Much to my chagrin, I am told that it is my responsibility to pay for the removal of my neighbor’s tree after it fell in my backyard. Never mind that the tree is old and was left untended for many years until a bad storm destroyed its ability to stand. Ignore the fact that I diligently prune my trees on a regular basis and otherwise provide for their care and maintenance. While my leafy plight is trivial in the grand scheme of things, this notion of paying for the inaction or bad action of others appears likely to stay. Its unhappy companion is the idea that “free” goods and services can magically appear.
There are so many examples in recent news about questionable economics that it is hard to know where to begin. Just tonight, ABC News announced that the City of Chicago has contributed $634 million to its teacher pension plan, thereby forcing a “cut in classroom spending.” According to Mayor Rahm Emanuel, there is an inequity because the State of Illinois “makes the employer contribution to teach pensions for districts outside Chicago.” Elsewhere, it was announced that five million more individuals could be eligible to receive overtime pay, notwithstanding the upset on the part of small business owners who predict layoffs to pay for the mandate.
Then there is the issue of sovereign debt, notably Greece. It is heartbreaking to see the photos of retirees who are desperately seeking reassurance that there will be money to pay them. There is a human face to the creditors as well. Banks, supranational organizations and hedge funds that have lent money to this Hellenic nation, Puerto Rico and other self-declared borrowers in trouble owe an allegiance to their investors to collect. Think about the millions of pensioners and hard-working individuals who will likewise face a diminished checkbook if any of this debt remains unpaid.
At an industry-level, the truism that there is “no free lunch” equally applies. Every action has a consequence and a cost. In an ideal world, interested parties evaluate the risks and expected rewards and decide on a course thereafter. It is not left to governance-focused advocates to pick up the expense. Yet here we are, continuing down the path of often being forced to dive into the deep end when “pushed” by organizations with a lesser focus on good process. How often do we hear regulators address the sins of others as a catalyst for a new rule or regulation? A good example is the current debate about fiduciary standards. If conflicts of interest were less of a concern on the part of some, would the U.S. Department of Labor proposal look as it does now? If organizations with anemic compliance were singularly penalized by the marketplace with no spillover of ill effects on good players, the operating environment would differ from today’s reality. Money spent on risk management and internal controls would exclusively benefit the clients and shareholders of the party that writes the check.
Alas, there is no unfettered free market that purely rewards or impugns. This means that the issue of subsidization is far from trivial since it guides how much money an organization such as an asset manager, bank, advisory firm or insurance company should pay to influence the deeds of industry “peers.” As things currently stand, too much of an isolationist stance could end up plaguing even the most solid of stewards. Said differently, there is an advantage for everyone to strive for integrity in financial dealings, even if it means that some organizations pay more than others, absent a proper price signalling device. It may not seem fair but bad trades, like felled trees, can cost disciplined individuals and businesses real money.