What We Can Learn from Canada and Denmark

Question: Why did shareholders fail to curb some of the excessive risk taking of banks and finance companies that led to the crisis? (Dan Indiviglio, Atlantic Business Channel)

Bill George:  Well first of all I think shareholders were blinded themselves.  They were so caught up in the short term game.  I have identified the root cause of this crisis as leaders who practice short termism, but the shareholders were caught up in the same game, how much can you get outright now and I think it was deeper than greed.  It’s getting caught up in the fervor of we’re all going this direction.  Everyone is doing well and no one was really taking a hard look at the risks and the naysayers were kind of pushed aside and so it was go, go, go and as Chuck Prince of Citigroup said famously, “You know we couldn’t stop dancing while the music was playing.”  Well somebody needed to stop dancing and shareholders could have done that, but they chose not to.

Question: Should the U.S. follow the lead of Canada and Denmark by discouraging mortgages with less than 20 percent down payments? (Scott Sumner, the Money Illusion)

Bill George: The answer is absolutely.  Show me the cash.  You need to have skin in the game.  By the way, I’ll apply this to healthcare.  I apply it to every walk of life.  You shouldn’t be able to get a 105% mortgage on a new house that is way beyond your means and it’s got to be you know show me the 20% you can come up with, absolutely.  I was up in Canada at the Canadian Housing and Mortgage Corporation and also talked to Gordon Nixon, the head of Royal Bank of Canada.  They didn’t have all these subprime problems because they kept their standards up.  Does it benefit your citizens for people to get cars they can’t afford and have to default on the mortgage?  No, it just causes untold misery.  Better to stay in a rental facility.  Yes, everyone wants to own their own home, but we need to save money to do that.  Now back to the savings and consumption argument.  This is a huge argument right now and I think it’s an indictment of the last ten years, our focus on consumption and it feels good.  It’s one of these things it like a drug.  It feels good while it’s happening.  Everyone is spending.  Great, the economy is going up.  We’re racking up GDP points.  We’re hiring more service workers.  There is a price you pay just like the day after that drug and we’re paying a huge price because people haven’t saved and as a country we haven’t invested.  We haven’t invested in infrastructure publically and privately we haven’t invested enough in manufacturing and research and develop and all those things that make this country great.  I don’t think we can become just a service economy and we need to get back not trying to drive consumer spending to a higher percentage of the GDP.  We need to lower that and put some money out there for investment and that’s a complex issue because it’s going to require restructuring of our capital gains tax so that you get greater benefits for starting a company or holding an entity for ten years than you do for a year and a day.  Right now you get long term capital gains treatment for a year and a day.  That’s not long term.  I’m on the board of Exxon.  We look at 25, 50, 75 years for those investments to payout.  That’s what it should be, but we’re making 29 billion dollars in capital investments this year too and I think we need more companies focusing on how can they invest in the company and invest and create an investment economy and an innovation economy. 

Question: Do we need to fundamentally reevaluate how we tax consumption versus savings?

Bill George:  Well as you know the Europeans have a built in consumption tax in the VAT and the argument against that is it’s like a sales tax.  It’s somewhat regressive.  Your idea of putting a higher tax on luxury items, sure, why not?  Why try to drive evermore materialistic society and I think we can get more a building society.  What are we building here?  Are we building a great country?  This country was built on investment and in the eighties and nineties it was built on entrepreneurial companies growing up.  I mean if you go back 20, 25 years companies like Microsoft, Intel, Walmart, Target, Cisco, Google they didn’t exist.  They’ve grown up in the last 20, 25 years.  Those are the big job creators and they’re also the big wealth creators.  Genentech in the biotech field was just taken over by Roche for 98 billion dollars was the post market capitalization of the company, stunning.  You know they turn out more drugs for a period of three or four years than all the U.S. pharmaceutical industry did.  Why?  Because they’re so innovative, they’re so creative.  Isn’t that what we want?  Don’t we want the YouTube’s out there and the Skype’s and the Google’s to be creating ideas for us?  Same in healthcare, my company was basically an innovation machine.  That was the proudest thing when Business Week said that because we’re treating so many more patients and helping save lives.  I think that’s the key to the economy, so it’s a combination of investment and innovation, which are one in the same, but I think we need then to change the tax laws to favor those long term investments.

Recorded on December 9, 2009