How Wall Street sold out America (the first time around)

You know, Curmudgeon57 thinks a lot of himself and his work experience. Who knows --he may have had a huckuva life.

What I do NOT see any evidence of, however, is long term Fortune 500 experience at a level senior enough to be able to deconstruct decision making.

If he had, he would grasp the following:

--actual investment in work force skills is down at all levels
--outsourcing has moved beyond "Not my Business" or the 80% of events that constitute 20% of volume under Pareto's Law to anything that keeps expenses off books this term, so my options will be woth more at the end of the quarter.

I recently saw a company spend a year divesting a division for no discernable reason other than that the CEO's options vested and he made $16 million off it. Since I had dinner conversations related to me that seem to confirm this --and the company's results have not improved on either side --it is probably the case.

In other words, corporate culture has changed from building towards long term success to returning results for a very limited number of people on a very short term basis. This is why "retention" bonuses are routinely granted to people who have underperformed their own market segment.

Does this remind me of the financial's community's behavior over the last 10-15 years? You bet. That's why America now manufactures as much "stuff" as India.

Curmudgeon57 is correct that we have to deal with global competition, and can't make it go away. What his comments don't acknowledge is that we're sending the troops out in unarmored Humvees without body armor and with their guns loaded with rubber bullets.

That's how Wall Street has taught us to fight the global economic war.

TC: I can't help but agree with most of what you say, especially the part about my inflated ego. But I think what you don't do is draw any sort of causation between what you describe and the investment banking culture. As I mentioned to Barbara, it seems to me more likely that a focus on short term results and lack of investment in business is caused by a drastically higher level of competition and competence around the world over the last couple of generations.

Companies that have attempted to keep business as usual (think Detroit auto industry) find that international competition has brought them to the brink I think that other companies realized that ahead of time. While you can criticize the response by their executives (and it is worthy of criticism), I see the short term focus as an acknowledgement of how fast a business can deteriorate today.

Not being an academic (any more, and I wasn't an economist), I have no hard evidence of that assertion, but I think that Friedman uses his largely anecdotal evidence to build a plausible theory.

If a reporter were to come to his editor with a proposed article titled, “President Obama is gay,” the editor would demand supporting evidence, before that article ever saw print.
However, if the same reporter submitted an article titled, “Federal deficit is too high,” history says the editor would ask for no supporting evidence, nor would the article contain any. The media merely assume as a matter of faith that revenue neutrality is more prudent than deficits.
Economics is rare, perhaps unique, among sciences, most of which demand evidence for their hypotheses. Only in economics can intuition, faith and popular wisdom obviate facts or even the desire for facts. Thus, I have had editors, columnists and reporters tell me it is obvious that large deficits are unsustainable, lead to recessions, depressions, inflations and hyper-inflations. When I ask for evidence to support these views, I seldom hear from them again, probably because they feel scientific evidence is unnecessary in a science, but more importantly, they don't have any.
Even the Concord Coalition, an organization that for seventeen years, has collected vast amounts of money to preach for federal deficit reduction, unashamedly offers no evidence to support its views. Check its website, http://www.concordcoalition.org, or write to them and you will see.
Because our leaders parrot the economic beliefs promoted by the media, lack of evidence has contributed heavily to government actions that yield repeated recessions. Until the media learn to ask, “What is your evidence?” we will continue to suffer periodic, economic traumas. These traumas may seem inevitable and unavoidable, but in reality they are caused by beliefs lacking evidence.

Rodger Malcolm Mitchell
rmmadvertising@yahoo.com
http://www.rodgermitchell.com

Curmudgeon,

There is a general hierarchy of organizational longevity, based upon the motivations driving behavior. This has been well known for some time.

Universities and churches, which traditionally make their decisions on a long term basis.

Corporations, which traditionally valued long term equity preservation lasted longer.

Partnerships (high flight law firms being a terrific example) have no equity structure and have a very short shelf life.

The nature of calculations such as Internal Rate of Return is that a dollar received 10 years from now has virtually no value. Thus, corporations generally consider a 3 year payback on an investment to be outlandishly long.

This did come from Wall Street, and while it is perfectly true --up to a point --it is also foolish. Don't we have children? Won't they need jobs? For that matter, won't most of US be working in 10 years?

So, to put no serious thought into long term survival, is fundamentally destructive. Mark Hurd, who now runs HP, is a classis case. The numbers got better at NCR while he ran it --then, when "cooking" and "cost cutting" without improving the business model had been taken to its logical exterme, he got the heck out of Dodge and moved to HP, leaving NCR in objective disarray.

Expect similar long term consequences at HP.

Regarding the auto companies, I do not think you get it. They built --in general, for an extended period, an inferior product. Yes, their union health care costs were high (another example of short term thinking by the way, they got the union to forego immediate pay raises for gold plated health care "forever") --but what really put them out of business was this:

1. I never owned a Toyota or Honda that had a serious problem before 150,000 miles.
2. I have owned only 1 American car that made it to 100,000 miles without serious problems.

Young people have internailzed this mantra --the Total Cost of Ownership on a foreign car has been, for some time, substantially lower.

Since American workers build Toyotas and Hondas, one has to lay responsibility for this failure in the design and quality process at the feet of corporate management, where it belongs. It would have cost them real money to build a better product --negatively effecting bothe arnings and THEIR compensation --they preferred to sell Hummers in the fair days of summer.

Besides, they had a ready made excuse, it was all the union's fault.

This is similar to the whining I hear from my buddies in the financial industry that --sure securitization was stupid --but how could they resist when the rating agencies didn't make a fuss?

American culture, led by Wall Street, has become all about making money now, with no thought to the future or our children's well being. For a vetter exposition, I refer you to Warren Buffet's fable "Squanderville".

http://docs.google.com/gview?a=v&q=cache:q7xS8z5E_jMJ:www.summitglobal.com/acrobat_pdf/warren_buffett_in_fortune_magazine_oct_03.pdf+squanderville+buffet&hl=en&gl=us

Where is the long term evidence? We need policies that preserve America's global competitiveness, and we need to oppose policies that reduce businesses' ability to grow. Make the tax system simple and fair. A successful economy encourages investment and rewards achievement. It would be the height of economic folly to target any group for a major tax increase. http://www.friendsoftheuschamber.com/takeaction/index.cfm?ID=42