Scanning today's headlines, there’s naturally lot’s of focus on the soon arriving “fiscal cliff.” And although Republicans have taken a much stronger stand regarding responsible governmental spending, including constructing a sensible budget, neither side is really going to be able to quickly solve the nation’s financial problems.
However, without going into a great deal of detail, a major flaw in the system jumped off the pages as I read the ongoing stories of the cliff battle on-line. Because, although it hadn’t dawned on me so clearly until today, I believe a huge part of the problem exists because none of the parties involved in the negotiation have any real “skin” in the game.
Something I was taught way back in the beginning of my financing career was that lenders are in far safer positions when borrower’s have something of their own at risk. For instance, one’s owning businesses, operating them themselves, and depending on those entity’s success for survival are much better risks than others where employees are in charge, such as subsidiaries, branches, franchises, or similar business types located away from the parent organization.
And that’s because, regardless of experience, skill, integrity or honor, if entities fail, all that employee's lose are jobs...no matter how prestigious, important or lucrative those positions may be. On the other hand, though, owners generally lose considerable financial worth and equity in the event of failure which tends to make them far more concerned about critical things, such as financial risk and exposure.
So, I think a valid comparison can be made as to why politicians and government representatives at any level do such a poor job regarding finance of any kind. Because, just like employees working for absentee owners, they have no personal equity at risk and in fact, are always “managing” other people’s money. Consequently, although they might face some embarrassment, or perhaps even an electoral setback, in a practical sense they aren’t even personally exposed for a dime.
Therefore, what seems obvious to me is that if responsible, realistic solutions to fiscal problems are really being sought, there has to be some real personal exposure for elected officials in the case of failure. Not simply the potential loss of votes.
And I’m just about as sure as I can be that if those in office were personally liable for financial shortfalls, the nation’s budget would have a solid surplus within an hour.
That’s it for today folks.
Adios
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