The collapse of Lehman Brothers (established in 1850) on September 15, 2008 was the catalyst for revealing the banks’ mess all around the world. The silly notion of “free market” economics was used by the Bush administration to justify their ignorance in not saving Lehman which was purchased by Barclays for $1.75 billion US – an obscenely low price – Lehman had hit a high of $82 US per share.
The US administration then put together bailout packages worth more than $1 trillion US for various entities – they suddenly realized that free market economics would plunge the US and ultimately the world into even deeper chaos, with money being thrown around now with hideous ease. Some estimates of the fallout of the total collapse of the financial sector, put worldwide unemployment at 50%. The ramifications of this actually happening are terrifying.
The fact that the world superpower and biggest advocate for free trade, by its own actions has shown that true free trade and free market economics does not work, is a prelude to a much bigger debate. What is the problem with Nationalization to protect tax payer interests? When does “true” free trade really work and if it does, then why bail out companies at all?
The philosophical debate needs to be had in the US and when economic models of other countries are considered (especially the countries that end up getting through the crisis with the least downside). The US must look at what it has done, is doing and plans to do, and must be smart enough to shift to an economic model which is far more understanding. The true capitalist model is incapable of covering all of the needs of the population.
Government needs to step in to shift private enterprise in the direction to cover weak spots or areas that are unprofitable or unsustainable if it were not for Governmental support. In other words we need to balance true capitalism with socialism – meaning that public or state ownership and administration of industries or business sectors may sometimes be necessary.
The British have chosen to nationalize collapsed banks. One example is Northern Rock (Newcastle, UK Bank) which was nationalized one year ago and it has been announced that Northern Rock is planning to lend 14 billion (UK Pounds) over the next two years.
The total value of home loans written in the UK in 2008 was 256 billion pounds (52% less than the previous year) – I would expect this to be significantly less in 2009. Northern Rock originally owed 27 billion pounds to taxpayers and now owes approximately 9 billion pounds – this is a tremendous success story for Nationalization.
The benefit of nationalizing troubled banks is that certainty is cemented in the market place. The refusal of the US Government to nationalize troubled banks that would otherwise collapse should alarm all US tax payers. Handing out hundreds of billions of dollars which may or may not be returned to taxpayers in the future is risky at the very least – in essence they are handing out unsecured loans.
The approach of the UK will result in a future return to tax payers as the value of the nationalized banks will increase. If the UK Government chooses to partly or fully privatize the banks at a later stage the monies realized will go back into the Treasury, thus creating a positive return to taxpayers.
Profits from the nationalized banks will also go into the Treasury – either way taxpayers benefit and there is certainty in the market place. I am sure the US will decide to nationalize banks and the longer they take to make the decision the greater the uncertainty in the market.
Lobby groups in the US have far too much power and when I consider that their influence has the intention of maximizing the return for their shareholders or supporters it makes me feel extremely uncomfortable. The decision making process can so easily become blurred through what in many ways would be considered as corrupt activity in other parts of the world.
Bank and company executives have shown total disregard for both common sense and prudent business decision making. They have focused on lining their own pockets, promoted poor lending practices in the case of Banks and have worked for short term results to ensure receipt of their bonuses. All of this has raped and pillaged companies and has left shareholders in despair.
Change is required on many levels, including legislation to limit executive pay limits. Bonuses should be approved by shareholders at Annual General Meetings (AGM’s) and bonuses should be paid on performance over a contract period – maybe three or five years. This would promote decision making for the long term health of companies, maximizing the benefit to shareholders which surely is what a company executive is meant to be doing.
I do not believe that any one person is worth $100 million US each year and bonuses should be paid on success as a reward – exactly as the word suggests. Viewing the actions of the American Insurance Group (AIG) in handing out almost $500 million US to executives as a “retention bonus” was appalling. Firstly it represented an average of $1million US for each person and secondly the company had received billions of tax payer dollars in bail out money. Executive pay limits require legislative consideration and anything less than this represents a total “cop out” in truly confronting the issue.
AIG argued that it needed to retain these people to enable the company to repay the bail out money to the US Fed. I would argue that their expertise (or lack of it) was what helped get AIG into such a mess and if they chose to leave there would be no tears from my eyes. They could always take their resume to another company and offer to destroy that entity in a similar manner that they were so successful in doing at AIG.
Sir Fred Goodwin, former Royal Bank of Scotland CEO was at the helm of the bank when it became the largest corporate collapse in British history – 24 billion UK pounds (approximately $50 billion US). His lifetime pension of 500,000 UK Pounds (around $1 million US) per annum is a perfect example of what has gone wrong in the world. Those entrusted in growing business for shareholders have focused on looking after themselves. Even worse is the fact that they have been rewarded with obscene amounts of money for making mistakes. How does this make any sense?
The ignorance of the Bush Administration in allowing Lehman to collapse and the massive subsequent spending programs to bailout or stimulate the market show clearly that US Government oversight and the basis of their priorities need careful examination. Nationalization is necessary to rescue struggling industries and guarantee tax payer return. Legislation to limit the level of executive re-numeration is needed immediately. There are many examples just like that of Sir Fred – will we learn this time?
Part 6: The Car Industry and Climate Change
The MASTERPLAN part 1 – My “Solution” to the Economic Mess (with podcast)
The MASTERPLAN part 2 – Credit Cards, Consumer Credit & Endless Economic Growth (with podcast)
The MASTERPLAN part 3 – Government Debt (with podcast)
The MASTERPLAN part 4 – Banking, Company Regulation & Limiting the Size of Corporations