Spreadsheets and smart people aren’t enough to make this recession go away

At home, at work, in the paper, and on TV, there are conversations almost every day about the current climate.  I have heard some really smart people with some very insightful thoughts (often with language that might make even Rahm Emmanuel blush) about why we are where we are and who is to blame as well as some ideas about the path to the solution, “how” we get there, since “what” we want seems reasonably clear to most.

“Stupidity” is a word that has  been absent in the conversations about how we got here, “hard work” as well.  Whether people are talking about auto manufacturers or banks, or insurance companies, not once have I heard anyone say the decision-makers were stupid.  Most frequently, I hear people talk about greed (banks and insurance), and neglect (autos).

But greed and neglect are not new by any measure.   So why now, in the early stages of the 21st century have they brought the global economy to its knees?

My answer lies in the shadows of this obituary from last year.  William S. Stevens wrote a legal note in a law journal that changed the way people talked about laws, and he compared laws to the baseball infield fly rule.  The article describes this far better than I will, but basically, in many situations if a player catches a ball hit by a player on the opposing side, that player is out, but in some cases in the infield, it is easier to get more outs if the player drops the ball and then throws multiple base runners out. Even though it’s clever, it was considered unsportsmanlike, so the infield fly rule was added and it says that in the infield, the player hitting the ball is out whether the ball is caught or dropped, and that helped eliminate the temptation for some to be unsportsmanlike.   Stevens observed that each time a new law is added, it is often to close the door to the temptation for uncivilized behavior in much the same way the infield fly rule prevented unsportsmanlike behavior.

What does an obituary about baseball rules have to do with the recession?  A lot.  The greed and neglect that have been around forever have now run amok because these people have figured out that they can get away with it, even the Sarbanes-Oxley, the SEC, and congressional oversight.  And when I hear about seven and eight figure bonuses getting handed to some of the greedy and neglectful executives of companies, that’s simply a reward for bad behavior.  So all of the spreadsheets that are being used to calculate bank debt risk start to sound like “all the kings horses and all the kings men” but we are obviously talking about a lot more than a broken egg.

So what to do?  There need to be strict rules about board accountability with clear enforcement provisions.  There have to be stricter laws about lending and passing more transparent credit worthiness ratings.  Banks have to disclose to shareholders and regulators what their risks are (like debt risk) in terms that are clear and simple (after all, it is really just math in the case of the banks).  The bigger piece is that with the auto makers and a lot of the banks and the insurance companies, I really think we need to be more open to the idea of letting them fail and go into bankruptcy, because really, if no one loses, then no one wins, and that’s not going to last.

So to get to the outcome of restored trust in banks and corporate America as whole, we need to rethink how we get there, and I talk about this in the book in a chapter about following the rules, but this is deeper than that – the behavior is now beyond the reach of the rules, and we need more rules.  Yes I know this post oversimplifies some things, but I am tired of people not dealing with the underlying greed and neglect that got us here.  So let’s get some more infield fly rules, and let’s play ball!

-Ric