Capitalism’s Beast of Burden
As the “once high-flying new economy darlings” are hauled before Congress for “probes”, we’ll probably get to see how well CNN does at reporting on its own parent company, AOL. Business Week says that“In the last year, AOL Time Warner has lowered its earnings guidance three times, reported decelerating growth at the flagship Internet unit, and been forced to shell out $6.75 billion for the 49.5% of AOL Europe that it didn’t already own”, and is now poised to take another big charge.
Now that we see how many people have been exaggerating their earnings for the past 10 years, I would like to takes this opportunity to point out that the SEC during the last ten years ignored all of this and instead investigated (and settled with) Microsoft forunderreporting earnings.But thebillion or so that Microsoft allegedly forgot to report as income is little consolation when theentire system is melting down due to overstated earnings on the part of the big players. An individual company is kind of powerless –”rainy day” account or not — in the face of this magnitude of malfeasance. Maybe the SEC should start requiring companies to sock away money “for a rainy day” the way that Microsoft allegedly did.
Instead, it looks like the regulators are going to overreact and just make things worse. The regulators seem to think the problem is that business is risky and people are greedy. So they are going to try eliminating the risk and greed from business. Paul McCulley, managing director atPacific Investment Management, explains why it is a huge mistake to try to regulate risk out of business. In part, he says:
“… Ponzi Finance Units have been evaporating ever since, with ever more putative Speculative Finance Units being exposed as Ponzi Finance Units in drag. These developments are, as Minsky declared, a prescription for an “unstable system” - to wit, a system in which the purging of capitalist excesses is not a self-correcting therapeutic process, but a self-feeding contagion: debt deflation. Eighteen months ago, I dubbed the outlook to be a Minksy Moment.
It still is. I don’t, however, think we’ve reached a “tipping point” into a Minsky Meltdown in the United States. But we’re far closer to the point than I thought we would get eighteen months ago, or even three months ago. What frightens me most is the herd notion “in play” right now that all Speculative Finance Units must strive to rehabilitate themselves into Hedge Finance Units; to wit, that the only truly “money good” credit is a borrower that can both service and amortize its debt with cash flow from its operations. This is the emerging, and frightening paradox of our times: for a company to prove that it is a going concern, it must prove that it could liquidate itself.“
But the problem isn’t risk or greed. The problem is lies and lack of transparency. The CFOs (and their auditors)lied.
Lies themselves sometimes happen in any society that involves humans. So we elect representative governments that create agencies like the SEC to uncover and expose lies. Too bad our government agencies utterly failed to investigate and expose the lies.
Government failure sometimes happens, even in a democracy. So an essential part of any democratic is a free press, who uncover and illuminate incompetence, corruption, and scandal wherever it is found. When the government and corporations fail to provide transparency to “we the people”, the newsmen sneak a camera behind the veil and put the pictures on the front page. Unfortunately, in this case, the press were preoccupied with other things and seem to have completely missed all of the lies and government failures.
We need to punish CFOs and auditorsfor lies. We need to hold government accountable for failing to enforce existing transparency regulations. And we need to create and cultivate a free press that we can actually trust tohelp us uncover and hold accountable those who lie. Unless we do those three things, everything else fails. Without those three things, no amount of tinkering with capitalism would work anyway, even if it was a good idea (and it isn’t).