Re: Some words of wisdom during the economic crash and the credit crunch plaguing the world

Checking the BBC News for interesting insight into the ongoing credit crunch affecting the world economy at the moment, I stumbled across an excellent opinion piece penned by Sir Evelyn de Rothschild discussing why the U.S., the U.K., and the E.U. have so spectacularly fallen off the reservation financially.  This 2008 credit crunch, on the heels of the 2007 super-spike in food, fuel, mineral, and commodity prices, has signaled a final death knell to the free market euphoria hedge fund manager George Soros dubbed “market fundamentalism.”  The rate of credit in the economy has expanded much faster than the real economy.  The end result has been a glut of worthless financial instruments invented in the midst of the sheer folly of the speculative mood.  

Sir Evelyn de Rothschild, scion of one of the oldest banking families in Europe, offers some well-considered perspective on the worsening crisis. I will go through and re-post his words in italics, and then make some of my own comments.

Here we begin with Sir Evelyn de Rothschild’s remarks….

All of us – countries, corporations and consumers – have neglected basic principles.

Ethics – we have lost sight of an honest day’s work for an honest day’s pay.    >>>>>> I couldn’t agree more here.  Thinking of Wall Street in particular, the spirit of deregulation and “innovation” had caused credit rating agencies to take fees on their evaluations of dubious securities and financial investment instruments.  Wall Street began to think that acquiring debt and maximizing leverage bore no relation to accumulating solid pools of equity.  Unscrupulous hedge fund managers and derivative traders have untold amounts of contracts and “bets” on market trends that cannot be redeemed from capital stocks.  Most of the highly touted financial instruments from a few years ago are now arguably worthless.  What a meltdown!

Careful management – we have indulged our wants without the taxes or the prices or the cash to pay for them.

>>>>> Management is not only a skill, but an art.  The pride of running a good business has also been lost.  Building relationships over the long-term with customers has been sacrificed to short-term gain and the collection of massive fees for peddling junk securities.  The art of the leveraged buy-out, perfected by the likes of the 1980s investment banking firm Drexel & Burnham arguably was perfected in the Kohlberg, Kravis, & Roberts leveraged buy out of RJR Nabisco and the assault on that company’s board and management team.  The leveraged buy-out destroyed the relative autonomy of company boards and managers, now that they had to look over their shoulders at corporate raiders in the financial community that looked to do little more than engage in wanton asset stripping.  For an excellent run-down of the historical problems in the relationships between finance and management in the corporate world, I highly recommend viewing a lecture Sanford Jacoby, the Howard Noble Professor of Management at the UCLA Anderson School of Management.

Oversight – public relations and spin have replaced disclosure and transparency; casual yet complex accounting and accommodating rating agencies left us blissfully unaware of the problems, and we revelled in our ignorance.

>>>>>This is clearly a consequence of the “free market” ideologies arguing venally against all regulation of the financial economy.  Under such conditions, players in the financial industry have incentives to indulge in careless and overly risky behavior to maximize short-term profits at the expense of their institutions and the real economy at large.

Hubris has replaced community responsibility as a requirement for executive positions.

>>>>>> I can definitely attest to this fact being true.  Corporate philanthropy and community investment is definitely down.

American automobile executives and British bankers have been unable to form their lips into an apology.

Yet their institutions lie in ruins and the rest of us are left feeling embarrassed for them.

>>>>>Shame on GM, especially.  They had been especially resistant to building fuel-efficient cars, even lobbying to change laws to make their “light trucks” and SUVs more marketable and cheaper for the public.  GM also had produced great little electric cars in the early 1990s—the EV1.  But they bowed to pressure from government bureaucrats wary of losing revenues from gasoline taxes as well as to pressure from oil companies worried about declining gasoline sales and the concomitant revenue from such transactions.

Their customers worry that their savings or their working capital will just vanish, their mortgage will be transferred to a new institution they have never heard of.

Their employees wonder which of their colleagues – or they themselves – will be unemployed in the coming week, with bleak prospects for working again anytime soon.

Where is the shame of those who only months earlier boasted of ever increasing profits, of ever more clever products, of ever easier loans?

Remaining credit

The US automakers may be the worst of the lot, so far.

Years of incompetence and now manoeuvring in the halls of Congress for a massive bailout.

Management prefers to hold onto private corporate jets rather than push for fuel efficiency standards to make their products more competitive.

Union members would rather hold onto their gold-plated pensions for life than to save their companies.

>>>>>>GM is practically the U.S.’s largest health annuity fund—retired workers are receiving better pay and medical benefits than current GM workers.  That seems manifestly unfair considering how poor the company’s internal financial situation has become.

Why should taxpayers help those who have so frequently refused to accept responsibility themselves?

If the US government uses up its remaining credit to help the auto industry carry on as usual, who will lend the country the money to repair its bridges, build its power stations, clean its water, fuel its navy?

Slow revival

Thirty years ago, New York City found itself in a position similar to GM, Ford and Chrysler today.

They asked Washington for help. The government refused.

The Daily News summed it up in its front page headline – Ford to City: Drop Dead

Instead New York balanced its budget, taxed itself, reduced hiring, negotiated better labour contracts and gradually worked itself back to fiscal health.

It took more than 10 years.

Take responsibility

This era of struggle may last as long.

Until we can be generous in accepting fault for our predicament, we will have difficulty dropping our suspicions about others so that we can get on with repairing the damage.

Unless action is taken soon, we can only see a long time of difficult and very onerous problems continuing.

Could be one or two years.

It is therefore essential that management must take a firm look at it’s problems and accept its faults and redeem them.

A lot of talk and a lot of words have been written.

But in the end action has to be taken and action must be taken very soon if we are not going to see this stretched out over many years. 

>>>>> Action must be swift, and it must be along the lines of the New Deal.  We need Keynesian stimulus of the real economy to get the unemployed back to work so that they can participate in buying and selling goods and services once again.  Without consumers having the incomes and savings that only employment can provide, very few of them will be able to purchase goods and draw down the inventories that firms have built up as consumer confidence and interbank lending has dried up.

Sir Evelyn de Rothschild’s remarks, however, really don’t fully grasp how serious the problems really are.  Bad credit and financial contagion have spread throughout the economy.  Undoing these effects will be very difficult in the years ahead.  We might have to completely redo the way our economies are managed—-a return to the Keyenesian past and a push forward to develop the clean energy infrastructure needed to confront climate change will grease the wheels on the economy and restore confidence in the global system.




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