Steep Trajectory

Al Sikes

Free Lunch Writ Large

In the last six years the profits at Moody’s, the ninety-nine-year-old bond ratings firm, rose 375 percent and its stock price quintupled. Extraordinary. As Moody’s became a growth stock we must have known the final chapter of this credit explosion story would not be good. The synopsis: a staid bond ratings company with a history of prudence becomes the most sought after financial date at the mortgage ball and then . . .

As we have known for some time, the housing bubble’s enablers from the financial world somehow missed the chapter about intoxication. So now we are deep in the blame game. Mortgage brokers, all sorts of banks (retail, commercial, and investment), rating agencies, property flippers, and regulators have all made the list. Perhaps somebody should go upstream in a search for the real culprit. In the meantime, at the global level, central bankers work on liquidity; earlier liquidity mistakes should give us pause. And at the personal level we are learning once again a very old lesson: there is no free lunch.

My advice: be careful when you find steep trajectories. Today our minds should be concentrated on the ascendant path of deficit financing (public and private), trade imbalances, and unfunded liabilities at all levels of government. Free lunches writ large. In time each of these pernicious trajectories will result in jarring social, political, and economic dislocations.

We all have our own version of pernicious growth curves. My own is the growth of what I think about as “marginal dollar” irresponsibility—the inclination to push revenue or profit beyond moral limits. Avarice pushed the limits of sound home financing. Advertising is not infrequently avarice camouflaged in clever lines delivered by beautiful people.

Perhaps the most cynical revenue-growth game is state-sponsored gambling. In my formative years, the idea of the state sponsoring and then promoting gambling would have been unthinkable. The state stopped large-scale gambling, it didn’t own it. Yet, today the state is the principal owner and promoter of gambling, and profit levels pivot on the addicted—not the casual—gamer. The state, incapable of controlling or prioritizing its appetites, constantly looks for the next dollar. If that means destroying families’ lives, so be it.

Material good fortune is, well, good. But as materialism mutates into hedonistic behavior a virulent strain of moral hazard is exposed. Today commentators concern themselves with whether Bear Stearns stockholders or the owners of JPMorgan got too good a deal from the Federal Reserve. This moral hazard concern is a sidebar to the seminal issue of cultural restraints on greed.

Many writers have famously explored the conditions that destroy civilizations. Cormac McCarthy recently took on that subject in The Road. He writes chillingly of the barbarism that led to his novel’s post-apocalyptic world. Nightly the Middle East and Africa offer up catastrophes of civilization degraded by religious or tribal hatred. Film companies are drawn to prisons where they explore the tensions as autocrats take on those whose dignity in one way or another has been stripped away.

We read or watch from our comfortable chairs. Have they become too comfortable? Can what increasingly looks like an obsession with comfort—a concept now virtually synonymous with pleasure—co-exist with a healthy culture? Economics, like politics, is downstream from the culture and is increasingly degraded by it. McCarthy’s narrative strips away the veneer to reveal to us civilization’s foundations. What is the threshold beyond which the pursuit of wealth functions as an attack on civilization?

Wants have become needs and deferred gratification alien. All the economic strata are engaged. At the top, the media translates rich into famous; those celebrated lifestyles then exert a centripetal force. Martha Stewart’s talent makes her rich, but then to get richer she stumbles. How often is this story repeated? How high is up? And increasingly politicians, using the top-bracket taxpayers as a rhetorical foil, try to convince the electorate that there is a free lunch. Unfortunately they often succeed.

America’s business leaders are confronted each day with a choice. Products and services inevitably have moral content. “Consumers” are human beings, not some value-neutral black box in an economic equation. How often are products and services and associated marketing shaped by using a societal cost-benefit analysis?

Those who are privileged to work at the apex of a global business generally confront these decisions daily. To whom much is given, though, much should be expected. And this admonition means more than what we do with the money that is left over after we have funded our preferred lifestyle. It should go to the heart of every decision that implicates others—and in business and government few decisions are without such consequences.

Our nation’s economic affairs are in the danger zone. Global networks and appetites multiply risks. The sub-prime mess that has sullied Moody’s reputation has sent markets reeling across the globe. And underneath those market gyrations are millions of people who have been ill served by business and government leaders.

It is perhaps no coincidence that the current unrest comes at a time when the context in which we make decisions has been inexorably changed. Judeo-Christian values, not situational ethics as taught in business schools, have long been our society’s buffer. While not assuring faultless decision-making, they weighed on the minds of most of the nation’s leaders. However, as economic scorekeeping has moved closer to the center of gravity, short-term pragmatics have displaced these long-held values. Increasingly, what should be value-laden decisions are replaced by an exclusive concern for the bottom line.

So as we assess financial risk and our own stewardship, as we listen to the grab-bag promises of politicians on the make, we should keep our eyes upstream. A degraded culture will inevitably fall. Every generation should abhor the prospect of such failure being their legacy. Additionally—since we often find generational causes and effects too abstract to motivate us—we should all recognize our own ultimate accountability.  

Al Sikes is Chairman of The Trinity Forum.

Features, Business, Character and Ethics, Society, Wed 07 May 2008