Punchinello’s Chronicles

September 20, 2008

The Root of our Economic Problems

Filed under: Foolish Rants — Punchinello @ 12:21 am
Tags: , , , , ,

I dunno, I was listening to the news and they’re going on and on about how it’s the real-estate business that caused everything. It’s as if we have a one-time problem, it was created by real-estate loans, and when it’s fixed, we’ll be back in business. Mmm…I guess I don’t agree.

All my life I’ve heard business executives tell me how business ought to happen, how it runs, how the “real world” runs, and blah-blah-blah. I’ve asked various questions and nobody seems to have a good answer. One of those questions is, “How does a business grow forever?” Don’t we eventually run out of room, or the business runs out of either customers or resources?

Sure, we could maybe start selling to interplanetary aliens, but we haven’t met them yet. We open up foreign markets, but how many countries are there?

Then I started doing some research and found out about the basic concept of a corporation. It seems the fundamental rule of existence for a large corporation, taught in business schools and carried out by accountants is that no matter what, the corporation should increase shareholder equity. That means the corporation must absolutely increase the value of each share, forever.

Nope, they aren’t supposed to make something, and they’re not supposed to make our lives better. They’re really not interested in if we like the product or not, excepting that if enough of us don’t like the product they won’t be able to sell anything. And that’ll make the share values go down.

Who are the shareholders? Are they grandmas and grandpas, moms and dads working on a college fund? Nope. It’s true those individuals own something, but usually it’s a fund of some kind. The big institutional investors, like for the teachers’ union or corporate pension funds, those are managed by fund managers.

Good fund managers have rules about how long a corporation can go without making an increase in profit. We won’t even get into the funny-money definitions of “profit,” and just accept the word of Wall Street. If a company doesn’t make a profit for some amount of time, then they get sold. If the share values go down, the company gets bought out, sold off, broken up, or comes under new management.

If the values go down low enough, the company might even go into a reorganization, a bankruptcy, or, if they’re big enough, a bail-out. People say that AIG is “so big” that if they were “allowed” to go bankrupt, the consequences would be too terrible. Well…who let them get “that big?” Where were the oversight committees and guardians of public good?

The reason real estate loans went insane is because banks had to always show an increasing profit. With lots of money laying around, they had to move it on out. If they didn’t, then the value of their shares would decline and the world would explode. Executives know all this, and their job is on the line with each quarterly profit-loss statement.

Managers know this, and have to make sure their department always and forever shows a profit. Even if the department doesn’t DO anything or make anything! How does the mail room show a profit? Only by cutting costs, letting people go, and making their operations more “efficient.”

This has been going on for at least 50 years, with retiring executives taking their multimillion-dollar bonuses and living great until they die. They hand off problems to the next generation of executives, who then figure out amazing ways to sell and buy companies, all to make it look on paper as if they’re always and forever increasing profits, and raising the value of each share of stock.

In the real world, unlimited growth is usually called cancer! Only in the corporate world does unlimited growth become the goal and end-all, be-all of existence! All that’s happening is reality is finally catching up with an insane premise. It isn’t the capitalists, bankers, business owners, and employees who caused all this. It’s the accountants!

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