By now, everyone knows the story. After all the cost to take over Freddie Mac and Fannie Mae, plus the guarantees given to J.P. Morgan Chase for their acquisition of Bear Sterns, and the cost to keep AIG alive – in the range of $300million to $600million – the Treasury secretary now says the U.S. taxpayers need to spend at least (it could be more – even more than 2x this amount) $700billion to purchase the bad loans sitting on the books of banks, investment firms, insurance companies and hedge funds.
So what does the taxpayer get for this? So far, all the taxpayer is told is "it’ll stave off an even worse crisis." I’m reminded of the words attributed to Illinois Senator Everett Dirkson "a billion here and a billion there and pretty soon it adds up to real money." This is a lollapalooza of a bunch of money – and yet no one seems interested in saying what the taxpayer gets. The proposal is pinned on "things will be worse if you don’t", without much talk about how things will ever get better. There’s no talk about how this will create more jobs, create rising incomes, or improve asset values. Just "it can get a lot worse."
So, put yourself in the role of CEO. If someone came into your office saying "I think we made a whopper of a mistake, and you need to agree to pony up something like $1 to $1.3trillion dollars to bail us out." After you get back up, what would you ask? How about, "what’s this for?" To which you hear "Well, it seems we simply made a bunch of bad investments, and now we have to buy them all back." Nothing about how your business will be better for having done it.
Now, it might occur to ask, "if I do this, how do I know it won’t happen again?" And that’s the question you really should be asking today. Have you heard before about this problem, and told your previous actions would stop the problem? If yes, wouldn’t you say "hey, I’m a bit tired of running around this tree and getting these recurrent bad news meetings. Seems like every Monday is something of a ‘here’s the newest crisis’ environment. What’s your plan to adjust to the market requirement?" And if the plan is to do more of the same, but now with more resources, done harder, and working smarter you’d be pretty smart to say "if the previous actions didn’t work, why should these work?"
In the end, this $700billion to $1.6trillion isn’t changing anything. It’s just putting the proverbial "finger in the dyke." Only what started out as a few hundred million dollars (the finger in the first hole) has exploded into over $1trillion and the dyke hole isn’t the size of a finger – it’s the Holland Tunnel! Clearly, what was tried hasn’t worked. Yet, this is asking more of the same. So, in the legislation the person who’s been watching and saying "things will be fine" and spending the hundreds of millions has now said "just to make sure this works, I want not only all this money but no oversight on what I might need to spend additionally – and no controls over what actions I might need to take – in order to finally stop the flooding problem." Uh, right. Since everything you’ve done before didn’t work the obvious right answer is to give you more money than I ever imagined, and on top of that give you unbridled permission to do anything else you want to keep trying more of the same to stop the problem.
When do you say "no"? Confronted week after week with crisis after crisis, when do you say "I don’t think this is working?" It’s so easy to go along. It’s so easy to say "this has been the way we’ve always done it. Things haven’t worked so far, so clearly all we need to do is do more of it. Possibly more than any of us ever dreamed imaginable – but surely if we do enough, do more, eventually it will work."
Now, more than ever, we need White Space. The financial markets have shifted. Competition has shifted. The balance of competitiveness has shifted to those who have access to lower cost resources of everything from oil to labor. Those who focus on industrial production can now see that it is dominated by those who have more people, who are equally trained and who work for less. Whether that is the production of shirts, or software code. Trying to prop up a global financial system based on the "full faith and credit of the U.S. government" is difficult when that government is significantly in debt, has lost its position as #1 in manufacturing output, and no longer controls the financing of everything from dams to auto purchases. Trying to "fix" this situation with solutions designed to work in another era, under a different set of circumstances, will not produce better results.
At the very least, when confronted with this kind of situation it is the time for leaders to say "where is the White Space to develop a new solution? If I have $1.3trillion to buy the problem – either by giving up the money or by printing more – and I forego all other expenditures (like health care, or defense against competitors) to put the money here – I deserve to see some money spent on developing a new solution. One that is built upon the new market characteristics." This is not the S&L crisis again, nor is it the failure of a single big bank. We are seeing the results of a market shift which the industry was not prepared for. And the only way to come out successful is to have White Space to develop a new solution.
So far, no one has asked for permission to develop a new solution – nor has anyone even proposed it. No one has even asked for resources to develop a new financial system. All the money is going to attempt propping up the old system – and the more we dig, the deeper we get.
At the very least, for $700billion, we need White Space. We don’t need hedge fund managers who are salivating to buy up beaten down assets. We don’t need regulators trying to roll back the clock. Nor do we need "do nothing" recommendations with "have faith this will all work out in a capitalistic system." We are in the information age – not the industrial age. We are in a global economy – not a U.S.-led international economy. We are facing new competitors, with different advantages, doing very different things. And we need new solutions. Without those, each Monday will continue to feel like the movie "Groundhog Day" as we relive over and again the problems we don’t address by simply throwing money at it. We have to find a way to move beyond "more of the same."
Mr. Paulson is willing to bet the U.S. Treasury on doing more of the same. He’s ready to spend money Americans don’t have (since there is a negative U.S. government budget and huge deficit.) This means either higher taxes, or turning on the printing press and creating inflation. That’s a bet he’s willing to take. Are you? Or would you like to see some options? Some new solutions? Or even some teams that are working on new solutions? If he’s your V.P., your CFO, do you approve his recommendation, or do you ask for something more – some White Space to develop a solution that does more than stave off future crisis. Do you look to the future, and how to win, or do you try to preserve the past and put all your money on the bet that old solutions will work?