The Dilution of the Tax Payer

So this week we experienced a mini-milestone in the economic recovery.  The Dow hit 12,000 earlier in the week and it was lauded by all the news organizations.  So on the surface it seemed to me that progress was being made.  For those keeping score the last time the Dow was above 12,000 was in June 2008 which was right before the huge house crash and essentially my generation's "Black Tuesday."  The DOW and the other indexes are often a measure (albeit often a flawed one) of the capital and for lack of a better term the money out in the corporate economy. So by looking at this single metric I thought, wow - the public companies out there are getting back to "normal."  But what does not make sence to me is why then is our unemployment rate still hovering at 9.8%?  I looked it up and turns out that the last time the Dow was at this level the unemployment rate was at 5.5%;  HALF of what it is today. (source)  Why if companies have the same amount of equity they did before are we so short on jobs?   The IT person in me wants to say that "well .. we are just more efficient than before.  Advancements in technology allow us to get the same amount done we did before, but with fewer resources."  The problem with that is that the GDP looks to have declined since 2008.  In fact it appears to be the first time since the 50's that it has actually gone the wrong direction (source).  So that's probably not it.  Where is the money?

The only thing I can think of in my tiny little uneducated brain is that while the economy may be kicking the ball down field, the government bailouts and the treasury printing large amounts of money have actually moved the goal posts further away from us.  In essence the american people (ie: me and you) all experienced a very significant dilution of our equity.  I have worked at a couple startups now and noticed that when we were short on money and possibly on the brink of loosing the company, we simply increased the number of shares available in the company so we could sell more.  But for those who owned enough stock to say they had about 10% of the company all of sudden only owned 5%.  The amount of stock certificates/options they had did not change, but their value was diluted.  This is what the US government did to all the tax payers.   Was it necessary?  I don't know.  I do remember in these companies I often heard "I'd rather have 5% of something than 10% of nothing" as justification for it.  The problem is that the worth of the company did not actually change, yet it was now capable of selling more of itself for cash.  We had to modify the articles of incorporation in order to do this.  I think this is what the US government did when it moved off the Gold Standard some time ago.  There is definitely a lot of gold out there and there is still a lot to be discovered and unearthed.  But at least there is a finite amount of it out in the world.  Now the ceiling has been completely removed.  Again they very well may have been the right decision - I'm no economist.  But I am still upset over the bailouts.  I think a lot of people made a lot of money and broke the rules of risk and return with our money.

I just finished reading "The Big Short" by Micheal Lewis and it left me very ticked off at Wall Street and the US regulatory system(s).  It proved to me that left unchecked, Wall Street will most certainly run rampant with our money with no conscience.  I have been a proponent of capitalism for a long time, but I now I am convinced that too much 'laissez-faire' is synonymous with fraud in this country.  My belief has been  that the purpose of a Board of Directors was to keep the executives in check and to ensure that they are doing all they can to realize a return for shareholders.  If I as a tax-payer am a shareholder in these bailed out companies, I want to some representing ME, on those boards. Damn-it. (Had to throw that in there for effect - cover your children's ears)  In fact I want someone from the US government who is a representative of the constituency that I belong to sitting on the board of AIG and making those executive's lives MISERABLE until they are incentivized enough to buy me out!  Or at least let us use the private jets from time to time - whichever is easier.

Ok, well as ticked off as I am at their reckless behavior, I also think a lot of the equity piling up in these public companies is sitting on a lot of company's balance sheets.  I think 2011 will be the year of corporate acquisitions.  I predict there will be a fire sale of businesses as companies look to move excess accumulations of cash on their books.  Unfortunately I think this lends itself to a consolidation of large companies as the small businesses get gobbled up in the coming years, but it also is probably a decent time to think about being an entrepreneur.  SBA loans are still going to be hard to get, but at least I think the market for selling a company is only going to get better.