March 26, 2009

A different take on the banking crisis

A thought occurred to me yesterday regarding the AIG bonus kerfuffle, if I may be so bold as to call it a kerfuffle. What the Democrats are doing regarding taxing back the 'talent' at AIG is in a weird way, analogous to allowing the bankruptcies to happen.

True, the bailouts are spreading the pain from those stupid enough to make bad decisions to the taxpayers as a whole. Bankruptcy would allow the taxpayers to escape the financial impact because only those invested in the specific at risk institution(s) would be impacted. However, looking at it from a personnel perspective, the result may end up being the same as a bankruptcy.

In the case of a bankruptcy the 'brain trust' of the banking institutions would be out of work. In the case of the bailouts, you'd assume the same people would still be working. However, given that the claw back of 90% of the agreed upon bonuses is occurring, many of these people while not yet out of work, are most likely looking for alternative work. And by alternative, I mean outside of the financial services industry, which apparently is subject to imperial whim at this point.

So the net effect of either approach is that there will likely be a talent drain away from the financial services sector, given that at least some of the talent has skills transferable across other industries (project management, mergers, acquisitions, legal, marketing are some examples).

This may be a good thing for the economy. If the true talent shoe horns it's way into manufacturing or technology industries, then that can only be a boon to those industries, and potentially for American manufacturing. There's no guarantee of that happening of course. But while the financial sector is key to a prosperous economy, manufacturing is still arguably the backbone of any nation.

On the other hand, it may speed the nationalization of the banking industry. This would definitely start a downward spiral of American economic power, and start the thought process of "what else can we nationalize?" Both of those things are bad, and both can be brought on by the same symptom - exodus of talent from the industry.

Conversely perhaps Democrats believe that these people are trapped - their skills are too specific to change industries and they are too American to go work in Hong Kong or London. If that's the case their cynicism and antipathy towards those affected is pretty harsh.

Overall, losing executive talent in the financial industry nets out as a bad thing. While creating a climate where executive resources are self-diverted to manufacturing, creating American jobs in the process would be a good thing, it's not being done that way, and there are just too many down sides to letting or causing it to happen.

Dick Morris was on Sean Hannity's show this week arguing that the Obama administration, by offering a hand to the industry and then using the same hand to slap the people in the industry, is complicit in trying to drive the failure of the banking industry precisely so that it can be socialized. At first I thought Dick Morris was being over the top to help flog his latest book, but on reflection, there may be some truisms in his points.

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