Systemic Change

As we see news post after news post of failures in our banking system to the credit crunch to the loss of jobs, after a while it becomes just numbing to think about. I admit that I don't even like listening to the news at night since it just spews the same story - just rehashed. About how the recession is affecting this or the job losses are affecting that. Its almost easier to just put your head in the sand and hope it will all pass without mangling your life up too much.

I believe that it's in our cultural nature to try to assign blame to what went so wrong to get us to this uncomfortable economical spot. Who was the mastermind behind the mortgage meltdown, the subsequent credit crisis, fuel speculation that drove the cost of oil to over $140/barrel this summer - who was to blame behind the reason why GM and Chrysler need bridge loans. The fallout is what is painful - so far in my circle, it's only hit some peripheral friends - those that worked in economic low hanging fruit of speculative real estate that have been laid off. For the most part, it just doesn't seem to be hitting many people I know.

But as this spreads and if it ever gets to be an actual Depression, then maybe people will be more massively affected. But who knows. I'm sure that there will be plenty of conspiracy theories that will develop that some elite group of billionaires got together in some secret room to arrange this economic time just so they could become even more wealthy when the economy recovers - probably headed by George Soros.

When I think of this, I believe the way out of this mess is to look further than the one-off explanation and just collectively realize that the system failed and a revised and/or new system needs to be put into place to ensure future economic growth. Here are my top systems that need to be retooled:

1. Energy: We have all heard the rhetoric about foreign oil and how it's bad. Well, it's worse than you probably think (see my posting on Petro-dictatorships). This not only highly affects our foreign policy as a nation, but it has severe limitations to future growth and maintenance of our resources. Nations that manage their natural resources and means for energy will come out on top - no matter what the economic issues happening globally. This is a huge area for growth, but we need to make some tough choices - such as placing a floor on the cost of oil so that investors in renewable energy sources aren't clobbered with shrinking global oil demand. This industry could be completely reinvigorated with our engineering expertise and technical labor to retool the nation. This could create and maintain "green" jobs for the next several decades and spur all sorts of new innovation. If you'd like to read more about this - pick up "Hot, Flat & Crowded" by Thomas Friedman - he makes a compelling argument to achieve this.

2. Credit: Most of us have heard the saying: moving money makes money. With a credit freeze - money isn't moving so money isn't being "made". Credit is the actual foundation of our economy - banks lend short term loans to businesses so they can make the monthly expenses (so you can get paid) and then business can grow through capital investors and loans. We need it. The thing is that we need to have sufficient capital behind the credit to ensure confidence (thus why our current problem is so big - no one knows the value of backing capital so it kills the overall system). The credit that was "borrowed" against individual households by extending housing credit to those that could not afford them through exotic lending tools (like ARM's and interest-only) has created most of this mess. Credit should be extended, but only with individual businesses and households putting up their own risk - 20% should be the rule for all long term credit lines - no exceptions. This would stabilize the housing market and we would see incremental growth in home prices. Plus the rate of foreclosure would be near zero - protecting all of our home values.

3. Stock Options: Why stock options you may ask? I get them at work and it can be pretty sweet (unless you're trying to cash out options issued at $14/share for a stock that's trading at $2 - not that I know anything about that...). Stock options for non company executives is reasonable. It can be nice reward system for the hard working regular Joe - the thing that I have a problem with is how it is abused as an executive compensation packaging tool. CEO's who are issued stock options as a large percentage of their compensation can be unduly influenced to artificially inflate the value of the trading stock for their own personal benefit. It seems reasonable that the CEO's job is to make the stock as valuable as possible for the shareholders, the thing is that it is done for short term quarterly wins only to find the stock tanking when the true economic factors are placed on the table. CEO's work hard and deserve to be compensated for the commensurate work and value they provide - but enough is enough - 40-50 times average worker is plenty for anyone living in America - anything above that is just plain greedy. Make most of their compensation packages based upon annual performance - just like everyone else. Guaranteed bonuses written into contracts aren't really bonuses for good work are they?

Each one of these categories would require an entire systemic change to make it happen. All of which would create jobs (and take them away in certain circumstances), but in the long run, we would find a much more stable environment for tackling our future issues and strength comes from stability.

Think of all of the jobs created by widespread innovation for energy - new storage mediums, transmissions, applications - it would affect every single industry everywhere in America. Plus it would shut down oil producing nations who don't like us very much. Not to mention the environmental impacts for future generations (if you want to get a good look at how societies have historically managed their resources - to either their benefit/survivability or to their demise - read Jared Diamond's "Collapse" - very much an eye opener).

Correcting the credit policies would help everyone - mainly by creating the base floor for entry into certain higher stake purchases. Our savings rates would increase - which would we could take those gross savings and put them to work as capital for banks to re lend (just as the system works now). It would be a responsible approach and keep bubbles and busts happening in core survivability areas like shelter.

Regulating Stock Options would allow for a stronger moral compass for companies and their leadership. If they bring true value to the company, then they'll receive the bonuses not unlike a highly skilled worker would. Let the owners of the company (the stockholders) give out bonuses when they're of merit and let's move away from the rock star CEO who runs the company into the ground for his own personal benefit. And let the government give it's best incentives to those companies who create jobs and make every effort to hold them when times are rough. We should hold up integrity as much as how profitable a CEO can make a company. It would pay off for the stockholders over the long run (read the book: "Good to Great" - excellent for how a business could create the foundations for long term success).