The Federal Reserve Board has created our present economic predicament and now we will suffer a thumping crash.
For too long, the Fed kept money easy, rates artificially low, and pumped up the stock and asset markets, including housing. The bubble has burst and dire consequences are upon us. The result is pain: more inflation, a likely global recession, and crashing markets in just about every category. It was all very predictable.
But it wasn’t just the Fed that screwed up. Businesses in general played right along. “Principled” is the cornerstone of commonsense business. No business can survive for long (or thrive at all) without principles. But principles don’t show up on the profit-and-loss statement. They are deep seated and hard to describe. Conservatives preach this.
To have a principle means to believe that something is right and good and another thing is wrong and bad. In the respect, principles are outmoded. We are much more comfortable with what I would call “synthetic business” or the new woke game about diversity, inclusion, and equity.
Synthetic things are fabricated to replace or imitate the real thing. On the surface, modern-day investment bankers and traders may not seem to have much in common with baseball and other sports superstars. But like the Fed, all have been caught dealing in synthetics.
Not long ago, the Financial Times reported that Morgan Stanley and J.P. Morgan, two of the largest banks in the country if not the world), were looking to relaunch the giant boom-or-bust synthetic Collateralized Debt Obligations (CDOs) that nearly doomed the world economy and caused the painful crash of 2008. These two giant banks are not alone. Bloomberg reported that Citigroup had already sold over $1 billion in CDO products just a few months into the calendar year. Recall, the global economy lost some $35 trillion in assets from the 2008 financial crisis, and it has yet to fully recover. Was anything learned from that experience?
With corporate bond yield rates wobbling, banks are growing increasingly frustrated. Some may even go under. The need for “fast money” again is luring banks into devising, selling, and marketing the same old spineless synthetic financial products that led to the previous crisis.
The push for synthetics is driven by investors who are aggressively seeking high-yield investments in securities outside of the flat corporate bond market and what looks like a possible coming depression. This thirst for rapid profit among banks and investors alike has created what could be called a modern-day financial doping (synthetics) scandal. Like addicts, we can’t seem to “just say no” or get clean from the drugs.
This is a societal problem. Despite the warnings and tremendous risks, baseball players and other pro athletes still turn to doping and synthetic means to enhance their performances.
Alex Rodriguez hit 600 home runs in the shortest amount of time in all of baseball history. But he was finally forced to admit to substance abuse and that ended his career. “A-Rod” was once one of the awe-inspiring talents of the game. His career came crashing down à la Bear Stearns and Lehman Brothers. He is like cyclist Lance Armstrong, a liar and a cheat, and he will be stripped of his honors. He had to wait until late 2021 to find out, but no one predicted he would enter the Hall of Fame—rather, he occupies the Hall of Shame.
The Rush and the Crash
Addiction to short-term booming success, whether in home runs or in derivatives, has led to the destruction of century-old companies, of the careers of iconic figures, and of the reputations of both the financial professional and America’s favorite pastime. And the trend is global, as we saw among the international community at the recent Olympics.
These collapses, scandals, and crimes demonstrate an ethical decay. Societal addiction to synthetics penetrates so deeply that both investors and sports fans have more or less come to expect scandal and seem unimpressed with old-fashioned and hard-won success. But don’t we remember from our childhood Halloween candy-gorges that the crash always follows the rush? To the 6-year-old, understandably, the trade-off is worth it. But it appears we
human beings do not outgrow our tendency to overindulge in junk food or other kinds of instant gratification. Today, the risk of financial, societal, or career crash is accepted over prudent behavior fashioned by common sense.
Occasional losses are part and parcel of a capitalist economy and of everyday existence. No matter how much quantitative acumen a trader might have, no Wall Street “all-star” can consistently and perpetually hit the ball over the fence for investors and shareholders. Just ask Buddy Fox. Even the infamous “Wolf of Wall Street”—depicted in the movie by that name—got caught. Incredibly, in 2020, there were eight high-profile financial scandals in a period of only five months. The year after that, there were 30 more, and the list keeps growing.
We appear to have learned next to nothing from the past. Firms and athletes alike have not only shifted or lost their sense of judgment but have dramatically lost their way. The entire landscape has radically changed. Companies and employees may know right from wrong, but they are lured by the fame that comes from fast money— not to speak of the lucrative economic and psychic rewards.
What happened to selling products where you actually have “skin in the game”?
What happened to hard work, reputation, and devotion? Are these commonsense notions lost? Most frustratingly, there is little push to change the current system, whether in the form of regulation, character development, or independent governance.
Short-Termism: Our Economic Vice
A stubborn addiction to short-termism is at the very root of the problem, and admittedly, no regulation can fix it. It is both a mania and a mantra. Financial icons and athletes alike focus on results now, and to hell with the consequences and any lingering ethical qualms. Like junkies, they are willing to sacrifice long-term reputation and profitability for a quick hit.
Think about the World Series, which is scheduled to begin later this month. The change from previous generations is dramatic. Bygone baseball stars like Babe Ruth, Hank Aaron, Willie Mays, Mickey Mantle and Cal Ripken, all became icons through talent and hard work—lots of hard work—and sacrifice. The same was true in the privately held firms of yesteryear and in capital markets where careers were earned and promotions made over many decades, not mere months. The partners in a firm put their own money and reputations on the line as a cost of doing business. They all had plenty of skin in the game.
Our moral fabric and way of doing business requires a fundamental change. The current race to the bottom in sports and in finance is surely not sustainable or prudent; it has lost any idea of common sense and is reckless. Realities of universal limitations must be accepted. Out of control, “high-yield” greed and outright fraud must come to an end. The effects of performance enhancing drugs (PEDs) on our way of life as well as on our financial system are now becoming obvious. Synthetic courage (which is really cowardice) can make anyone a 15-minute superstar, yet 15 minutes won’t sustain anyone. The risk proves ruinous for persons, firms, and entire societies.
The Road to Rehab
Unless we restrict the use of financial PEDs, the entire system is likely to spin out of control (again). The way to curtail such behavior is outlined in the second part of our book, The End of Ethics, where Jordan Mamorsky and I talk about “A Way Back.” That hard way back is paved along three necessary axes. The first is personal responsibility based in character. Ethical people are not born; they are nurtured and trained in the habits of doing what is right and of appreciating the good while resisting the bad and the wrong.
Next, these people—when joined together in social units, and especially in forming or joining corporations—can envision and build sustainable cultures of integrity. It can be done; many companies across all industries, in every country and tradition, and of every size are living proof.
Ethical, prudent leadership is absolutely critical. The tone at the top matters.
That is why the final piece of any return to common sense is necessarily regulatory regimes. Now, noticeably we don’t start there, and I do not believe that ethics or prudence can be legislated. It is increasingly clear, however, that in various countries, and especially across international boundaries, some regulation (not mere compliance or box-ticking) is required to guide—and even at times direct—companies to do the right thing. This includes everything from corporate governance to foreign bribery and enterprise-wide risk management.
Overcoming our present predicament will require nothing short of a transformation—and that change is best carried out by remembering the virtue and practice of principles rooted in common sense. Any short-termism that pursues one’s own benefits at the expense of everyone else’s interests will, sooner rather than later, bring down the house. That is where we are today.
In short, egotistic action is not in one’s informed self-interest. The principled businessman and policymaker will want to succeed not only today but also tomorrow. Hence we must be rooted enough in our principles to resist the pull of financial doping be it at the Fed, in business, or in Congress and the White House.