Financial Crisis and a Prophecy About Profit

It’s a common notion that philosophy and ethics are topics for the ivory tower, the kinds of things regular people don’t have the time to think about because they work in the “real world” and give their attention to real concerns like income and job security. But this is confused. Consider, for example, the possible (if not already actual) financial crisis explained in the PBS Frontline documentary, Age of Easy Money. In light of this, it’s obvious that few things have a more direct impact on people’s income and job security than philosophy and ethics.

The “easy money” in question comes from the efforts of the Federal Reserve at various times since the 2008 economic crash to lower interest rates as a means to stimulate the economy. The lower the interest rates on loans, the more incentive to borrow money. The large-scale impact from this for everyday working people comes when large corporations are incentivized to borrow money to invest in expanding operations in pursuit of providing more and better goods and services—new products and applications—the construction of roads, bridges, schools, hospitals. New jobs should be created to facilitate the expanding production made possible by the low-interest “easy money.”

According to the documentary, however, it didn’t work out that way. Large corporations definitely took advantage of the opportunities to borrow large sums of money with little cost, but instead of using it to create jobs and build better infrastructure (that is, for the sake of their country and fellow citizens), many used the money to buy back large portions of their own stock to raise their companies’ net worth. Here’s the excerpt from the transcript that explains:  

---

James Jacoby (Frontline Reporter):

Companies were often borrowing money to buy back their own stock, making the remaining shares more valuable and the prices higher.

Dion Rabouin (Wall Street Journal Reporter):

As a corporation you realize all that matters is the stock price. So what do we have to do to increase the stock price? And more often that is buying back the stock.

So it used to be the Fed would lower interest rates. Businesses would then take on more debt. They would use that debt to hire more workers, build more machines and more factories. Now what happens is the Federal Reserve lowers interest rates, businesses use that to go out and borrow more money, but they use that money to buy back stock and invest in technology that will eliminate workers and reduce employee headcounts. They use that money to give the CEO and other corporate officers big bonuses and then eventually issue more debt and buy back more stock. So it's this endless cycle of things that are designed to increase the stock price rather than improve the actual company.

James Jacoby:

The numbers were astounding: More than $6 trillion in corporate buybacks during this easy money decade after the financial crisis.

Sheila Bair, Chair, FDIC, 2006-11:

Buybacks were an embarrassment, and so it’s just another example of things that used to be viewed as kind of "ew" just going mainstream.

James Jacoby:

Sheila Bair, a former top banking regulator, was issuing public warnings at the time that the Fed was incentivizing bad behavior on Wall Street despite its best intentions.

Sheila Bair:

I can't fault the companies so much, because this interest rate environment creates very strong economic incentives to do exactly what they're doing. It's hard to create a new product. It's hard to come up with a new idea for a service. It's hard to build a plant and hire people and run the organization. It's real easy to issue some debt and pay it out to your shareholders to goose your share price. That's real easy to do, but it doesn't create real wealth. It doesn't create real opportunity. It doesn't create jobs. It doesn't improve the labor market. But it's just another example of how these very low interest rates have really distorted economic activity and frankly been a drag on our economic growth, not a benefit.

---

Sheila Bair says she “can’t fault the companies much,” but I think she should. She also says, “this [low] interest rate environment creates very strong economic incentives to do exactly what they're doing.” Yes, but only if “what they’re doing” is driven by the principle of profit maximization as the priority around which all business operations are oriented. The more common word for profit maximization as the top priority is “greed.” I know that claim will evoke some eye rolling and accusations of naïveté from hard-nosed business types, but that’s probably just greed in self-defense mode. (My confidence on this point is based on the clear example of myself).

There is a sense of inevitability in saying we can’t fault the corporate executives in such an “interest rate environment” for spending on themselves and forgetting about the millions of their fellow citizens whose financial priorities are rent and food rather than second homes and diversified portfolios. But this is not inevitable.

The foreboding outcome of the age of easy money could have been very different if enough corporate executives would have said something like this: “It is tempting to borrow millions at such low interest rates and buy back our own stock to raise our company’s value, pay higher dividends to shareholders, and give ourselves a bonus or two. But that’s not what the Federal Reserve had in mind in lowering interest rates. The central concern is what’s best for the country as a whole. The point is to strengthen the ailing economy in a way that provides the most Americans with good jobs and long-term stability. And, let’s be honest, most of us have been in high-level corporate positions for several years, and…well, we already have a lot of money.”

For some reason, I don’t think this is characteristic of the kinds of things that were said in most boardrooms when the Fed dropped the bloody meat of low-interest loans into the waters of the corporate shark tank.

The undercurrent of greed and self-interest so evident in the financial industry brings to mind the disturbingly prophetic words of John Adams spoken to the Massachusetts Militia on October 11, 1798 (I’ve highlighted the lines that strike me as most disturbingly applicable):

“While our country remains untainted with the principles and manners which are now producing desolation in so many parts of the world: while she continues sincere and incapable of insidious and impious policy: We shall have the strongest reason to rejoice in the local destination assigned us by Providence. But should the people of America once become capable of that deep…simulation towards one another and towards foreign nations, which assumes the language of justice and moderation while it is practicing iniquity and extravagance; and displays in the most captivating manner the charming pictures of candor frankness & sincerity while it is rioting in rapine and insolence: this country will be the most miserable habitation in the world. Because we have no government armed with power capable of contending with human passions unbridled by…morality and Religion. Avarice [and]Ambition…would break the strongest cords of our Constitution as a Whale goes through a Net. Our Constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other.”

---

This week’s photo was taken in Box Elder County, Utah