Let the Banks Fail: Why a Few of the Financial Giants Should Crash

By Joshua Holland, AlterNet. Posted December 15, 2008.

And corporate managers’ own fortunes are tied to their companies’ share prices through bonuses, stock options and other incentives. The desire to make the financial sector happy often dwarves other imperatives; Mitchell calls it "short-termism" and suggests that making a company’s balance sheet look good quarter to quarter drives CEOs to sacrifice values like worker safety, environmental protection and other social goods.

A good example of this financial market-driven short-termism can be seen in a 2004 study of CEO compensation conducted by United for a Fair Economy and the Institute for Policy Studies (PDF). It found, "CEOs at companies that outsource the most U.S. jobs are rewarded with bigger paychecks … average CEO compensation at the 50 firms outsourcing the most service jobs increased by 46 percent in 2003, compared to a 9 percent average increase for all CEOs at the 365 large companies surveyed by Business Week."

There’s no doubt that offshoring decent jobs that paid living wages was good for those firms’ short-term bottom lines, and those corporate managers were rewarded on that basis. But was it good for the economy? With consumer spending in the tank and inequality at levels not seen since the robber barons were tamed, it’s hard to argue that such short-term thinking served the nation’s economy very well.

Let’s return a moment to the fact that banks aren’t lending money. There are multiple causes for the freeze, including the fact that businesses and individuals aren’t in the market to borrow money to purchase goods or expand their operations. Another reason is that, as Bloomberg reported, "With three weeks to go until the end of the year, financial institutions are vying for loans that mature after Dec. 31 to bolster their balance sheets as they prepare to report to investors."

As the financial meltdown forces the economic establishment to chart a new course, we should not only let the financial sector contract significantly, but curtail its influence as well. That can be achieved in a number of ways: by banning corporate compensation based on firms’ stock values, creating new forms of socially responsible financing or encouraging the expansion of what Bill Gates calls creative capitalism -- a nebulous phrase that's been interpreted to mean adding corporate social responsibility to the traditional imperative of maximizing profits over the short term.

That won’t be easy -- and would be politically impossible in a normally functioning economy. But letting a few banking giants sink, and the financial sector as a whole write down massive amounts of the junk it produced during the last decade just might help focus the mind on newer and more creative models of finance.

See more stories tagged with: bailout, financial crisis

Joshua Holland is an AlterNet staff writer.

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