Monday, July 11, 2011

Short-Termism is Harming Our Nation

Sheila Bair, head of the FDIC since 2006, is ending her five-year term with a bang: this last weekend she's on the cover of the New York Times magazine with a long interview and she published a 4-page (web-length) op-ed in the Washington Post.

Ms. Bair has been portrayed as the “difficult” member of the White House economic team (for instance in the movie "Too Big to Fail" by New York Times reporter Andrew Ross Sorkin) because not only did she see the problem in advance and warn about it before it happened, giving the lie to the revisionist “no one saw/could-have-seen-it beforehand,” she argued against the pro-bondholder slant of the rest of the financial team. She believed that depositors/taxpayers should be the ones protected and that "market correction," in other words investors losing money, is what the bondholders needed. They needed to learn a lesson about risk management.

The main message of her op-ed is that our country is suffering from "short-termism." The financial industry and our political system focus almost exclusively on improving short-term profits and avoiding short-term losses, completely ignoring the long-term effects on our nation. If this doesn't change we are doomed to suffer, at minimum, another major financial crisis. That's as far as Ms. Bair goes in her article, but it is clear to me that this short-termism is hastening the decline of the United States.

Both articles are very worth reading to help understand what happened to cause the Great Recession, and what the policies enacted in response have accomplished. But for convenience here's the opening of her op-ed:
The nation is still struggling with the effects of the most serious financial crisis and economic downturn since the Great Depression. But Wall Street seems all too ready to return to the same untenable business practices that brought it to its knees less than three years ago. And some in government who claim to be representing Main Street seem all too ready to help.

Already we have heard rationalization of the subprime mortgage debacle and denigration of those of us who have advocated long-term, structural changes in the way we regulate the financial industry. Too many industry leaders, as well as some government officials, compare the crisis to a 100-year flood. “Who, us?” they say. “We didn’t do anything wrong. Nobody saw this coming.”

The truth is, some of us did see this coming. We tried to stop the excessive risk-taking that was fueling the housing bubble and turning our financial markets into gambling parlors. But we were impeded by the culture of short-termism that dominates our society. Our financial markets remain too focused on quick profits, and our political process is driven by a two-year election cycle and its relentless demands for fundraising.

I’ve had a unique vantage point during my five-year term as chairman of the Federal Deposit Insurance Corp., from the early failure of IndyMac Bankto the implementation of reforms designed to ensure that no conglomerate ever again is deemed “too big to fail.”

Now that I’m stepping down, I want to sound the alarm again. The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favoring the short term over the long term, impulse over patience. We overvalue the quick return on investment and unduly discount the long-term consequences of that decision-making.

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