the entities to whom a corporation is answerable: shareholders, bondholders, employees, regulators, residents where the business operates, customers, environmentalists, etc. If all of these stakeholders got a voice then businesses would change overnight. Don’t you agree?

Bankers & financiers could be lumped in the above category with general business. However, they could also stand a unique perspective. The first thing is that leadership of these institutions needs to realize that good ethics is an economic issue! That means that there is more to the economy than that which can only be measured by a dollar sign. For too long financial institutions have only managed that which is quantifiable by dollars. That is jackass in the long-term. Look no further than the current pickle that the world is in for your proof that ethics are economics, too. Wholesale, across the board, leaders of financial institutions need to be replaced with leaders who have a shepherd’s view, or gardener’s view, of the economy. Instead, we have a collection of wolves looking to cull the weakest members of the herd. What’s more, when the weakest are gone, the leaders of these institutions are not above cannibalism. They see one another as enemies competing for a limited resource: your money. And they will literally resort to just about anything to wrest it from you (hello Bernie Madoff! – AIG – FNMA – FHLMC – ETC). This has to stop. Shepherds and gardeners have a very long-term focus and they do things to cultivate the long-term health of their resources. In other words, these leaders need to change their ideas about time-scale. More long-term, less short-term. Additionally, these institutions need to be allowed to fail. Capitalism only works if there is a fear of losing your money. That fear is what leads to rational risk-taking behavior.

Unions…well gosh…I think that I covered them pretty well in the first posting. Both the leaders and the ideas. [NEXT!]

Consumers. I also covered them well in the last post. We all have to learn how to live within our means. The secret to wealth accumulation is very simple: spend less than you earn and save that difference. This means that we all need to learn how to budget. This means that we all need to learn how to save money for purchases. This means that we learn how to find satisfaction from something other than material goods. This means that we need to spend as much time choosing our investments as we do our curtains. This means that we learn to take responsibility for our choices instead of blaming others for our misfortune. This means that we become more active in our voting, both with our dollars and our political votes. This means that we need to become proactive instead of myopic, cynical and lazy. All of the above institutions is accountable to the public. The irony is that we now have the unparalleled ability in the 21st Century to communicate with one another to organize ourselves, yet we are feeling ever more remote and powerless. So the last idea I am going to suggest as a “proposal for change” is that each of us learns to publicly communicate our feelings, either positively or negatively or objectively.

Please be well!

Jason