“Insanity: doing the same thing over and over again and expecting different results.”
Albert Einstein
When we examine the headlines, this oft-quoted phrase becomes increasingly relevant. We accept public policy errors with barely a whimper. We are either too comfortable with the status quo or paralyzed by fear of the unknown. Worse, perhaps we have lost our ability to question critically. Maybe all the aforementioned are true at once. Let’s examine some of the current insanity.
Living on Flood Plains
Our family was raised near the Passaic River in New Jersey. In high school in 1970, my brother did an in-depth study of flooding in the Passaic River Valley. Even then, after relatively modest storms, flooding of the towns of Lincoln Park and Wayne, NJ, was all too common. My brother interviewed then State Senator (later Governor) Thomas Kean. Kean was well aware of the problem and had worked with the Army Corps of Engineers to devise a plan to stop the flooding. A new dam was needed, but the project withered from political opposition. Now, more than forty years later, the area routinely floods in these and other Passaic River towns. No dam has been built. Worse, overbuilding since the seventies has intensified, leaving more families in harm’s way. Now, with full media drama, we are treated to heroic emergency rescues, and heart rending scenes of home evacuations and lost possessions.
My guess is that many of these homeowners will receive sizeable checks from federal flood insurance programs. We the taxpayers are subsidizing the choices of individuals to build homes on flood plains. Although I believe there is a role for a federal emergency response, Ron Paul was right to question the need for a federal response to Hurricane Irene. Even the liberal Huffington Post recognized the insanity in some of these programs.
Federal disaster relief programs have their faults. The National Flood Insurance Program, originally designed to force homeowners to take financial responsibility for living in flood plains, has encouraged development in unsafe areas. So too have federal levee and flood control programs. See A Natural Disasters History Lesson for Ron Paul
Insanity is to encourage overbuilding in flood plains, watch hurricanes and lesser storms destroy houses, and then having taxpayers reward reckless builders and homeowners with monies from the Treasury. We need to at least begin the process of requiring our citizens to acknowledge the risks they take in their choices. Financial responsibility should reside with the homeowner not the taxpayer.
Boards and CEOs
Much hoopla surrounds the naming of a new CEO for a major American company. Too often, we find out later that the Board of Directors never fully investigated the candidate to explore the “soft issues” such as management style. And then comes the consequences for the company and its shareholders. We have two recent cases of high profile executive terminations: Jeffrey Kindler at Pfizer and Robert Kelly at Bank of New York Mellon.
In both instances the Board discovered after the CEO was ensconced that his abrasive management style was alienating other key senior managers. The result was dysfunctional management decision making.
This woeful tale occurs quite often. The Board becomes enamored of a brilliant, seemingly charismatic executive. But if the Board did its homework, it would discover that sometimes an executive is a brilliant individual contributor, but a mediocre or too often a terrible manager. Given the hierarchical nature of corporations and the fear of losing one’s job, subordinates do not speak out about their bosses. Or if the rare employee has the courage to speak out, the Board rationalizes complaints: such employees are disaffected complainers, or sore losers in the climb to the top.
When corporate performance inevitably founders, the mass exodus of senior talent or the disclosure of a scandal catapults the Board into action. Horrors! All those complainers may have been correct. Secret sessions occur, the Board develops some backbone and fires the executive, but tells the world that the executive is retiring or resigning to spend more time with their family. Worse, Boards do not deal harshly enough with a mistake in hiring: they reward the offending executive with a large severance package and a proclamation of gratitude for taking the company to a new, higher level. The end result: a cynical group of employees and shareholders.
See Inside Pfizer’s Palace Coup, Robert Kelly: Bank Fired Him Because of His ‘Abrasive’ Management Style Lowered Morale
QE3
Wall Street continues to beat the drums for a third round of quantitative easing from the Federal Reserve. Peter Tchir of TF Market Advisors debunks the effectiveness of QE2. The stock market may have gone higher but that may have been related to the problems in Europe that lowered the value of the dollar or the lower stock price levels then (1050 S&P 500) versus now (1215 S&P 500). The “wealth effect” related to rising stock prices did little to improve the lot of the average American. Unemployment remained high, house prices did not recover and wages stagnated. Finally, there were dramatic increases in commodity prices raising the cost of key items such as food and energy. Yet, the Federal Reserve continues to hint at QE3 and major investment banks view it as a given. See QE3, What’s not to Like?
Repeating Insanity
What has happened to critical questioning of key institutions: Congress, the Executive Branch, the Federal Reserve and even corporate boards of directors? Policy initiatives are floated every day in the press, one crazier than the next, and few pundits ask why? As crises seem to occur without respite, my guess is that this obtuseness will not serve us well.
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Tags: Bank of New York Mellon, flood plains, Hurricane Irene, Jeffrey Kindler, Passaic River, Pfizer, QE3, Robert Kelly
