2007: America flunks finance and economics
By Bill Settlemyer
President and CEO, Setcom Media
It’s hard to know where to start, but suffice it to say that the big story of 2007 was that America flunked finance and economics.
OK, I guess I do know where to start: The housing bubble and the subprime mortgage mess. It’s fairly easy to cut Joe Sixpack some slack for not recognizing the pitfalls of gimmick mortgages with high fees and unrealistically low initial rates, but how do you cut slack to the highly compensated top executives in banking and finance who lost billions for their shareholders?
The answer, it appears, is that you cut these executives some slack by politely firing them and letting them walk out the door with tens or even hundreds of millions of dollars in compensation. Isn’t there something wrong with this picture?
Of course there is. It’s a symptom of a failing system of regulating financial markets, or rather a policy of not regulating financial markets to the degree necessary to prevent this kind of disaster from recurring.
There is a contrary argument being mounted pre-emptively by apologists for this most recent financial catastrophe: Free markets, they say, are so vital to economic growth and prosperity that we have to avoid making the terrible error of tightening up on financial regulation.
Well, baloney. This subprime disaster could have been avoided, but nobody in a key leadership role in government or the private sector had the guts to step up to the plate and do the right thing. Now we’re all paying the price, and we’ll be paying it for a long time.
Financial literacy vs. financial lunacy
With the emergence of the Internet as a wonderful “font of all knowledge,” you’d think American consumers could get a handle on the fundamentals of economics and finance and internalize the well-known principle that “if it sounds too good to be true, it probably is.”
But knowledge and wisdom are not the same thing. To use knowledge effectively, you have to dig deeper, and “look around the edges” of the great flood of information available via the Internet.
The same goes with personal investing and finance. I was speaking to a friend recently about the Lowcountry’s Al Parish debacle. “When I read about his expensive collection of pens,” she said, “that made me suspicious right there.”
I understand her point: I’ve known a fair number of financial planners, and you’re not likely to hear them boasting about their exotic investments, whether they have any or not.
Another friend working in the high-stakes investment banking world described the source of the current American credit crisis in one word, “greed.” Right on the mark. Who can forget the immortal words of Gordon Gekko, a character in the movie “Wall Street”, proclaiming that “greed is good!”
Well, not so good. All of us in business understand the profit motive, and given a choice, we’d rather make more profit than less. But most of us, especially those in small businesses, are just as focused on providing something of value to our customers and offering good quality at a fair price. In the world of small business, my experience is that you won’t have much of a future if your core values including taking advantage of customers or misleading them to achieve higher profits.
It really boggles the mind to even try to imagine what people were thinking on Wall Street when they started swapping bundles of subprime mortgage securities like baseball trading cards. In an echo of the dot-com bubble, the companies that rated the quality of the securities were paid for their services by the people doing the bundling and trading. Oh, what a surprise that their work was sloppy, careless and catastrophic for the financial markets.
The same thing happened in the dot-com bubble, only then it was stock analysts rubber-stamping glowing reports on the value of companies with no revenue and wacky business plans. Sock puppet, anyone?
Morality tales
The subprime mortgage disaster is a morality tale as well as a story about bad judgment. A few months ago I was listening to a report on public radio about a Web site that had been set up to help consumers defraud mortgage companies by producing fake documents about their income and employment. For a modest fee, the Web site would provide the customer with false payroll stubs from a fake company.
If that didn’t do the trick, for an additional fee the Web site even had operators standing by to pretend they were in the HR department of the fake company so they could confirm the fake employment to the prospective lender.
Ugh! In the current presidential race, there’s been a lot of attention paid to the religious beliefs of the candidates, especially regarding the hot-button issues that have caused so much political controversy in recent years. But I wish all the candidates would say more about morality, about personal character and the standards of behavior that either make a nation great or undermine its strength and unity. Every great religion demands in one way or another that we “do unto others as we would have them do unto us.” That’s a good starting point for any set of moral standards.
So let’s resolve to regain our national and individual fiscal sanity in 2008. Let’s clean up our balance sheets, learn to be more prudent and realistic in our economic decision making, and find far greater things to aspire to than greed.
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