Wednesday, September 17, 2008

The freedom to fail

President Bush stole a play from Jimmy Carter’s playbook and had his administration bail out Fannie Mae, Freddie Mac, and AIG over the past week or so. It is a play straight from Jimmy Carter’s political playbook, as Carter bailed out Chrysler in 1979.

Barack Obama and John McCain both hint at more government regulation of the financial industry as a remedy to the mess on Wall Street. However, it is hard to take either very seriously when both men are surrounded by advisors who either worked for or lobbied for Fannie Mae and Freddic Mac. Indeed, in his short tenure in the United States Senate, Barack Obama took more money related to the two mortgage giants than all but one member of the United States Congress in the past decade.

Regardless, the simple truth is that government money and regulations can not fix what is wrong with American financial institutes and frankly, American business across the board. Despite the resiliency of the American economy, the shift in the priorities and the character of American business management over the past decade created this crisis.

When the United States was becoming the economic engine it is now, what mattered to owners and managers was performance. Owners and stockholders did not care about what college some manager went to or if he participated in some post graduate special course or the like. What they worried about was the bottom line. Take for example Dave Thomas, the late founder of the Wendy’s hamburger chain. Before he founded Wendy’s, Thomas worked for the KFC chain. Within KFC, he rose through the ranks not based on his educational resume, indeed Thomas dropped out of high school, but on his performance. Most American businesses today would not even allow a business genius like Dave Thomas to even manage the night shift because he did not have some degree.

The dwelling upon degrees instead of actual performance is one aspect of what is wrong with American business today. Another is the shift in the definition of success. There was a time when success was not only turning a profit, but setting up a business that produced in the long run. Men such as Jim Self of Greenwood would sometimes sacrifice their own short term benefit to keep their businesses running. Self did so in the Great Depression, when he paid his employees with his own cash out of armored trucks to keep his mills open. Self, as other business giants of his time, got rewards in the long term for himself and his business.

Today’s business world is so different. Folks with Harvard and Yale MBAs sit around and think of ways to put as much money in their pockets as quickly as possible and hire computer experts to make decisions for them to do just that. In the financials it is as simple as having a computer decide to sell mortgages at 70 cents on the dollar if the borrowers were late on three payments in a year. Never mind the human factor that a borrower most likely does not want to lose his home and that the asset of his mortgage could be kept with negotiation. American business leaders wanted short term profits, not steady long term secured profits.

Those business leaders who took that road failed. Their management was horrible, their stockholders did not hold them accountable, and they failed. It is that simple. Such failures could have redefined the American business culture back to where it was when America became an economic giant. Instead, with bailouts from the federal government and with talk of regulation, all the American political leaders are doing is supporting failed business models.

Business is not about who has the best degree, or who speaks the nuanced languages of the business academic elite, it is about performance. Businesses who sacrifice long term success for short term gain should not be shocked when, eventually, their practices take them down. If allowed to just fail, better ideas could be come forth in the face of failure.

However, our leadership, in both parties sees fit not to allow that to happen. Ronald Reagan put it so well over twenty years ago. When asked what made capitalism stronger than socialism, Reagan replied, “We have the freedom to fail.”

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