What’s the Rush?
A month ago Newsweek proclaimed that “The Recession is Over,” and that’s just one of the more visible signs of our eagerness to put it all behind us. The Federal Reserve announced Wednesday that the recession appeared to be bottoming, while policy makers, financial analysts and investors are joining in the chorus.
But in case we hadn’t noticed it ourselves, a New York Times editorial on Monday summarized grimmer news: Thursday the Commerce Department reported retail sales down, Friday the University of Michigan reported consumer confidence is down, over the weekend another big regional bank failed, while unemployment is still growing. (See “The View From the Bottom.”) The Times editorial makes the point that yet more government action is required for the economy not to be mired at the bottom. But my question is where is the optimism coming from? What is motivating the rush?
We all want it to be over, of course, that’s just common sense. Moreover, optimism is good for the economy at this point. But I think something more insidious is fueling this premature excitement. Too many of us want to get back to business as usual before we are forced to learn the lessons of our mistakes. We don’t want to think too much about what needs to change.
It is now so clear that the big banks were drastically over-leveraged, wildly underestimating their risks, that the “shadow banking system” had grown out of proportion and out of the view of regulators, that the market did not work as most assumed it would (including Alan Greenspan), and that banks and mortgage companies had free reign to sell debt to those who did not understand what they were getting into. The big investment banks want to get back to parleying risk into outsized profit. Wall Street wants to go back to big bonuses. We all want to see our portfolios increase – and we want the financial industry to work its magic again.
On the bottom of the first page of Saturday’s financial section in The Times, was a revealing story about changes over 200 companies made to their pay plans: “The biggest shock? . . . . despite the calamities that short-term profiteering has visited on our economy [virtually all the companies surveyed] made short-term incentives a bigger component of compensation.” The author of the study commented: “This is counter to the direction suggested by the United States Treasury, academics and other expert advisers regarding ways to mitigate risk.” Another troubling finding was an increased use of restricted stock awards that are not performance-based. That is, compensation was still tied to promise and risk, not delivery. The old game had started up again. Nothing had changed. (See “The Quick Buck Just Got Quicker.”)
The financial playing field has been drastically altered by the Great Panic. But, by and large, the same players remain, and they are eager to get back into the game they know. The drive to believe the recession is over masks the fact they we do not want to face what needs to be changed.
Postscript: An editorial in today’s Times, calls attention to the same study that caught my attention yesterday, noting that Geithner, the Treasury Secretary, was quoted in the Wall Street Journal last week as saying that he did not think the financial system was reverting to past practice, adding: “and we won’t let that happen.” (See “More Business as Usual.”) But Congress appears reluctant to act, and it’s not clear that the Administration itself grasps the extent of the resistance it will face.
Even when people know they need to change, they do not want to give up what they know, the familiar habits that worked for them in the past. That is true for bankers, investors, and a public that is impatient for a return to prosperity.