Business Insight Zone

Yesterday I was talking with a Hoover’s colleague who opined — understandably — that the executives who ran WaMu, Lehman, et al. into the ground should be made to return their outsized pay packages. I told him that I sympathized (hey, look at the beating I gave Angelo Mozilo a while back), but that there were two kinds of “should” in play here:

1. What many outraged people agree “should” happen to these executives (or their banks) on moral or ethical grounds.
2. What “should” be done to restore the equilibrium in the U.S. markets, and especially the liquidity in short-term interbank credit markets.

The grand problem with the bailout — the problem I tried to address in my post on Monday — is that Should #1 is irrelevant to Should #2. And while meting out justice according to Should #1 might feel good, restoring some sort of normalcy to the financial sector a la Should #2 is absolutely unavoidable . . . if we want to avoid a meltdown far worse than anything we’ve already seen this year.

This view is ably expressed by James B. Stewart in his “Common Sense” column that appeared in this morning’s Wall Street Journal:

Bailout Might Not Be Popular, But It’s Necessary

This paragraph is particularly telling:

The catalyst for the rescue operations was paralysis in the credit markets. Some companies have had trouble borrowing in the commercial paper market to finance their short-term cash needs. Should conditions continue to worsen, it’s plausible that some employers will find that they can’t meet their payrolls. When workers show up for their paychecks, and don’t get them, will that be enough to shock them into recognizing we face a crisis?

(Emphasis added.)

When I was talking to my friend yesterday, I wondered if we might not compare this to the kind of hard choices we must make sometimes when a loved one faces potentially catastrophic health problems. Imagine that Granny goes into the hospital with complications from her diabetes, and the doctors determine that they have to amputate her leg.

This is a situation that stinks worse than any ill-deserved CEO paycheck. Granny has never said a cross word to anyone. She’s a pillar of the community. She’s worked hard to control her diet so the diabetes wouldn’t get out of hand. If there were any sort of justice in the world, she should be able to avoid amputation. Yet medically, the disease hurts much worse than the cure — no matter how much we may hate the cure.

That’s where we are now with Wall Street. I share Stewart’s hope that Monday’s vote may allow Congress to come up with a better piece of compromise legislation. And surely plenty of the “Nay” voters from Monday will get behind a new bill that lets them make this speech on the stump when they face their angry constituents:

“I’m proud to say I put my foot down on that first bill. I was proud to do it because I was standing up for your interests. And then I helped to shape a much better bill that gives vital aid to the financial institutions that you count on for your mortgage and your retirement, without rewarding the greedy executives . . .”

A year from now, most of us will have forgotten Dick Fuld and Alan Fishman, just like we’ve now mostly forgotten about Angelo Mozilo. But if the economy spirals into collapse, that’s something we won’t forget for a long time.

Just ask Granny to tell you what it was like in the 1930s.

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(Public-domain image via pingnews.com, used under CC-Share Alike license.)

Category: Economics, Finance & Real Estate