Academic v the Real World

[image: BankofAmerica Hq]

“Bank of America—How Can We Help You?”

Let's say you are the CEO of Bank of America. And let's also give you a net worth of $100 million. Today you are sitting in your lavish offices high atop the tower in downtown Charlotte, North Carolina surveying your kingdom. It's quite a view from up there. Other words that come to mind when describing your space and view are “opulent,” “regal” and “stunning.” You are a top 0.1 percent-er. Life is good.

Today you are gazing out and across the panoramic view and contemplating your objectives for the next 5 years at which time you plan to retire. You have fulfilled every goal, every dream, every vague expectation that ever entered your head, and many more that never surfaced to consciousness. You ponder this burning question: “What could you possible achieve that would make the best use of your time, talents, and inner most desires? “

You are immersed in a deep and serious trance. Suddenly, you look up as a broad smile comes across your face. A choir of angels is singing softly in surround sound. Heavenly trumpets herald your vision. The million dollar carpet on the floor ruffles in anticipation. A blinding light illuminates the top of the tower. “Eureka!” you shout. “I have it!”

You call your private secretary into your chambers. “Take a note quickly,” you instruct her. “My goal for the next 5 years at Bank of America is this: To triple my net worth!”

This scene is repeated approximately 74,200 times across America in similar offices and in similar towers by similar CEOs summing up the expectations of 7,500 corporate banks, the 3,700 private equity fund managers, and the 63,000 CEOs of public corporations.

Do I exaggerate? Almost certainly not. Bankers alone paid themselves $91.1 billion in bonuses last year. “For doing what?” you may be thinking. Last year the Federal Reserve directed the Treasury department to print $1.02 trillion in new money, after which they made it available to those bankers to do with it—whatever they chose to do with it to stimulate the economy. The presumption according to all the textbooks, was that they would make loans available to you and to me at a higher interest rate than their borrowing rate consistent with the market. And those bankers, being of like minds, unanimously chose to take that money at a cost to them of 0.25 percent and invested it in the stock market. The market, in return for their efforts, rewarded them with a return of 32 percent. And that, according to my calculator built by the employees of one of those corporations, is 128 times their borrowings, or a return on investment of 12,700 percent!

Notice in that scenario that the Fed was acting on behalf of us in those transactions. It was really we the people who supplied the money. And since all those banks made very little of it available to us so that we might stimulate the economy with purchases of cars, and homes, or in business start ups or expansions, there was a huge opportunity cost associated with their diversions. Those costs were roughly 6.5 times the value of the new money in GDP, or $6.5 trillion. Other costs were $5.5 trillion in additional incomes not realized, 12 million new jobs not created, and $2.6 trillion in new tax revenues foregone to cities, states, and the IRS.

Now I don't know what the professors at the Wharton School of Business, or MIT, or Harvard, or the University of Chicago teach their students about the banking industry, or how money flows into the economy, how jobs are created, how deficits are reduced, or the cost per square foot of office space occupied by CEOs. But I don't need any of that to plug the preceding numbers into my calculator and let it reveal to me (according to 3rd grade arithmetic) just what goes on in those office spaces and the consequences of their decisions. And I also suspect there is nothing in the curriculums of ethics classes, or sociology, or any other -ology that informs, explains, or otherwise digs below the surface of human needs and illuminates young minds about the world of reality and a simple concept known as human greed. Those issues are typically dismissed with two assertions: “You are envious,” and “If you worked hard you could also reach the top.”

A few years ago when BofA CEO Ken Lewis handed over the keys to the ivory tower penthouse suite in Charlotte, NC, and introduced his replacement CEO Brian Moynihan at a banker's gathering, a hush came over the crowd of bankers. Lewis walked back to the microphone, and spoke directly into it in a firm but subdued voice and said: “Don't worry, he's one of us.” The bankers roared a huge sigh of relief.

We often learn lessons that are far different from those that appear in lesson plans. Life is funny that way. Fifty seven years ago one of my fellow students asked our economics professor this probing question; “Sir, can you explain why the subject of economics is important to me?” It was a good question. The professor thought about it for a moment, and replied: “Years from now, when you find yourself in the unemployment line, at least you will understand why you are there.”

And that is the one and only recollection I have of that class. It is also one prediction by one economist that came true .