Three times in the 12 years, Republicans have convinced the rest of us to bail out common stockholders.
- During the Great Recession, banks were bailed out by the Federal Reserve creating cash, subsidizing consolidation, and forgiving them the crime of creating fake “insurance” for mortgages.
- In 2017, the Trump Administration bailed out the bull market with a tax cut that went almost entirely to propping up stock prices, extending the disconnect between stock values and the real economy.
- In 2020, the Federal Reserve created trillions of dollars of new money, and Trump wound up giving it to people who didn’t need to spend it, once again propping up assets like stocks.
When you hand money to someone who doesn’t need it right away, they save it or invest it. When you hand money to someone who is hungry, they spend it. What we needed, in the face of this pandemic, was spending. We needed the government’s money to go into food, into rent, into keeping people employed.
It didn’t go there. Take the airline industry. United Airlines negotiated for itself a $3.5 billion grant (not a loan, a grant) to keep its people employed through September. They then talked their weak unions into taking 10 fewer hours per week, turning them all into part-timers. They finally backed off this when competitor American Air’s CEO complained, but the damage was done.
Cash is king right now, and all our corporations are now rulers. They’re borrowing money with both hands and doing nothing with it. They’re not investing, they’re not hiring. Even people with good jobs are being made to take pay cuts. Unemployment is 20%, it’s rising, but so long as everyone’s scared to spend it’s going to get worse. Our economic policy has done nothing but heighten the fear, and thus extend the downturn.
What angers me most, as a financial writer, is that common stockholders should never be bailed out. Ever. We should be last in line. It’s in the rules. Our money is risk capital. Running the business, paying its bills, should come first. Bondholders come second. When times are flush money can flow to common stock in the form of dividends, and rising values. But in a downturn, it’s our necks that need to be on the chopping block. The interests of keeping the business afloat, and its employees, come first.
That’s how bankruptcy works. Chapter 11 is designed to keep businesses operating when they’re out of money. The bondholders take haircuts, meaning they only get back some of their money. The stockholders get taken out entirely. The company’s reputation takes a hit, but you can come back from that. The airlines did after they price-cut each other to death in the 2000s.
But without bankruptcy, management learns nothing from its poor performance or lack of planning. The same idiots keep giving themselves raises. They make themselves into a new ruling class of incompetence.
I’ve seen it and seen it this decade, atrocious managers getting huge golden parachutes while line workers got the sack.
Jeff Immelt destroyed GE and walked away after making idiotic investment in industrial equipment companies in exchange for the money-printing machine that was GE Capital. Brian Krzanich nearly destroyed Intel by driving out every manager with a Clue and then running his life like a sheikh. Virginia Rometty of IBM handed out dividends and buybacks for a decade, ignoring the biggest opportunity of this century. Then there’s Randall Stephenson, who did the same thing at AT&T and compounded it by buying DirecTv and Time Warner for debt the company now can’t pay. All these idiots are now multi-millionaires, protected by golden parachutes and ironclad pensions.
That’s not the way it’s supposed to work. Top executives get the big pay packets because they’re taking the biggest risks, on behalf of the biggest number of stakeholders. That must mean they take personal risks.
That’s the way it worked in the 20th century. Titans like Samuel Insull wound up virtually penniless when they drove their companies under. It was also working early in this century. Bernard Ebbers died broke, in jail, after rolling up the phone industry and then finding he’d bought nothing. Ken Lay was also convicted. You act like Bernie Madoff, you need to go to jail and rot, or other CEOs don’t take the lesson.
That’s not the way it is any more. But if we’re to become a competitive country again, that’s the way it has to work. If you want to bankrupt people and lock them up, do it with CEOs.
Of course, the result of all this free money is that stocks are, once again, overvalued. In the middle of the worst economic crisis in 90 years, anything that works is priced like it’s 1999. There’s no reason for even the Cloud Czars to have their current valuations. The money being thrown at companies like Gilead and Moderna is pure speculation. Peleton is worth 9 times revenue and DraftKings, which doesn’t have a real business yet, is worth $8 billion.
A lot of this money will be lost again, once the stock market realigns itself with the real economy. It’s going to take years to work off 20% unemployment. Before that we’re going to have to go through a bout of serious inflation to work off the trillions the Fed has thrown from helicopters.
Give a man a fish and he’ll eat it. Teach a man to fish and he’ll set himself up as a fishing instructor at $50/hour. We have too many fishing instructors. The economy needs fish.
This is what Democrats should be talking about. The right policy in the current pandemic is a leftist policy. That’s what is best for business.
