Tuesday, August 25, 2009

Allowing People to Fail Upwards

The world is a strange place these days. Social and societal norms have been turned upside down. This is the only explanation when people who have failed are rewarded for that failure. Here are three examples:

1. Timothy Geitner:
Mr. Geitner was sent to Asia to fix the Asian Economic Crisis (Thailand and Indonesia) when things went south in the late 1990's. Many in the know say that his policies made things worse for Asia, not better. Instead of being sacked, he was made head of the New York Federal Reserve. Under his leadership, or lack thereof, Wall Street and the financial system the NY Fed oversaw has seized up and collapsed leaving millions of investors and the institutions that they invested with poorer. He's now been made Secretary of the Treasury of the United States.

2. Larry Summers:
Every economic belief the man believes in is wrong. What are the chances that a 60 year old academic will have the courage to refute his own conceptual framework and belief system in spite of events proving everything he believes in regarding economics wrong? This was the question posed by William Black at UCLA this summer (see the previous post for that lecture). His answer was, "It's not going to happen". He is now the Director of the White House's National Economic Council.

3. Ben Bernanke:
Chairman of the Federal Reserve System, now reappointed. The man who should have seen the Great Depression II coming, didn't. Imagine the captain of the Titanic steaming at full speed towards the iceberg despite warnings of ice ahead. After striking the iceberg, the ship continues along at a slower speed taking on water, but the boilers are fully stoked and the engines are still set to full speed. Instead of pumping the water overboard, steerage and second class passengers are tossed overboard as well as nonessential crew such as the band. The ship will be lighter and float for a time, but the ship has not been repaired or fixed, and water is still flooding the hull. How is this analogy different from the economic ship of State we call the United States of America? We've sacrificed the poor, lower middle class, and possibly the middle class, while transferring wealth in the form of present and future tax revenues and people's homes, to the wealthy investors and managers of the financial institutions who caused this mess. But likely these measures have just bought those managers and investors time to earn a few more million before the firms go officially bankrupt, even though they are likely underwater even now. We have no social safety net for the taxpayers and the poor other than unemployment benefits. Few families can afford to live on unemployment for as long as this economic depression will last. The benefits will likely run out long before the depression ends and the economy recovers. Yet, we've just reappointed Bernanke to his old job at the Fed.

Failure at the highest corporate and government levels has been rewarded, not punished. Corporate losses (banking and nonbanking) have been socialized, while the profits have been privatized. Control and accounting fraud are still rampant (the ratings agencies aren't fixed, the regulators aren't regulating, and the Gramm-Leach-Bliley Act hasn't been repealed). In short, the system is still broken and people are still throwing money at the problem. The Fed is trying to fix a Housing Bubble collapse by creating another bubble. This is an insane solution to the problem. The normal solution would be to put insolvent banks into receivership, wipe out the creditors (shareholders and bondholders), and make depositors whole while sacking the current management. Fixing the rating agencies and the ratings system will stop the ongoing accounting and control fraud (financial fraud). While costly, the solution is much less risky and costly than what the Fed and the government are doing now. William Black knows this. Others in power do as well. The question is, why are we not taking the rational course, but repeating the mistakes of the recent past? Is this the reward for rewarding incompetence and failure?


Well, no doubt, these are Personal Friends, fixers, People Persons (PPs).

If they change jobs fast enough they are never responsible and hence the sh*t doesn't stick.
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