Sunday, April 12, 2009

Whither Brain Drain: Where Are The Smarty Pants Guys Gonna Go?

One of the lead articles in today’s NY Times, and a topic of discussion on This Week with George Stephanoupoluffugus regarded how the limitations on compensation and bonuses for executives in bailout receiving banks is causing a brain drain in those institutions. Yes folks, the geniuses that brought you the world financial meltdown are taking their collective balls and going home. Or, if not home (to their palatial estates in Connecticut), to other banks which didn’t take the bailout funds and are thus not restricted in their modes of compensation, or to other investment entities. What are the likely results of this so-called “brain drain”?

For those who go to other, still healthy banks, the cycle may repeat unless the strict regulation necessary to reign in the aggressive risk-taking which caused the crisis is finally put in place. Here we see a potential for more real danger. The folks who engaged in these behaviors are a type which is at once needed for the functioning of the upper reaches of a sophisticated capitalist regime. But at the same time, those types are so smart and so aggressive in their desire to turn profit at almost any potential cost that serious regulation is needed together with vigilant enforcement and constant revision to keep them from running rampant as they have for the past eight years. Without it there is continued great risk of systemic threat like that which we are experiencing today. For that reason the regulations in place since the New Deal were created, and with their gradual repeal or failure to enforce, we see a return to catastrophic financial panic of a sort which was a common and expected part of the business cycle from the birth of the nation until the Great Depression. This is all easy and obvious and greatly discussed.

The interesting part is that some of these aggressive financial geniuses will go where they more properly belong. They don’t really belong in high finance and banking which, for all its potential for risk and reward, should really remain an area of relative conservatism and risk aversion in approaches to money management. Instead, I’m hoping that many of these folks return to the world of venture capitalism. Here they can invest huge risk into big ideas with the money from people who know fully the chances of failure as opposed to the average 401K guy on the street. We need big investment in big ideas to finally get done the things which need doing in this economy so we can start competing again and maintain ourselves as the location of choice for research and development. Sure most big ideas fail. For every Google and Amazon there are a couple dozen but again, the investors there know what they get into at the start. And Amazon lost ungodly amounts of money for years before turning a profit.

I’ve made reference to my belief that the current crisis isn’t one of credit but one of value. Contrary to the operating philosophy of the past generation, Wall St. does not create value, it makes promises of future value which in reality are just hopes. If the big brains leaving Wall St. do indeed go into venture capitalism, they may then be engaged in creating something of value instead of manipulation promises of a particular future size into ones of bigger potential future size. If that happens, the financial crisis will eventually shake itself out and over time, the downward slope of the banking industry will meet up with the upward slope of value creation and both can then begin again to increase and hopefully improve the value of all of our lives.

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