I wonder, for example, what our students think when they see astronomically well-paid financial leaders trash their companies' stocks by investing hundreds of billions of dollars entrusted to them in overpriced derivative securities whose nature and risk they did not fully comprehend. These leaders made pure bets that put trillions of dollars at risk, and now humbly pay court to Communist China or to Middle Eastern potentates to beg for financial bailouts in return for huge chunks of their companies' stock, sold to these foreigners at severely depressed prices.
I wonder what students who have spent so many years in a purely meritocratic environment think when they hear about CEOs who recently impoverished their shareholders through reckless investment strategies that helped push the nation into a recession argue with straight faces before Congress last week that their exorbitant compensations were needed to attract talented managers to their firms and to keep them there. They were speaking, of course, of themselves. Did I hear that correctly? "Talented"? What do students who just had to take a B+ on an exam over a few flaws think when they see adults justify their ample rewards like that on C-SPAN?
After all, sober analysts in academia, the press and elsewhere had warned about the "underpricing of risk" by the major banks. This means that the highly risky derivative securities emerging from the chain-letter games played on Wall Street were vastly overpriced, given that they ultimately were anchored in so-called "subprime" mortgage loans made to households unlikely to be able ever to pay back those loans. By helping to finance such shaky mortgage debt the banks helped fuel major inflation in real-estate prices that had been widely predicted to come crashing back down, as they now are. Did the highly paid "talent" sitting before Congress last week sincerely believe, as they argued, that no one could have seen this coming? Did they sincerely believe that one could package and repackage and repackage manure and have the final package smell like roses?
What do students think when they see their nation's leaders start a war, making the country "sacrifice" for it by graciously accepting trillions of dollars in tax cuts and going shopping while letting a few good men and women in the military do all of the real sacrificing? A sage general recently said, "America is not a nation at war. It has a military at war." Does anyone among the non-combatant Baby Boomers - or any of their offspring - feel ashamed of it? And does it bother our students that, in effect, we covered the bulk of the federal deficits triggered by this peculiar approach to war financing with loans from abroad? A recent analysis showed that extending the President's tax cuts past 2010 would add another $4 trillion or so to our national debt over the next decade. Much of that debt would have to be financed by foreigners, perhaps in exchange for title to America's productive assets. Wherever Mao Zedong may be now, he must be smirking at the current spectacle of Communists financing the "capitalist American running dogs," especially since our reliance on Chinese credit must give that country considerable leverage in its foreign policy vis-a-vis us.
And what do our students think when the Bush administration and Congress routinely use the surpluses in the Social Security Medicare Trust Funds - which in principle should function like savings accounts - to finance current government operations and tax cuts when those funds could have been invested in a diversified portfolio of U.S. and foreign securities, as Canada does? In this way, we could have made future generations of foreigners pay our kids dividends and interest rather than the other way around.
Do any of these Baby Boom follies bother their sweet little offspring at all?
Uwe E. Reinhardt is the James Madison Professor of Political Economy and a professor in the Wilson School. He can be reached at reinhardt@princeton.edu
Original URL: http://www.dailyprincetonian.com/2008/03/10/20438/