Monday, March 30, 2009

Theory vs. practice

With the economy suffering its worst downturn in a long while, the heat is on economists and various financial types for (mostly) not seeing the crisis coming. Some are going to extremes and questioning capitalism and the very basis of our society's financial structure. Others are re-examining and questioning various economics tenets (though often only those of opposing schools...)

However, some old and hoary shibboleths are still taken as a given. For example, this blogger has already wondered re the multiple calls to make the shareholders of institutions that get government aid in this downturn "take a haircut" (see for example #1 in the Feb 15th 'Random Thoughts' entry, or the Feb 11th 'Rhetorical Questions...' entry). Well, another such "haircut" argument comes from the link below, and includes a shibboleth, that of the shareholder overseeing the institutions in which they hold shares):

"... First, banks that are de facto insolvent need to be restructured, a word that is preferable to the old-fashioned nationalisation. Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks..."

OK, at one point in time, perhaps only the wealthy owned stocks, and part of that involved making sure that the companies in which they had an ownership position were well run, etc. But with the spread of stock ownership to the far reaches of the population, this is one idea way beyond its expiration date. This blogger works at a health care institution. All the employees there have money invested in 403(b)s as part of their retirements (via defined contribution plans). These are invested in diversified plans that no doubt include the main companies in the financial sector.

As such, all these employees have already taken a big hit. However, hopefully, in a few years the market will go back up and their retirement nest eggs will gain back the lost value. But this certainly won't happen if they are given a haircut! And telling the Environmental Services associate buffing the floors, or the staff on the Receiving Dock, etc. that they deserve this because they "should have kept a more vigilant eye on the people running their banks" is the height of stupidity.

Niall Ferguson: The great repression

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