Hard Costs Hardly Understood. Financialization’s Costs Pile Up on the Soft Side. Until They Spill Over.

Goldman Sach’s unofficial motto used to be “Long-Term Greedy.”  There’s a lot to commend that as a business philosophy.  It implies some immediate restraint in service of longer-term gains.  But like most artful things, that nuance got lost as “financialization” crept into the US economy.  It got shortened to “Greedy.”

Financialization describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible or intangible, future or present promises, etc.) into a financial instrument. 

Concerns about financialization abound, but the damage all seems a little vague and hard to quantify.  Which allows the (financialized) commentator crowd to dismiss the concerns as a bunch of liberal hand-wringing.

The problem?  The damage is done in the “soft side” of the business equation, which the financialists ignore until it bites them in the ass.  The guys making the mess (and it is mostly guys) then blame some “market” force instead of their own clumsiness/ignorance/gracelessness/general bro-ish-ness.  Lets mine the Wall Street Journal’s Monday May 2 Edition for some examples.

  • Sports Authority files for liquidation after failing to even go bankrupt.  This follows on from another bankruptcy filing at Sports Chalet.  Reporting talks about how tough the sports equipment retail category is, and because Amazon and e-commerce (waving of hands here).  No-one thinks to mention that both were owned by private equity shops that probably made them spectacularly dull, un-informative, un-delightful places to shop.  Because Financialization means limited SKU’s, ignorant store staff, and (eventually) run-down stores and stock-outs.  Shopping becomes drudgery.  This cancer of the soft tissues runs across most of the retail big box, “category killer” stores.  Just visit a Bed Bath & Beyond, Home Depot, Best Buy and ask “is this fun?”  That’s as much why people are going to Amazon.
  • Valeant Pharma admits they were “too aggressive” about drug price increases.  This is at a Senate hearing after a spectacular stock crash, the CEO’s firing, and a general scandal.  Maybe Valeant would still be making piles of money if they had only doubled the price of an acquired cardiac drug instead of tripling it?  And maybe even had the sense to raise the prices over a year instead of a one-off the day the deal closed?  But the long term cost of those “soft” considerations got lost in a room full of financialization…  Lets not even get into Martin Shkreli‘s awesome missing the nuance of “long term greedy.”
  • CNN’s revenues up BIG after they boosted ad rates by up to 40x following the first Republican debate in August 2015.  Whooeee we got a live one here lets make some money!!!  And so the Republican race morphed into a reality TV show.  A (financialized) TV executive’s dream.  A newsperson’s nightmare. The immediate cost is obvious (in retrospect);  A reality TV veteran about to clinch the Republican nomination.  The long term costs range from a crack-up of the Republican party to President Trump starting a nuclear war with someone (maybe France’s Force de Frappe lobbed in with “Freedom Fries for you American Jerks” scrawled on the first missile?).  But hey!  CNN’ll make big bucks on that road to perdition.

So how do we get out of this hole?  It won’t be via self-help.  The “bro” culture of financialization centers on NOT getting the point of all of the above.  Consider that aggressively, almost defensively ignorant guy with the backwards ball cap dragging down conversation to some lowest common denominator (usually sports – sigh…).  He will do anything to stomp out even the idea of nuance.  And, per the WSJ, there is always some convenient “free markety-y-dumb-it-down” explanation that deflects consideration of those long-term (obvious-but nuanced) costs of being a limited, low-horizon, un-interesting jerk.  Or running the business equivalent.  Especially if enough of your options vest before the sh*t piling up under the bed starts to really stink…

PS:  I really don’t think France would nuke us, but it was just a great excuse to use the wonderful term “Force de Frappe.”  Hard to know if its a threat or a dessert.  Really a great phrase either way.

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