A proposal for change, part I

With this post I am going to take a chance and try and make some suggestions as to what needs to change in our economy in order for it to survive its current credit-crunch spawned problems, permanently change, and thrive into the far future. Whew! Here goes…

I have been saying for many months now that three things need to change before the economy stabilizes and recovers from its problems. Those three things are:

• the Institutions that got us into this mess need to change
• the Leaders that headed those institutions need to change
• the Ideas that those leaders espoused need to change

Let’s take these in turn in order to develop some basic ideas as to what kinds of change we should all be interested in, work toward, and hopefully eventually witness.

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1. Institutions

Our economy is a series of interlinked institutions that result in an organic, non-linear mechanism. The major institutions that unite to create our economy include: politicians; regulatory agencies; businesses; bankers and financiers; unions; and consumers.

The elections of last November helped to eject a number of politicians from office whose ideas, laws and votes led to this financial crisis. In my opinion, the laws and votes that have most damaged the economy are those that led to a chronic and intentional underfunding of regulatory bodies. Additionally, Congress and various Presidents, have failed to put into place laws that created a proper regulatory structure to accommodate an ever-growing, more sophisticated financial infrastructure in our country. By now you have heard this from me. However, there still has been very little movement in the direction of improving regulatory oversight from the newest crop of politicians. This has to change. As it stands currently, no one regulator has good transparency into the financial system. That means that economic policy is fractured, dis-jointed, and incomplete, resulting in ineffective action on the part of policy makers. The good news is that there are new politicians in office so there is a greater opportunity for change.

The regulatory agencies also need to change. However, because these agencies are beholden to their purse strings being held by Congress and beholden to Congress to determine the bounds of their authority, it will be difficult for real change to be affected. Yet, these agencies can choose to act in concert and share their knowledge so that policy can be coordinated. The Federal Reserve and Treasury Department currently try and coordinate policy, for example. The regulatory agencies could also choose to be more pro-active in their identification of poor business practices. This thought frightens many “free-market” sorts in the belief that over-regulation chokes off business. I think that history has an abundant number of stories that demonstrate the damage done when the rules of the capitalist game border on anarchy, don’t you? The sorts of problems that the economy has been experiencing are not new. In fact, they strongly resemble the sorts of problems that occurred in the lead up to the Great Depression. The fact is that risks are a fairly ordinary and the same types of general risks repeat themselves over and over and over again. That means that regulatory bodies should seek to address these sorts of risks. I believe that the largest and entirely foreseeable risk is the aforementioned issue of transparency. Regulators need to see the ENTIRE picture. This means that they need the authority to regulate hedge funds, all investment managers, investment banks, banks, credit card companies, etc. But even beyond authority, they need the budgetary support from Congress to be able to “widen their eyes” so that they can actually wield their authority. Geez, isn’t this obvious? The somewhat good news is that there has been talk about some of these changes, but not much action, yet.

The next institution that needs to change is business. Businesses have begun to treat their customers as units, instead of as people. This is not some Polyannish liberal cry for protecting the poor consumer. No, instead it is a cry for business to return to ethical business practice. This means that businesses need to stop pursuing “growth at any cost.” This means that businesses need to stop deceiving consumers with unethical business practices. An example of this is soft drink makers keeping their prices flat, while lowering the volumes they give you in a beverage can. This is a veiled price increase. Or pharmaceutical companies re-jiggering a drug that is about to go off of patent into a new form (e.g. capsule, gel, etc.) so that they can extend the length of time the drug has renewed patent protection. Another pharma sin is creating new drugs whose efficacy is barely better than a generic drug and charging many multiples of price greater for the new drug relative to the generic. I could go on, and I am sure that you all have numerous examples of very bad business behavior, but the bottom line is that businesses need to shift to contributors to the ultimate success of the economy and of the nation, as opposed to the ultimate success of its management teams. (Goddamn it!) The last thing that businesses need to change is the way in which they incentivize their executives. Frankly, it’s bullshit and has been for two decades. It is pure greed and a large crack in the foundations of a sustainable democracy. (Goddamn it!) The bad news is that most businesses haven’t yet gotten “it” and are continuing to try and seduce and deceive money out of the public, rather than earning it.

Bankers and financiers have behaved like drunken frat boys trying to get some before the whore house is shut down. They need to become responsible for who they lend money to. Yes, poor credit-quality customers are responsible, too. However, who has more responsibility in this situation, the lender who literally makes millions of loans, or the consumer who has maybe entered into a few large credit-type arrangements in their entire lives? Isn’t it obvious? Bankers and financiers also need to find new ways of compensating their executives, too. There is no good news with regard to these institutions – they still have to accord themselves with the concept of operating a business humbly. OK, I guess there is one piece of good news…the road to being humble is paved with humiliation and there has been plenty of that going on.

Most unions in the U.S. are archaic and actually contribute to greater economic instability. As almost everyone knows, there was a time in American business history when unions were absolutely necessary as a way of empowering employees relative to a bunch of jackass Kapital Kings. Additionally, I can think of a few industries in which workers would really benefit from being able to organize themselves into unions. However, most unions, and union demands serve to create an environment in which native business tries to find a way to eliminate, or export jobs. How else can you explain the fact that the auto industry developed sophisticated and very expensive robots in the 1970s and 80s because they were cheaper than a union being…er, I meant: human-being? My big beef with unions is that they see business as the Enemy as opposed to as the Collaborator. For many years this resulted in labor contracts that were crazy in terms of the long-term viability of a business. We all know the story of the auto industry and its near constant battle with the unions, yes? It is absolutely the case that the U.S. auto-industry was horribly managed and for decades. But it is also the case that the unions were a large contributor to the decline of this once vibrant industry. The good news here is that most unions are finally relenting in the face of unprecedented unionized-business woes.

Lastly, we arrive at consumers and their need to change. For years and years the U.S. savings rate has been negative, meaning that consumers were spending more than they made. This is clearly stupid and unsustainable. Many consumers are now experiencing budgetary strain as they sit and watch the nightly news and hear about the bad economy on their flat-panel TVs and surround sound systems. Oh, and what about the whining that occurs when people say, “I didn’t read the fine print?” How can someone grow up in our economy and not know that they need to understand contracts that they sign? Are you friggin‘ kidding me? And what about consumers that are also political citizens and don’t vote and don’t research issues and get side-tracked by “Culture War” type issues? This is asinine. The bottom line for consumers is that they need to GET REAL and live within their means. This means saving for that next big-ticket purchase instead of using credit cards. This means cutting out the fat in their lives like the $100+ per month spent on flavored water. Etc. Etc. The very good news here is that consumers are finally starting to rationalize their budgets and finding ways to save money, rather than spend it.

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I will post Part II within the next several days. But this is enough to chew on for now.

Jason