Mitt Romney on the economy

Mitt Romney wrote in an op-ed to the NYT regarding what to do about the auto-makers. It's a good read, but in particular this part stood out to me.

The need for collaboration will mean accepting sanity in salaries and perks. At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. Get rid of the planes, the executive dining rooms — all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.

Beautiful words. It reminds me of business owners who are complaining about taxes being raised on companies who make really big profits. If they're so interested in the lower tax bracket, why don't they pay their employees a better wage? It sickens me to see executives exploit the productivity of their workers for their own personal gain.

Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.

This is a great idea in theory, but capitalism is cutthroat in practice. Imagine for a second that you're a company and you're focused on long-term appreciation and watching your balance sheet. Now imagine that you have competitors, and they're focused on the short-term; they're leveraging their balance sheet and taking risky bets, and right now the bets are paying off. Suddenly, you start losing all kinds of market share because investors can get better returns somewhere else. If you don't lower your standards to that of your competitors, you risk going out of business.

That must be how Daniel Mudd felt when he took over Fannie Mae in 2004. He had the following conversation with the CEO of Countrywide at the time, Angelo Mozilo.

Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.

“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.

“You need us more than we need you,” Mr. Mozilo said, “and if you don’t take these loans, you’ll find you can lose much more.”

Then Mr. Mozilo offered everyone a breath mint.

An honest businessman cannot make a living in a capitalist society that encourages market participants to be no more honest than those with the least honesty and lowest ethics.