Thursday, October 7, 2010

Discipline, Especially Related to Financial Discipline, is a Bad Word

What appears as the lead in the Huffington Post this morning?

“What a Waste: Companies Using Piles of Cash to Buy Back Stock, Not Generate Jobs!” This headline points to an article in the Washington Post:

It was the lack of discipline that got this country where it is now. The recipe that some people are pushing for is “more of the same!”

The United States has been a show case for the “lack of discipline” over the last fifty years. The credit inflation initiated by the federal government has grown and expanded to almost every sector of the economy. Almost everyone, public and private, has leveraged up to the hilt over this time period.

The question remains: did we reach levels of debt that were unsustainable and had to be reduced?

Other questions follow: Have we misdirected resources in ways that have left one out of every five people of employment age untrained for employment in today’s workforce? Have we, like Japan, created surplus capacity in industry through fiscal stimulus and excessively low interest rates? Have we provided incentives that the wealthy can take advantage of, which the less-well-off cannot?

And, the problems swirl around us.

Elizabeth Warren pointed to the 3,000 commercial banks in the United States that are seriously in trouble and face enormous pressures due to the commercial real estate loans that are coming due or re-pricing over the next 12 to 18 months.

There have been numerous articles over the past week or so about the fiscal woes that cities face. (See the New York Times article “Fiscal Woes Deepening for Cities, Report Says”:

“The nation’s cities are in their worst fiscal shape in at least a quarter of a century and have probably not yet hit the bottom of their slide,” states a report by the National League of Cities.

What about the financial health of the states? “Right now there isn’t really anywhere to turn” as many states are now cutting aid to cities, says Christopher Hoene, one of the authors of the report. “The state budgets are in a position where they are more likely to hurt than to help.”

And, this doesn’t get into the problems individuals are having holding onto their jobs or homes.

Who seems to be doing well and positioning themselves to move into the future? Well it seems as if large companies and large banks are doing all the positioning at the present time. (See my post Corporations buy back stock to better position themselves for future moves in the acquisition area. A higher stock price gives them more bargaining power when they are negotiating a “for-stock” transaction.

We are just seeing the tip of this iceberg. In August, acquisitions were unusually high in the manufacturing area for this time of year. We have not seen the September figures yet, but we are seeing lots of movement.

How can one doubt this movement with headlines like this one that appeared this morning in the Wall Street Journal: “GE Goes On Binge For Deals” (

In the article, John Krenicki, chief executive of GE Energy is quoted as saying, “This is another sign we’re playing offense.” There are “lots of choices organically and inorganically to grow the business.”

The article goes on: “GE Vice Chairman John Rice said last month the company has the firepower to spend about $30 billion on acquisitions over the next two to three years.” He added, however, that “we’re not going to run out and buy something just for the sake of buying it.”

But, this is not going to add jobs to the economy and it is not going to produce a lot of investment expenditures, both of which would help to spur on an economic recovery.

The United States is re-structuring. It appears as if more discipline is being exercised by those in a position to move forward. It also appears that those that are “under water” are scrambling to get their lives back under control.

The correction will not be comfortable or easy. But, calls for people and businesses to forget their efforts to bring discipline back into their lives will just postpone the fact that discipline will, at some time, have to be brought back into their lives. In fact, we may have reached the point where there is no going back…the thrust of the last 50 years may not be able to be sustained…and discipline will be re-established.

There is no question that this re-structuring is going to be very, very hard on some people. But, that is why one needs to be disciplined in what one does, even in the go-go years. Getting back the discipline is always hard. Perhaps the hardest part is to realize is that some, in the go-go years, were pushed to go beyond what they could really achieve at the time: these individuals were given incentives to put aside their discipline with the impression that their lack of discipline would not come back to haunt them.

The lesson that apparently needs to be learned over and over again is that, ultimately, a lack of discipline catches up with you. Discipline then has to be re-established. Re-establishing discipline is painful. But, there is no such thing as a free lunch.

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