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Sunday, July 10, 2011

Short-termism

By Sheila Bair, who is ending her term as FDIC chair:
The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favoring the short term over the long term, impulse over patience. We overvalue the quick return on investment and unduly discount the long-term consequences of that decision-making.

Our decades-long infatuation with financing our spending through ever-growing debt, in the private and public sector alike, is the ultimate manifestation of short-term thinking. And that thinking, particularly in business and in government, is actually getting worse, not better, as we look for solutions to put our economy on a sounder footing.
It is getting worse at the top, too. You have Fed governors going around and pleading for loosening lending terms, when credit is really still very easy. A lot of good points in this op-ed. Bair may be campaigning for the Consumer Financial Protection Bureau. She would be by far a better choice than Warren, because Bair understands banking and Warren doesn't know jack about it and doesn't care to learn.

But regardless, Bair's points about things as various as performance-based compensation and the failures of the guardians are just so well taken!


Comments:
Perhaps Bair should have taken her own advice regarding the threat of favoring the short term over the long term instead of supporting the Citi bailout in 2008.
 
Her points are well taken. Roubini's book, "Crisis Economics," pointed out the same fascination with short term goals and the damage that they do to our financial system.

One of the major problems has been top managers' pay. They are paid way out of proportion to their actual contributions to the profitabillity of their companies. Interlocking boards, boards with too few independent members, and so-called compensation consultants have allowed this foolish wasting of company resources to go on for too long. A solution implementd a few years back was that managers should receive incentive pay in stock or options to align compensation with results. However, that system was gamed with awards of stock options that were priced to allow immediate profits and sales. That only incentivised more short term thinkling and cooking the books. Roubini suggests that all incentive compensation be in restricted stock options that cannot be exercised for a minimum of five years. That would require a bit more long term thinking and action. I think it is a good idea.

Bair's point about agressively taking on the mortgage situation is an option somewhat like the Resolution Trust Corporation. Deal with the losses as real and not "potential" as they are now. Yes, there will be big losses and write-offs and the big lenders (B of A, CITI, Chase, etc.) will all show losses for a number of years. Their managements know what that will do to their compensation packages, so they resist and try to buy time, believing (fervantly praying) that a recovery is right around the corner. The problem is recovery will not come until more of the debt is washed out of the system. Thus Bair's recommendation that the problem be met head on.

Short term investment? For the individual investor with a short term horizon, like me (I'm old with a need to preserve capital and get 4-6% returns per year.) you cannot invest long term because you can't hope to recover from big losses in a short time frame. Especially with the present economic policies in place.
I'm much like Roubini in my investments. 80% cash or safe income instruments and 10% used in short term trading forays following trends. I never thought I would be a short term trader, but here I am in a struggle for financial survival. Wishing it wasn't what it is won't do me any good. Just as the banks hoping a real estate revival will bail them out won't do them any good. Hope and change are not something you can pay the bills with.
 
(Quotes are from the linked article.)

"This past week, the FDIC adopted a rule that allows the agency to claw back two years' worth of compensation from senior executives and managers responsible for the collapse of a systemic, non-bank financial firm."

Didn't we just get done talking about the insanity of laws getting written by bureaucrats rather than legislators? And who gets to decide who is "responsible", the FDIC? So the executive branch not only bypasses the legislative branch here, but the judicial branch as well?


"The rationales the executives come up with to try to escape accountability for their actions never cease to amaze me. They blame the failure of their institutions on market forces, on "dead-beat borrowers," on regulators, on space aliens."

Yes, because unforeseen market forces have *never* ruined a company. Never. And I think I will want some proof that someone has actually blamed "space aliens". I wish *I* had the power to just take money from anyone who failed to predict the future.

The real solution here is to let failed companies fail. If companies face potential failure, then they will have motive to come up with better rules concerning compensation. Instead she proposes trying to treat a symptom. As Ron Paul said (http://www.youtube.com/watch?v=Jx9aRgibY6c): "We must watch out when government comes up with interventionist solutions to interventionist problems."


(on the topic of the bank bailouts)
"those actions were necessary to prevent an even bigger economic catastrophe"

No. They were actions that just about guarantee more economic catastrophes in the future.


(on the topic of entitlement programs)
"The rational thinker in each of us can appreciate the logic that reform is absolutely necessary to keep these essential programs viable."

The rational thinker knows that in the long term these are not essential programs, and are in fact harmful programs.


(on the topic of the US defaulting on its debt)
"An electorate and a news media properly focused on the long-term implications of our government policies would rightly condemn any political position that even contemplated such outcomes."

I'm not convinced. Defaulting on all US debt and making it so no one will ever lend to the US government again could be a good thing (for the US, not so much for the debt holders). It's like getting a balanced budget amendment *and* total debt forgiveness all in one. (I'm not saying we should -- only that I'm not convinced it would a net bad thing.)


"Our financial system is still fragile and vulnerable to the same type of destructive behavior that led to the Great Recession."

Vulnerable? Really? Is that like a mugger being "vulnerable" while robbing you in you a dark alley?


She blames the politicians, not the people who elect them.
She blames the media, not the people who enable the media by continuing to watch the drivel the media puts out.
The "destructive behavior" and "fragility" is due to leverage, but she doesn't blame or call for the end of the FDIC which she heads and whose only purpose is to allow the continuation of the fraudulent leverage known as fraction reserve banking.
And rather than letting the market clear out the losers she supports keeping them around via bailouts.
Color me spectacularly unimpressed.


(None of the above should be taken to mean Warren is any good either.)


The #1 thing (and #2, #3 and #4) I need financial protection against is the government. You can be pretty sure that will be one thing that the "Consumer Financial Protection Bureau" will not provide.
 
Foo - she is basically arguing against the Fed and the politicians.

I have been very angry about a lot of this, but Bair is more realistic than most.
 
You say that like somehow she's on our side, like she's for ending the Federal Reserve and getting rid of the other central planners damaging our lives, like she hasn't been the head of the fraudulent insurance racket that protects banks from bank runs so they can continue their fractional reserve fraud, like she's NOT a regulation-happy central-planning bureaucratic lifer. But those are of course all false, so it's not really like that at all. The argument you are really making is "this dictator seems like she might be better than that other dictator." I hope you can understand that that argument is never going to sway me to like the dictator, even if the dictator you were presenting wasn't as horribly flawed as Blair. And even if you think Blair is an improvement over Warren, Blair is still *very* flawed.

And if you think "dictator" is too strong a term for this role, tell me, what natural rights is this new agency going to protect? Or is this new agency in fact going to be in the practice of taking away our rights? I believe it will be the latter. And in the very article you link Blair willingly demonstrates that she is all too happy to limit our rights. She is natural dictator material.
 
Foo, all I ask is that someone be struggling with realiy, not against it.

The Fed - still struggling against it. Bair - tried to roll up her sleeves and see what could be salvaged. There is an immense difference in approach.
 
"Foo, all I ask is that someone be struggling with reali[t]y, not against it."

You ask for far too little, and far too much. You don't ask for your own freedom, and you ask for the continued destruction of mine.

Shouldn't it be each of *us* who engages in that struggle? Why should we be subject to the "Consumer Financial Protection Bureau" and be reduced to hoping that it ends up with a "nice" dictator that doesn't hurt us too much? Why shouldn't we instead demand that our natural rights are preserved, that fraud is stamped out, and that we are all free to struggle with our own realities in the way that *we* see fit?

You say you want someone who pursues solutions that will work rather than non-solutions that will fail, but who gets to define "solution", "work" and "fail"? When it comes to government my definition of "solution" and "work" is that all of our natural rights are defended with the best possible combination of strong/broad protections and small costs. Everything else is some shade of "fail".

My definition of "solution" and "work" would work just fine at fixing the current issues -- and would fix them for good, not just until the next credit recession rolls along. Furthermore it is the only definition of "solution" and "work" applicable to government that is morally justifiable. Blair clearly has other, immoral ideas about what these terms mean.


"The Fed - still struggling against it. B[l]air - tried to roll up her sleeves and see what could be salvaged. There is an immense difference in approach."

Did they do what they did by protecting people's rights or by stepping on them? The answer to that question is the same whether you are talking about Blair or Bernanke.

Did they do what they did to protect the banks and their ability to commit fraud? The answer to that question is the same whether you are talking about Blair or Bernanke.

You want to highlight the "immense difference in approach" between being slowly poisoned vs being stabbed in the back. I on the other hand reject the right of anyone to attack me.

The highest priority should be to argue against this new agency whose only purpose will be to write up rules which take away our rights. But *IF* we are stuck with such an agency, I don't want someone who will "roll up her sleeves" and get to work -- I would rather have someone who will sit on their ass and do nothing but collect a paycheck, because that is far less damaging.
 
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