By Kimberly Krautter
Let's be clear: our current economic crisis is not about cash. It's about credit. It's about the debt game and a pernicious pandemic addiction to debt instruments.
I'm rather relieved that Congress took a vacation today because we all need to take a time out and get some perspective. YES, the vicious 7% decline in the stock market is painful. And, the media kept punching that bruise in the context of the no vote on the revised Paulson plan and the near failure of another major bank (Wachovia).
However, yesterday's event does not even rise to the category of trauma. It did not, in fact, even break into the list of top ten worst days in the history of Wall Street (CNN Money). Although a few voices of reason attempted to make this clear, they were drowned out by the cacophony from the echo chambers.
The message that we keep hearing from media folks who report on business and the economy is that if banks won't lend each other money then the entire bedrock of the American economy will liquefy, businesses will collapse and America will go back to bartering for goods and services. They threaten that If the banks won't lend each other money then they won't lend it to us.
So what? Cash is -- and always has been -- king. You don't walk into a grocery store and say, "I'll gladly pay you Tuesday for some hamburger meat today." No. You want the beef, and if they have it, and the price is right, you pay for it. 'Nuff said.
Even in this time of crisis, the only small businesses that are not going to make payroll are those who unwisely risked their cash positions, and so they deserve to fail. Isn't that the definition of free market capitalism?
That is how small business and ALL good businesses operate. At least that's how it used to be. The problem we are reading about in today's headlines is that too many big businesses have gotten drunk on debt and leveraged (read: "gambled") their cash position on the promise of great gains by buying a parking spot on Wall Street. Essentially the big guys stepped away from business basics and started to put at risk more than just their net profits.
True, this worked beautifully for a period of time (one in which there were regulations in place to prevent wholesale chicanery), and this type of strategic business finance allowed many companies to diversify and led to the rise in global commerce. But as regulatory controls were relaxed, the funny business and fuzzy math began.
Unfortunately for the rest of us (homeowners, small business operators and other taxpayers), after 20 years of Gordon Gekkonomics, the Wall Streeters figured out a scheme to earn even more per-trade fees by taking their own counsel and diversifying their services. They began to target the small investor, and in a truly brilliant stroke, they used their big corporate clients as street corner pushers of the new debt drug.
In a move that would make the biggest Mafia boss green with envy, Wall Street bosses leaned on corporations and said, "Pay me protection against those pesky employees, and tell them that in lieu of cash compensation, you'll invest about 15-25% of it for them (with us, wink-wink, nudge-nudge) and they'll end up with a big retirement bungalow in Boca on the backend."
When this new game was initiated, the 401K and profit sharing plans were optional. As it gained in popularity though (and not so coincidentally in the go-go days of the Clinton '90s) it became mandatory. Today, new employees in all but the retail industry no longer have the option to earn full cash compensation with which to spend or invest as they wish. Consequently, as the corporation goes, so goes the nest egg.
One would have thought that the regulators would have learned not to trust the Wall Street Robber Barons after the Savings & Loan collapse of the '80s and the Enron fiasco of the '90s. But, then again, since the regulators themselves are so personally vested in Wall Street as are all of the elected leadership, (who are further compromised by accepting campaign donations from Wall Streeters) to expect clarity and perspective is a stretch.
Now hold on Hoss. Take your finger off the trigger and come down off that high horse of yours before you accuse me of suggesting that we should NOT invest or worse just stick our money under the mattress. Far from it. As my dad, a CPA, always said, the greatest story ever told about money and capitalism is Frank Capra's "It's a Wonderful Life". The point of that movie so apropos to now is are we going to continue to allow the Potters of this world sell us a bill of bad debt? Or are we going to smartly maintain a cash position, live/do business within our means now and invest only that which we can afford to risk? Doing the latter ensures that Old Man Gower gets to keep his store and Mrs. Macklin can keep her house.
Although for more than 20 years my career has been in corporate communications (and still is), last year I bought a small event design firm that was owned by a dear friend who passed away. On the side, I had helped him operate it for years, and I knew full well the perils and pitfalls of balancing the books, meeting payroll and satisfying customers while maintaining a high level of quality. It's a tough and mean task. Still only operating it as a side business, we have been able to stay afloat using old-school business basics. With the signs and portents of the current economic crisis looming last year, I kept a careful eye on the cash position, inventory position and marketplace and made sound strategic moves to cut overhead so the company could operate within its means.
A bottom up, Capra-esque stabilization strategy is not just the stuff of heartwarming cinema. Even New York Times columnist and noted Princeton economist Paul Krugman agrees. Just last night on CNN's Larry King Live he and the irascible Ben Stein agreed that a bottom-up strategy would prove far more healthy and intelligent than the stink bomb bill currently before Congress. It puts real cash into the pockets of people who live and trade in real cash. It gets cash flowing through banks at the retail level and through businesses where real goods and services are bought and sold. A strategy like this keeps the middle class working and earning.
The Robber Barons do not like this plan because they exist in a wholly virtual world in which real money never changes hands, only ephemeral exchanges of ones and many, many zeroes.
If we can stop the spin and hype, and take one good minute to THINK, perhaps we will realize that "Greed, for lack of a better word, is good" -- but only for a select few. There is no such thing as "trickle down" in Gekkonomics unless you count the stink of the decay of the middle class.
I don't know about you, but I find it unconscionable that in only three generations our country has gone from the depths of economic depression to enjoy the wide freedoms bought by a disciplined free market after WW2 to a drunken debt orgy and near collapse.
I do think a solution needs to be wrought. I do not claim to have the knowledge to recommend or counsel on the subject, but I do know that the Gordon Gekkos should not earn one penny from it. I also think that we the middle class taxpayers on whose future and posterity the solution will be borrowed should be part of the calculus. After all, the banks and robber barons expect to be compensated when they put their money at risk, and so should we.
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