The Bravery of Being Out of Range

Everybody seems to be weighing in with their opinion of what went wrong with the economy. We all have our opinions, but focusing on what went wrong won’t necessarily fix the problem. That is not to say that we can’t learn lessons from our mistakes, but the solutions to improving our economy will not come from placing blame or pointing fingers. We have to roll up out sleeves and get to work to make things better.

I’ve stated in numerous posts that I am against all of the bailout plans. They are too complex and they utilize the resources derived our tax dollars for the benefit of a few select businesses. Another issue with the bailouts is that they do not address solutions to one of the key fundamental problems with our economy.

This problem is that too many people are making key financial decisions with the “bravery of being out of range.” What I mean by that is that those who are running these companies into bankruptcy are not suffering the consequences for their failures. These executives have the so called “golden parachutes” in their compensation packages to ensure they can live a life of luxury well into the future, whether their companies succeed or fail. Meanwhile their employees get laid off, usually with minimal severance packages and a complete loss of health benefits.

Entrepreneurism, whether on a large scale or small scale, refers to a very simple concept of running enterprises to be profitable. By definition, entrepreneurs are people who have possession over companies, enterprises, or ventures, and assume significant accountability for the inherent risks and the outcome. (http://en.wikipedia.org/wiki/Entrepreneur, target="wikipedia"). Yet if we look at the leaders of the companies at the forefront in this economic crisis, you will see compensation packages that eschew all risk and accountability. How else does a CEO fly a luxury jet to Washington to ask the government to help them from failing? How else does an executive ask for a $10 million bonus after losing billions of dollars and laying off thousands of workers (yes, I am referring to John Thain from Merrill Lynch, who has since come to his senses and withdrew that request).

I have to admit that I feel quite a bit of anger that people who don’t get it, somehow got placed in these positions of great power. But anger won’t solve the problem, so I’ll get over it.

Now comes the solutions part. I am a firm believer in Occam’s Razor, which refers to a principle that basically states, “All other things being equal, the simple solution is the best.”

So I’ve come up with 3 simple steps we could take to help fix our economy:

1. Invest in assets that will generate revenue. I wrote quite some time ago about the simple genius of this strategy that is covered in Robert Kiyosaki’s book, Rich Dad, Poor Dad. If government wants to invest in turning the economy around, then government has to put more thought into the development of its assets and how it derives income from those assets. Things like our highways, ports, our military and our national parks are all assets that could be generating more income. We have to change the paradigm of how our government invests so we continue to be innovative in developing these assets to provide more lucrative revenue opportunities. For our government, that means using the development of our assets to generate jobs and income opportunities (user fees at National Parks, resource development on government owned lands, selling of government funded technology, etc.). As for the private sector, this step will happen out of necessity. There is an old saying that cream rises to the top. Eventually the last investors standing will be those who are wise enough to follow this basic strategy.
2.Make accountability a part of all financing and investment decisions. Everybody talks about regulation, whether we should increase it or decrease it to spur the economy. To me, there is no need for this debate if accountability is included in all investment decisions. Consequence is an amazing regulator. Our problem is that we have allowed too many people to be insulated from the consequences of their poor decisions. We could change this by having shareholders demand that executive compensation be tied to company performance. There could also be an insistence by all lenders that there is some form of personal investment made in any financial investment deal to make sure decision makers have some “skin in the game.” If I had my say with our Congress, I would make sure that all executives who are making decision with bailout money have some of their personal assets pledged as collateral. Then we would find out how confident they are in their ability to properly utilize that public investment. Those who are not willing to be accountable should not ask for handouts and should wait this crisis out on the sidelines.
3. Increase financial education. William Durant wrote, “Education is a progressive discovery of our own ignorance.” One of the things that we have learned in this economic crisis is that quite a few people had losses in the marketplace and they really had no clue in regards to the level of risk they were taking with their investments. The use of mutual funds and IRAs as an investment tool really didn’t gain traction until the late 80’s and early 90’s. It brought millions of new investors into the marketplace, with many of them not having a clear understanding of what they stood to lose. Most people didn't realize what they should be researching or even have a clue as to whether their investments were high risk or safe. That is because times were good and they believed their advisers as long as they were making money. But now that people are watching their values dwindle, all of a sudden they are starting to take notice and ask questions. Well, let’s not forget this progressive discovery of our ignorance and insure that we learned our lesson and teach others what we have learned. The fundamentals of business and investment should be taught in all secondary schools and community colleges should make financial educational more accessible as a non-credit curriculum so anyone who wants to learn more can.

I remain optimistic about our economic situation. I am obviously over simplifying some complex issues, but this is where we have to begin. We live in a big world with quite a bit of consumers who need products or services. Eventually more entrepreneurs will recognize this and profit from their ventures. That is if they maintain the bravery to be accountable for their actions and work responsibly towards achieving success.