Intervention Follow On

Nice note by Frank Rich on the growing rage of Americans for the continuing parade of financial recklessness and fecklessness. He “retweets” a letter to the editor by Paulette Altmaier from Cupertino CA who elegantly pens the phrase, “President Obama may not realize it yet, but his Katrina moment has arrived.”

Brilliant. I think that Paulette has really captured the underlying issue– the administration’s legitimacy is on the line in how it deals with the issues of corporate irresponsibility.

And this is not just banking or high finance. The S&P500 lost about 38.5% of its value in CY2008. I would be very curious to see how shareholder value fared with respect to corporate executive compensation. While we need to be cautious and not grab  pitchforks and torches, it seems that there’s a real need to rationalize executive compensation. However, I advocate that executive compensation needs protection against abuse so that a free market is maintained, not because we are embarking upon a doomed path of economic class warfare. A small point, but important to me.

What we need is for efficient market action to purge ineffective companies and leadership and replace them with efficacious companies and leaders. (If this can be done without blowing up the global financial system and causing economic Armageddon next time, so much the better.) After all, market forces in unregulated markets should exorcise executives that enrich themselves at the expense of the business owners (equity holders, this means you.) If there are structural reasons this is not happening, then there is a regulatory gap that is distorting free market mechanisms that needs correcting.

The administration needs to walk a fine line between populism that degenerates into class squabbling and the “elephant in the living room” of failing to effectively address the issue. Either extreme will fail, albeit with different results. However, Frank Rich points out as I do in my Intervention note, that there is real concern that the regulators that we need to confront this complex problem may themselves be hopelessly compromised because of their personal past relationships with industry and financial services.

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