That isn’t the line Gordon Gekko said in the movie Wall Street, probably because “greed is good” is alliterative and more rememberable. But greed motivates risk. And risk-taking is a both a key component of the US economy and the creation of the new jobs. Jobs we need to not only recover but to be competitive in the new global market.
Recently Congress passed the Financial Reform Bill. President Obama and the Democrats congressman have praised it as a pallative to prevent a future financial collapse. President Obama has a few more IQ points than me, but I find that guarantee to be naive political spin.
Whether we pass new laws or not, financial crisis will occur again, though probably not in his lifetime. And the cause will probably be a scenario we didn’t legislate against, unless free markets and human emotions are completely removed by some advanced technology.
Furthermore, enacting thousands of pages of new laws to prevent excessive risk taking is premature when we are mired in a Great Recession now showing signs of retrenchment. The Recovery Act enacted in January 2009 was either ill-conceived or too small, depending on whether you side with Hunter Lewis or Paul Krugman. That debate could go on forever, to the delight of the editorial pages of the New York Times, The Wall Street Journal and the Financial Times. The next debate in Congress will be the extension of Bush Tax Cuts – the monetary equivalent of stimulus spending though targeted at stimulating private spending that sustains a recovery. I think the key question is what tax cuts actually do that.
Quoting from an editorial in yesterday’s New York Times, “The economy’s central problem is not lack of money to hire workers or make loans or rates that are too high. It is lack of hiring and lack of lending.”
In other words, the solution does not require more of the same public spending we have seen over the last two years. The solution lies with increasing the risk motive . When companies hire workers and expand product lines they are betting on demand and betting takes money. But money isn’t the problem. Corporations are sitting on $1.6T of cash and continue to raise money selling low interest bonds. Private equity is sitting on a mountain of money. And banks are flush with 0.25% Federal funds. What is missing is motivation to spend, lend, and take risks.
My company, Wattminder Inc., has received stimulus awards from the DOE and NSF as part of the Recovery Act of 2009. This pays for an engineer or two, and a few graduate students at Carnegie Mellon University, our research partner. It’s a good thing, it helps advance the state of the art of solar photovoltaic diagnostics. But those programs alone won’t put California back to work.
The stimulus required to put California (and America) back to work comes in the form of policy changes, like a “Feed In Tariffs” to encourage alternative energy power generation. Germany’s FIT helped them become the world leader in alternative energy production; And tax code changes that encourage repatriation of profits when US jobs are created; And banking incentives to expand lease & credit lines for small businesses. A a venture capitalist told me recently that one of his portfolio companies was using investor cash to buy manufacturing equipment to ramp production because the mezzanine credit facilities are available.
Instead of fretting over China’s ability to buy our goods and debt, we should be weening ourselves off of foreign oil – the major component of our trade deficit. Cap ‘n Trade is doomed legislation. How about an import tax on oil instead? Start small but ratchet it up every year until alternatives become lucrative – for suppliers and consumers.