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It's impossible to escape the news of the huge amount of financial turmoil taking place over the last few weeks. The government is working on an unfathomably huge $700 billion bailout package intended to clean up bad debts and keep big companies with lots of obligations from coming to collapse. Just imagine: The entire US economy produces about $14 trillion in goods and services each year, so the bailout alone is worth 5% of the entire economy. That's on top of the mind-boggling $53 trillion "real" Federal government debt, mostly hidden in future promises to pay for things like Social Security and Medicare that our politicians have collectively shown almost zero willingness to address. So while millions of Americans are going to pay attention to who won which of the Emmy Awards, almost nobody is paying attention to the warnings of groups like the Peter G. Peterson Foundation, led by David M. Walker, who quite recently was head of the GAO and served as Comptroller General of the United States.
Fundamentally, Americans are far more capable of understanding basic economics, finance, and investing than we give ourselves credit for. Frankly, if you can deal with the rules on eligible receivers in football or make sense of the infield fly rule, then there's no reason you can't easily learn the difference between assets and liabilities, or be trained to understand why student-loan debt is usually "good" debt, but revolving credit-card loans to pay for pizzas and overpriced cups of coffee would be "bad" debt. To reiterate a point we've made many times before, Americans need financial education, starting no later than high school. It shouldn't take an act of Congress or even the Iowa Legislature to make this happen -- in fact, we'd be better off if it didn't. But people need to demand more financial and economic education from their schools, lest we leave young people completely incapable of handling the massive problems they're inheriting anyway (whether they're prepared or not).
There's a good argument to be made that the US won the Cold War because the everyday things in our lives were better than those suffered by people living under Communism. There's a frightening sense of certainty among the leftists of the world who think that every problem can be made better with just a little more government intervention -- take, for example, the embarrassing foot-in-mouth moment suffered by Paul Krugman the other day when he insisted at a conference, contrary to experiences of the Canadians in attendance, that Canadians like their health-care system.
Ownership seems to make all the difference between systems that work and those that don't. In the Soviet Union, nobody was supposed to "own" the factories. So they didn't work very well, because as a consequence of non-ownership, nobody had any real incentive to make sure that things worked right. Capitalism has a rather brutally efficient way of getting rid of the things (services, goods, and businesses) that don't work very well. They tend to go out of business.
But that makes our current situation more than a little unsettling. On one hand, we're seeing what happens when the government tries to create a risk-free environment: Fannie Mae and Freddie Mac basically collapsed because the people in charge figured they had nothing to lose from making bad decisions, so they went ahead and made them anyway. And the government (read: us) ends up footing the bill. On the other hand, many people who were already inclined to prefer government intervention are taking the current situation as a sign that we need more government intervention (read: socialism), rather than less.
How's this for a takeaway from the recent situation: The people who set fire to AIG and blew up the investment banks were terrible capitalists. Milton Friedman once said that the only social responsibility of a business is to maximize its profits. Well, a business that loses billions of dollars is hardly "maximizing profits". I may be going far to the other end by arguing that we'd be better off with more 100-year business plans, but that has to be a better standard than the waste-now-pay-later attitude that has laid waste to so many businesses lately.
By the way, energy is still a major issue that we haven't really resolved, we still have a colossal project ahead to update the nation's physical infrastructure, and the consequences of the inflation likely to result from these bailouts probably won't be clearly seen for at least a few years -- though the consequences will be significant.
These are some of the reasons why we have been warning about the risks of debt, both public and private, for years. Here's the truth: A business that profitably employs six people in the owner's hometown is a far better business than the one that employs 1,000 people but loses money and later goes into bankruptcy. And maybe that's a lesson we need to spend a little more time reinforcing with the young: There's a lot of honor in owning a business and employing other people...a lot more so than in running an investment bank into the ground. As a society, we spend too much time worshipping a handful of glamorous occupations and far too little applauding the hard work of people with good ideas who make their customers and employees better off while making money for themselves in the process.
There's no doubt that lots of people in high finance have been wildly overpaid, but the answer really isn't going to be with government regulation. We said it on the air almost a full year ago: Shareholders need to exercise their power as partial owners of their companies. If you own shares of stock in a company and you think the CEO is overpaid, vote to kick the board members out, vote against new compensation plans, and vote against any other proposal put before you by management. If you own shares in a mutual fund, put pressure on the managers to act responsibly as custodians of your money.
To put it another way, if you're willing to comment on a message board about how Kirk Ferentz managed the Hawks yesterday against Pittsburgh, then you should be willing to spend five minutes writing to the manager of your mutual funds. We'll even give you some sample text:
Dear ______:There. Now you have the text. Go ahead and post on the sports message boards, but reserve at least as much outrage for what other people are doing with your money as you reserve for bad coaching calls.
As a shareholder in your mutual fund, I want you to know that I am deeply concerned about executive compensation. I insist that, at every available opportunity, you will vigilantly protect my interests as an owner of the companies in which I have entrusted you to act as my representative. You receive (hundreds) (thousands) of dollars from me in management fees every year. I hope you understand that I expect you to conduct yourself as a fierce guardian of my assets -- which includes ensuring that the people running the businesses in which I am a partial owner are accountable to me first, last, and always.
What policies do you have in place to ensure that I am getting the most value for what I am paying the managers in the companies I own?
By the way, remember that you can always reach us online, via text message (at 515-745-7887), or on Twitter.
Keywords in this show: AIG • bailouts • business plans • Canada • capitalism • Cold War • Comptroller General • debt • economics • economy • education • executive compensation • Fannie Mae • Federal debt • Ferentz, Kirk • finance • financial education • Freddie Mac • Friedman, Milton • GAO • health care • investment • Krugman, Paul • mortgage debt • mutual funds • ownership • ownership capitalism • Peter G Peterson Foundation • profit • profit maximization • shareholder activism • shareholder votes • socialism • socialized medicine • Soviet Union • Sports • stewardship • Walker, David