Fundamental change is must come.

Companies go out of business for a myriad of reasons. The same as why an organism perishes. There can be a lack of food. The eco-system turns hostile and rends the internals.  New organisms out compete others for resources.  Many things contribute to the destruction of life and organizations.

Technology and innovation creates mutations in companies.  This allows horrible monstrosities such as Pets.com, Overstock.com Golden West Mortgage Bankers & Aol-Time Warner. It also allows beautiful organisms such as Apple, Google, and Salesforce.com. 

A free market system allows company mutations and life creation (start-ups) to occur.  The fertile soil, instead of carbon, nitrogen and a light smattering of heaver elements are clear contractual law, enforceable contracts, established property rights, equal treatment under the criminal system, governmental transparency and peaceful transition of governmental power (elections).

Some argue that economic prosperity is heavily correlated with natural resources.  They would argue that it is man exploiting those energies and resources in place that allow one group to have dominance over an other.  At a certain level they are correct, however in this day in age having a stable economic system depends more on the afore mentioned attributes.  It matters not how much oil or gold you have under the ground but can you attract capital investment to exploit it.   Even more importantly those economic rules create much more value add then just gold or timber.  Any Dow Jones Industrial company creates more economic value then most countries in Africa by creating ideas.

Our economic fertility has created a vast jungle of millions companies.  Each consumes and sells something, product and/or service for a profit.  If it does not do this then it dies.  Profit is the measure of success, value difference between what the company consumes and its output.  It is sad to see a company die, just as it is to see a deer die by the teeth of a lion.  It is sad to see on television an old elephant pass away in the dense Indian forest.  But as it passes on it frees up another animal of its ilk, not completely the same which is more suited to its eco-system.

Technologies and innovations have begotten more technologies and innovations since the printing press allowed others to easily convey ideas to others and writing before it which was re-discovered in the West after the first Greek dark age in 800 BC. 

Change

These technologies cause the tiny mutations in the processes and DNA of companies that create fundamental shifts in their operations, some better and some worse.  In the last twenty years we have seen more change in business then the previous several centuries.  There has been an explosion in business change. On a human scale there has become a near infinite availability of relevant information; societal, economic, inventive, political, technological… everything.  It arrives instantaneously.

Lifespan have doubled.  Diseases that ravaged populations have been irradiated.  People can fly inexpensively.  We can do and have more.  Billions have been lifted out of grinding poverty and millions are now economically productive.  Today the poorest have better health care then the richest people in the world two generations ago. 

Moore’s law states that processor speed will double every two years while costs may stay the same or go down. Electronics and technology power is not increasing at a linear rate.  It’s increasing at an exponential rate.  This is causing great changes in our business and social eco-system.

This is coming to a head as perhaps the most disruptive technology to-date, is just starting permeate through the fabric of the business eco-system; the internet.  The internet will have a hyperbolic effect on our society, as the printing press effected us before and writing before that. 

This simply means; “more change faster and more company startups and deaths, faster.”  More dislocation, faster.  More employment and unemployment, faster. More great monopolies will fail, faster.

The most vulnerable to paradigm shifts in technology are monopolies and oligopolies. The reason why disruptive technology is called disruptive is that they displace currently ways of doing business rapidly, over the course of a few years.  Disruptive technology such as computers has brought change to media, finance, retail, logistics, telephony, defense and many other grand industries.

Media

Let’s take media for example.   There has been a long train of innovation in the music industry over the last several hundred years. They have also caused dislocation and opportunity. The innovation of sheeted music allowed others to learn songs across distance and time.  The greatest composers were played and local innovators and not sponsored as much.  But with out that innovation the world would have never known Bach, Mozart or Beethoven.

When RCA created the recording device, people could not listen to their favorite music with out going to the theater, or paying to large orchestras to perform.  Now a common man could listen to that same Mozart in the comfort of his own parlor.

Records were produced, then 8tracks cassettes and CDs.  Each technology allowed a better quality of reproduction, at a lower cost.  Many manufactories went out of business. While new companies took their place.

Movies supplanted plays and operas.  It used to be you would attend with your wife out to a night at the theater, now you have 1000 channels of entertainment for a month the for the same price as that night out.

An older revolution is going on with music, the move to digital download.  CD sales have fallen 70% while such companies as Apple have come on line to take their place.  And where revenue has not kept of with the fall, it is because people are generating their own content as creative expression and are distributing it for free, like this blog.

Newspapers

Other monopolies are going thru trouble.  The main ones are the, big banks, big investment banks and newspapers.  I have been writing about the follies of the investment banks for a year and a half now so let us first examine the news papers.

News papers are a near obsolete technology.  Content of course is not obsolete.  Why people haven’t seen this coming for years is beyond me.  The paper is a value subtract.  I can read the news on my phone, cut, paste, email and save.  Why haven’t they moved to a near digital distribution is beyond me.

What people want is good content that convenient to consume.  The net has allowed the distribution of said content for nearly free.   People are going to where they get the content that they want.  Increasing that is the web and television.   The web, because of its nominal distribution costs allows for long tail survival.  Or the idea that esoteric goods and services can now find a home and prosper with those rare consumers.

Local news papers must get back to their roots.  They must become the center of the community.  They must report on local politics and local events.  There is no point in duplicating news that consumers can get more timely on the net.

Banks

Banks also must evolve.  Banks are inherently unstable.  They take in flexible deposits that can be yanked at any time and lone it out for periods of 5 years to 30 years.  Not only that but they have interest rate risk.  That is that their short term money can become more expensive then what they have loaned it out for.  Banks are so unstable that the federal government now regulates them and insures them.  They are effectively regulated private equity funds.

The financial system has collapsed under its own weight.  These private equity funds, due to a poor understanding of risk management, flawed business model and absent shareholders have allowed most of these institutions to run amuck.  With out a complete over-hall of the three mentioned changes banks will forever be prone to quick and certain collapse. 

Banks did not understand how correlated their real-estate holdings were.  They loaned to much to value of property.  They under wrote loans on the assumption that real-estate would never go dramatically down.  They also got to big because people knew that the federal government would not let them fail.  Now if a company gets big enough.  It can establish enough political pressure and receive funds. 

Finally, the structure of the non activist money manager must change.  Most money managers of mutual funds, pension funds and hedge funds do not participate in management.  They are just random equity pickers.  There needs to be more activism to keep pressure on the boards.

Symptoms being treated, not cause

These are flaws inherent in the system and are not being addressed by the current political leaders.  They keep trying to pump and shock the organisms (companies) back to life.  GM has been losing market share for 30 years.  People thought they would go under years ago and the board did nothing. Management could not or would not nimbly respond to change.  The entire structure of large companies must change.

Banks should be recognized as private equity funds that take huge risks when making “vanilla loans”.  How can anyone in bank management know the full exposure of their balance sheet when they have billions and trillions on it?  Many banks have become to big to manage.  The artificial constructs and illusion of transparency has been placed on these large public companies.

Investment banks have learned that you can’t leverage 80 to 1 anymore.  They had just become hedge funds with banking services attached.  We need to let the companies fail and have the surviving organisms that are more fit take their place.

What is sad is that Democrats, who are supposed to before the proletariat are handing billions of dollars to big corporations and talking about regulation.  The big corporations are happy to take regulation because that is better then bankruptcy to them! They are taking the toxic paper that is worthless and putting on the back of the proletariat and raising their taxes, and deflating their assets by printing billions in dollars and hurting the small business man.  The small business man is catching no break.  By treating the system our leaders betray the natural order of our eco-system and keep alive organizations that need to pass on.

Treating the cause

We got into this mess by over-leverage, overspending and having companies that should not exist. People who enabled corporations and individuals to engage in such behavior must lose, always.  People who took the risks must lose assets invested.  People who loaned money to out of control, unsupervised bankers with out doing due diligence have to lose.  These companies and their stakeholders must be allowed to bow out so new, responsible and innovate companies can take their place.

We can try to regulate banks or autos or a hundred other industries but who is wise enough to say how they should run their business?  Who knows what kind of cars GM should produce, where they should put the gear shift and what kind of horse power should be included.  Who is to say that one particular kind of loan is more risky than an other or what a bank’s capital structure has to be? 

Why is it that the middle class is dependent on the stock market’s fortune?  Millions of people’s fortunes are dependent on what someone will pay them for stock certificates that trade like baseball cards.  Stock certificates that usually don’t even pay regular dividends!  The state promotes 401ks and IRA to self perpetuate one kind of asset class, the public company?  Why isn’t it easier to invest in local businesses, down the street where one can much more easily gage character management and transparency of balance sheets?

Why is it that the consumer is reward for taking on debt in the form of mortgages?  Labor must be free to relocate.  By having our citizenry locked in to one place we limit their potential for growth and thereby wealth of society.  Instead of people starting new businesses or investing in invention or innovation, they buy more house.  How does that help the world?  Isn’t that only encouraging materialism and separating our people into the bland sprawling suburbs?

We need to let the companies fail and stop interfering with the growth of new ideas and innovations.  Only then will our recovery take place.  Taking capital from the middle class and giving it to inept bankers will only cause inflation, disrespect for the system and make us more vulnerable for the next time this happens.