Talent Talk

'Too much intelligence and energy is being devoted to scraping the crumbs off the table of capitalism instead of preparing the meal.'

If there ever was an epithet that sums up the failings of capitalism, Warren Buffett's comes pretty close.

In previous Talks we've looked at the make-up of entrepreneurs and the impact of 'The System' on one's individual talent. In this Talk we combine the two themes and ask whether the way the economic system is run rewards the right values. Does the economic system encourage creation, a 'preparing of the meal', or does it lend itself to incrementalism, a 'scraping the crumbs off the table'?

Feed, Fed, Fed

The starting point is inevitably corporate America, and particularly its supposed guardian, the Fed.

George Bush recently came on record to say that America had got drunk in the last few years, and I'm sure that we all find his analogy interesting given that George Bush has been in this time effectively the barman and the Fed, the brewery.

In economic terms, he was happy to keep serving up cheap beer while the Fed continued to fill the pumps, the result of which is the current hangover. And I'm sure the strongest drinkers will need more than a few alka seltzers to get over it.

All this is very interesting, because it's not gone unnoticed that those involved in running the Fed, including the top brass of JP Morgan and others (the identity of these folk are supposedly a secret) have done spectaculary well out of America's misfortunes. Last year the senior management of JP Morgan took home record bonuses, and more than the whole company made in profits. This begs the question whether they could even be trusted to run a local co-op, let alone the icon of American capitalism.

This raises two more questions. The first is whether the top brass of the likes of JP Morgan deserved the financial rewards they have been receiving. The second is whether the Fed has really encouraged wealth creation or parasitism - the baking of the cake or sweeping up of the crumbs?

'Let them eat cake' - Part Two

America is going through no revolution. Its system is too well-developed for that. But it's worth recalling a time when, in spite of an economic downturn, the rich continued to get richer and the poor slid ever more surely towards poverty.

A great example is the French Revolution, and when they ascended the throne, King Louis XVI and Marie Antoinette said that they were doing so too soon, and feared they were not prepared for the challenge. Such modesty, doomed as perhaps it was, would certainly be welcome in such places as modern-day Wall Street, where you're never likely to get so much as a qualified apology for the greed and incompetence that has been a hallmark of the last twelve months.

The French King and Queen were woefully out of touch, certainly a consequence of the system they had been born into, and while Marie Antoinette never said 'let them eat cake', on many occasions she attended social events with her hair coiffured as one, the effort of which took ten courtiers.

Today's Wall Street though has created a layer cake of its own, and it comes in the form of a derivatives market some say exceed $500 trillion. As impressive an achievement as this may sound, when you peel back the layers you will notice that much of this has been built of the 'crumbs' Warren Buffet spoke of, and the proof of this is apparent as the derivatives market comes tumbling down.

Many in Wall Street will have you believe that this is a cyclical event, and has little to do with individual choices and actions, but I beg to differ.

Burning Bush

Rewind to January 2001, and the picture was very different. I'm sure many Americans now look back to that time as if it were a golden age. The Clinton administration had left the economy in a reasonably strong state, with record gains in productivity, a healthy fiscal position and a balanced budget. And, above all, with a sound dollar.

It's this last factor that, eight years from now, many will in turn look back and say was George Bush's single greatest failure. America is only in the early stage of a slide which will cause widespread job losses and in many communities poverty, coupled with a drastic loss of spending power. America has, in short, got poorer, and will continue to do so in relative terms for years to come. Some drinking binge!

This happened because, early on in George Bush's first presidency, he departed (in collusion with senior Fed officials) from the sound money policy practised to such good effect by President Clinton. In usual cases it would have been an 'okay folks, I think you've had enough to drink' from the barman. And there would have been the odd hospitalisation. But what has happened since at least 2006 has been greater and greater encouragement to get seriously drunk, some would say to a reckless level, and now we have almost everyone who is leaving the bar in such a sorry state that they are getting run over - all because those running the Establishment were serving their own agendas.

The problems facing the American economy is not entirely a human factor, but I would say the values, strategies and decisions taken by the Fed, the US Government and Wall Street largely determined the recession America is now going through. I am no doubt that the loss of a sound dollar will be seen as George Bush's greatest folly in years to come.

The System

Confronted with this view (it is only a view), some Americans may feel a certain despair.

Many may feel hard done by, because while 'the System' has rewarded those who have been reckless, greedy and incompetent, many of those who have been thrifty have been punished, and continue to be punished, by a double whammy. Their savings are being watered down by inflation, while their purchasing power has been chopped in half as the dollar collapses against almost every other currency.

All this because a small and unrepresentative group of politicians, financiers, businessmen and officials have embarked on an economic programme that favoured incrementalism - the crumbs, and their own self-interest - rather than true wealth creation for the benefit of all Amaericans. Adam Smith said it: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." A conspiracy it has been. The loser has been those who have had similar values to those of Warren Buffet.

The Human Factor

History is cyclical, and during downturns you will notice that many analysts and mainstream economists attribute the misfortune to factors beyond their control. Namely 'the increasing prices of commodities' and so on. They forget that much of those increases have been caused by the weakness of the dollar itself.

What I find interesting is the damage the 'human factor' has caused, and, from a system point of view, Wall Street and the Fed seem to attract and promote those who scrape crumbs rather than bake the cake.

It's this factor which is in my view central to America's ability to 'bounce back'. It's essentially a matter of talent management. America's institutions and leading businesses need to do more to hire the kind of people who care about 'baking the cake'.

In the next Talk we'll look at how that can be done, with especial emphasis on innovation and value-creation.

Stumble it!

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