Monday, April 6, 2009

Nature Abhors a Vacuum

Nature Abhors a Vacuum: How Recessions Fix Themselves
(And How the Government is Accidently Fixing the Economy Faster)

April 1, 2009. My morning ritual is to get up, wake up the kids, make some coffee, let my dogs out and enjoy my first (always the best!) cup of coffee before getting ready for work. The other morning I noticed a colorful photographic business card near my place at the kitchen table. It was for my brother-in-law’s new photography business. My brother-in-law is my kayaking buddy, a talented master electrician at an unnamed car company, and a great guy. I called him and asked about the business, and he told me he was going to do photo collages of sports teams, and explained he had just done a successful series on a soccer tournament. I was curious about why he decided to start a business now. “These are tough times. I have a good job, but I want to make sure I’m using all of my options, in case something happens to F**d”.

This lead me to thinking about another friend and client, who retired under a package from another unnamed car company, who retired from one car company to actually set up another car company (they actually already have a car). I found it ironic and interesting that someone would set up a car company in this dismal market. “There’s a need out there for this type of vehicle (this is an unusual specialty vehicle), and we know exactly how to do it and how to get it done. There’s plenty of hungry talent and suppliers who will work with you.”

So, in this thought exercise, it occurred to me that bad times bring us out of our ‘Comfort Zone’. In good times, it’s easy to take the overtime in your electrician’s job, wait your 30 years, retire and kick back. In good times, if you want a job, you just put an application out and hold out for the best one. In tough times, you have to push the edges out. You have to try new marketing ideas, you have to be more visible, you have to try new things. You have to make a value proposition for yourself or your business that’s compelling. In real tough times (like now), everyone gets humbled. Maybe you inherited some stock from Grandpa, and now the stock is in the dumps and it cut its dividend. Maybe you’re a city employee, and now you have to be competitive and be service-oriented in a tight budget year. Maybe you want to sell a house and have to come up with a whole new version of its value, or a way to sell it.

Aristotle said “nature abhors a vacuum”. In natural science, when a vacuum is created, the surrounding gas tries to enter the vacuum. When a vacuum of security and prosperity is created (thanks to our boys in the credit derivative departments of the major invest houses!), energy seeks to fill the vacuum, with creative solutions, hard work, innovation, and better, entrepreneurship.

Which leaves me with an observation. By happenstance or maybe by very clever calculated intent (nah!) the federal government may have given the biggest boost to the economy by firing Rick Wagoner and potentially stuffing a 95% tax onto AIG executives. The feds showed their teeth in the last few weeks, first by getting outraged at the AIG execs for getting their contractually agreed upon bonuses, to the extent that they passed a 95% tax on the bonus. Then they didn’t like the leadership at GM (never mind the UAW leadership or the AIG or Citigroup leadership), so they kicked Rick Wagoner out. [Actually, Rick may be OK, since he went from a $1 a year job to a $20 million dollar retirement. Talk about a ‘work or retire’ analysis]

Now, I’m a capitalist. I actually think that our government should protect us when we need it, like from bad guys with nuclear weapons. I think they should provide a valid justice system. I think they should uphold the Constitution. But I don’t like them running businesses. That’s never worked in prior history, and won’t work now. To be sure, as the 77% shareholder of AIG, I think the Treasury could have had a shareholder’s meeting, fired all of the members of the Board (which they should have done day one), and hired some very nasty lawyers to sue the guys with the bonuses under some alleged breach of contract, like ordinary businesses do. If the government is the largest creditor of GM, it’s within their power as a creditor to go to the Board (who also should be fired) and tell the Board that they don’t have confidence in management (even though it looks like the management only changed by one person).

But, here’s the cool accidental benefit. What we learned in the last three weeks or so is the stark truth that we don’t want the government running businesses. How is it that a group that has pretty much never held a real job, runs an entity at a deficit, and has expenses vastly in excess of its revenues; should be running businesses? Then, if the group gets mad at you, they create taxes for you or fire you arbitrarily (never mind some of the transgressions by members of the House and Senate that have not caused them to lose their jobs). What I see is rapid and stark: nobody wants the government as a partner. Today the NY Times reported that Signature Bank of NY, Old National Bancorp, Iberiabank, and Bank of Marin all paid back their TARP funds. Yesterday, Mark Fields of Ford gave a great interview where he basically said that Ford was going to do anything in its power to stay away from government money.

Want to get things moving? Be a petulant, unreasonable, inconsistent bully. All the kids will walk across the street to avoid you. If the bully loaned you lunch money, pay it back as fast as you can. If the bully wants to loan you lunch money, don’t take it. Because living with the bully is worse than living away from him. That lesson was clear this week. Now watch the new Treasury crow victory, when all they did was scare everyone into fixing the problem. Nature abhors a vacuum: they suck.